SEC adopts new anti‐fraud rule for private funds

Purpose – The purpose of this paper is to analyze new SEC Rule 206(4)‐8 under the Investment Advisers Act of 1940 and discuss its practical implications. Design/methodology/approach – The paper describes the new rule, the types of advisers and funds to which the rule applies, examples of topics on which advisers might make statements that run afoul of the new rule, the application of the rule to both existing and potential investors, the application of the rule beyond statements made in the context of a securities transaction, and the application of the rule to any conduct that is fraudulent, deceptive, or manipulative, including negligent conduct. The paper explains that the scope of the new rule extends beyond Section 34(b) under the Investment Company Act of 1940, that the rule creates no new fiduciary duty, and that it creates no new private right of action against fund advisers. Findings – The new rule signals that the SEC continues to focus intently on the fund activities of both registered and unregistered investment advisers, in particular with respect to their unregistered funds. Practical implications – The new rule is an indicator of the SEC's enforcement intentions. Advisers should review their compliance programs, particularly as they relate to communication and other interaction with current and prospective fund investors, in light of the new rule. Originality/value – The paper provides an helpful rule description and practical guidance from experienced securities lawyers.