Recently, the SEC proposed changes that would affect the investment in hedge funds as well as other pooled investments. On December 27,2006, Release No. 33-8766 (the "Release") proposed an anti-fraud rule that would be new under the Investment Advisers Act of 1940 (the "Advisers Act"). This new rule revised criteria for admission for individuals that invest in some private funds (excluding some venture capital funds). The Release says that these rules are meant to cover two of the SEC's particular areas of interest.

Accredited Investor

The Release suggested new standards for individuals that may invest in certain funds privately offered as an enhanced definition of "accredited investor." These funds are exempt from the Investment Company Act of 1940, as amended (the "1940 Act") by provisions of Section 3(c)(1). New standards would require "accredited investors" to fulfill the previous standards plus not own investments totalling less than US$2.5 million as a qualified purchaser under the Section 3(c)(1) exemptions. Under Regulation D of the Securities Act of 1933, as amended, require a net worth of over $1 million (individual or joint net worth with spouse), or have an income over $200K each year over the past two years (or joint income with a spouse of over $300K in each of those two years plus an expectation to stay at the income level for the current year).

Anti-fraud Regulations

Section 206(4) of the Advisers Act has a new proposed anti-fraud rule that would prohibit investment advisers from making statements to investors in pooled investments it manages that would be misleading or false, regardless of whether the investment is registered or unregistered (including hedge funds). The management company also many not participate in fraudulent, manipulative, or other deceptive behavior.

The rule would allow the investors to be viewed through the fund, and reverses one of the effects of the U.S. Court of Appeals decision in Phillip Goldstein, et al, v. SEC. In this case, the SEC's 2004 requirement for hedge fund advisers to count investors in that particular fund to determine if registration is neceaary was overturned. The new rule is meant to assure that the anit-fraud provisions apply to future and prospective investors and not just to the current pool.

The Release also stated that the new rule was made intentionally broad to outline "the making of materially false or misleading statements as a fraudulent, deceptive or manipulative practice, and to prohibit other practices that defraud or deceive pool investors, rather than designed to prohibit a specific practice." It would regulate practices and statements made to current and prospective investment clients, and would provide for, among other things, representations made in account statements and memoranda.

Investment advisers to pooled investment vehicles as well as advisers that are not required to be registered under the Advisers Act, are covered in this new rule as well. The SEC stated in the Release that "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."