On June 5, 2024, the U.S. Court of Appeals for the Fifth Circuit vacated the new private funds rules1 adopted by the U.S. Securities and Exchange Commission (SEC) on August 23, 2023 (collectively, the Private Funds Rule). In a unanimous decision, the court held that the SEC had exceeded its statutory authority under the Investment Advisers Act of 1940 (the Advisers Act) in adopting the Private Funds Rule.2
What Was Vacated
The Private Funds Rule was composed of a variety of new requirements that would have overhauled private fund regulation in the United States. Specifically, the restricted activities rule and preferential treatment rule would have applied to all private fund advisers, whether registered with the SEC or not, and the quarterly statement rule, private fund audit rule and adviser-led secondaries rule would have applied to SEC-registered advisers.3 Larger private fund advisers (with more than $1.5 billion in private fund assets under management) would have been required to comply with the restricted activities rule, preferential treatment rule and adviser-led secondaries rule by September 14, 2024, and with the quarterly statement rule and private fund audit rule by March 14, 2025. All other private fund advisers would have been required to comply with all of these provisions by March 14, 2025.4
Fifth Circuit Rejects SEC’s Rulemaking Authority
The court held that in promulgating the Private Funds Rule, the SEC exceeded the scope of the rulemaking authority granted to the agency by Congress pursuant to Sections 206(4) and 211(h) of the Advisers Act, the two provisions the SEC relied upon to justify its rulemaking.5
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1 See Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews, Investment Advisers Act Release No. 6383, 88 Fed. Reg. 63206 (August 23, 2023) (the Adopting Release).
2 National Association of Private Fund Managers v. Securities and Exchange Commission, No. 23-60471 (5th Cir. 2024).
3 For more information about the details of the Private Funds Rule, see our prior client alert on this topic: SEC Adopts Sweeping Private Fund Adviser Reforms (September 13, 2023).
4 Adopting Release at 63290 et seq.
5 National Association of Private Fund Managers, No. 23-60471. at 25.
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