SEC Rule Aimed At Protecting Hedge Fund Investors

July 11, 2007 ( - The U.S. Securities and Exchange Commission (SEC) voted unanimously to approve a rule prohibiting hedge fund advisers from defrauding investors, Reuters reported.

The rule targeting hedge fund advisers who make false or misleading statements applies to investment advisers of private equity funds, venture capital funds and mutual funds.

The new rule invokes Section 206 of the Investment Advisers Act of 1940, which says that it is unlawful for an investment adviser to:

  • Employ any device, scheme, or artifice to defraud any client or prospective client;
  • Engage in any transaction, practice, or course of business that operates as a fraud or deceit upon any client or prospective client;
  • Acting as principal for his own account, knowingly to sell any security to or purchase any security from a client.

The SEC’s attempts at regulating the hedge fund industry have been met with varied success. The regulator’s hedge fund registration requirement took effect in February 2006 (SeeSEC Imposes Hedge Fund Registration), only to be later overturned in federal appellate court (SeeCourt Throws out Hedge Fund Registration Rule).