The Securities and Exchange Commission (the "SEC") yesterday voted to adopt the antifraud rule that it had proposed in the wake of the Goldstein decision vacating the hedge fund registration rule. The new rule, Rule 206(4)-8 (the "Rule") under the Investment Advisers Act of 1940 (the "Advisers Act"), makes it a fraudulent, deceptive, or manipulative act, practice, or course of business within the meaning of Section 206(4) of the Advisers Act for an investment adviser — whether registered or unregistered — of a "pooled investment vehicle": (1) to make any false or misleading statement or omission of material fact to any investor or prospective investor in the pooled investment vehicle; or (2) to otherwise engage in any fraudulent, deceptive, or manipulative act with respect to any investor or prospective investor in the pooled investment vehicle. The Rule applies to investment advisers of pooled investment vehicles that rely on Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act of 1940 (the "1940 Act"), including but not limited to hedge funds, private equity funds and venture capital funds. It also applies to investment advisers of "investment companies" as defined by Section 3(a) of the 1940 Act, including registered funds and business development companies. Significantly, the Rule is not limited to the context of purchases or sales of interests in a fund, and is not limited to situations involving intentional wrongdoing.

In December 2004, the SEC adopted a rule requiring most hedge fund advisers to register with the SEC and become subject to the Advisers Act's substantive provisions. However, in June 2006, the U.S. Court of Appeals for the D.C. Circuit overturned that rule in the case of Goldstein v. SEC. In the view of the SEC, the Goldstein decision "created some uncertainty" as to whether Sections 206(1) and 206(2) of the Advisers Act (which make it unlawful to defraud clients and prospective clients) apply to the defrauding of investors in pooled investment vehicles because the court in Goldstein interpreted the term "client" to mean the pool itself and not the investors in the pool. Rule 206(4)-8 attempts to address this uncertainty by providing that investors and prospective investors in a pooled investment vehicle may not be defrauded.

The SEC received comments on its proposal to adopt the Rule expressing, among other things, concern that the broad language of the Rule, as proposed, would not provide advisers with direction as to what constitutes prohibited conduct. At yesterday's SEC open meeting during which the Rule was discussed and adopted, Commissioners Paul Atkins and Kathleen Casey expressed concerns about the lack of a scienter (intent) requirement in the Rule. Also, at the open meeting, the SEC staff indicated that the Rule is intended to fill the gap left by the Goldstein decision, and is not intended to expand recordkeeping requirements or the need for prophylactic measures. The SEC staff also noted that the Rule is enforceable only by the SEC and does not create a private right of action.

The Rule becomes effective 30 days after its publication in the Federal Register. The information in this Alert is based on the proposed Rule, the SEC's proposing release and the discussion at yesterday's open meeting. We will provide a more detailed summary and guidance when the adopting release addressing the Rule is published.