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Lawsuit filed against SEC over new rules enhancing regulation of private fund advisers

On Behalf of | Sep 14, 2023 | Financial News

The Securities and Exchange Commission is facing a lawsuit over its recently adopted rules to increase the regulation of private fund advisers, reports Reuters.

Six private equity and hedge fund trade groups filed the suit in the United States Court of Appeals for the Fifth Circuit, saying the rules exceed the SEC’s statutory authority, fail to address the stated objectives, and will harm institutional investors.

The petitioners are the Managed Funds Association, the National Association of Private Fund Managers, National Venture Capital Association, American Investment Council, Alternative Investment Management Association, and Loan Syndications & Trading Association.

Under the rules adopted by the SEC, private fund advisers will be required to provide investors with quarterly statements detailing certain information regarding fund fees, expenses, and performance. They will also have to distribute to investors an annual financial statement audit of each private fund it advises and, in connection with an adviser-led secondary transaction, a fairness opinion or valuation opinion.

The rules will also prohibit all private fund advisers from providing investors with preferential treatment regarding redemptions and information if such treatment would negatively impact other investors. The measures were aimed at increasing transparency and competition in the private funds industry.

The lawsuit filed by the trade groups called the rules “arbitrary, capricious, an abuse of discretion, and contrary to law.”

“The SEC has overstepped its statutory authority and core legislative mandate, leaving us no choice but to litigate,” said Managed Funds Association President and CEO Bryan Corbett. “The Private Fund Adviser rule will harm investors, fund managers, and markets by increasing costs, undermining competition, and reducing investment opportunities for pensions, foundations, and endowments.”

In their suit, the associations asked the court to vacate the rules.

SEC Chair Gary Gensler has said the commission has the authority to enact the measures under the 2010 Dodd-Frank Act which allows the SEC to prohibit or restrict advisers’ sales practices, conflicts of interest and compensation.

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