The Securities and Exchange Commission has moved to protect hedge fund investors from fraud with a new provision to the Investment Advisers Act of 1940. Under the proposed rule, an investment adviser to a pooled investment vehicle -- such as a hedge fund -- who makes false or misleading statements or to otherwise defraud investors or prospective investors could be charged with engaging in a "fraudulent, deceptive, or manipulative" act. The proposal would also make it clear that the SEC has the authority to pursue such violators. And to clarify the SEC’s other big news of the day, the commission voted 5-0 to open for public comment a proposal to revise the accredited-investor rule that would require individuals who want to invest in hedge funds to have in addition to net worth of $1 million – or annual income of $200,000 -- $2.5 million in investments, and would exclude the real estate value from their net worth. Under the current rule, a potential investor needed only to have a net worth of $1 million. The proposal reportedly would reduce the percentage of qualified households from 8.5% to about 1.3%, according to the SEC. When the original requirements went into effect in 1982, only 1.87% of all U.S. households qualified were qualified to invest in hedge funds. Connecticut Attorney General Richard Blumenthal for the most part is pleased with the proposal. "Raising net worth requirements is a critically significant first step" to protect hedge fund investors, the AG said in a statement, adding that it is "exactly the type of measure I have repeatedly urged, most recently before the Senate Judiciary Committee on Dec. 5." Blumenthal particularly likes the provision excluding an investors’ home from the $2.5 million threshold. "Especially in areas like Connecticut, increasing real estate values have escalated the retailization of hedge funds – and entitled and exposed exponentially growing masses of middle class investors to hedge funds." But, he says, it shouldn’t end there. "The SEC and Congress must consider additional steps to address the regulatory black hole surrounding hedge funds." Both proposals will be open 60 days for public comment.