Courts Strike Down SEC's Private Fund Adviser Rules

As we've been predicting since the challenge to the SEC's Private Fund Adviser Rules was first filed, a federal court has vacated the rules on the basis that the SEC exceeded its statutory authority. In our view, this was the inevitable outcome in light of the plaintiffs' calculated efforts to have their challenge heard in the Fifth Circuit, which historically has been quite hostile to the expansion of federal regulatory oversight, in general, and to the SEC, in particular.

At the time of writing, the SEC's only comment has been to say that they are reviewing the decision, so we will have to wait to see whether they will appeal the ruling, go back to the drawing board on the rules, or abandon them altogether. If the SEC does appeal, we don't expect that the rules will fare much better should the case be taken up by the U.S. Supreme Court, and any new rulemaking that is even remotely comparable in scope would presumably face the same legal hurdles upon adoption.

While this may well be the death blow for the SEC's attempts to meaningfully target private funds through rulemaking for quite some time to come, private fund advisers should not be too complacent in the wake of this victory. The SEC has many other arrows in its quiver to pursue enforcement actions against private fund advisers, including the broader anti-fraud provisions of the Advisers Act and related rules, and those arrows have struck numerous targets in the decade-plus since private fund advisers became subject to SEC registration in 2012. Accordingly, private fund advisers would still do well to keep the spirit of the rules in back of mind if they want to stay out of the SEC's crosshairs.