A host of industry trade groups have filed a lawsuit in federal court seeking to overturn a new Securities and Exchange Commission rule that requires increased disclosure from private fund advisers and prohibits certain fee arrangements.
The SEC in August finalized a rule to require private fund advisers to supply investors with quarterly statements, including information on 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.
Gibson, Dunn & Crutcher, on behalf of 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 on Nov. 1 in the Fifth U.S. Circuit Court of Appeals in New Orleans, arguing the rule unlawfully restricts the longstanding, widely used business arrangements of private funds and their investors. The groups claim 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.
"Because private funds serve large, predominately institutional, investors capable of protecting their own interests, Congress deliberately exempted them from the prescriptive regulatory regime applicable to publicly offered investment vehicles," the groups state in the brief.
The brief argues that Congress intended the Investment Advisers Act of 1940 to govern, in limited ways, the relationship between the investment adviser and the fund, Gibson Dunn noted in an accompanying news release. "However, the SEC has upset Congress' plan by broadly regulating the relationship between the adviser and the investor," the law firm added.
When finalizing the rule, which was initially proposed in February 2022, SEC Chair Gary Gensler said it will "promote private fund advisers' efficiency, competition, integrity and transparency. That benefits investors, issuers and the markets alike."