A court ruling deeming the SEC incompetent in introducing its Private fund Adviser Rule has helped several American associations win a significant victory on the path to increasing investment in private assets.
The legal challenge was successfully brought by a number of industry bodies, including the National Association of Private Fund Managers, the Alternative Investment Management Association, the American Investment Council (AIC), the Loan Syndications and Trading Association and the Managed Funds Association.
The PFAR was introduced in August 2023 to promote transparency, efficiency, and competition “for all investors, large or small, retail or institutional, sophisticated or uninformed.”
The Fifth Circuit Court of Appeals found that the SEC lacked legal authority to introduce the rules. These rules required, amongst other things, SEC-registered fund managers to provide investors with certain disclosures. They also required quarterly statements on compensation and expenses of fund advisers and their performance, as well annual audits of the financial statements of each fund.
The regulation also prohibits any investor from receiving preferential treatment or information regarding redemptions.
According to a report from Preqin this judicial result will not only have implications in the United States, but will also affect the global alternative assets industryy.
Reactions To A Decision That Could Be A Double-Edged Sword
The AIC described the PFAR as “illegal, unfair, and ultimately harmful for investors.” Drew Maloney is the president and CEO of the association. He said that the court ruling was “a victory” for “thousands of businesses in the United States who need capital to grow, and millions of workers whose retirements are based on private equity and credit.”
The Wall Street Journal hailed the defeat of SEC chairman Gary Gensler.
The President and CEO of Investment Company Institute, Eric J. Pan stated that the Fifth Circuit’s ruling overturning SEC’s private funds adviser rule was a clear acknowledgement by the court that ICI raised serious issues about regulation by hypotheses. We share the court’s concern that the SEC exceeded its mandate. We hope that the SEC, as it awaits action on dozens of similar overreaching SEC proposal, will take the time needed to study this case and pay more attention the serious concerns expressed by market participants and the public on issues such a liquidity risk management, safeguarding and outsourcing.
Jennifer Choi is the Executive Director of the Institutional Limited Partners Association. She warned that without mandatory standards for critical information about performance, fees and expenses, LPs would have to negotiate terms that “should be common sense”.
Heather Heys Vice President and Michael Gallagher Senior Associate of Preqin’s Legal Insights Team suggest that LPs are more likely to rely on their own financial and legal advice, as well as their understanding of standard market terms and fees in limited partnership agreements. could be a steep learning curve for some investors.