In a closely watched case, the U.S. Court of Appeals for the Fifth Circuit struck down in its entirety the SEC鈥檚 new private fund advisers rule on the grounds that the rule exceeded the SEC鈥檚 statutory authority in a win for the private funds industry. The rule imposed several new requirements on private fund advisers which many industry participants have argued significantly, and unnecessarily, increase compliance obligations and costs of private fund advisers.

On June 5, 2024, a three-judge panel on the U.S. Court of Appeals for the Fifth Circuit to vacate the SEC鈥檚 new rules and amendments under the Investment Advisers Act of 1940 (the Advisers Act) that targeted private fund advisers (the Rule). The Rule, adopted by the SEC in August 2023, included several new requirements on private fund advisers, including requirements related to restricted activities, preferential treatment, quarterly statements, private fund audits and adviser-led secondaries.

The SEC had stated at the time of adoption that the Rule was designed to increase investor transparency in to the practices of advisers to private funds in which third parties invest.  Many industry participants have argued that the Rule significantly, and unnecessarily, increases compliance obligations and costs of private fund advisers. 

In ruling in favor of the private fund industry group plaintiffs, the Fifth Circuit sided with the argument that Section 211(h) of the Advisers Act (adopted in connection with the Dodd-Frank Act of 2010) does not expand the SEC鈥檚 authority to regulate the relationships between private fund advisers, their private funds and the funds鈥 third-party investors to the extent cited by the SEC. In addition, the Fifth Circuit ruled that the SEC鈥檚 reliance on the anti-fraud provisions of Section 206(4) of the Advisers Act to adopt the Rule was 鈥減retextual鈥 and that the SEC had failed to articulate a 鈥渞ational connection鈥 between fraud and any part of the adopted Rule.

For both of those reasons, the Fifth Circuit concluded that the SEC 鈥渆xceeded its statutory authority in adopting鈥 the Rule and that, because the adoption of the Rule was unauthorized in its entirety, 鈥渘o part of it can stand.鈥  Accordingly, the Fifth Circuit fully vacated the Rule.

The Fifth Circuit鈥檚 ruling is a significant victory for private fund adviser advocacy groups and advisers themselves that have maintained that the Rule unduly proscribes the contractual relationships between private funds and sophisticated investors and places too much compliance burden on private fund advisers. In addition, the Fifth Circuit鈥檚 interpretation of the scope of Section 206(4) may have implications for other rulemaking adopted by the SEC in reliance on Section 206(4) in the past and may constrain the ability of the SEC to adopt certain regulatory measures in the future. 

It remains to be seen whether the SEC will petition for a rehearing by the Fifth Circuit or appeal to the U.S. Supreme Court.

For further information about the now vacated Rule, please see our client update from September 2023.

If you have any questions regarding the matters covered in this publication, please reach out to any of the lawyers listed below or your usual 麻豆入口 contact.

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