SEC Uses Advisers Act’s Antifraud Rule Against Hedge Fund Manager
The SEC has obtained a temporary restraining order essentially shutting down a hedge fund manager for violating the Adviser Act’s rule against making false statements to fund investors. The SEC has alleged that the hedge fund manager made false statements in fact sheets and account statements about performance and asset levels. In addition to the usual causes of action under Sections 17 and 10 of the 1934 Act, the SEC also alleged violations of Rule 206(4)-8, the rule that prohibits a registered investment adviser that advises a pooled investment vehicle from making false or misleading statements to investors or prospects. The SEC adopted Rule 206(4)-8 in 2007 after the courts struck down the SEC’s rule requiring hedge fund advisors to register under the Advisers Act.
OUR TAKE: The SEC is demonstrating its willingness to use Rule 206(4)-8 against hedge fund managers. Although it cannot use the Rule against unregistered hedge fund managers, new legislation making its way through Congress, could extend the SEC’s authority.