There has been much ink spilled over the Marketing Rule and the Private Fund Rule under the Investment Advisers Act of 1940. These rules represent significant regulation of investment advisers, imposing specific affirmative duties where federal securities regulation had historically been based on broad interpretations of the fiduciary duties under Section 206 of the Advisers Act.
Today, the SEC went a little further in these efforts. In an Administrative Order, the SEC interpreted the fiduciary duties owed to clients and to investors in private funds under Section 206 of the Advisers Act and Rule 206(4)-8 to encompass a disclosure duty of disclosure to existing investors, not only prospective investors (communications to whom is governed by the Marketing Rule).
This shouldn't be surprising.
Traditional notions of fiduciary duty include a duty to truthfully and fully disclose material facts when communicating with the beneficial owners of an entity or a trust. And, any person communicating about securities could be subject to the anti-fraud rule, Rule 10b-5, under the Securities Exchange Act of 1934.
What is interesting here is the SEC's continuing and growing interest in the function and operation of private funds by investment advisers. The Private Funds Rule contains provisions not only about the formation and structure of private funds advised by investment advisers but also mandating certain continuing governance tools, such as reporting, by the private fund's sponsor.
The facts here were pretty bad. The fund sponsor inconsistently reported certain positions to investors and sometimes reported positions that the fund did not actually hold at the time the reports were sent to investors. It was pretty clear that the statements and reports given to existing investors were either false or misleading.
But could we see the expansion of the SEC's interest in this area? Could the Commissioners and the SEC Staff start to import concepts, such as the “fair and balanced” concept, from the Marketing Rule into the realm of communications to existing investors?
We are not there yet. But, whether this “creep” develops into more areas of investment advisers' business practices is yet to be seen.