Trade groups urge SEC to withdraw 3 proposals, point to ruling on private fund rule

Six financial industry groups that successfully sued the SEC over its private fund adviser rule asked the agency to withdraw three other proposals July 9, as they said the court’s ruling invalidates the proposals.

On June 5, the 5th U.S. Circuit Court of Appeals in New Orleans vacated the private fund adviser rule, contending that the SEC exceeded its statutory authority in issuing it. The rule would have required increased disclosure from private fund advisers, including supplying investors with quarterly statements with information about fees, expenses and performance; obtaining an annual audit for each fund managed; and acquiring a fairness opinion in connection with an adviser-led secondary transaction.

In a July 9 comment letter to the SEC, the six groups that sued over that rule — the National Association of Private Fund Managers, Alternative Investment Management Association, American Investment Council, Loan Syndications and Trading Association, National Venture Capital Association and Managed Funds Association — argued that the SEC should also withdraw its predictive data analytics proposal, outsourcing proposal and cybersecurity proposal.

“As drafted, (these) proposals exceed the commission’s authority in the same way as the recently vacated private fund adviser rule,” Bryan Corbett, MFA president and CEO, said in a July 9 statement. “The SEC needs to withdraw these rules that are based on an improper reading of the relevant statutes.”

In its ruling, the 5th Circuit held that certain sections of the Investment Advisers Act of 1940 — sections 211(h) and 206(4) — do not “(grant) the commission rulemaking authority to cover the relationship between private fund advisers and investors in the funds they advise,” according to the comment letter.

However, the commission issued its predictive data analytics proposal based on the authority of section 211(h), the groups wrote, and the SEC relied on both sections 211(h) and 206(4) for the authority to issue the outsourcing and cybersecurity proposals.

Therefore, the SEC should withdraw the three proposals, or make clear that they “are not applicable to investment advisers with respect to any client that is not a ‘retail customer,’” as the court found that section 211(h) only applies to retail customers, the groups said in their letter.

The predictive data analytics proposal has already received overwhelming pushback from the industry. Several trade associations, including MFA, AIMA and the American Investment Council, previously asked the SEC to withdraw the proposal, which would require investment advisers and broker-dealers to "eliminate or neutralize" conflicts of interest that arise from using certain technologies in investor interactions. In May, SEC Chair Gary Gensler said he asked SEC staff to consider re-proposing the issue based on public comments.

The cybersecurity proposal, issued in March 2022, would require enhanced and standardized cybersecurity disclosures for public companies, including reporting material cybersecurity incidents on Form 8-K filings. And the outsourcing proposal, issued in October 2022, would restrict registered investment advisers from outsourcing certain services and functions to service providers without conducting due diligence and monitoring of such providers.