[Federal Register: August 9, 2007 (Volume 72, Number 153)]
[Rules and Regulations]
[Page 44756-44763]
[DOCID:fr09au07-12]

=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 275

[Release No. IA-2628; File No. S7-25-06]
RIN 3235-AJ67

Prohibition of Fraud by Advisers to Certain Pooled Investment
Vehicles

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Securities and Exchange Commission is adopting a new rule
that prohibits advisers to pooled investment vehicles from making false
or misleading statements to, or otherwise defrauding, investors or
prospective investors in those pooled vehicles. This rule is designed
to clarify, in light of a recent court opinion, the Commission's
ability to bring enforcement actions under the Investment Advisers Act
of 1940 against investment advisers who defraud investors or
prospective investors in a hedge fund or other pooled investment
vehicle.

DATES: Effective Date: September 10, 2007.

FOR FURTHER INFORMATION CONTACT: David W. Blass, Assistant Director,
Daniel S. Kahl, Branch Chief, or Vivien Liu, Senior Counsel, at 202-
551-6787, Division of Investment Management, Securities and Exchange
Commission, 100 F Street, NE., Washington, DC 20549-5041.

SUPPLEMENTARY INFORMATION: The Commission is adopting new rule 206(4)-8
under the Investment Advisers Act of 1940 (``Advisers Act'').\1\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 80b. Unless otherwise noted, when we refer to the
Advisers Act, or any paragraph of the Advisers Act, we are referring
to 15 U.S.C. 80b of the United States Code, at which the Advisers
Act is codified.
---------------------------------------------------------------------------

I. Introduction

    On December 13, 2006, we proposed a new rule under the Advisers Act
that would prohibit advisers to pooled investment vehicles from
defrauding investors or prospective investors in pooled investment
vehicles they advise.\2\ We proposed the rule in response to the
opinion of the Court of Appeals for the District of Columbia Circuit in
Goldstein v. SEC, which created some uncertainty regarding the
application of sections 206(1) and 206(2) of the Advisers Act in
certain cases where investors in a pool are defrauded by an investment
adviser to that pool.\3\ In addressing the scope of the exemption from
registration in section 203(b)(3) of the Advisers Act and the meaning
of ``client'' as used in that section, the Court of Appeals expressed
the view that, for purposes of sections 206(1) and (2) of the Advisers
Act, the ``client'' of an investment

adviser managing a pool is the pool itself, not an investor in the
pool. As a result, it was unclear whether the Commission could continue
to rely on sections 206(1) and (2) of the Advisers Act to bring
enforcement actions in certain cases where investors in a pool are
defrauded by an investment adviser to that pool.\4\
---------------------------------------------------------------------------

    \2\ Prohibition of Fraud by Advisers to Certain Pooled
Investment Vehicles; Accredited Investors in Certain Private
Investment Vehicles, Investment Advisers Act Release No. 2576 (Dec.
27, 2006) [72 FR 400 (Jan. 4, 2007)] (the ``Proposing Release''). In
the Proposing Release, we also proposed two new rules that would
define the term ``accredited natural person'' under Regulation D and
section 4(6) of the Securities Act of 1933 [15 U.S.C. 77d(6)]
(``Securities Act''). As proposed, these rules would add to the
existing definition of ``accredited investor'' and apply to private
offerings of certain unregistered investment pools. On May 23, 2007,
we voted to propose more general amendments to the definition of
accredited investor. Proposed Modernization of Smaller Company
Capital-Raising and Disclosure Requirements, Securities Act Release
No. ---- (----, 2007) [72 FR ---- (----, 2007)]. We plan to defer
consideration of our proposal to define the term accredited natural
person until we have had the opportunity to evaluate fully the
comments we received on that proposal together with those we receive
on our May 2007 proposal.
    \3\ 451 F.3d 873 (D.C. Cir. 2006) (``Goldstein'').
    \4\ Prior to the issuance of the Goldstein decision, we brought
enforcement actions against advisers alleging false and misleading
statements to investors under sections 206(1) and (2) of the
Advisers Act. See, e.g., SEC v. Kirk S. Wright, International
Management Associates, LLC, Litigation Release No. 19581 (Feb. 28,
2006); SEC v. Wood River Capital Management, LLC, Litigation Release
No. 19428 (Oct. 13, 2005); SEC v. Samuel Israel III; Daniel E.
Marino; Bayou Management, LLC; Bayou Accredited Fund, LLC; Bayou
Affiliates Fund, LLC; Bayou No Leverage Fund, LLC; and Bayou
Superfund, LLC, Litigation Release No. 19406 (Sept. 29, 2005); SEC
v. Beacon Hill Asset Management LLC, Litigation Release No. 18745A
(June 16, 2004).
---------------------------------------------------------------------------

    In its opinion, the Court of Appeals distinguished sections 206(1)
and (2) from section 206(4) of the Advisers Act, which is not limited
to conduct aimed at clients or prospective clients of investment
advisers.\5\ Section 206(4) provides us with rulemaking authority to
define, and prescribe means reasonably designed to prevent, fraud by
advisers.\6\ We proposed rule 206(4)-8 under this authority.
---------------------------------------------------------------------------

    \5\ See Goldstein, supra note 3, at note 6. See also United
States v. Elliott, 62 F.3d 1304, 1311 (11th Cir. 1995).
    \6\ Section 206(4) of the Advisers Act makes it unlawful for an
investment adviser to ``engage in any act, practice, or course of
business which is fraudulent, deceptive, or manipulative'' and
authorizes us ``by rules and regulations [to] define, and prescribe
means reasonably designed to prevent, such acts, practices, and
courses of business as are fraudulent, deceptive, or manipulative.''
---------------------------------------------------------------------------

    We received 45 comment letters in response to our proposal.\7\ Most
commenters generally supported the proposal. Eighteen endorsed the rule
as proposed, noting that the rule would strengthen the antifraud
provisions of the Advisers Act or that the rule would clarify the
Commission's enforcement authority with respect to advisers.\8\ Others,
however, urged that we make revisions that would restrict the scope of
the rule to more narrowly define the conduct or acts it prohibits.\9\
---------------------------------------------------------------------------

    \7\ We received over 600 comment letters that addressed the
proposed amendments to the term ``accredited natural person'' under
Regulation D and section 4(6) of the Securities Act. All of the
public comments we received are available for inspection in our
Public Reference Room at 100 F Street, NE., Washington DC, 20549 in
File No. S7-25-06, or may be viewed at http://www.sec.gov/comments/s7-25-06/s72506.shtml
.

    \8\ E.g., Letter of the Alternative Investments Compliance
Association (Mar. 5, 2007); Letter of the CFA Center for Financial
Market Integrity (Mar. 9, 2007) (``CFA Center Letter''); Letter of
the Coalition of Private Investment Companies (Mar. 9, 2007); Letter
of the Commonwealth of Massachusetts (Mar. 9, 2007) (``Massachusetts
Letter''); Letter of the Department of Banking of the State of
Connecticut (Mar. 8, 2007); Letter of the North America Securities
Administrators Association (Apr. 2, 2007) (``NASAA Letter''); and
Letter of the U.S. Chamber of Commerce (Mar. 9, 2007). Another
commenter observed that the proposed rules are broadly similar to
current U.K. legislation and regulations. See Letter of Alternative
Investment Management Association (Mar. 9, 2007) (``AIMA Letter'').
    \9\ E.g., Letter of American Bar Association (Mar. 12, 2007)
(``ABA Letter''); Letter of Davis Polk & Wardwell (Mar. 9, 2007)
(``Davis Polk Letter''); Letter of Dechert LLP (Mar. 8, 2007)
(``Dechert Letter''); Letter of New York City Bar (Mar. 8, 2007)
(``NYCB Letter''); Letter of Schulte Roth & Zabel LLP (Mar. 9, 2007)
(``Schulte Roth Letter''); and Letter of Sullivan & Cromwell LLP
(Mar. 9, 2007) (``Sullivan & Cromwell Letter'').
---------------------------------------------------------------------------

    Today, we are adopting new rule 206(4)-8 as proposed. The rule
prohibits advisers from (i) making false or misleading statements to
investors or prospective investors in hedge funds and other pooled
investment vehicles they advise, or (ii) otherwise defrauding these
investors. The rule clarifies that an adviser's duty to refrain from
fraudulent conduct under the federal securities laws extends to the
relationship with ultimate investors and that the Commission may bring
enforcement actions under the Advisers Act against investment advisers
who defraud investors or prospective investors in those pooled
investment vehicles.

II. Discussion

    Rule 206(4)-8 prohibits advisers to pooled investment vehicles from
(i) making false or misleading statements to investors or prospective
investors in those pools or (ii) otherwise defrauding those investors
or prospective investors. We will enforce the rule through civil and
administrative enforcement actions against advisers who violate it.
    Section 206(4) authorizes the Commission to adopt rules and
regulations that ``define, and prescribe means reasonably designed to
prevent, such acts, practices, and courses of business as are
fraudulent, deceptive, or manipulative.'' In adopting rule 206(4)-8, we
intend to employ all of the broad authority that Congress provided us
in section 206(4) and direct it at adviser conduct affecting an
investor or potential investor in a pooled investment vehicle.

A. Scope of Rule 206(4)-8

    Some commenters questioned the scope of the rule, arguing that the
Commission should define fraud.\10\ We believe that we have done so,
only more broadly than some commenters would have us do. As the
Proposing Release indicated, our intent is to prohibit all fraud on
investors in pools managed by investment advisers. Congress expected
that we would use the authority provided by section 206(4) to
``promulgate general antifraud rules capable of flexibility.'' \11\ The
terms material false statements or omissions and ``acts, practices, and
courses of business as are fraudulent, deceptive, or manipulative''
encompass the well-developed body of law under the antifraud provisions
of the federal securities laws. The legal authorities identifying the
types of acts, practices, and courses of business that are fraudulent,
deceptive, or manipulative under the federal securities laws are
numerous, and we believe that the conduct prohibited by rule 206(4)-8
is sufficiently clear and well understood.\12\
---------------------------------------------------------------------------

    \10\ E.g., ABA Letter, supra note 9; Letter of Debevoise &
Plimpton LLP (Mar. 14, 2007); and NYCB Letter, supra note 9.
    \11\ S. Rep. No. 1760, 86th Cong., 2d. Sess. (June 28, 1960) at
4. See rule 206(4)-1(a)(5) [17 CFR. 275.206(4)-1(a)(5)] under the
Advisers Act; rule 17j-1(b) [17 CFR 270.17j-1(b)] under the
Investment Company Act of 1940 [15 U.S.C. 80a-1] (``Investment
Company Act''); and rule 13e-3(b)(1) [17 CFR 240.13e-3(b)(1)] under
the Securities Exchange Act of 1934 [15 U.S.C. 77a] (``Exchange
Act'').
    \12\ Loss, Seligman, & Paredes, Securities Regulation, Chap. 9
(Fraud) (Fourth Ed. 2006); Hazen, Treatise on The Law of Securities
Regulation, Vol. 3, Ch. 12 (Manipulation and Fraud--Civil Liability;
Implied Private Remedies; SEC Rule 10b-5; Fraud in Connection With
the Purchase or Sale of Securities; Improper Trading on Nonpublic
Material Information) (Fifth Ed. 2005). See, e.g., Superintendent of
Insurance of New York v. Bankers Life & Casualty Co., 404 U.S. 6, 11
n. 7 (1971) (`` `We believe that section 10(b) and Rule 10b-5
prohibit all fraudulent schemes in connection with the purchase or
sale of securities, whether the artifices employed involve a garden
type variety of fraud, or present a unique form of deception. Novel
or atypical methods should not provide immunity from the securities
laws.' '' (quoting A. T. Brod & Co. v. Perlow, 375 F.2d 393, 397
(CA2 1967))); Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 477
(1977) (``No doubt Congress meant to prohibit the full range of
ingenious devices that might be used to manipulate securities
prices.''). Moreover, the established legal principles are
sufficiently flexible to encompass future novel factual scenarios.
United States v. Brown, 555 F.2d 336, 339-40 (2d Cir. 1977) (``The
fact that there is no litigated fact pattern precisely in point may
constitute a tribute to the cupidity and ingenuity of the
malefactors involved but hardly provides an escape from the penal
sanctions of the securities fraud provisions here involved.'').
---------------------------------------------------------------------------

1. Investors and Prospective Investors
    Rule 206(4)-8 prohibits investment advisers from making false or
misleading statements to, or engaging in other fraud on, investors or
prospective investors in a pooled investment vehicle they manage. The
scope of the rule is modeled on that of sections 206(1) and (2) of the
Advisers Act, which make unlawful fraud by advisers against clients or
prospective clients. Rule 206(4)-8 prohibits false or misleading
statements made, for example, to existing investors in account
statements

as well as to prospective investors in private placement memoranda,
offering circulars, or responses to ``requests for proposals,''
electronic solicitations, and personal meetings arranged through
capital introduction services.
    Some commenters argued that the rule should not prohibit fraud
against prospective investors in a pooled investment vehicle, asserting
that such fraud does not actually harm investors until they, in fact,
make an investment.\13\ We disagree. False or misleading statements and
other frauds by advisers are no less objectionable when made in an
attempt to draw in new investors than when made to existing
investors.\14\ For similar policy reasons that we believe led Congress
to apply the protections of sections 206(1) and (2) to prospective
clients, we have decided to apply those of rule 206(4)-8 to prospective
investors.\15\ We believe that prohibiting false or misleading
statements made to, or other fraud on, any prospective investors is a
means reasonably designed to prevent fraud.
---------------------------------------------------------------------------

    \13\ Davis Polk Letter, supra note 9; Dechert Letter, supra note
9; NYCB Letter, supra note 9; Letter of the Securities Industry and
Financial Markets Association (Mar. 9, 2007); Sullivan & Cromwell
Letter, supra note 9.
    \14\ See CFA Center Letter, supra note 8.
    \15\ We have used the term ``prospective investor'' to give the
term similar scope to the term ``prospective client'' in sections
206(1) and (2). See, e.g., In the Matter of Ralph Harold Seipel, 38
S.E.C. 256, 257-58 (1958) (the solicitation of clients is part of
the activity of an investment adviser and it is immaterial for
purposes of an enforcement action under sections 206(1) and (2) that
an adviser engaging in fraudulent solicitations was not successful
in his efforts to obtain clients).
---------------------------------------------------------------------------

2. Unregistered Investment Advisers
    Rule 206(4)-8 applies to both registered and unregistered
investment advisers.\16\ As we noted in the Proposing Release, many of
our enforcement cases against advisers to pooled investment vehicles
have been brought against advisers that are not registered under the
Advisers Act, and we believe it is critical that we continue to be in a
position to bring actions against unregistered advisers that manage
pools and that defraud investors in those pools.\17\ The two commenters
that expressed an explicit view on this aspect of the proposal
supported our application of the rule to advisers that are not
registered with the Commission.\18\
---------------------------------------------------------------------------

    \16\ A few commenters requested that we clarify how we intend to
apply rule 206(4)-8 to offshore advisers' interaction with non-U.S.
investors. See AIMA Letter, supra note 8; Letter of Jones Day (Mar.
9, 2007); Sullivan & Cromwell Letter, supra note 9. Our adoption of
this rule will not alter our jurisdictional authority.
    \17\ Proposing Release, supra note 2, at note 14.
    \18\ Massachusetts Letter, supra note 8; NASAA Letter, supra
note 8.
---------------------------------------------------------------------------

3. Pooled Investment Vehicles
    The rule we are adopting today applies to investment advisers with
respect to any ``pooled investment vehicle'' they advise. The rule
defines a pooled investment vehicle \19\ as any investment company
defined in section 3(a) of the Investment Company Act \20\ and any
privately offered pooled investment vehicle that is excluded from the
definition of investment company by reason of either section 3(c)(1) or
3(c)(7) of the Investment Company Act.\21\ As a result, the rule
applies to advisers to hedge funds, private equity funds, venture
capital funds, and other types of privately offered pools that invest
in securities, as well as advisers to investment companies that are
registered with us.\22\
---------------------------------------------------------------------------

    \19\ Rule 206(4)-8(b).
    \20\ 15 U.S.C. 80a-3(a). Unless otherwise noted, when we refer
to the Investment Company Act, or any paragraph of the Investment
Company Act, we are referring to 15 U.S.C. 80a of the United States
Code, at which the Company Act is codified.
    \21\ Section 3(c)(1) of the Investment Company Act excludes from
the definition of investment company an issuer the securities (other
than short-term paper) of which are beneficially owned by not more
than 100 persons and that is not making or proposing to make a
public offering of its securities. Section 3(c)(7) of the Investment
Company Act excludes from the definition of investment company an
issuer the outstanding securities of which are owned exclusively by
persons who, at the time of acquisition of such securities, are
``qualified purchasers'' and that is not making or proposing to make
a public offering of its securities. ``Qualified purchaser'' is
defined in section 2(a)(51) of the Investment Company Act generally
to include a natural person (or a company owned by two or more
related natural persons) who owns not less than $5,000,000 in
investments; a person, acting for its own account or accounts of
other qualified purchasers, who owns and invests on a discretionary
basis, not less than $25,000,000; and a trust whose trustee, and
each of its settlors, is a qualified purchaser.
    \22\ We have brought enforcement actions under the Advisers Act
against advisers to these types of funds. See, e.g., In the Matter
of Askin Capital Management, L.P and David J. Askin, Investment
Advisers Act Release No. 1492 (May 23, 1995) (hedge fund); In the
Matter of Thayer Capital Partners, Investment Advisers Act Release
No. 2276 (Aug. 12, 2004) (private equity fund); SEC v. Michael A.
Liberty, Litigation Release No. 19601 (Mar. 8, 2006) (venture
capital fund).
---------------------------------------------------------------------------

    Several commenters supported applying the protection of the new
antifraud rule to investors in all these kinds of pooled investment
vehicles, noting, for example, that every investor, not just the
wealthy or sophisticated that typically invest in private pools, should
be protected from fraud.\23\ Some other commenters urged us not to
apply the rule to advisers to registered investment companies, arguing
that the rule is unnecessary because other provisions of the federal
securities laws prohibiting fraud are available to the Commission to
address these matters.\24\ They expressed concern that application of
another antifraud provision with different elements would be
burdensome. These commenters claimed that the rule would, for example,
make it necessary for advisers to conduct extensive reviews of all
communications with clients. But the other antifraud provisions
available to us contain different elements because they were not
specifically designed to address frauds by investment advisers with
respect to investors in pooled investment vehicles. In some cases, the
other antifraud provisions may not permit us to proceed against the
adviser.\25\ As a result, the existing antifraud provisions may not be
available to us in all cases. As we discussed above, before the
Goldstein decision we had brought actions against advisers to mutual
funds under sections 206(1) and (2) for defrauding investors in mutual
funds.\26\ Because, before the Goldstein decision, advisers to pooled
investment vehicles operated with the understanding that the Advisers
Act prohibited the conduct that this rule prohibits, we believe that
advisers that are attentive to their traditional compliance
responsibilities will not need to alter their business practices or
take additional steps and incur new costs as a result of this rule's
adoption.
---------------------------------------------------------------------------

    \23\ E.g., NASAA Letter, supra note 8.
    \24\ E.g., ABA Letter, supra note 9; Letter of Investment
Adviser Association (Mar. 9, 2007); Letter of Investment Company
Institute (Mar. 9, 2007) (``ICI Letter''); Sullivan & Cromwell
Letter, supra note 9. Commenters noted in particular that section
34(b) of the Investment Company Act already prohibits an adviser
from making fraudulent material statements or omissions in a fund's
registration statement or in required records.
    \25\ This may be the case with respect to section 34(b) of the
Investment Company Act, for example, if the adviser's fraudulent
statements are not made in a document described in that section, or
with respect to rule 10b-5 under the Exchange Act, where the
fraudulent conduct does not relate to a misstatement or omission in
connection with the purchase or sale of any security.
    \26\ See, e.g., In the Matter of Van Kampen Investment Advisory
Corp., Investment Advisers Act Release No. 1819 (Sept. 8, 1999); In
the Matter of The Dreyfus Corporation, Investment Advisers Act
Release No. 1870 (May 10, 2000); In the Matter of Federated
Investment Management Company, Investment Advisers Act Release No.
2448 (Nov. 28, 2005).
---------------------------------------------------------------------------

B. Prohibition on False or Misleading Statements

    Rule 206(4)-8(a)(1) prohibits any investment adviser to a pooled
investment vehicle from making an untrue statement of a material fact
to any investor or prospective investor in the pooled investment
vehicle, or omitting to state a material fact necessary in order to
make the statements made to any investor or

prospective investor in the pooled investment vehicle, in the light of
the circumstances under which they were made, not misleading.\27\
---------------------------------------------------------------------------

    \27\ A fact is material if there is a substantial likelihood
that a reasonable investor in making an investment decision would
consider it as having significantly altered the total mix of
information available. Basic, Inc. v. Levinson, 485 U.S. 224, 231-32
(1988); TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449
(1976). See also In the Matter of Van Kampen Investment Advisory
Corp., supra note 26; In the Matter of the Dreyfus Corporation,
supra note 26.
---------------------------------------------------------------------------

    The provision is very similar to those in many of our antifraud
laws and rules that, depending upon the circumstances, may also be
applicable to the same investor communications.\28\ Sections 206(1) and
(2) have imposed similar obligations on advisers since 1940 and, before
Goldstein, were commonly accepted as imposing similar requirements on
communications with investors in a fund. For these reasons, and because
the nature of the duty to communicate without false statements is so
well developed in current law, we believe that commenters' concerns
about the breadth of the prohibition or any chilling effect the new
rule might have on investor communications are misplaced.\29\ Advisers
to pooled investment vehicles attentive to their traditional compliance
responsibilities will not need to alter their communications with
investors.
---------------------------------------------------------------------------

    \28\ See, e.g., sections 12 and 17 of the Securities Act [15
U.S.C. 77l, 77q]; section 14 of the Exchange Act [15 U.S.C. 78n];
section 34 of the Investment Company Act; rules 156, 159, and 610
under the Securities Act [17 CFR 230.156, 230.159, 230.610]; rules
10b-5, 13e-3, 13e-4, and 15c1-2 under the Exchange Act [17 CFR
240.10b-5, 240.13e-3, 240.13e-4, 240.15c1-2]; and rule 17j-1 under
the Investment Company Act [17 CFR 270.17j-1]).
    \29\ Letter of Managed Funds Association (Mar. 9, 2007) (``MFA
Letter''); NYCB Letter, supra note 9; Davis Polk Letter, supra note
9; Dechert Letter, supra note 9; Letter of Seward & Kissel LLP (Mar.
8, 2007) (``Seward & Kissel Letter'').
---------------------------------------------------------------------------

    Rule 206(4)-8(a)(1) prohibits advisers to pooled investment
vehicles from making any materially false or misleading statements to
investors in the pool regardless of whether the pool is offering,
selling, or redeeming securities. While the new rule differs in this
aspect from rule 10b-5 under the Exchange Act, the conduct prohibited
is similar. The new rule prohibits, for example, materially false or
misleading statements regarding investment strategies the pooled
investment vehicle will pursue, the experience and credentials of the
adviser (or its associated persons), the risks associated with an
investment in the pool, the performance of the pool or other funds
advised by the adviser, the valuation of the pool or investor accounts
in it, and practices the adviser follows in the operation of its
advisory business such as how the adviser allocates investment
opportunities.\30\
---------------------------------------------------------------------------

    \30\ We have previously brought enforcement actions alleging
these or similar types of frauds. See Proposing Release, supra note
2, at note 29.
---------------------------------------------------------------------------

C. Prohibition of Other Frauds

    Rule 206(4)-8(a)(2) makes it a fraudulent, deceptive, or
manipulative act, practice, or course of business for any investment
adviser to a pooled investment vehicle to ``otherwise engage in any
act, practice, or course of business that is fraudulent, deceptive, or
manipulative with respect to any investor or prospective investor in
the pooled investment vehicle.'' \31\ As we noted in the Proposing
Release, the wording of this provision is drawn from the first sentence
of section 206(4) and is designed to apply more broadly to deceptive
conduct that may not involve statements.\32\
---------------------------------------------------------------------------

    \31\ Rule 206(4)-8(a)(2).
    \32\ See Section II.C of the Proposing Release, supra note 2.
---------------------------------------------------------------------------

    Some commenters asserted that section 206(4) provides us authority
only to adopt prophylactic rules that explicitly identify conduct that
would be fraudulent under the new rule.\33\ We believe our authority is
broader. We do not believe that the commenters' suggested approach
would be consistent with the purposes of the Advisers Act or the
protection of investors. That approach would have us adopt the rule
prohibiting fraudulent communications but not fraudulent conduct.\34\
But, section 206(4) itself specifically authorizes us to adopt rules
defining and prescribing ``acts, practices and courses of business,''
(i.e., conduct), and does not explicitly refer to communications,
which, nonetheless, represent a form of an act, practice, or course of
business. In addition, rule 206(4)-8 as adopted would provide greater
protection to investors in pooled investment vehicles.
---------------------------------------------------------------------------

    \33\ ABA Letter, supra note 9; ICI Letter, supra note 24;
Schulte Roth Letter, supra note 9; Sullivan & Cromwell Letter, supra
note 9.
    \34\ See, e.g., ABA Letter, supra note 9.
---------------------------------------------------------------------------

    Alternatively, commenters would have us adopt a rule prohibiting
identified known fraudulent conduct or would have us provide detailed
commentary describing specific forms of fraudulent conduct that the
rule would prohibit.\35\ Either approach would fail to prohibit
fraudulent conduct we did not identify, and could provide a roadmap for
those wishing to engage in fraudulent conduct. This approach would be
inconsistent with our historical application of the federal securities
laws under which broad prohibitions have been applied against specific
harmful activity.
---------------------------------------------------------------------------

    \35\ Id.
---------------------------------------------------------------------------

D. Other Matters

    We noted in the Proposing Release that, unlike violations of rule
10b-5 under the Exchange Act, the Commission would not need to
demonstrate that an adviser violating rule 206(4)-8 acted with
scienter.\36\ Commenters questioned whether the rule should encompass
negligent conduct, arguing that it would ``expand the concept of fraud
itself beyond its original meaning.'' \37\ We read the language of
section 206(4) as not by its terms limited to knowing or deliberate
conduct. For example, section 206(4) encompasses ``acts, practices, and
courses of business as are * * * deceptive,'' thereby reaching conduct
that is negligently deceptive as well as conduct that is recklessly or
deliberately deceptive. In addition, the Court of Appeals for the
District of Columbia Circuit concluded that ``scienter is not required
under section 206(4).'' \38\ We believe use of a negligence standard
also is appropriate as a method reasonably designed to prevent fraud.
As the Supreme Court noted in U.S. v. O'Hagan, ``[a] prophylactic
measure, because its mission is to prevent, typically encompasses more
than the core activity prohibited.'' \39\ In O'Hagan, the Court held
that under section 14(e) ``the Commission may prohibit acts, not
themselves fraudulent under the common law or Sec.  10(b), if the
prohibition is `reasonably designed to prevent * * * acts and practices
[that] are fraudulent.' '' \40\ Along these lines, the prohibitions in
rule 206(4)-8 are reasonably designed to prevent fraud. We believe
that, by taking sufficient care to avoid negligent conduct, advisers
will be more likely to avoid reckless deception. Since the Commission
clearly is authorized to prescribe

conduct that goes beyond fraud as a means reasonably designed to
prevent fraud, prohibiting deceptive conduct done negligently is a way
to accomplish this objective.
---------------------------------------------------------------------------

    \36\ Section II.B of the Proposing Release, supra note 2.
    \37\ See ABA Letter, supra note 9 at page 3.
    \38\ SEC v. Steadman, 967 F.2d 636, at 647 (D.C. Cir. 1992). The
court in Steadman analogized section 206(4) of the Advisers Act to
section 17(a)(3) of the Securities Act, which the Supreme Court had
held did not require a finding of scienter, id. (citing Aaron v.
SEC, 446 U.S. 680 (1980)). In discussing section 17(a)(3) and its
lack of a scienter requirement, the Steadman court observed that,
similarly, a violation of section 206(2) of the Advisers Act could
rest on a finding of simple negligence. Id. at 643, note 5. But see
Aaron at 690-91 (citing Ernst & Ernst v. Hochfelder, 425 U.S. 185,
199 (1976)); cf. S. Rep. No. 1760, 86th Cong., 2d. Sess. (June 28,
1960) at 8 and H. R. Rep. 2179, 86th Cong., 2d Sess. (Aug. 26, 1960)
at 8 (comparing section 206(4) to section 15(c)(2) of the Exchange
Act).
    \39\ U.S. v. O'Hagan, 521 U.S. 642, 672-73 (1997).
    \40\ Id. at 673.
---------------------------------------------------------------------------

    Rule 206(4)-8 does not create under the Advisers Act a fiduciary
duty to investors or prospective investors in a pooled investment
vehicle not otherwise imposed by law. Nor does the rule alter any duty
or obligation an adviser has under the Advisers Act, any other federal
law or regulation, or any state law or regulation (including state
securities laws) to investors in a pooled investment vehicle it
advises.\41\ The rule, for example, will permit us to bring an
enforcement action against an investment adviser that violates a
fiduciary duty imposed by other law if the violation of such law or
obligation also constitutes an act, practice, or course of business
that is fraudulent, deceptive, or manipulative within the meaning of
the rule and section 206(4).\42\
---------------------------------------------------------------------------

    \41\ For example, under the Uniform Limited Partnership Act,
advisers who serve as general partners owe fiduciary duties to the
limited partners. Unif. Limited Partnership Act section 408 (2001).
    \42\ For example, if an adviser has a duty from a source other
than the rule to make a material disclosure to an investor in a fund
and negligently or deliberately fails to make the disclosure, the
rule would apply to the failure.
---------------------------------------------------------------------------

    Finally, the rule does not create a private right of action.\43\
---------------------------------------------------------------------------

    \43\ The Supreme Court has held that ``there exists a limited
private remedy under the Investment Advisers Act of 1940 to void an
investment adviser's contract, but that the Act confers no other
private causes of action, legal or equitable.'' Transamerica
Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11 at 24 (1979) (footnote
omitted).
---------------------------------------------------------------------------

III. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 does not apply because rule
206(4)-8 does not impose a new ``collection of information'' within the
meaning of the Paperwork Reduction Act of 1995. The rule does not
create any filing, reporting, recordkeeping, or disclosure requirements
for investment advisers subject to the rule. Accordingly, there is no
``collection of information'' under the Paperwork Reduction Act that
requires the approval of the Office of Management and Budget under 44
U.S.C. 3501.

 IV. Cost-Benefit Analysis

    The Commission is sensitive to costs imposed by our rules and the
benefits that derive from them. In the Proposing Release, we encouraged
commenters to discuss any potential costs and benefits that we did not
consider in our discussion. Three commenters addressed the issue of
cost. Two of them stated their belief that the rule would increase
advisers' costs of compliance, by, for example, making it necessary for
advisers to conduct extensive reviews of all communications with
clients.\44\ One stated that the rule would achieve a reasonable
balance of providing important benefits to investors at an acceptable
cost.\45\ None of the three commenters, however, provided analysis or
empirical data in connection with their statements.
---------------------------------------------------------------------------

    \44\ NYCB Letter, supra note 9; Seward & Kissel Letter, supra
note 29.
    \45\ CFA Center Letter, supra note 8.
---------------------------------------------------------------------------

    The rule makes it a fraudulent, deceptive, or manipulative act,
practice, or course of business within the meaning of section 206(4)
for any investment adviser to a pooled investment vehicle to make any
untrue statement of a material fact or to omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading, to any
investor or prospective investor in the pooled investment vehicle. The
rule also makes it a fraudulent, deceptive, or manipulative act,
practice, or course of business within the meaning of section 206(4)
for any investment adviser to a pooled investment vehicle to otherwise
engage in any act, practice, or course of business that is fraudulent,
deceptive, or manipulative with respect to any investor or prospective
investor in the pooled investment vehicle. For the reasons discussed,
we do not believe that the rule will require advisers to incur new or
additional costs.
    Investment advisers to pooled investment vehicles should not be
making untrue statements or omitting material facts or otherwise be
engaged in fraud with respect to investors or prospective investors in
pooled investment vehicles today, because federal authorities, state
authorities, and private litigants often can, and do, seek redress from
the adviser for the untrue statements or omissions or other frauds. In
most cases, the conduct that the rule prohibits is already prohibited
by federal securities statutes,\46\ other federal statutes (including
federal wire fraud statutes),\47\ as well as state law.\48\
---------------------------------------------------------------------------

    \46\ See, e.g., section 10(b) of the Exchange Act [15 U.S.C.
78j(b)] and section 17(a) of the Securities Act [15 U.S.C. 77q]
which would apply when the false statements are made ``in connection
with the purchase or sale of a security'' or involve the ``offer or
sale'' of a security, and section 34(b) of the Investment Company
Act which makes it unlawful ``to make any untrue statement of a
material fact in any registration statement, application, report,
account, record, or other document filed or transmitted pursuant to
[the Investment Company Act] * * *.''
    \47\ See, e.g., 18 U.S.C. 1341 (Frauds and Swindles) and 18
U.S.C. 1343 (Fraud by wire, radio, or television) which make it a
criminal offense to use the mails or to communicate by means of
wire, having devised a scheme to defraud or for obtaining money or
property by means of false or fraudulent pretenses, and 18 U.S.C.
1957 (Engaging in monetary transactions in property derived from
specified unlawful activity) which makes it a criminal racketeering
offense to engage or attempt to engage in a transaction in
criminally derived property of a value greater than $10,000.
    \48\ See, e.g., Metro Communications Corp. BVI v. Advanced
Mobilecomm Technologies, 854 A.2d 121, 156 (Del. Ch. 2004) (court
held that plaintiff-former member of LLC had sufficiently alleged a
common law fraud claim based on the allegation that a series of
reports by LLC's managers contained misleading statements; court
stated that ``[i]n the usual fraud case, the speaking party who is
subject to an accusation of fraud is on the opposite side of a
commercial transaction from the plaintiff, who alleges that but for
the material misstatements or omissions of the speaking party he
would not have contracted with the speaking party'').
---------------------------------------------------------------------------

    We recognize that there are costs involved in assuring that
communications to investors and prospective investors do not contain
untrue or misleading statements and preventing other frauds. Advisers
have incurred, and will continue to incur, these costs due to the
prohibitions and deterrent effect of the law and rules that apply under
these circumstances. While each of the provisions noted above may have
different limitation periods, apply in different factual circumstances,
or require the government (or a private litigant) to prove different
states of mind than the rule, as discussed above we believe that the
multiple prohibitions against fraud, and the consequences under both
criminal and civil law for fraud, should currently cause an adviser to
take the precautions it deems necessary to refrain from such conduct.
    Furthermore, prior to Goldstein, advisers operated with the
understanding that the Advisers Act prohibited the same conduct that
would be prohibited by the rule. Accordingly, we do not believe that
advisers to pooled investment vehicles attentive to their traditional
compliance responsibilities will need to take steps or alter their
business practices in such a way that will require them to incur new or
additional costs as a result of the adoption of the rule.
    We also recognize that the rule may cause some advisers to pay more
attention to the information they present to better guard against
making an untrue or misleading statement to an investor or prospective
investor and to reevaluate measures that are intended to prevent fraud.
As a consequence, some advisers might seek guidance, legal or
otherwise, and more closely review the

information that they disseminate to investors and prospective
investors and the antifraud related policies and procedures they have
implemented. While increased concern about making false statements or
committing fraud could be attributable to the new rule, advisers should
already be incurring these costs to ensure truthfulness and prevent
fraud, regardless of the rule, because of the myriad of laws or
regulations that may already apply.
    The principal benefit of the rule is that it clearly enables the
Commission to bring enforcement actions under the Advisers Act, if an
adviser to a pooled investment vehicle disseminates false or misleading
information to investors or prospective investors or otherwise commits
fraud with respect to any investor or prospective investor. As noted
above, the existing antifraud provisions may not be available to us in
all cases. Through our enforcement actions we are able to protect fund
investor assets by stopping ongoing frauds,\49\ barring persons that
have committed certain specified violations or offenses from being
associated with an investment adviser,\50\ imposing penalties,\51\
seeking court orders to protect fund assets,\52 \and to order
disgorgement of ill-gotten gains.\53\ Moreover, we believe that rule
206(4)-8 will deter advisers to pooled investment vehicles from
engaging in fraudulent conduct with respect to investors in those pools
and will provide investors with greater confidence when investing in
pooled investment vehicles.
---------------------------------------------------------------------------

    \49\ See section 203(k) of the Advisers Act (Commission
authority to issue cease and desist orders).
    \50\ See section 203(f) of the Advisers Act (Commission
authority to bar a person from being associated with an investment
adviser).
    \51\ See section 203(i) of the Advisers Act (Commission
authority to impose civil penalties).
    \52\ See section 209(d) of the Advisers Act (Commission
authority to seek injunctions and restraining orders in federal
court).
    \53\ See section 203(j) of the Advisers Act (Commission
authority to order disgorgement).
---------------------------------------------------------------------------

V. Regulatory Flexibility Act Analysis

    The Commission certified, pursuant to section 605(b) of the
Regulatory Flexibility Act, that rule 206(4)-8 will not have a
significant economic impact on a substantial number of small
entities.\54\ This certification was included in the Proposing
Release.\55\ While we encouraged written comment regarding this
certification, none of the commenters responded to this request.
---------------------------------------------------------------------------

    \54 \ 5 U.S.C. 605(b).
    \55\ Section VII.A of the Proposing Release, supra note 2.
---------------------------------------------------------------------------

VI. Statutory Authority

    We are adopting new rule 206(4)-8 pursuant to our authority set
forth in sections 206(4) and 211(a) of the Advisers Act (15 U.S.C. 80b-
6(4) and 80b-11(a)).

List of Subjects in 17 CFR Part 275

    Reporting and recordkeeping requirements, Securities.

VII. Text of Rules

0
For the reasons set out in the preamble, Title 17, Chapter II of the
Code of Federal Regulations is amended as follows:

PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940

0
1. The authority citation for Part 275 continues to read in part as
follows:

    Authority: 15 U.S.C. 80b-2(a)(11)(F), 80b-2(a)(17), 80b-3, 80b-
4, 80b-4a, 80b-6(4), 80b-6a, and 80b-11, unless otherwise noted.
* * * * *

0
2. Section 275.206(4)-8 is added to read as follows:

Sec.  206(4)-8  Pooled investment vehicles.

    (a) Prohibition. It shall constitute a fraudulent, deceptive, or
manipulative act, practice, or course of business within the meaning of
section 206(4) of the Act (15 U.S.C. 80b-6(4)) for any investment
adviser to a pooled investment vehicle to:
    (1) Make any untrue statement of a material fact or to omit to
state a material fact necessary to make the statements made, in the
light of the circumstances under which they were made, not misleading,
to any investor or prospective investor in the pooled investment
vehicle; or
    (2) Otherwise engage in any act, practice, or course of business
that is fraudulent, deceptive, or manipulative with respect to any
investor or prospective investor in the pooled investment vehicle.
    (b) Definition. For purposes of this section ``pooled investment
vehicle'' means any investment company as defined in section 3(a) of
the Investment Company Act of 1940 (15 U.S.C. 80a-3(a)) or any company
that would be an investment company under section 3(a) of that Act but
for the exclusion provided from that definition by either section
3(c)(1) or section 3(c)(7) of that Act (15 U.S.C. 80a-3(c)(1) or (7)).

    Dated: August 3, 2007.

    By the Commission.
Nancy M. Morris,
Secretary.

Concurrence of Commissioner Paul S. Atkins to the Prohibition of Fraud
by Advisers to Certain Pooled Investment Vehicles

    New Rule 206(4)-8 under the Investment Advisers Act of 1940
(``Advisers Act''),\56\ which we adopt today, prohibits advisors from
(i) making false or misleading statements to investors or prospective
investors in hedge funds and other pooled investment vehicles they
advise, or (ii) otherwise defrauding these investors.\57\ Although the
SEC has other ways to reach fraud by advisors, this new rule will fill
in gaps in the coverage of other transaction-based, anti-fraud
provisions so that the SEC may pursue advisors of pooled investment
vehicles who have defrauded investors and prospective investors in the
course of their acting as fund advisors. I support the new rule, but I
am writing separately to express my disagreement with the conclusions
in the Adopting Release \58\ related to the requisite mental state for
violation of the rule.\59\
---------------------------------------------------------------------------

    \56\ 15 U.S.C. 80b.
    \57\ 17 CFR 275.206(4)-8. Paragraph (a) of the new rule
provides:
    Prohibition. It shall constitute a fraudulent, deceptive, or
manipulative act, practice or course of business within the meaning
of section 206(4) of the Act (15 U.S.C. 80b-6(4)) for any investment
adviser to a pooled investment vehicle to:
    (1) Make any untrue statement of a material fact or to omit to
state a material fact necessary to make the statements made, in the
light of the circumstances under which they were made, not
misleading, to any investor or prospective investor in the pooled
investment vehicle; or
    (2) Otherwise engage in any act, practice, or course of business
that is fraudulent, deceptive, or manipulative with respect to any
investor or prospective investor in the pooled investment vehicle.
    Paragraph (b) of the rule defines a ``pooled investment
vehicle'' to include any investment company and any company that
relies on an exclusion from the definition of ``investment company''
in Section (3)(c)(1) or (3)(c)(7) of the Investment Company Act [15
U.S.C. 80a-3(c)(1) or (7))].
    \58\ Prohibition of Fraud by Advisers to Certain Pooled
Investment Vehicles, Advisers Act Release No. 2628 (Aug. 3, 2007)
(``Adopting Release'').
    \59\ See Section II.D of the Adopting Release. I agree with the
Section's conclusions with respect to fiduciary duty (Rule 206(4)-8
does not create a fiduciary duty) and private rights of action (Rule
206(4)-8 does not create any private rights of action).
---------------------------------------------------------------------------

    In discussing the mental state required for violation of the rule,
the Adopting Release states that ``the Commission would not need to
demonstrate that an adviser violating rule 206(4)-8 acted with
scienter.'' \60\

According to the Adopting Release, therefore, the rule covers negligent
conduct as well as intentional conduct. My objections to this
interpretation of the rule's scope are twofold. First, I do not believe
that a negligence standard is consistent with the Commission's
authority under Section 206(4). Second, even if a negligence standard
were within our authority, for policy reasons, we should require a
finding of scienter \61\ as part of establishing a violation under this
anti-fraud rule.
---------------------------------------------------------------------------

    \60\ Adopting Release, at text accompanying note 36.
    \61\ ``Scienter'' is ``a mental state embracing intent to
deceive, manipulate, or defraud.'' Ernst & Ernst v. Hochfelder, 425
U.S. 185, 194 (1976). Recklessness has also been found to satisfy a
scienter standard.
---------------------------------------------------------------------------

    The Adopting Release offers several arguments in support of a
negligence standard. First, it argues that the language of section
206(4) is not limited to knowing or deliberate conduct. In support of
this argument, it cites the decision by the United States Court of
Appeals for the District of Columbia Circuit in SEC v. Steadman.\62\
Second, the Adopting Release contends that use of a negligence standard
is an appropriate method reasonably designed to prevent fraud. In
support of this contention, it cites U.S. v. O'Hagan.\63\ I will
discuss each of these in turn.
---------------------------------------------------------------------------

    \62\ SEC v. Steadman, 967 F.2d 636 (D.C. Cir. 1992).
    \63\ U.S. v. O'Hagan, 521 U.S. 642, 672-73 (1997).
---------------------------------------------------------------------------

    The language of Section 206(4) does not reach negligent conduct.
Section 206(4) makes it unlawful for an advisor ``to engage in any act,
practice, or course of business which is fraudulent, deceptive, or
manipulative'' and directs the Commission ``by rules and regulations
[to] define, and prescribe means reasonably designed to prevent, such
acts, practices, and courses of business as are fraudulent, deceptive,
or manipulative.''
    The Adopting Release maintains that, because Section 206(4)
``encompasses `acts, practices, and courses of business as are * * *
deceptive,' '' it reaches ``conduct that is negligently deceptive as
well as conduct that is recklessly or deliberately deceptive.'' \64\ As
the Supreme Court has said, however, ``it is a `familiar principle of
statutory construction that words grouped in a list should be given
related meaning.' '' \65\ Hence, it is inappropriate to base a
conclusion that negligent conduct is reached by looking at the term
``deceptive'' apart from its companion terms.
---------------------------------------------------------------------------

    \64\ Adopting Release at Section II.D.
    \65\ Schreiber v. Burlington Northern, Inc. 472 U.S. 1, 8 (1985)
(quoting Securities Industry Assn. v. Board of Governors, FRS, 468
U.S. 207, 218 (1984).
---------------------------------------------------------------------------

    In the Section 10(b) context, the Supreme Court has accorded
special significance to the term ``manipulative'':

    Use of the word ``manipulative'' is especially significant. It
is and was virtually a term of art when used in connection with
securities markets. It connotes intentional or willful conduct
designed to deceive or defraud investors by controlling or
artificially affecting the price of securities.\66\
---------------------------------------------------------------------------

    \66\ Hochfelder, 425 U.S. at 199 (footnote to dictionary
definition omitted). Hochfelder considered whether scienter was a
necessary component of a private action under Section 10(b). In a
subsequent case, the Court considered whether scienter was a
necessary element of an injunctive action by the SEC and concluded
that it was. Aaron v. SEC, 446 U.S. 680, 691 (1980) (``the rationale
of Hochfelder ineluctably leads to the conclusion that scienter is
an element of a violation of section 10(b) and Rule 10b-5,
regardless of the identity of the plaintiff or the nature of the
relief sought.'').

    The language of Section 206(4), like the language of Section 10(b),
would seem then to suggest a scienter requirement.
    The Adopting Release, however, cites for the contrary conclusion a
decision by the United States Court of Appeals for the District of
Columbia. Indeed, it is true that in SEC v. Steadman, the court held
that ``scienter is not required under section 206(4).'' \67\ The court
reached its conclusion by comparing the language of Section 206(4) to
the language of Section 17(a)(3) under the Securities Act of 1933,\68\
which makes it unlawful ``to engage in any transaction, practice, or
course of business which operates or would operate as a fraud or deceit
upon the purchaser.'' \69\ The Steadman court drew a comparison between
Section 17(a)(3)'s ``transaction, practice, or course of business'' and
Section 206(4)'s ``act, practice, or course of business.'' The court,
relying on the Supreme Court's decision in Aaron, held that, in both
cases, the focus was on effect. \70\ The Supreme Court in Aaron,
however, placed considerable weight on the terms ``operate'' or ``would
operate,'' neither of which appears in Section 206(4).\71\ In fact,
Section 206(4) instead uses the affirmative word ``is,'' which would
seem to de-emphasize effect.\72\ Further, while Section 17(a)(3) speaks
of only ``fraud'' and ``deceit,'' Section 206(4) also includes
``manipulative.''
---------------------------------------------------------------------------

    \67\ Steadman, 967 F.2d at 647.
    \68\ 15 U.S.C. 77a et seq.
    \69\ 15 U.S.C. 77q(a)(3).
    \70\ Steadman at 647.
    \71\ Aaron, 446 U.S. at 696-97 (``the language of section
17(a)(3), under which it is unlawful for any person to `engage in
any transaction, practice, or course of business which operates or
would operate as a fraud or deceit,' quite plainly focuses upon the
effect of particular conduct * * * rather than upon the culpability
of the person responsible.'') (emphasis in original).
    \72\ Section 206(4) makes it unlawful ``to engage in any act,
practice, or course of business which is fraudulent, deceptive, or
manipulative.'' (Emphasis added.)
---------------------------------------------------------------------------

    It is also helpful to note that Section 206(4), which was adopted
in 1960,\73\ was modeled on Section 15(c)(2) under the Securities
Exchange Act of 1934.\74\ Section 15(c)(2) makes it unlawful for
brokers and dealers to effect transactions in or induce the purchase or
sale of securities in connection with which they ``engage[] in any
fraudulent, deceptive, or manipulative act or practices, or make[] any
fictitious quotation.'' \75\ Hence, as the legislative history of
Section 206(4) noted, Section 206(4) ``is comparable to section
15(c)(2).'' \76\ The Steadman opinion did not address the link between
Sections 206(4) and 15(c)(2).
---------------------------------------------------------------------------

    \73\ S. Rep. No. 86-1760, at 4 (1960) (``The proposal has
precedent in similar authority granted to the SEC over brokers and
dealers by the Securities Exchange Act of 1934.'').
    \74\ 15 U.S.C. 78a et seq.
    \75\ 15 U.S.C. 78o(c)(2).
    \76\ H.R. Rep. No. 86-2179, at 8 (1960). See also S. Rep. No.
86-1760, at 8 (1960) (``almost the identical wording of section
15(c)(2)'').
---------------------------------------------------------------------------

    Section 14(e) under the Exchange Act, which relates to tender
offers, also follows the Section 15(c)(2) pattern.\77\ Section 14(e),
like Section 206(4), includes both a proscription against ``engag[ing]
in any fraudulent, deceptive, or manipulative acts or practices'' and a
directive that the SEC ``by rules and regulations define, and prescribe
means reasonably designed to prevent such acts and practices as are
fraudulent, deceptive, or manipulative.'' Because of the similarities,
it is useful to look at the Supreme Court's interpretation of Section
14(e). In Schreiber v. Burlington Northern, the Supreme Court relied on
Hochfelder's interpretation of the term ``manipulative'' in the Section
10(b) context to interpret that term in the Section 14(e) context.\78\
The Schreiber Court noted that the addition of the rulemaking
authorization to Section 14(e) did not ``suggest[] any change in the
meaning of `manipulative' itself.'' \79\ In U.S. v. O'Hagan, The
Supreme Court again looked at Section 14(e). This time, it considered
whether Rule 14e-3(a), which prohibits trading on undisclosed
information in connection with a tender offer, exceeds the SEC's
authority under Section 14(e) given that the prohibition applies
regardless of whether there is a duty to disclose. The Court held that

Rule 14e-3(a) was within the SEC's authority under Section 14(e)
because Section 14(e) allows the SEC to ``prohibit acts, not themselves
fraudulent under the common law or Sec.  10(b), if the prohibition is
`reasonably designed to prevent * * * acts and practices [that] are
fraudulent.' '' \80\ The lesson from both of these cases is that the
SEC cannot effect a change in the meaning of specific statutory terms
under its comparable Section 206(4) rulemaking authority.
---------------------------------------------------------------------------

    \77\ 15 U.S.C. 78n(e).
    \78\ Schreiber, 472 U.S. at 12 (``We hold that the term,
`manipulative' as used in Sec.  14(e) requires misrepresentation or
nondisclosure. It connotes `conduct designed to deceive or defraud
investors by controlling or artificially affecting the price of
securities.'') (citing Hochfelder, 425 U.S. at 199).
    \79\ Id. at 12 n.11.
    \80\ O'Hagan, 521 U.S. at 672-73.
---------------------------------------------------------------------------

    The Adopting Release asserts that, under O'Hagan, a negligence
standard is a means reasonably designed to prevent fraud. As the
Adopting Release notes, conduct outside of the bounds of the statutory
prohibition can be prohibited by Commission rule under Section 206(4).
The rule that we are adopting here, however, differs markedly from the
rules at issue in O'Hagan and Steadman.\81\ Both of those rules were
narrowly targeted rules that covered clearly-defined behavior. They
were designed to prohibit conduct, that, although outside of the ``core
activity prohibited'' by the statute, were designed to ``assure the
efficacy'' of the statute.\82\
---------------------------------------------------------------------------

    \81\ O'Hagan dealt with Rule 14e-3(a), which governed trading on
non-public, material information in connection with a tender offer.
Steadman dealt with Rule 206(4)-2, the investment advisor custody
rule.
    \82\ O'Hagan, 521 U.S. at 673-74.
---------------------------------------------------------------------------

    Rule 206(4)-8(a)(2), by contrast, is as broad as the statute
itself. It essentially repeats the statutory prohibition. It does not
logically follow, therefore, that lowering the standard of care would
be the type of ``means reasonably designed to prevent'' within the
contemplation of the regulatory mandate within Section 206(4). Lowering
the standard of care is instead an attempt to rewrite the statute by
assigning new definitions to the words of the statute. A potential
unfortunate consequence of the Adopting Release's change in mental
state is that it is now arguably contrary to statute and therefore
might interfere with the SEC's ability to use the rule effectively.\83\
Congress included a rulemaking directive in order to give the SEC the
necessary authority to provide clarity in this area about the types of
practices covered by the statute's broad prohibition,\84\ not to alter
the standard of care that Congress selected through the language it
used.\85\ Imposing a negligence standard is particularly improper given
that, as the Adopting Release notes, ``Rule 206(4)-8 does not create
under the Advisers Act a fiduciary duty to investors and prospective
investors in a pooled investment vehicle.'' \86\
---------------------------------------------------------------------------

    \83\ See Chevron U.S.A. Inc. v. Natural Resources Defense
Council, Inc., 467 U.S. 837, 844 (1984). The Adopting Release
states: ``Since the Commission is clearly authorized to prescribe
[sic] conduct that goes beyond fraud as a means reasonably designed
to prevent fraud, prohibiting deceptive conduct done negligently is
a way to accomplish this objective.'' Adopting Release at Section
II.D. This does not answer the question, however, of whether
``fraudulent, deceptive, or manipulative'' conduct can arise from
negligent acts.
    \84\ Up until now under Section 206(4), we have done exactly
this. We have adopted rules covering advertisements [17 CFR
275.206(4)-1], custody of client funds and securities [17 CFR
275.206(4)-2], cash payments for client solicitations [17 CFR
275.206(4)-3], disclosure of financial and disciplinary information
[17 CFR 275.206(4)-4], proxy voting [17 CFR 275.206(4)-6], and
compliance procedures [17 CFR 275.206(4)-7].
    \85\ See H.R. Rep. No. 2179 at 7 (1960) (identifying as the
``problem'' that Section 206(4) was intended to remedy: ``there has
always been a question as to the scope of the fraudulent and
deceptive activities which are prohibited and the extent to which
the Commission is limited in this area by common law concepts of
fraud and deceit.'').
    \86\ Adopting Release at Section II.D.
---------------------------------------------------------------------------

    Finally, from a purely practical perspective, I dispute the
regulatory approach underlying the contention that ``by taking
sufficient care to avoid negligent conduct, advisers will be more
likely to avoid reckless deception.'' \87\ By an extension of that same
logic, a strict liability standard would evoke even more care by
advisors. Even if the SEC is authorized to pick the standard of care
that applies broadly to all ``fraudulent, deceptive, or manipulative''
acts and practices, arbitrarily selecting a higher standard of care
``just to be on the safe side'' has the potential of misdirecting
enforcement and inspection resources and chilling well-intentioned
advisors from serving their investors.
---------------------------------------------------------------------------

    \87\ Adopting Release at Section II.D.

[FR Doc. E7-15531 Filed 8-8-07; 8:45 am]

BILLING CODE 8010-01-P


[Federal Register Volume 79, Number 138 (Friday, July 18, 2014)]
[Proposed Rules]
[Pages 41948-41949]
[FR Doc No: 2014-16816]

-----------------------------------------------------------------------

ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 52

[EPA-R06-OAR-2013-0764; FRL-9913-93-Region 6]

Approval and Promulgation of Air Quality Implementation Plans;
New Mexico; Grant County Sulfur Dioxide Limited Maintenance Plan

AGENCY: Environmental Protection Agency (EPA).

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: The Environmental Protection Agency (EPA) is proposing to
approve a limited maintenance plan submitted by the State of New
Mexico, dated November 1, 2013, for the Grant County maintenance area
for the 1971 sulfur dioxide (SO2) National Ambient Air
Quality Standard (NAAQS). New Mexico submitted this limited

maintenance plan to fulfill the second 10-year maintenance plan
requirement, under section 175A(b) of the Clean Air Act (CAA), to
ensure maintenance of the 1971 SO2 NAAQS through 2025. The
EPA is also proposing to approve a monitoring network modification for
the area. The EPA is proposing to approve these revisions pursuant to
the CAA.

DATES: Written comments must be received on or before August 18, 2014.

ADDRESSES: Comments may be mailed to Mr. Guy Donaldson, Chief, Air
Planning Section (6PD-L), Environmental Protection Agency, 1445 Ross
Avenue, Suite 1200, Dallas, Texas 75202-2733. Comments may also be
submitted electronically or through hand delivery/courier by following
the detailed instructions in the Addresses section of the direct final
rule located in the rules section of this Federal Register.

FOR FURTHER INFORMATION CONTACT: Ms. Dayana Medina (6PD-L), Air
Planning Section, telephone<PHONE_NUMBER>, fax<PHONE_NUMBER>, email:
<EMAIL_ADDRESS>
SUPPLEMENTARY INFORMATION: In the final rules section of this Federal
Register, EPA is approving the State's request for a limited
maintenance plan submitted on November 1, 2013, for the Grant County
maintenance area for the 1971 sulfur dioxide SO2 NAAQS
because the Agency views this as a noncontroversial submittal and
anticipates no adverse comments. A detailed rationale for the approval
is set forth in the direct final rule. If no relevant adverse comments
are received in response to this action, no further activity is
contemplated. If EPA receives adverse comments, the direct final rule
will be withdrawn and all public comments received will be addressed in
a subsequent final rule based on this proposed rule. The EPA will not
institute a second comment period. Any parties interested in commenting
on this action should do so at this time.
    For additional information, see the direct final rule, which is
located in the rules section of this Federal Register.

    Dated: July 7, 2014.
Ron Curry,
Regional Administrator, Region 6.
[FR Doc. 2014-16816 Filed 7-17-14; 8:45 am]
BILLING CODE 6560-50-P


[Federal Register Volume 86, Number 15 (Tuesday, January 26, 2021)]
[Notices]
[Page 7089]
[FR Doc No: 2021-01611]

-----------------------------------------------------------------------

DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Docket Nos. EL21-40-000 and TX21-1-000]

Athens Utilities Board, Gibson Electric Membership Corporation,
Joe Wheeler Electric Membership Corporation, Volunteer Energy
Cooperative v. Tennessee Valley Authority; Notice of Complaint

    Take notice that, on January 11, 2021, Athens Utilities Board,
Gibson Electric Membership Corporation, Joe Wheeler Electric Membership
Corporation, and Volunteer Energy Cooperative (Complainants) filed a
formal complaint against Tennessee Valley Authority (TVA or
Respondent), pursuant to sections 211A, 306, 307, 308, and 309 of the
Federal Power Act (FPA), and 18 CFR 386.206, requesting that the
Federal Energy Regulatory Commission (Commission) exercise its
authority under FPA section 211A to order TVA to provide unbundled
transmission service at rates and on terms and conditions that are
comparable to those under which TVA provides transmission services to
itself and that are not unduly discriminatory or preferential.
Complainants further request that the Commission exercise its authority
under FPA section 210 to formalize the interconnection arrangements
between Complainants and TVA in order to facilitate the provision of
transmission service ordered under FPA section 211A, all as more fully
explained in the complaint.
    The Complainants certify that copies of the complaint were served
on the contacts listed for Respondent in the Commission's list of
Corporate Officials.
    Any person desiring to intervene or to protest this filing must
file in accordance with Rules 211 and 214 of the Commission's Rules of
Practice and Procedure (18 CFR 385.211, 385.214). Protests will be
considered by the Commission in determining the appropriate action to
be taken, but will not serve to make protestants parties to the
proceeding. Any person wishing to become a party must file a notice of
intervention or motion to intervene, as appropriate. The Respondent's
answer and all interventions, or protests must be filed on or before
the comment date. The Respondent's answer, motions to intervene, and
protests must be served on the Complainants.
    The Commission strongly encourages electronic filings of comments,
protests and interventions in lieu of paper using the ``eFiling'' link
at http://www.ferc.gov. Persons unable to file electronically may mail
similar pleadings to the Federal Energy Regulatory Commission, 888
First Street NE, Washington, DC 20426. Hand delivered submissions in
docketed proceedings should be delivered to Health and Human Services,
12225 Wilkins Avenue, Rockville, Maryland 20852.
    In addition to publishing the full text of this document in the
Federal Register, the Commission provides all interested persons an
opportunity to view and/or print the contents of this document via the
internet through the Commission's Home Page (http://ferc.gov) using the
``eLibrary'' link. Enter the docket number excluding the last three
digits in the docket number field to access the document. At this time,
the Commission has suspended access to the Commission's Public
Reference Room, due to the proclamation declaring a National Emergency
concerning the Novel Coronavirus Disease (COVID-19), issued by the
President on March 13, 2020. For assistance, contact the Federal Energy
Regulatory Commission at<EMAIL_ADDRESS>or call toll-free,
(886) 208-3676 or TYY,<PHONE_NUMBER>.
    Comment Date: 5:00 p.m. Eastern Time on February 1, 2021.

    Dated: January 19, 2021.
Kimberly D. Bose,
Secretary.
[FR Doc. 2021-01611 Filed 1-25-21; 8:45 am]
BILLING CODE 6717-01-P


[Federal Register Volume 82, Number 190 (Tuesday, October 3, 2017)]
[Notices]
[Pages 46071-46072]
[FR Doc No: 2017-21190]

-----------------------------------------------------------------------

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Food and Drug Administration

[Docket No. FDA-2017-D-5739]

Formal Meetings Between the Food and Drug Administration and
Abbreviated New Drug Application Applicants of Complex Products Under
Generic Drug User Fee Act; Draft Guidance for Industry; Availability

AGENCY: Food and Drug Administration, HHS.

ACTION: Notice of availability.

-----------------------------------------------------------------------

SUMMARY: The Food and Drug Administration (FDA or Agency) is announcing
the availability of a draft guidance for industry entitled ``Formal
Meetings Between FDA and ANDA Applicants of Complex Products Under
GDUFA.'' This draft guidance describes an enhanced pathway for
discussions between FDA and a prospective applicant preparing to submit
(or an applicant that has submitted) to FDA an abbreviated new drug
application (ANDA) for a complex product. Specifically, this draft
guidance provides information on requesting and conducting product
development meetings, pre-submission meetings, and mid-review-cycle
meetings with FDA. This draft guidance will assist applicants in
generating and submitting a meeting request and the associated meeting
package to FDA for complex products to be submitted under the Federal
Food, Drug, and Cosmetic Act (FD&C Act) and as contemplated in the
commitments made by FDA in connection with the reauthorization of the
Generic Drug User Fee Amendments for Fiscal Years (FYs) 2018-2022
(GDUFA II).

DATES: Submit either electronic or written comments on the draft
guidance by December 4, 2017 to ensure that the Agency considers your
comment on this draft guidance before it begins work on the final
version of the guidance.

ADDRESSES: You may submit comments on any guidance at any time as
follows:

Electronic Submissions

    Submit electronic comments in the following way:
     Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments. Comments submitted
electronically, including attachments, to https://www.regulations.gov
will be posted to the docket unchanged. Because your comment will be
made public, you are solely responsible for ensuring that your comment
does not include any confidential information that you or a third party
may not wish to be posted, such as medical information, your or anyone
else's Social Security number, or confidential business information,
such as a manufacturing process. Please note that if you include your
name, contact information, or other information that identifies you in
the body of your comments, that information will be posted on https://www.regulations.gov.
     If you want to submit a comment with confidential
information that you do not wish to be made available to the public,
submit the comment as a written/paper submission and in the manner
detailed (see ``Written/Paper Submissions'' and ``Instructions'').

Written/Paper Submissions

    Submit written/paper submissions as follows:
     Mail/Hand delivery/Courier (for written/paper
submissions): Dockets Management Staff (HFA-305), Food and Drug
Administration, 5630 Fishers Lane, Rm. 1061, Rockville, MD 20852.
     For written/paper comments submitted to Dockets Management
Staff, FDA will post your comment, as well as any attachments, except
for information submitted, marked and identified, as confidential, if
submitted as detailed in ``Instructions.''
    Instructions: All submissions received must include the Docket No.
FDA-2017-D-5739 for ``Formal Meetings Between FDA and ANDA Applicants
of Complex Products Under GDUFA; Draft Guidance for Industry;
Availability.'' Received comments will be placed in the docket and,
except for those submitted as ``Confidential Submissions,'' publicly
viewable at https://www.regulations.gov or at the Dockets Management
Staff between 9 a.m. and 4 p.m., Monday through Friday.
     Confidential Submissions--To submit a comment with
confidential information that you do not wish to be made publicly
available, submit your comments only as a written/paper submission. You
should submit two copies total. One copy will include the information
you claim to be confidential with a heading or cover note that states
``THIS DOCUMENT CONTAINS CONFIDENTIAL INFORMATION.'' The Agency will
review this copy, including the claimed confidential information, in
its consideration of comments. The second copy, which will have the
claimed confidential information redacted/blacked out, will be
available for public viewing and posted on https://www.regulations.gov.
Submit both copies to the Dockets Management Staff. If you do not wish
your name and

contact information to be made publicly available, you can provide this
information on the cover sheet and not in the body of your comments and
you must identify this information as ``confidential.'' Any information
marked as ``confidential'' will not be disclosed except in accordance
with 21 CFR 10.20 and other applicable disclosure law. For more
information about FDA's posting of comments to public dockets, see 80
FR 56469, September 18, 2015, or access the information at: https://www.gpo.gov/fdsys/pkg/FR-2015-09-18/pdf/2015-23389.pdf.
    Docket: For access to the docket to read background documents or
the electronic and written/paper comments received, go to https://www.regulations.gov and insert the docket number, found in brackets in
the heading of this document, into the ``Search'' box and follow the
prompts and/or go to the Dockets Management Staff, 5630 Fishers Lane,
Rm. 1061, Rockville, MD 20852.
    You may submit comments on any guidance at any time (see 21 CFR
10.115(g)(5)).
    Submit written requests for single copies of the draft guidance to
the Division of Drug Information, Center for Drug Evaluation and
Research, Food and Drug Administration, 10001 New Hampshire Ave.,
Hillandale Building, 4th Floor, Silver Spring, MD 20993-0002. Send one
self-addressed adhesive label to assist that office in processing your
requests. See the SUPPLEMENTARY INFORMATION section for electronic
access to the draft guidance document.

FOR FURTHER INFORMATION CONTACT: Elizabeth Giaquinto Friedman, Center
for Drug Evaluation and Research, Food and Drug Administration, 10903
New Hampshire Ave., Bldg. 75, Rm. 1670, Silver Spring, MD 20993-0002,
240-402-7930<EMAIL_ADDRESS>
SUPPLEMENTARY INFORMATION:

I. Background

    FDA is announcing the availability of a draft guidance for industry
entitled ``Formal Meetings Between FDA and ANDA Applicants of Complex
Products Under GDUFA.'' This draft guidance describes an enhanced
pathway for discussions between FDA and an applicant (or prospective
applicant) preparing to submit an ANDA for a complex product to FDA.
Specifically, this draft guidance provides information on requesting
and conducting product development meetings, pre-submission meetings,
and mid-review-cycle meetings with FDA.
    This draft guidance reflects a unified approach to all formal
meetings between FDA and ANDA applicants or prospective ANDA applicants
for complex products. This draft guidance is intended to assist ANDA
applicants and prospective ANDA applicants in generating and submitting
to FDA a meeting request and the associated meeting package for these
complex products, as defined in this guidance, to be submitted under
section 505(j) of the FD&C Act (21 U.S.C 355(j)) and as contemplated in
GDUFA II.
    As part of the commitments FDA made in connection with GDUFA II,
FDA agreed to develop a program to assist ANDA applicants and
prospective ANDA applicants of complex products before the submission
of an ANDA to FDA. As stated in the ``GDUFA Reauthorization Performance
Goals and Program Enhancements Fiscal Years 2018-2022'' (GDUFA II Goals
or Commitment Letter), this pre-ANDA program is intended to:

. . . clarify regulatory expectations for prospective applicants
early in product development, assist applicants to develop more
complete submissions, promote a more efficient and effective ANDA
review process, and reduce the number of review cycles required to
obtain ANDA approval, particularly for [complex products](GDUFA II
Commitment Letter at 14).

    To facilitate development of complex products that may be submitted
in an ANDA, FDA and industry agreed to a series of meetings between
ANDA applicants and prospective ANDA applicants and FDA to discuss the
proposed complex product and support submission of a high-quality,
approvable ANDA.
    In addition to developing a robust pre-ANDA program, FDA agreed to
respond to requests for and conduct meetings related to the development
of complex products submitted on or after October 1, 2017, within
specific timeframes.
    This draft guidance is being issued consistent with FDA's good
guidance practices regulation (21 CFR 10.115). The draft guidance, when
finalized, will represent the current thinking of FDA on ``Formal
Meetings Between FDA and ANDA Applicants of Complex Products Under
GDUFA.'' It does not establish any rights for any person and is not
binding on FDA or the public. You can use an alternative approach if it
satisfies the requirements of the applicable statutes and regulations.

II. Paperwork Reduction Act of 1995

    This draft guidance refers to previously approved collections of
information found in FDA regulations. These collections of information
are subject to review by the Office of Management and Budget (OMB)
under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520). The
collection of information has been approved under OMB control number
0910-0797.

III. Electronic Access

    Persons with access to the internet may obtain the draft guidance
at either https://www.fda.gov/Drugs/GuidanceComplianceRegulatoryInformation/Guidances/default.htm or
https://www.regulations.gov.

    Dated: September 28, 2017.
Anna K. Abram,
Deputy Commissioner for Policy, Planning, Legislation, and Analysis.
[FR Doc. 2017-21190 Filed 10-2-17; 8:45 am]
BILLING CODE 4164-01-P