Trade Associations Sue to Vacate SEC Private Fund Adviser Rules
Commentary by Steven Lofchie
Several industry trade associations filed a Petition for Review in the U.S. Court of Appeals for the Fifth Circuit seeking to "hold unlawful, vacate, and set aside" the SEC's final rules on private funds advisers. The associations argued that the SEC has "not shown any need for the intrusive rules it has adopted."
In its Petition, the National Association of Private Fund Managers, Alternative Investment Management Association, American Investment Council, Loan Syndications & Trading Association, Managed Funds Association and National Venture Capital Association (collectively, the "associations") challenged the SEC's adoption of significant new regulations governing private fund advisers (see previous coverage). The associations argued that the final rules "fundamentally change the way private funds are regulated" by (i) prohibiting many of the "bespoke contractual terms investors negotiate to meet their specific needs," (ii) preventing advisers from charging certain expenses and (iii) imposing "costly reporting that is wholly unnecessary."
The associations further alleged that the SEC violated the Administrative Procedure Act by adopting rules without complying adequately with notice-and-comment procedures. They also argued that the regulations are "arbitrary, capricious, [and] an abuse of discretion," and alleged that the SEC is exceeding its statutory authority given that Congress has "long recognized" the size and sophistication of private funds investors and, therefore, such funds do not require the "exhaustive regulatory requirements" adopted by the SEC.
The associations asserted that the SEC's rule adoption will only work to hinder entrepreneurialism, flexibility and investment returns, which "until now made private funds an increasingly attractive option for the world's most sophisticated investors."
Commentary
Regulated participants in the securities markets are generally very reluctant to sue the SEC, even from behind the relative anonymity of a trade association, for fear of angering their regulator. Obviously that fear was insufficient in the current instance and no doubt each participating trade association drew heart from the participation of the others.
Now that the first challenge to an SEC rule adoption has been filed, the ice has been broken and it is not difficult to imagine a good number of challenges by other industry groups to other SEC rule proposals should the SEC move to adoption. Among the rule proposals that would seem obvious subjects to challenge are (i) the rules expanding the broker-dealer registration requirement, (ii) the rules as to the best execution of trades, (iii) the rules as to climate disclosure, (iv) the SBS reporting rules, (v) the stock lending reporting rules and (vi) the adviser custody rules. (See, e.g., "Industry Trade Groups Restate Opposition to SEC Large Swap Position Reporting Proposal.") There are reasonable bases to argue that each of these rules was either based on insufficient cost-benefit analysis and, as to many of the rules, that their adoption is outside the statutory authority of the SEC.
Potential challengers to the SEC must also be heartened by the fact that two of the Commissioners have not only dissented from most of these rule proposals, but they have also expressed doubts in many instances as to the SEC's procedures and statutory authority. (See "SEC Commissioners Amp Up Objections to Recent Rulemakings.") The Bitcoin trust case demonstrated that the courts are willing to examine whether the SEC's conduct is appropriate, and not simply to defer to the agency.
If the current judiciary is less willing to defer (whether that deference is called "Chevron" or something else) to regulatory agency determinations, particularly where every such determination is by a 3-2 vote, it is not difficult to imagine the SEC losing most or all of the challenges with which it may be faced.
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