Client Insight: U.S. Court of Appeals Strikes Down Private Fund Adviser Rules

The U.S. Court of Appeals for the Fifth Circuit (“Court”) issued its long awaited opinion today in National Association of Private Fund Managers et. al. vs. Securities and Exchange Commission, the lawsuit brought by the National Venture Capital Association and other trade associations representing the private funds industry (“Petitioners”) challenging the validity of the Securities and Exchange Commission’s (“SEC”) private fund adviser rules (“PFA Rules”).

Key Decision Takeaways

• • The private fund adviser rules, portions of which would have gone into effect in September for many private fund advisers, have been fully vacated.
  • This decision represents a significant win for all private fund managers and will reduce costly regulatory burdens.
  • The SEC may appeal the decision, either through a request to the Fifth Circuit to re-hear the case or to the U.S. Supreme Court, and may propose certain portions of the PFA Rules again.

As we previously outlined, the recently adopted private fund adviser rules imposed substantial regulatory and disclosure burdens on all private fund advisers.

In striking down the PFA Rules, the Court agreed with the Petitioners’ arguments and considered all of the PFA Rules as a single rule for purposes of its opinion. Specifically, the Court held that the SEC exceeded its statutory authority under the Investment Advisers Act of 1940 and the Dodd-Frank Wall Street Reform and Consumer Protection Act in adopting the PFA Rules.

As such, anticipated burdens on private fund advisers under all portions of the PFA Rules have been eliminated including requirements imposed by the Quarterly Statement Rule, Restricted Activities Rule, Preferential Treatment Rule, Audit Rule, Adviser-Led Secondaries Rule, and amendments to the Recordkeeping Rule.

While the PFA Rules have been vacated, the Adopting Release for the PFA Rules and the rules themselves continue to offer insight into the SEC’s current priorities and interpretation of investment advisers’ fiduciary duties. We expect the SEC will continue to focus on areas covered by the PFA Rules in examinations including conflicts of interest and adequacy of investor disclosures. In addition, we note that it is possible the SEC may propose certain portions of the PFA Rules again with modifications designed to address issues identified by the Court. Finally, the SEC may request that the Court re-hear the case en banc or petition the U.S. Supreme Court to review the decision.

We will continue to monitor for any developments. Please reach out to insights@gunder.com or your primary Gunderson Dettmer attorney if you have any questions.