The SEC in August finalized a rule to require private fund advisers to supply investors with quarterly statements, including information about fees, expenses and performance; obtain an annual audit for each fund it manages; and acquire a fairness opinion in connection with an adviser-led secondary transaction.
But in November, six industry groups — the National Association of Private Fund Managers, Alternative Investment Management Association, American Investment Council, Loan Syndications and Trading Association, Managed Funds Association, and National Venture Capital Association — filed a brief in the 5th Circuit, arguing the rule unlawfully restricts the long-standing, widely used business arrangements of private funds and their investors. The groups claimed the rule exceeds the SEC's statutory authority; that the agency failed to provide the public a meaningful opportunity to comment on the final rule; that it did not perform an adequate cost-benefit analysis; and that the rule is arbitrary, capricious and otherwise unlawful.
The SEC on Dec. 15 filed a brief urging the court to dismiss the case, and arguing that the groups lack standing to bring the case in the 5th Circuit and even if the court disagrees with that assertion, the case still fails on its merits.
ILPA, CII and the pension funds side with the SEC and in their brief said private fund advisers hold outsized control of information and influence over the fund formation process. "As a result, despite their sophistication and best efforts, investors often face headwinds in negotiating for common, but critical governance terms, including consents and disclosures," they said in the brief.
In a Jan. 4 statement, ILPA CEO Jennifer Choi said the SEC's rule offers tangible investor protections that fit squarely within the agency's mandate and align with ILPA's core principles of alignment of interest, transparency and governance. "ILPA believes that the SEC's continued oversight of private funds offsets the structural challenges within the industry, by ensuring better disclosures to investors and management of conflicts of interest," Choi said. "The role that the SEC plays in overseeing these minimum standards is critical to institutional LPs as they carry out their fiduciary duties on behalf of the millions of beneficiaries they serve."
Also signing on to the amicus brief were the Chartered Alternative Investment Analyst Association; Florida State Board of Administration on behalf of the $188.8 billion Florida Retirement System, Tallahassee; Washington State Investment Board, Olympia, which oversees $153.6 billion in its commingled trust fund of defined benefit plan assets; $29 billion Los Angeles Fire & Police Pensions; $21.2 billion Los Angeles City Employees' Retirement System; $11.9 billion Chicago Public School Teachers' Pension & Retirement Fund; District of Columbia Retirement Board, which oversees pension plans totaling $10.5 billion in assets; $6.5 billion Colorado Fire & Police Pension Association, Denver; $3.3 billion Missouri Department of Transportation and Highway Patrol Employees' Retirement System, Jefferson City; $2.6 billion Fort Worth (Texas) City Employees' Retirement Fund; and $2.5 billion Louisiana Municipal Police Employees Retirement System, Baton Rouge.
