SEC Adopts New Investment Advisor Anti Fraud Rule

On September 10^th, 2007, Rule 206(4)-8 of the Investment Advisers Act of 1940 (The "Rule") became effective. The Rule, passed at least in part to clarify the SEC's position with respect to the June 2006 Court of Appeals "Goldstein" decision striking down the requirement for registration of certain Investment Advisers, has been broadly drafted to apply not only to Hedge Funds, but to Investment Advisers to all "pooled investment vehicles".

The Rule prohibits material misstatements or omissions to investors, whether or not the untrue statements or omissions are in connection with any securities transaction. The effect is to make all statements to current or prospective investors subject to the Rule regardless of whether any offering or sale of interests took place. The Release adopting the Rule specifically states that the Rule is applicable to not only Advisers of hedge funds, but to advisers to private equity funds, real estate funds, venture capital funds and any type of privately offered pools that are "investment companies" pursuant to the Investment Advisers Act of 1940 or are exempted from such Act pursuant to sections 3(c)(1) or 3(c)(7). The Rule also prohibits a broad range of fraudulent conduct, whether or not such conduct includes statements. Perhaps most importantly, the Rule does not require the SEC to prove intent or "scienter", requiring the SEC only show negligent conduct. Finally, the Rule does not impose any additional fiduciary duty on Advisers subject to the Rule and does not provide any private right of action against Investment Advisers, thereby limiting enforcement to SEC action.

While the Rule is still new and has not been tested, we believe the Rule is perhaps most important due to the clear statement the SEC has made regarding its intent to review the operations of private investment pools. Although the Rule does not create additional fiduciary obligations, it is clear that investment advisers should continue to be cautious in all communications with current and prospective investors and should implement procedures (if such are not already in place) to monitor and document such communications.

If you would like more information on this topic, please contact Richard Lepowsky At (212) 233-3620 or Michael Present at (212) 779-3207.