SEC to Discuss New HF Rule |
Date: Saturday, July 7, 2007
Author: Christopher Faille, HedgeWorld
WASHINGTON (HedgeWorld.com)—The Securities and
Exchange Commission has announced that it will consider a new
anti-fraud rule at its meeting next week, one that will include hedge
funds in its coverage.
The SEC originally proposed such a rule in December, with the goal of
closing an asset management con artistry loophole in the protection
available to investors under the Investment Advisers Act of 1940.
As the agency said when it opened the proposal for notice, the Goldstein v. SEC
decision in 2006 "created some uncertainty regarding the application of
sections … of the Advisors Act in certain cases where investors in a
pool are defrauded by an investment adviser." There is no uncertainty,
however, about the SEC's authority to "adopt rules proscribing
fraudulent conduct that is potentially harmful to the growing number of
investors who directly or indirectly invest in hedge funds and other
types of pooled investment vehicles."
Phillip Goldstein, who manages the Bulldog Investors General
Partnership and the Opportunity Partners LP hedge funds, sued the SEC
in 2004, claiming the commission exceeded its authority earlier that
year when it adopted new rules to regulate hedge funds, partly because
it changed the definition of the term "client" to count individual
investors in a fund, rather than the funds themselves. The goal of the
change was to require more hedge funds to register with the commission.
In its ruling on the case, though, a federal appeals court
effectively said the SEC used the wrong word in its rule, because
clients were distinct from "investors" in that clients actually
received investment advice. In his lawsuit, Mr. Goldstein had argued
that he gave no advice, and therefore the term "client" was not
applicable. The court agreed, prompting the SEC to move to close this
loophole.
In its new proposed rule, the SEC substituted the terms
"investor" and "prospective investor" for "client." This brings
investment advisers to pooled vehicles under the scope of the
anti-fraud rule, since making false or misleading statements, or
otherwise defrauding investors or prospective investors would
constitute fraud, deception or a manipulative act, practice, or course
of business, according to the SEC. No advice need be given. The rules
would apply to investment advisers for all pooled vehicles, whether
they operate under 3(c)(1) or 3(c)(7) exemptions of the Investment
Company Act of 1933.
The rule in its original form also proposed a change in the definition of an "accredited investor".
That aspect of the proposal received the bulk of the public's attention
during the notice period—including one comment from a "J. Cleckner,"
who expressed concern that it would harm the environment.
The proposed rule, the person said, would prevent current accredited
investors with investable assets below the revised thresholds from
"paying for capping an oil well that is being shut down in the future.
The environment suffers if the well is not capped."
Whether out of a desire to get oil wells capped or otherwise, the form
of the rule that the SEC will discuss next week doesn't include any
change in the accredited investor standard. It focuses solely on the
anti-fraud aspect of the December proposal.
The SEC will consider the slimmed-down form of this proposal at an open meeting Wednesday, July 11, at 10 a.m.
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