Speech by SEC Commissioner:
Remarks at the SEC Open Meeting: Antifraud Rule For Advisers To Pooled Investment Vehicles
Commissioner Roel C. Campos
U.S. Securities and Exchange Commission
July 11, 2007
I, too, would like to thank the Division of Investment Management staff, as well as the staff of the Office of Economic Analysis and the Office of the General Counsel, for all of their hard work in finalizing this rule. With current industry sources estimating the number of hedge funds at approximately 8000 funds worldwide and $1.2 trillion in total size, the timing of our rule could not be more appropriate. On a daily basis we are inundated with press articles and news reports that show the rapid development and changes that are occurring, almost overnight, in this industry. It is clear that hedge funds and other pooled investment vehicles are now major market forces - as investors, public companies, and investment vehicles for other investors - in their own right.
While the vast majority of these pooled investment vehicles provide important and legitimate benefits to our markets and investors - including market stability, diversification, and capital - we at the Commission have unfortunately seen too many cases involving unscrupulous advisers and individuals who utilize the complexity and lack of transparency in these vehicles to defraud, harm, and rob investors of their assets.
Which is why I believe that the rulemaking before us today is not merely desirable, but critical for the protection of U.S. investors and for maintaining the reputation and integrity of this very important industry. Sections 206(1) and (2) of the Advisers Act provide us with full authority to address fraud by an adviser against the fund itself, and - until the District of Columbia Circuit issued its opinion in Goldstein v. SEC - were also used to bring enforcement actions against advisers who defrauded investors in funds. When the Goldstein opinion created some uncertainty as to the application of Sections 206(1) and (2) to cases involving such defrauded investors, we quickly proposed a rule under Section 206(4) that was intended to preserve our long-standing and traditional SEC enforcement authority to address these types of frauds.
For this reason, I view with skepticism the arguments made by some commenters that this new rule will have significant negative consequences - for example, by chilling investor communications or by creating confusion with respect to investors in registered investment companies. Such confusion or chilling effects cannot be the product of this rulemaking, since this rule does not create any new or different legal obligations - it merely reaffirms our long-standing view and practice of investigating, stopping, and deterring advisers who defraud investors in pooled investment vehicles.
Similarly, I do not agree with those commenters who argue that the new rule should contain an explicit scienter requirement since a non-scienter antifraud standard is not novel, either in law or fact. The language of the statute itself contains no such limitation. And, the only appellate court to have considered this issue - notably, the same court that issued the Goldstein opinion - concluded that scienter is not a requirement of Section 206(4) in SEC v. Steadman. Indeed, our agency's own legal analysis concluded that the unanimous decision in Steadman is the clear and controlling authority on this issue. Moreover, the industry is well aware that Section 206(2), which was one of the legal bases for bringing cases involving defrauded fund investors prior to Goldstein, has not been interpreted to require scienter.
There is good argument that this rule could have gone further and included an affirmative disclosure obligation. Nevertheless, the final rule is an excellent step in reaffirming many important investor protections that were thrown into a zone of ambiguity after Goldstein. Therefore, I am very happy to support this final rule.
I have just a few questions:
1) With respect to the rule's general prohibition against fraudulent acts, isn't there a strong body of existing authority, law and practice for us to promulgate this type of broad antifraud prohibition? Wouldn't proscribing specific fraudulent conduct have the odd and unfortunate effect of creating a "roadmap" for future fraudsters who wish to avoid the rule?
2) With respect to scienter, isn't Steadman the highest court to have addressed the state of mind requirement under Section 206(4)? Didn't other court decisions (e.g., Aaron v. SEC and Ernst & Ernst v. Hochfelder) address state of mind under different statutory provisions? Moreover, didn't the D.C. Circuit in Steadman analyze and consider these interesting, but non-controlling other cases in coming to the conclusion that Section 206(4) nevertheless does not require scienter?
3) Doesn't the Commission have clear authority to promulgate this rule under the plain language of the statute, interpretation of relevant case law, as well as legislative history?