U.S. Appeals Court Decision on New SEC Private Fund Advisers Rules: What It Means for LPs and GPs

On June 5, 2024, a federal appeals court in New Orleans ruled 3-0 to vacate the Private Fund Advisers Rules (PFAR) adopted by the Securities and Exchange Commission (SEC) last August. The rules would have required private equity funds, hedge funds, venture capital funds and managers of funds for institutional investors such as pension funds and endowments, among others, to disclose quarterly expenses and fees to investors for greater transparency into private funds.

A group of associations representing the private fund industry argued in front of a three-judge panel that the SEC overreached its statutory authority with PFAR, and that the new rules only applied to retail customers (e.g., mutual funds). The court concurred, stating that the law was intended to protect mutual fund and other public securities investors, rather than those investing in private equity firms and hedge funds.

The backstory

In August 2023, the SEC enhanced its regulatory overview of private fund advisers and adopted the Private Fund Advisers Rules in a bid to improve transparency, fairness and accountability and bring more uniformity to investor reporting. Set to take effect in early 2025, the rules prompted a rush among private fund managers to comply with new regulations, including issuing quarterly fee and performance reports, annual audits and maintaining comprehensive records of changes to policies and procedures.

More specifically, the new rules included five sets of regulations: the Restricted Activities Rule, Audit Rule and Adviser-Led Secondary Rule, Preferential Treatment Rule, and the Quarterly Statement Rule — the last two causing the biggest upheaval among U.S.-based general partners (GPs) we interviewed for our Unpacking New SEC Rules For Private Advisers white paper.

The regulations drew immediate criticism from associations representing the nearly USD 27 trillion industry, which expressed concern regarding the operational burden the rules would bring for fund managers. Although the SEC adopted amendments to the rules, loosening up its initial proposal, a lawsuit challenging the rule was in place, citing, in part, anticipated increased operating costs from quarterly disclosures and performance calculation headaches.

The other side

Opponents of the court’s ruling believe the decision would ultimately hurt ordinary investors who have indirect exposure to private funds through pension and retirement plans.

Advocates of greater transparency in the financial markets, like the Institutional Limited Partners Association (ILPA), say they will continue to work on the next evolution of ILPA reporting templates as planned:

“Since its proposal more than two years ago, we viewed the U.S. SEC's Private Fund Advisers (PFA) rules as addressing three primary areas that pose risks to both LPs and the industry: lack of transparency, conflicts of interest, and the lack of effective internal governance mechanisms to protect the capital managed by private funds. In particular, ILPA regarded the Quarterly Statements rule as a catalyst necessary to accelerate the industry’s adoption of minimum reporting standards that promised real cross-industry benefits. While the PFA has been vacated, our work on the next evolution of ILPA reporting templates will continue as planned.” – ILPA 

What’s next?

The SEC is reviewing the decision and determining its next steps, with the option to appeal to the U.S. Supreme Court within 90 days of the ruling. The U.S. appeals court’s ruling was effective immediately upon filing.

As the SEC reviews its next steps, LPs can expect continued efforts to enhance transparency and protect their investments. Meanwhile, GPs should stay engaged in shaping fair and effective regulatory frameworks that support innovation and growth in private equity and hedge funds.