U.S. Fifth Circuit Court of Appeals vacates private funds rules

On June 5, 2024, a federal appeals court vacated a rule adopted by the U.S. Securities and Exchange Commission (commission) related to the regulation of private funds advisers (final rule) in its entirety. A three-judge panel of the United States Court of Appeals for the Fifth Circuit in New Orleans agreed with the argument made by the industry groups that by adopting this rule, the commission exceeded their rulemaking authority. The court agreed with the industry that the rules did not add value for “sophisticated investors” who are assumed to perform reasonable due diligence prior to investing in private funds.

Background:

In August 2023, the commission issued final rules for private investment funds. Included in these rules were major changes to the regulation of private funds including:

1. The preferential treatment rule
2. The restricted activities rule
3. The quarterly statement rule
4. The adviser-led secondaries rule
5. The audit rule

It also included amendments to compliance procedures and practices.

This rule was an attempt to regulate a rapidly expanding industry. The commission believed that this rule would be helpful in better regulating the industry and potentially minimize fraud.

Industry groups raised concern about the rule that the commission had exceeded its rulemaking authority. Various industry groups, including the American Investment Council and the Managed Funds Association, filed suit a few days after the rule was adopted.

We are reviewing the court’s decision and will continue to provide updates following any further developments or actions by the commission.