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A New Chapter: SEC’s Private Fund Adviser Reforms Overturned

On June 5, 2024, in a noteworthy development, the U.S. Appeals Court has overturned the Securities and Exchange Commission’s (SEC) Private Fund Adviser Reforms: Final Rules.

In this article we have tried to provide a snapshot summary of this landmark decision and its implications for private investment funds in the U.S.

The Decision

The New Orleans-based 5th Circuit Court of Appeals, in a 3-0 decision, ruled that the SEC had overstepped its authority in adopting the rules. The court agreed with six industry groups who brought the challenge, that the rules were not necessary for sophisticated private fund investors. The rule was completely vacated by the 5th Circuit.

The SEC’s Rule

The rule required fund managers to issue quarterly performance and fee reports, perform annual audits, and stop giving some investors preferential treatment. It applied to private equity funds, hedge funds, venture capital funds and managers of funds for institutional investors including pension funds and endowments.

The Industry’s Concerns

The opposing groups argued that the rules were burdensome and would harm investors by forcing them to sift through a lot of new information, while bearing the estimated compliance costs of nearly $500 million a year. They also expressed concerns that the rules could suppress capital formation and make it harder for smaller advisers to compete.

Implications for Private Investment Funds

The decision is a win for U.S. investment firms and trade groups that have challenged the rules, arguing that they would further increase compliance costs and reduce profits. The overturning of the rules could have significant implications for private investment funds in the U.S., including those that provide fund administration, treasury, and investor services.

Commenting on the decision, American Investment Council Chief Executive, Drew Maloney, said: “The ruling is a victory for thousands of businesses across America that need capital to grow and millions of workers who depend on private equity and credit to strengthen their retirements”.

Wrapping Up

The overturning of the SEC’s Private Fund Adviser Reforms: Final Rules by the U.S. Appeals Court marks a significant development in the regulatory landscape for private investment funds in the U.S. While the decision has been welcomed by industry groups, it also highlights the ongoing debate about the appropriate level of regulation and transparency in the industry.

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