The Latest for Private Funds, Plus 3 Exam Areas Always Covered
In June, the Fifth Circuit Court of Appeals vacated the SEC’s new Private Fund Rules adopted in August 2023 with an initial compliance date of September 14, 2024 for large advisers. This did not come as a surprise to the industry based upon the massive pushback by private fund managers that were represented by several industry trade groups as petitioners in the case, National Associations of Private Fund Managers et al. v. SEC.
The Court decided in favor of the petitioners on the grounds that the SEC exceeded its statutory authority under the Administrative Procedures Act (“APA”). To be precise, the Court found the Commission had no grounds to authorize the new rules under Section 211(h) or Section 206(4) of the Advisers Act as it claimed.
The private fund industry gets a breather…for now. So, what’s next for these advisers?
Since the court decision, the SEC has not revealed its next steps. In fact, the regulator’s silence is quite unusual and makes one wonder what strategizing is going on behind its closed doors. The SEC could appeal the decision, and if it wins the Rules are then back on the table. However, the appeal process will take time and we have an election in November. If the administration should change after the election that could affect the appeal process. In the meantime, the current and extremely aggressive SEC Chair will do what he has to do in order to rein in an industry he believes is rife with conflict. For the industry, this means regulation by enforcement.
The following three areas will be in focus now during private fund SEC examinations:
- Fund Expenses
- Portfolio Valuations
- Conflicts of Interest
The above are the top three areas covered in every private fund exam by the SEC. Since the SEC lost its ability to regulate by rules, they will now push even harder in exams for deficiencies. Private fund advisers should be sure to thoroughly review these areas for compliance in advance of an exam. Other SEC exam areas will include those newer rules recently put in place on marketing, Form PF and short position/short activity reporting. Other areas may include proposed rules moving toward finalization, including rules on custody, cybersecurity, outsourcing and ESG. Compliance at private fund managers will need to keep up their guard.
The SEC is likely thinking long and hard about adjusting its enforcement process. A new goal would be to increase the number of cases against private fund managers so that any future rulemaking efforts have essential data to support the rationale for the rule and increase its success rate when legally challenged. The SEC will continue to seek settlements as a primary enforcement result and will likely need to be more selective with its enforcement cases. The SEC will now have to devote more resources to litigating their cases in light of the recent US Supreme Court decision, SEC v. Jarkesy, ending the SEC’s ability to use in-house tribunals before SEC administrative law judges (ALJs) to adjudicate its cases.
Despite a current regulatory environment that will continue to unfold under judicial decisions and political agendas, the private fund industry still has much at stake with current rule requirements. It also appears that this is not the end of rulemaking for private funds – it’s just the beginning.
View FrontLine Edge Platform for Private Funds
