Today, the United States Court of Appeals for the Fifth Circuit (the “Fifth Circuit”) vacated the Securities and Exchange Commission’s (the “SEC”) final rule1 regarding the regulation of private fund advisers (the “Final Rule”). The Fifth Circuit held that the SEC exceeded its statutory authority in adopting the Final Rule and, thus, it vacated the Final Rule in its entirety.2
In adopting the Final Rule, the SEC relied on its antifraud rulemaking authority found in section 206(4) of the Investment Advisers Act of 1940, as amended (the “Advisers Act”), and section 913(h) of the Dodd-Frank Act, codified at section 211(h) of the Advisers Act.
The SEC claimed that section 211(h) covered private fund advisers and investors and, therefore, the SEC’s rulemaking authority extended to such advisers. The Fifth Circuit held, however, “section 913 of the Dodd-Frank Act… applies to “retail customers,” not private fund investors. It has nothing to do with private funds.” The Fifth Circuit also held the SEC exceeded its statutory authority in relying on section 206(4) as it failed to explain how the Final Rule would prevent fraud.
The Fifth Circuit’s ruling also vacates the Final Rule’s amendments to the compliance rule under the Advisers Act, which became effective November 13, 2023, that required all registered advisers (including those that do not advise private funds) to document in writing the annual review of their compliance policies and procedures.
Seward & Kissel LLP will be monitoring developments and any future appeals closely. If you have any questions regarding the information discussed above, please contact your Investment Management Group attorney at Seward & Kissel LLP.
