Fifth Circuit Vacates SEC Private Fund Adviser Rules

On June 5, 2024, a Fifth Circuit panel vacated regulations adopted by the Securities and Exchange Commission ("SEC") in August 2023 designed to increase protection for investors in private funds. As Jones Day detailed in a previous Alert, "SEC Adopts Long-Awaited and Heavily Debated Private Fund Adviser Rules," these regulations—collectively, the "Final Rule"—were set to govern the offering of terms to investors, regulate fee and expense practices, and impose a host of disclosure and reporting obligations. Several of the Final Rule's compliance deadlines were active or scheduled for September 2024. 

In response to an industry suit, the Fifth Circuit held that, because "the promulgation of the Final Rule was unauthorized" by statute, "no part of it can stand." This decision may well be the final word on the Final Rule, although the SEC could petition for further review before either the Fifth Circuit (panel or en banc rehearing) or the U.S. Supreme Court. However, any further consideration would be discretionary, and both courts deny most petitions. Absent a stay, the Fifth Circuit panel's vacatur should take effect either in late July 2024 or, if the SEC petitions for rehearing before the Fifth Circuit, after that petition is resolved.  

Notwithstanding that the Fifth Circuit's decision is poised to negate the Final Rule and its deadlines, private fund advisers should expect that the SEC will continue to focus examination and enforcement efforts on the areas they attempted to address via the Final Rule. Private fund advisers should expect that disclosure and consistent application of internal policies in the areas of fees, expenses, and conflicts of interest (in particular in the area of adviser-led secondaries) will be a high priority for the SEC. While unlikely in the near-term, the SEC could try to craft new rules in place of the Final Rule.