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SEC Adopts Investment Adviser Antifraud Rule

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  • Baker, John
    The Securities and Exchange Commission has adopted Rule 206(4)-8 under the Investment Advisers Act of 1940, prohibiting investment advisers to pooled
    Message 1 of 2 , Aug 5, 2007
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      The Securities and Exchange Commission has adopted Rule 206(4)-8 under the Investment Advisers Act of 1940, prohibiting investment advisers to pooled investment vehicles from defrauding investors or prospective investors in those pooled vehicles. Release No. IA-2628 (Aug. 3, 2007). The new rule forbids any adviser to an investment company, or any company that would be an investment company but for Section 3(c)(1) or (3)(c)(7) of the Investment Company Act of 1940, to make any material misstatement or omission, or to engage in any other act, practice, or course of business that is fraudulent, deceptive, or manipulative, with respect to any investor or prospective investor in the fund. The rule was adopted in the form proposed.

      Several commenters argued that the rule should not apply to advisers to registered investment companies, because Section 34(b) of the 1940 Act already prohibits an adviser from making fraudulent material statements or omissions in a fund's registration statement or in required records. The SEC rejected these arguments, suggesting that the existing antifraud provisions may not be available in all cases and that advisers operated with the understanding that the Advisers Act already prohibited this conduct prior to the ruling in Goldstein v. SEC, 451 F.3d 873 (D.C. Cir. 2006).

      Whether it is true that Rule 206(4)-8 does not change the standard of care remains to be seen. The new rule does not require scienter, but encompasses negligent conduct, according to the adopting release. The SEC also takes the position that the new rule will permit the SEC to bring an enforcement action against an adviser that violates a fiduciary duty imposed by other law (e.g., state partnership law) if the violation of such law or obligation also constitutes an act, practice, or course of business that is fraudulent, deceptive, or manipulative. For example, if an adviser has a duty from a source other than the rule to make a material disclosure to an investor in a fund and negligently fails to make the disclosure, the rule would apply to the failure.

      Rule 206(4)-8 will be effectively approximately 30 days after publication in the Federal Register. The adopting release is available online at

      http://www.sec.gov/rules/final/2007/ia-2628.pdf

      For my post on the proposing release, see

      http://groups.yahoo.com/group/FundLaw/message/1113


      John M. Baker <JMB@...>
      Stradley Ronon Stevens & Young, LLP http://www.stradley.com
      1220 19th Street NW, Suite 600
      Washington DC 20036
      202.419.8413
      202.822.0140 fax
      FundLaw Listowner http://groups.yahoo.com/group/fundlaw
    • John M. Baker
      Commissioner Atkins has released a concurrence questioning whether a negligence standard is consistent with the SEC s authority under Section 206(4) of the
      Message 2 of 2 , Aug 6, 2007
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        Commissioner Atkins has released a concurrence questioning whether a
        negligence standard is consistent with the SEC's authority under
        Section 206(4) of the Advisers Act and arguing that, even if a
        negligence standard were within the SEC's authority, for policy
        reasons it should require a finding of scienter as part of
        establishing a violation under Rule 206(4)-8. Commissioner Atkins's
        concurrence is available online at

        http://www.sec.gov/rules/final/2007/ia-2628-psaconcurrence.pdf


        John M. Baker


        --- In FundLaw@yahoogroups.com, "Baker, John" <JMB@...> wrote:
        >
        > The Securities and Exchange Commission has adopted Rule 206(4)-8
        under the Investment Advisers Act of 1940, prohibiting investment
        advisers to pooled investment vehicles from defrauding investors or
        prospective investors in those pooled vehicles. Release No. IA-2628
        (Aug. 3, 2007). The new rule forbids any adviser to an investment
        company, or any company that would be an investment company but for
        Section 3(c)(1) or (3)(c)(7) of the Investment Company Act of 1940,
        to make any material misstatement or omission, or to engage in any
        other act, practice, or course of business that is fraudulent,
        deceptive, or manipulative, with respect to any investor or
        prospective investor in the fund. The rule was adopted in the form
        proposed.
        >
        > Several commenters argued that the rule should not apply to
        advisers to registered investment companies, because Section 34(b)
        of the 1940 Act already prohibits an adviser from making fraudulent
        material statements or omissions in a fund's registration statement
        or in required records. The SEC rejected these arguments,
        suggesting that the existing antifraud provisions may not be
        available in all cases and that advisers operated with the
        understanding that the Advisers Act already prohibited this conduct
        prior to the ruling in Goldstein v. SEC, 451 F.3d 873 (D.C. Cir.
        2006).
        >
        > Whether it is true that Rule 206(4)-8 does not change the standard
        of care remains to be seen. The new rule does not require scienter,
        but encompasses negligent conduct, according to the adopting
        release. The SEC also takes the position that the new rule will
        permit the SEC to bring an enforcement action against an adviser
        that violates a fiduciary duty imposed by other law (e.g., state
        partnership law) if the violation of such law or obligation also
        constitutes an act, practice, or course of business that is
        fraudulent, deceptive, or manipulative. For example, if an adviser
        has a duty from a source other than the rule to make a material
        disclosure to an investor in a fund and negligently fails to make
        the disclosure, the rule would apply to the failure.
        >
        > Rule 206(4)-8 will be effectively approximately 30 days after
        publication in the Federal Register. The adopting release is
        available online at
        >
        > http://www.sec.gov/rules/final/2007/ia-2628.pdf
        >
        > For my post on the proposing release, see
        >
        > http://groups.yahoo.com/group/FundLaw/message/1113
        >
        >
        > John M. Baker <JMB@...>
        > Stradley Ronon Stevens & Young, LLP http://www.stradley.com
        > 1220 19th Street NW, Suite 600
        > Washington DC 20036
        > 202.419.8413
        > 202.822.0140 fax
        > FundLaw Listowner http://groups.yahoo.com/group/fundlaw
        >
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