Today, the United States Fifth Circuit Court of Appeals vacated the SEC’s Private Fund Advisers Rule (88 Fed. Reg. 63026), which would have required, among other things, quarterly statements to investors in private funds, limitations on expenses that could be passed through to investors, and restrictions on preferential treatment. The Fifth Circuit held that Section 211(h) of the Investment Advisers Act applies to “retail customers”—a term that “has nothing to do with private funds”—and that the SEC “exceeded its statutory authority in relying on that section to adopt the Final Rule.” The Fifth Circuit also held that the Private Funds Rule lacked a “close nexus” to the statutory anti-fraud aims of Section 206(4).

There are several open questions, including whether the SEC will ask the full Fifth Circuit to review the panel’s decision en banc or file a petition for certiorari with the Supreme Court. Even with the Private Fund Advisers Rule vacated, the SEC will likely continue to apply heightened focus on investment managers’ disclosure practices with respect to expenses, expense allocations, preferential treatment, and conflicts.