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5th Circuit vacates private fund rules

05 Jun 2024

By Lindsay Burckett-St. Laurent, Senior Managing Director

Today, the 5th Circuit Court of Appeals issued its long-awaited decision on the SEC’s private fund rules.  A panel of justices found that there was no statutory authority for these rules and vacated them in their entirety.


On September 1, 2023, several industry groups, including the National Association of Private Fund Managers and the Managed Funds Association, filed a petition for review of the Final Rule. They argued that the SEC exceeded its statutory authority, and the rule was not a logical extension of the proposed regulations. They also contended that the rule was arbitrary and capricious under the Administrative Procedure Act (APA) and failed to consider its impact on efficiency, competition, and capital formation.

In holding that the SEC exceeded its statutory authority, the court emphasized that the SEC relied on sections of the Dodd-Frank Act that were intended to regulate retail customers, not private fund investors. The court also found that the SEC’s rationale for the rule did not sufficiently demonstrate a connection between the regulations and the prevention of fraud.

What’s next

If the SEC believes the court’s interpretation of its authority was incorrect, it could petition the 5th Circuit to re-hear the case or seek review by the US Supreme Court.  Either court can reject such a petition without further hearing or briefing.   Alternatively, the SEC could attempt to revise the rule based on the court’s feedback and re-propose it with modifications that align with its statutory authority.

Our take

IQ-EQ believes that industry groups may continue to engage with the SEC in further legal battles. For example, the modernized marketing rule that had a compliance deadline of November 2022 may be challenged if industry groups believe it overreaches the SEC’s statutory authority or imposes undue burdens. Specific rules that significantly impact business operations or involve substantial compliance costs may be more likely to face legal challenges. In addition to the modernized marketing rule, it would also include rules related to environmental, social, and governance (ESG) disclosures, cybersecurity requirements, or additional reporting obligations for private funds.

The court’s decision to vacate the SEC’s Final Rule underscores the ongoing tension between regulatory agencies and industry stakeholders over the scope of regulatory oversight. While the SEC aimed to enhance investor protection and transparency in the private fund sector, the legal pushback highlights the challenges in implementing broad regulatory changes. The private fund industry and regulatory bodies will need to continue navigating these complexities to ensure both investor protection and market efficiency.

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