SEC Will Consider New Anti-Fraud Rule Under Section 206 of the Investment Advisers Act of 1940

July 07, 2007

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During its open meeting on Wednesday, July 11, 2007, the United State Securities Commission (SEC) will consider adopting the a new anti-fraud rule under Section 206 of the Investment Advisers Act of 1940 for pooled investment vehicles such as hedge funds.

As you may recall, in 2006 the U.S. Court of Appeals for the District of Columbia Circuit vacated the SEC’s rule which had essentially required managers of certain hedge funds to register as investment advisors with the SEC. In response, the SEC proposed a new rule under the Investment Advisers Act of the 1940 that prohibits investment advisers to pooled investment vehicles from making misleading statements or otherwise defrauding investors or prospective investors in such pooled investment vehicles. In other words, although hedge fund managers will not be required to register as an investment advise, such managers can still be pursued by the SEC under the anti-fraud provisions of the Investment Advisers Act.

The SEC explained this rule will prohibit “… materially false or misleading statements regarding investment strategies the pooled investment will pursue (including strategies the adviser may pursue for the pool in the future), the experience and credentials of the adviser (or its associated persons), the risks associated with an investment in the pool, the performance of the pool or other funds advised by the adviser, the valuation of the pool or investor accounts in it, and practices the adviser follows in the operation of its advisory business such as how the adviser allocates investment opportunities.”

If interested, you can tune into the SEC’s open meeting on Wednesday, June 11 via a webcast to learn more about the SEC’s response to the comments letters it received on this subject and whether the Commission will approve this proposed rule.

Posted by Bryan Hill
Labels: Hedge Funds