The rule was finalized in August and requires 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.
The industry groups argue the rule unlawfully restricts the long-standing, widely used business arrangements of private funds and their investors; 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.
Eugene Scalia, partner at Gibson, Dunn & Crutcher, the law firm representing the industry groups, said in a statement to Pensions & Investments that the SEC is "trying to engage in the wholesale regulation of private funds, which Congress never authorized, by seizing upon a narrow, unrelated authority Congress gave it with respect to retail investors."
Scalia, the former labor secretary during the Trump administration and son of late Supreme Court Justice Antonin Scalia, also said in adopting this rule, "The SEC did not give appropriate attention to the limits Congress placed on its authority, and to the substantial evidence in the record that the rule is unnecessary and harmful."
The SEC in a brief filed in December argued that Congress granted the agency authority to promulgate such a rule in the Dodd-Frank Wall Street Reform and Consumer Protection Act.
"The public had a meaningful opportunity to engage with the rule-making," the SEC said. "And the commission reasonably explained its decision to adopt the rules, reasonably assessed the rules' likely economic effects, and provided reasonable interpretations of the federal fiduciary duty imposed by the Advisers Act."
The SEC also said that "private-fund investments 'are often opaque, and advisers do not frequently or consistently provide investors with sufficiently detailed information' to allow 'even sophisticated investors' to 'understand the fees and expenses they are paying, the risks they are assuming, and the performance they are achieving in return,'" citing text from the final rule.
Last month, the Institutional Limited Partners Association, Council of Institutional Investors and 11 public pension funds, including the $304.9 billion California State Teachers' Retirement System, West Sacramento, filed an amicus brief in support of the rule and made similar points.
Neal Prunier, ILPA's senior director of industry affairs, said in a statement to P&I that the alternatives market does not currently require the type of regular information disclosure that investors receive in public markets. Also, the SEC's "regulatory authority over the private fund industry has clearly become essential in ensuring that private markets remain fair and efficient, and investor interests remain protected, while capital is raised and deployed by private market participants," he said.
After oral arguments on Feb. 5, the 5th Circuit will decide the rule's fate.