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Appeals court takes up case involving challenge to SEC private adviser rule

On Behalf of | Apr 8, 2024 | Securities and Compliance

A federal appeals court is weighing a case involving a challenge to the Securities and Exchange Commission’s new private fund adviser rules, according to ThinkAdvisor.

The U.S. 5th Circuit Court of Appeals heard oral arguments in New Orleans in the lawsuit filed by six private equity and hedge fund trade groups. They allege the rules exceed the SEC’s statutory authority, fail to address the stated objectives, and will harm institutional investors.

The SEC adopted the new rules in August 2023, saying the action was aimed at protecting private fund investors by increasing transparency, competition, and efficiency in the market.

Under the regulations, 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.

During the appeals court February hearing, three judges questioned lawyers for the SEC and the plaintiffs which include the Alternative Investment Management Association and Managed Funds Association.

According to a press release from the groups who filed the suit, “We believe the rules would set back the industry by several decades by making it nearly impossible for private fund managers to offer bespoke treatment to fund investors. Our research and investor feedback show that customisation is a growing trend that has been spearheaded by institutional investors moving away from uniform products to a partnership model. This model offers investors greater flexibility while still retaining the operational benefits of investing in pooled vehicles.”

For further insights into the case and its potential impact, ThinkAdvisor interviewed Gail Bernstein, general counsel for the Investment Adviser Association, and Art Zwickel of Paul Hastings and CalALTs.

“The argument went in a somewhat surprising direction in that the panel [of judges] seemed very interested in potentially saving a couple of the rules even if it would decide to vacate others,” Bernstein relays.

Bernstein analyzed the debate over the SEC’s authority to impose the rules under Section 211(h) of the Dodd-Frank Act and the appeals court’s skepticism towards the SEC’s position.  SEC Chair Gary Gensler has said the commission has the authority to enact the measures under the portion of the Dodd-Frank Act which allows the SEC to prohibit or restrict advisers’ sales practices, conflicts of interest and compensation.

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