Fifth Circuit Court of Appeals Vacates SEC Private Fund Adviser Rules

On June 5, 2024, in an unanimous 3-0 decision, the United States Fifth Circuit Court of Appeals (“Fifth Circuit”) vacated the new private fund rules adopted by the Securities and Exchange Commission (“SEC”) on August 23, 2023 (“Rules”).[1]

The Rules would have imposed sweeping new regulations on private fund advisers, including among other things, quarterly reporting to investors, heightened requirements for adviser-led secondary transactions, annual audits and restrictions on preferential treatment (through side letters or otherwise).[2]

The SEC enacted the Rules citing its rulemaking authority under Sections 206(4) and 211(h) of the Investment Advisers Act of 1940 ( “Advisers Act”). 

Section 204(h) is the general anti-fraud provision and Section 211(h) was enacted as part of the Dodd-Frank Wall Street Reform Act’s (“Dodd-Frank Act”) expansion of the SEC’s oversight authority over private fund advisers. The Fifth Circuit held that the SEC exceeded its statutory authority on both grounds. Notably, with respect to Section 206(4), the Fifth Circuit held that the Rules lacked a “close nexus” to the statutory anti-fraud purpose of Section 206(4) and that the SEC cannot conflate a “lack of disclosure” with “fraud” or “deception.” With respect to Section 211(h), the Fifth Circuit reasoned the expansion of the SEC’s authority under Dodd-Frank was intended to apply to non-professional investors, known as “retail customers” and private funds, unlike public funds, are generally not accessible to such retail customers.

As of the publication of this alert, the SEC has not commented on whether it intends to contest the Fifth Circuit’s decision, either through further review by the Fifth Circuit or the United States Supreme Court. As a result of the Fifth Circuit’s decision, at such time as it issues its mandate, the Rules will be vacated and of no further effect.
 

[1] The Rules consisted of five new rules under the Advisers Act and made amendments to two existing rules (88 Fed. Reg. 63026).

[2] The Rules were adopted by a 3 to 2 vote on August 23, 2023 (Commissioners Gensler, Crenshaw and Lizarraga voted for and Commissioners Peirce and Uyeda voted against). Prior to the Fifth Circuit’s decision, the compliance dates for private fund advisers on the substantive portions of the rule were to begin in September 2024 for larger private fund advisers (with private fund assets under management of $1.5 billion or greater) and March 2025 for all other private fund advisers. Hunton’s commentary on the Rules can be found here.