Yesterday, the Securities and Exchange Commission (the “SEC”) voted unanimously to adopt a new rule under the Investment Advisers Act of 1940 (the “Advisers Act”) that takes an “evergreen” approach to prohibiting fraudulent statements by, and conduct of, advisers to certain pooled investment vehicles.
Rule 206(4)-8(a)(1) (the “Rule”), which applies regardless of whether the fraud is in connection with the purchase and sale of securities, 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 any adviser (whether registered or unregistered) to a “pooled investment vehicle” to make any untrue statement of a material fact to any investor or prospective investor in the pooled investment vehicle, or to omit to state a material fact necessary in order to make the statements, in light of the circumstances under which they were made, not misleading. Because the Rule applies “regardless of whether the pool is offering, selling or redeeming securities,” routine investor communications, such as a quarterly report on fund performance or a capital account statement, would be subject to the Rule.
The Rule also prohibits an adviser’s “fraudulent, deceptive or manipulative” conduct with respect to any investor or prospective investor, even if the conduct does not involve any statements. Accordingly, certain conduct such as the collection of management fees based on improper valuations may be captured by the Rule.
Significantly, liability under the Rule does not require scienter or knowledge by the adviser that a statement was false or misleading or that an act defrauded an investor or prospective investor.
The Rule defines any “pooled investment vehicle” to include any issuer that is an investment company or that would be an investment company under the Investment Company Act of 1940 but for the exclusion provided by either Section 3(c)(7) (for vehicles held exclusively by “qualified purchasers” and that are not offered publicly) or Section 3(c)(1) (for vehicles held by no more than 100 beneficial owners and that are not offered publicly). This means advisers to private equity funds, hedge funds, venture capital funds, distressed funds, funds of funds, CDOs and registered investment companies, whether U.S. or non-U.S. based advisers, are all subject to the Rule, (however, advisers to certain types of funds, such as real estate investment trusts and business development companies are not subject to the Rule).
The Rule does not provide for a private right of action and is only enforceable by the SEC. The Rule will take effect 30 days after its publication in the Federal Register.