On 10 September 2007, the U.S. Securities and Exchange Commission (SEC) adopted Rule 206(4)-8 (the New Rule) under the Investment Advisers Act of 1940 (the Advisers Act). The New Rule prohibits fraud against investors active in pooled investment vehicles.

The New Rule was adopted in response to the Goldstein v SEC decision, which invalidated the SEC’s attempt to require the registration of most hedge fund managers. The decision contained language that the SEC felt created ambiguity concerning its power to bring enforcement actions against investment advisers for defrauding investors in pooled vehicles. The New Rule draws upon the full scope of the SEC’s rulemaking authority under Section 206(4) of the Advisers Act and establishes two prohibitions. The first is that an investment adviser to a pooled vehicle cannot make materially false or misleading statements (including omissions) to investors or prospective investors. The second is that the adviser cannot otherwise engage in a fraudulent, deceptive or manipulative act or course of business “with respect to” investors or prospective investors in pooled vehicles.

The Scope of the New Rule

The New Rule applies to all investment advisers—whether or not registered under the Advisers Act—to “pooled investment vehicles” that have U.S. investors. Pooled investment vehicles are investment companies as defined in the Investment Company Act of 1940 (and must be SEC registered) as well as entities that are not investment companies by virtue of the “private investment company” exemptions from that definition (hedge, private equity and venture capital funds, and other privately offered pools that invest in securities).

The New Rule prohibits fraudulent activities with respect to both investors and prospective investors. Advisers must exercise care with regard to placement-related materials (prospectuses and other solicitation materials) and activities, which are already generally covered by other anti-fraud provisions. They also must be cautious regarding communications with, and actions affecting, existing investors.

New Rule Prohibitions

Among other things, the New Rule’s prohibitions relate to statements regarding the following: 

  • A pooled vehicle’s investment strategies and policies 
  • The experience and credentials of the adviser and its personnel
  • The risks associated with an investment in the pool
  • The valuation of the pool or investor accounts in it 
  • Administrative, brokerage and dealing practices, and conflicts of interest (such as allocation of investment opportunities, selection of brokers and counterparties, custody and expense allocation)

The New Rule’s prohibitions of fraudulent, deceptive or manipulative acts or “courses of business” could potentially cover a wide variety of dishonourable activities.

Other Aspects of the New Rule

The New Rule does not impose filing or recordkeeping requirements and may be enforced only by the SEC; it does not create a private right of action. It does not create new fiduciary duties for pooled vehicle investors, nor does it alter any other duty or obligation of advisers.

In the SEC’s controversial view, judicial precedent supports the conclusion that certain practices may constitute a fraudulent, deceptive or manipulative “course of business” without requiring the knowledge or reckless wrongdoing that has traditionally been required under the anti-fraud provisions of the U.S. securities laws.


Although the New Rule may not substantially increase the duties of pooled vehicle advisers to investors or prospective investors, unregistered advisers in particular should take care. All investment advisers should review their communications, operating procedures and codes of conduct, and seek to ensure that they have adequate controls in place to secure both accurate communications and management practices that meet the highest standards.