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Regulatory News Update: Court of Appeals Vacates SEC Private Fund Rule in its Entirety

Regulatory News Update: Court of Appeals Vacates SEC Private Fund Rule in its Entirety

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June 5, 2024

The United States Court of Appeals for the Fifth Circuit has vacated the Securities and Exchange Commission's (“SEC”) rule aimed at enhancing the regulation of private fund advisers (“Private Fund Rule”) in its entirety. This decision significantly impacts private fund managers and their impending increased compliance requirements under the Private Fund Rule.


The SEC adopted the rule in an attempt to enhance investor protection and prevent fraud within private funds. The Rule mandated comprehensive disclosures and compliance obligations for private fund advisers, including detailed quarterly statements, disclosure of preferential treatment, and restrictions on certain adviser activities. The Rule was aimed at addressing issues related to transparency, conflicts of interest, and governance mechanisms.

Court's Rationale

The Fifth Circuit Court ruled that the SEC exceeded its statutory authority under the Investment Advisers Act of 1940 (“Advisers Act”) by imposing the new regulations. The Court noted that private funds, by congressional design, are exempt from the prescriptive regulatory framework that applies to public funds, allowing them to freely negotiate terms directly with their sophisticated investors. The Court emphasized that the SEC's rule lacked a "close nexus" to statutory aims and conflated a lack of disclosure with fraud or deception without establishing a duty to disclose.

Key Points from the Decision

  1. Exceeding Statutory Authority: The Court found that the SEC overstepped its authority by applying rules that fundamentally altered the governance structure of private funds, which are meant to operate with significant flexibility and autonomy from federal regulation.
  2. Lack of Reasonable Design: The Rule did not fit within the statutory design, which exempts private funds from specific regulatory requirements that apply to public funds. This exemption includes negotiation terms for investor access to financial reports, advisory fees, and redemption terms.
  3. Arbitrary and Capricious: The Rule was deemed arbitrary and capricious, failing to adequately consider its impact on efficiency, competition, and capital formation within the private fund industry.

Impact on Private Fund Managers

Private fund managers previously affected by the SEC's rule can now revert to their standard practices without the burden of the vacated compliance requirements. This decision removes the extensive disclosure and operational mandates, thereby reducing compliance costs and administrative burdens. Managers should, however, continue to adhere to general fiduciary duties and other applicable regulations.

Next Steps

Private fund managers should:

  • Review and adjust their compliance programs in light of the court's decision, if and as necessary.
  • Stay informed about any potential appeals or new regulatory developments from the SEC, including any attempts to appeal this decision.
  • Consult with legal and compliance experts to ensure ongoing adherence to relevant regulatory requirements and to consider if and how to walk back any program changes that had been implemented and designed to comply with the Private Fund Rule.

For further details and specific advice tailored to your operations, please contact our consultancy team.

CRC keeps its thumb on the pulse of the evolving regulatory landscape. Keep an eye out for additional information, including updated guidance, risk alerts, and CRC’s thoughts on how to ensure successful compliance with evolving regulatory expectations within your firm’s existing regulatory compliance program.

Contact Mitch Avnet for further details: (646)346-2468 |



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