This Article argues that, from both theoretical and pragmatic perspectives, a better approach would be for law to regard private fund investors as clients of the managers of those funds for all purposes under the investment advisory regulatory regime. In making these arguments, it dissects the doctrinal and historical underpinnings and sources of the current doctrine--legislative history and case law, in particular, but also SEC interpretations and rule changes. In light of the policy considerations-- including investor protection--that gave rise to the Advisers Act, the growth of the investment advisory industry and private funds\u27 role in it, and lessons learned from recent turmoil in the financial markets, a doctrine that regards private fund investors as the clients of the funds\u27 managers is more coherent and better policy.
Part II discusses the current regulatory regime governing investment advisers, including the exemption from investment adviser registration that many large fund managers have relied on to avoid SEC regulation, which considers each fund a single client. Reviewing prominent cases on investment adviser regulation and obligations, Part II also traces the origins of the doctrine that the person who is the direct recipient of an investment adviser\u27s services is to be regarded as the client of that adviser--which, in turn, has been employed to support the doctrine that a fund (rather than its investors) is the adviser\u27s client.
Part III surveys some of the implications and incongruities arising from that doctrine, including the effective under-regulation of large investment advisers and augmentation of agency costs and other inefficiencies. It also discusses how recent and likely legislative changes are unlikely to remedy those deficiencies.
Part IV discusses the misunderstanding of the adviser-client relationship and the misinterpretation of precedent evident in recent, prominent cases supporting the current doctrine. It further shows that current doctrine is contrary to--or at least gains no support from--the legislative history of the Advisers Act. Part V focuses on an alternative doctrine, one in which fund investors are deemed clients for purposes of investment advisers\u27 regulatory obligations. That Part posits both that this alternative doctrine alleviates incongruities in current regulation and that it is consistent with fiduciary principles
