The U.S. private funds industry enjoyed a legal win yesterday, as the country’s Court of Appeals for the Fifth Circuit vacated U.S. regulator the Securities and Exchange Commission’s private fund adviser rule on the grounds that it is unlawful and exceeds the regulator’s authority to enact.
In September 2023, law firm Gibson, Dunn & Crutcher LLP filed suit on behalf of trade groups the Alternative Investment Management Association, the Managed Funds Association, the National Association of Private Fund Managers, the American Investment Council, the Loan Syndications and Trading Association and the National Venture Capital Association challenging the rule adopted by the US SEC regulating private fund advisers.
Yesterday, the panel of judges presiding over the case has ruled in favour of the industry trade bodies, which have been quick to applaud the decision.
“We are very pleased by the Court’s ruling, which will spare the private funds industry and investors a lot of unnecessary costs and disruption, as a result of the US SEC’s unlawful action. Today’s ruling rewards our decision to file suit, which was taken to protect the interests of our members against regulatory overreach and improper rulemaking by the US SEC that would have had severe and adverse impacts on a wide variety of market participants,” said AIMA CEO Jack Inglis.
“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,” said AIC President and CEO Drew Maloney. “In rejecting the SEC’s unfounded legal theory, the court has sent Washington regulators a strong message that they cannot bypass Congress when pushing their extreme agenda.”
“Today’s ruling is a significant victory for markets, fund managers, and investors, including pensions, foundations, and endowments. The court affirmed that the SEC cannot expand its authority beyond what Congress intended. Unfortunately, this is just one instance of SEC overreach as it looks to push through the most aggressive agenda in decades. MFA will continue to work constructively with the SEC to help improve its rushed rulemakings, and we remain focused on enabling alternative asset managers to raise capital, invest it, and generate returns for their beneficiaries,” said MFA President and CEO Bryan Corbett.
This may not be over yet, however.
“We’re reviewing the decision and will determine next steps as appropriate,” an SEC spokesperson told AlphaWeek in an emailed statement.
Any ‘next steps’ the SEC might take really comes down to one of two options, according to King and Spalding Partner Russell Sacks; both options would still give the private funds industry some welcome breathing room, however.
“The Court’s action leaves the SEC with two basic choices: appeal the decision to the Supreme Court or head back to the drawing board to propose new, more carefully tailored rules. In either event, the outcome of today’s ruling will be to delay action on the rules until after November’s election. Both the Supreme Court appeals process and the reproposal of a new rule will, at a minimum, take months.”
