Anti-Fraud Provision of the Investment Advisers Act

On September 10, 2007, the SEC Adopted Rule 206(4)-8. The SEC adopted this rule in response to the decision in Goldstein v. SEC, 451 F.3rd, 873 (in which the Court of Appeals for the District of Columbia ruled that the “client” of an investment adviser was the pool itself and not an investor in the pool).

Rule 206(4)-8 makes it clear that the SEC may prohibit fraudulent conduct of an investment adviser that impacts an investor in the investment pool, regardless of whether the investment adviser has registered with the SEC.

The rule does not create a private right of action.  It only provides the SEC with the authority to enforce the rule. But the SEC does have its broad authority to impose fines, sanctions bar individuals from the securities business and to seek criminal penalties.

The rule prohibits misleading statements and deceptive conduct and is not limited to “statements.” So,  the rule is applicable to non-written misstatements or omissions. The rule would include presentations at investor meetings and phone calls.

The bad act need not be made in connection with the sale of securities. Unlike 10b-5, this rule applies to regular disclosures and investor letters.

Unlike Rule 10b-5, there is no “in connection with” requirement and the SEC would not have to prove reliance or harm by any individual in an enforcement action. Also, Rule 206(4)-8 contains no scienter requirement, unlike Rule 10b-5.  The SEC need only prove that there was a misstatement or omission of a material fact.

The challenging piece is responding to requests for information from investors. If you are providing a piece of information to one investor and not providing it to others did you “omit to state a material fact”?

Although negligent conduct is proscribed, the SEC specifically stated that the rule does not create a fiduciary duty not otherwise imposed by law. This rule should not change the way an investment advisers perform their duties.  It merely removes the doubt regarding the scope of the SEC’s authority created by Goldstein.