SEC Private Fund Rule Overturned by Appeals Court

June 10, 2024

By: Aaron Bourke and Tom Scriven

New York, New York – On Wednesday, June 5th the 5th US Circuit Court of Appeals vacated the SEC’s Private Fund Adviser Rule (the “Rule”) in its entirety. The court concluded that in promulgating the Rule, the SEC exceeded its authority under the Investment Advisers Act of 1940. This development arises just as private fund managers are beginning to earnestly prepare for the rapidly approaching effective dates of the sweeping new Rule (September 14, 2024 for fund managers with $1.5B or more in private fund AUM, and March 14, 2025 for fund managers with less than $1.5B in private fund AUM).

The impact of this decision is that the Rule, as a whole, is no longer enforceable for any private fund advisers nationwide. However, we do not view this as a “pens down” moment for private fund advisers, as significant uncertainty remains.  In particular:

  • The SEC is certain to appeal the decision and may either request rehearing by the 5th Circuit Court of Appeals or appeal the case to the Supreme Court. Should the Fifth Circuit’s opinion be reversed on appeal, part or all of the Rule could be reinstated. While the SEC will stay the Rule’s effectiveness pending completion of appeals, they may choose not to defer the Rule’s compliance dates beyond the period of the stay if they are successful in their appeal. Private fund advisers will certainly want to avoid being caught flat-footed if the Rule is reinstated.
  • Even if the Rule ultimately does not become effective, the SEC has, through publication of the Rule, indicated its priorities with respect to protecting private fund investors. Limited Partners, having seen these priorities, may begin to negotiate for contractual protections similar to what the Rule would have required.
  • The SEC is likely to continue its strong focus on private funds under existing rules and via its examination and enforcement divisions.

Accordingly, we highly recommend that private fund advisers continue to prepare for compliance by the original effective dates, while keeping a close eye on further developments. Advisers should, regardless of the outcome of the SEC’s anticipated challenge of the Fifth’s Circuit’s ruling, ensure that their fees, preferential treatment and other practices align with disclosures and commitments to investors and their internal policies and procedures. Misalignment would run afoul of existing rules and has been an area of focus for the SEC’s examination information requests and enforcement investigations. Similarly, advisers should continue to maintain accurate records of preferential treatment granted to investors and how fees and expenses were calculated, to demonstrate consistency with disclosures and investor commitments. The ability of an adviser to quickly produce such records in the context of an examination will be important.

We will continue to monitor developments relating to the Rules closely and provide updates and guidance. As always, RPCK lawyers are available to assist with any questions you may have.

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