Court Vacates SEC’s Private Fund Rule, Pleasing Managers and Ruffling Investors

“Private funds will be under no obligation to provide critical information…leaving LPs to negotiate for terms that should be common sense,” says ILPA’s chief.


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An appellate court ruled against the Securities and Exchange Commission’s private fund adviser rules on Wednesday, a victory for asset managers and a decision unloved by many of their investors.

The U.S. Fifth Circuit Court of Appeals in New Orleans deemed the rules adopted by the SEC last fall were unlawful and exceeded the regulator’s authority. The biggest question was “whether the Dodd-Frank Act expanded the Commission’s rulemaking authority to cover private fund advisers and investors” under sections of the Advisers Act and the court said it did not. The Alternative Investment Management Association (AIMA), which represents hedge funds, private equity firms and other investment companies and filed a lawsuit challenging the rules, cheered the court’s 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 U.S. SEC’s unlawful action,” AIMA CEO Jack Inglis said in a statement. “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 U.S. SEC that would have had severe and adverse impacts on a wide variety of market participants.”

The Managed Funds Association (MFA), which represents similar investment firms globally and was a plaintiff in the same case against the SEC, was satisfied with Wednesday’s ruling but said it was only one example of the regulator overextending.

“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,” MFA President and CEO Bryan Corbett said in a statement.

MFA said the ruling is good for “markets, fund managers, and investors, including pensions, foundations, and endowments,” but some of those stakeholders were proponents of the SEC’s new rules. At least 11 pension funds and the Institutional Limited Partners Association (ILPA), an industry group representing 600 member institutions with more than $2 trillion of private equity assets under management, filed an amicus brief with the appeals court in December. ILPA argued that the new private fund rules addressed three critical areas important to investors: lack of transparency — such as bespoke fee and expense arrangements with clients through side letters — conflicts of interest, and the lack of internal governance mechanisms to protect the capital managed by funds.


The capital entrusted to institutional investors, ILPA reminded the court, is provided in large part by public employees, like teachers, firefighters, and police officers. Those are ultimately the people who stood to benefit from the SEC’s rules.

“With today’s ruling, and the absence of minimum mandated standards, private funds will be under no obligation to provide critical information related to the fees and expenses charged to fund investors and meaningful performance information, leaving LPs to negotiate for terms that should be common sense. We are also disappointed that the Fifth Circuit did not acknowledge the SEC’s long-standing authority to protect private market investors,” Jennifer Choi. the chief executive of ILPA, said in a statement.