Fifth Circuit Vacates SEC’s Private Fund Advisers Rule

The Fifth Circuit Court of Appeals has vacated a Securities and Exchange Commission rule that represented one of the most significant changes to regulating private funds and private fund advisers since 2010.

Unless the decision is reversed, it will spare private funds and their advisers from what would have been a material increase in the regulatory burdens placed on them.

The Fifth Circuit’s decision may portend the fate of additional challenges in that circuit to recent SEC rulemakings, including the SEC’s short interest and securities lending reporting rules and dealer rules.

The rule on private funds and their advisers expanded the scope of disclosure, reporting and other obligations.

 It required SEC-registered private fund advisers to:

• Distribute quarterly statements to investors, with standardized fee and expense information.
• Conduct annual audits.
• Comply with certain conditions to adviser-led secondaries.

The rule required all private fund advisers to:

• Prohibit certain preferential treatment of investors.
• Disclose information regarding preferential treatment provided to investors.

The decision of the Fifth Circuit Court of Appeals means those rules no longer apply – unless the SEC appeals and receives a favorable judgement. While we expect the SEC to appeal, it has some options at its disposal. It can appeal to another panel of the Fifth Circuit, the full Fifth Circuit or the Supreme Court.

Adopted in August 2023, the rule envisioned staggered compliance dates that began in November 2023 and were to have run through March 2025.

The SEC said last year that the rule was “designed to protect private fund investors by increasing transparency, competition, and efficiency in the private funds market.”

The court found that the SEC exceeded its statutory authority in adopting the rule because:

• The Dodd-Frank Act did not expand the SEC’s rulemaking authority in Section 211(h) of the Investment Advisers Act of 1940 to cover private fund advisers and investors in private funds.
• Anti-fraud provisions of Section 206(4) of the Advisers Act did not authorize the SEC to adopt the rule regulating private funds and private fund advisers.

Given the aggressive rulemaking agenda, we will carefully review any final rules to assess whether the SEC has curtailed any requirements in light of this high profile loss.

If you have any questions, reach out to our authors (Dolph Hellman, Ken Rasamny, Ignacio Sandoval, Amy Pasacreta, Allison Citron and Matthew Fechik) or other members of the Orrick team.