Our Investment Funds Team examines why the Securities and Exchange Commission is passing on the opportunity to appeal the Fifth Circuit’s ruling to vacate the Private Funds Rules.
- The deadline to request an en banc hearing from the Fifth Circuit has passed
- The SEC may wait to appeal to the Supreme Court in the fall before the presidential election
- Despite the setback, the SEC will continue to prioritize regulating private funds and their advisers
One of the key deadlines for the U.S. Securities and Exchange Commission (SEC) to appeal the U.S. Court of Appeals for the Fifth Circuit’s determination to overturn the proposed Private Funds Rules has passed, and the SEC has not yet taken further action for a judicial review of the circuit court’s decision.
The Private Funds Rules were a sweeping set of proposed reforms purportedly designed to protect private fund investors by expanding the regulatory compliance requirements for private fund advisers. In June, the Fifth Circuit sided with the industry participants who had called the Private Funds Rules “arbitrary, capricious, an abuse of discretion, and contrary to law,” agreeing that the SEC overstepped its authority and overturning the Private Funds Rules. The SEC had through Monday, July 22, to request an en banc review of the Fifth Circuit’s decision. According to the Fifth Circuit docket, the SEC has not filed such a petition.
What’s Next?
This inaction is significant to the private funds industry, but does not necessarily determine the future of the Private Funds Rules. Because the SEC will not seek en banc review at the Fifth Circuit, the proposed Private Funds Rules remain overturned, but the SEC can still petition the U.S. Supreme Court to review the case or propose a revised, narrower version of the rules. To date, there has been no official action by the SEC to seek further judicial review.
It is unsurprising that the SEC opted to forgo en banc review at the Fifth Circuit because such a review is rarely granted. When an en banc review is granted, a larger panel of judges from the same court hears the case, so the SEC may have deemed it unlikely that the en banc court would arrive at a different decision than the smaller panel made in June. If the SEC intends to appeal to the Supreme Court, this appeal would likely come in the fall.
In the meantime, we anticipate the regulation and monitoring of private funds and their advisers and managers – and in particular the types of investor protection considerations that were subject to the Private Funds Rules – will continue to be a priority for the SEC during examinations and enforcement actions.
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