Court Vacates SEC Regulations for Private Fund Advisers

On June 5th, 2024, the Fifth Circuit Court of Appeals issued a ruling regarding the SEC's previously adopted rule package for private fund advisers ("Rule Package"), which included:

• Requirements for private fund audits,
• Mandates for quarterly statements to private fund investors,
• Restrictions on activities performed by private fund advisers,
• Regulations on adviser-led secondary transactions,
• Provisions addressing preferential treatment of investors within private funds, and
• Amendments for all SEC registered investments advisers requiring written documentation of their annual compliance review.

The court's decision vacated the entire Rule Package. While the rule was finalized earlier this year with a compliance date of 2025, now, all is off the table. 

Additionally, the court vacated an amendment to Rule 206(4)-7 applying to all SEC RIAs — not just those specializing in private funds — that required written documentation of the annual compliance policy and procedures review. 

The court's reasoning focused on the legal basis for the Rule Package. The court determined that the SEC exceeded its authority under the Investment Advisers Act when adopting certain provisions within the Rule Package. Specifically, they questioned the SEC's reliance on retail customer sections of the Act for justifying some of the proposed regulations.

This decision has potential implications for more challenges to an active investment adviser rulemaking agenda. The SEC can appeal the decision, and its broader impact on future regulation remains to be seen.

Bates Group will continue to keep you apprised of SEC regulatory changes. Contact us today to learn about our ongoing compliance support for State- and SEC-registered Investment Advisors.