On June 5, 2024, the United States Court of Appeals for the Fifth Circuit (Fifth Circuit) vacated new rules applicable to advisers to private funds1 recently enacted by the Securities and Exchange Commission (SEC). These rules, as adopted, would have provided sweeping changes to the regulatory landscape of the private funds industry.
The Private Fund Adviser Rules were expected to have a substantial impact on industry-wide business practices and greatly increase advisers’ regulatory burden. The rules would have required more disclosure to investors on fees and expenses, and stricter provisions for secondary transactions, among other requirements.
Various industry groups2 brought suit against the SEC under the Administrative Procedures Act (APA). The Fifth Circuit found that the SEC exceeded its authority under the APA and therefore “[b]ecause the promulgation of the Final Rule was unauthorized, no part of it can stand. Accordingly, we vacate the Final Rule.” As of now, the Private Fund Adviser Rules are no longer in effect.
It is unclear if the SEC will ask for a rehearing by the full Fifth Circuit or appeal the decision to the Supreme Court; advisers who were subject to all or part of the Private Fund Adviser Rules will need to wait and see the SEC’s next steps. However, while many celebrate, even though advisers may not be subject to the Private Fund Advisers Rules, they have a roadmap to the types of issues that the SEC staff thinks is important for examinations, even if not officially codified.
1 The decision is available here: 23-60471CV0.pdf (uscourts.gov). The adopting release is available here: Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews, Release No. IA-6368 (Aug. 23, 2023) (Adopting Release). Please see our client alerts of these pieces available here: https://www.whitecase.com/insight-alert/us-sec-adopts-final-private-fund-adviser-rules and https://www.whitecase.com/insight-alert/sec-adopts-final-private-fund-adviser-rules.
2 The National Association of Private Fund Managers, Alternative Investment Management Association, American Investment Council, Loan Syndications and Trading Association, Managed Funds Association and National Venture Capital Association
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