The private fund industry breathed a big sigh of relief followed by a collective jump for joy on June 5 when the U.S. Fifth Circuit Court of Appeals vacated, in whole, the SEC’s Private Fund Advisers Rule. In short, the Fifth Circuit Court of Appeals determined the SEC lacked the rulemaking authority to issue the Private Fund Advisers Rule under Section 211(h) because Section 211(h) is limited to “retail customers” and therefore could not be used to make rules for private funds and private fund investors.
At this point, the future of the Private Fund Advisers Rule remains uncertain. The path forward appears to be one of the following three options (1) the SEC can ask for a rehearing by the Fifth Circuit Court of Appeals or appeal the decision to the Supreme Court, (2) the SEC could attempt to propose a new rule aimed at private funds and private fund advisers, or (3) do nothing.
Gone but not forgotten?
Given the options above, the compliance dates for the Private Fund Advisers Rule will no longer be effective (unless the SEC receives some sort of emergency relief). However, as I digested the news, two thoughts came to the forefront.
First, the SEC maintains ample tools to hold private fund advisers to account for certain elements of the rules. For example, through examinations and enforcement the SEC can (and likely will) review and adjudicate inconsistent practices and disclosures and/or incomplete disclosures, GP-led secondary practices, preferential treatment without ample disclosure and practices in the “restricted activities” portion of the rule.
Second, the Private Fund Advisers Rule provided specific insight into the SEC’s focus areas for private fund advisers. The SEC’s enforcement priorities are helpful to a certain extent but the annual priorities are historically wide-ranging and high-level. The Private Fund Advisers Rule is (was?) a detailed roadmap of areas the SEC sees as problematic or contrary to investors’ interests.
So, while there is surely temptation to cheer and toss the Private Fund Advisers Rule file in the trash and give it the same treatment as 2020 (i.e. “something we did”), don’t totally disregard the Private Fund Advisers Rule.
How Trillium Can Help
Testing and Surveillance: A key component of Trillium’s ongoing compliance support is reviewing your firm’s practices in key risk areas against policies and procedures and disclosures. The ability to identify and rectify problematic areas, prior to an examination, is integral in preventing potentially significant time and expense later on.
Compliance Program Development: Trillium helps you put in place policies and procedures that work for your firm. Developing and applying consistent policies and procedures is paramount to fulfilling a firm’s regulatory obligations and fiduciary duty.