The long-awaited SEC private fund rules were put on ice by the Fifth Circuit U.S. Court of Appeals today when the appellate court struck down the rules and the significant compliance, disclosure, and reporting changes that were to come along with those rules. The Fifth Circuit found in favor of a group of six private fund trade groups in rejecting the SEC’s rules, amendments that the Commission argued enhanced transparency for investors. The court held that the rules exceeded the Commission’s authority, an outcome many who have closely watched the Fifth Circuit’s decisions on administrative rule-making efforts in recent years expected, at least in some part.

So, what's next? It seems likely that the SEC will appeal the decision to the Supreme Court in short order. Regardless of the outcome for these specific private fund rules, however, the Exams and Enforcement Staff will continue to focus on many key aspects of how private fund advisers manage, what the agency believes may violate the rules already in effect, conduct that has been subject to many enforcement actions in the last few years: excessive fees, inadequate disclosures, improper expense allocation, and undisclosed conflicts of interest, to name a few.

In other words, private funds are still front and center on the SEC’s radar, and advisers should strongly consider auditing their funds’ policies and procedures based on recent enforcement actions and the expected continuation of interest in the private fund industry. The Fifth Circuit's decision may pause certain overhaul efforts, but the SEC's focus in this space remains strong.

The Final Rule’s “anti-fraud” measure is pretextual. The Private Fund Managers claim that the Commission has not articulated a “rational connection” between fraud and any part of the Final Rule the Commission adopted. We agree. The Commission fails to explain how the Final Rule would prevent fraud. . . .The Commission largely fails to “define” the fraudulent acts or practices that the Final Rule purportedly is designed to prevent. Complying with the “fund’s governing agreements” is not fraud, nor is disagreement over “discretionary violations.” And while some conduct could involve fraud, the Commission only has observed misconduct by about 0.05% of advisers. AR.119:13.11 The Commission’s vague assertions fall short of the definitional specificity that Congress has required.

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