Private Funds are exempt from federal regulations on their governance structure. The U.S. Appeals Court struck down the new Private Funds Rule.

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National Association of Private Fund Managers; Alternative Investment Management Association, Limited; American Investment Council; Loan Syndications and Trading Association; Managed Funds Association; National Venture Capital Association,

Petitioners,

versus

Securities and Exchange Commission,

Respondent.

______________________________

Petition for Review of an Order of the Securities & Exchange Commission

Agency No. 17 CFR Part 275 No. IA-6383

Before Southwick, Engelhardt, and Wilson, Circuit Judges.

Kurt D. Engelhardt, Circuit Judge:

The Securities and Exchange Commission (“Commission”) adopted a rule to enhance the regulation of private fund advisers, designed to protect investors who invest in private funds and to prevent fraud, deception, or manipulation by the investment advisers to those funds. Private Fund Advisors; Documentation of Registered Investment Adviser Compliance Reviews, 88 Fed. Reg. 63206 (Aug. 23, 2023) (to be codified at 17 C.F.R. pt. 275) [hereinafter “Final Rule”]. We consider a challenge to the Final Rule by petitioners National Association of Private Fund Managers, Alternative Investment Management Association, Ltd., American Investment Council, Loan Syndications and Trading Association, Managed Funds Association, and the National Venture Capital Association (collectively “Private Fund Managers”). For the following reasons, we VACATE the Final Rule.

?The U.S. Appeals Court struck down the new Private Funds Rule, vacating the Rule.? The majority of the opinion centers on the difference between retail investors and sophisticated Private Fund investors.? There has always been a distinct difference between retail investors and sophisticated investors, accredited investors or qualified investors in the minds of Congress and the SEC.? There has always been a need and desire to protect the retail investor because they don’t have the knowledge, experience or sophistication of the Private Fund sophisticated investors.? The Court examined carefully in a detailed decision the differences between retail investors and sophisticated investors as well as the intent of Congress on the regulation of Private Funds in the crafting of Dodd Frank.

The Court begins by making a distinction between the Adviser's duty to the Private Fund as its client as opposed to the individual investor in the Private Fund being the client, and that the duty is to monitor the performance of the Private Fund not the financial condition of the investor.? Then the Court explores the SEC's reliance on Dodd Frank for the authority to create the rule, specifically looking at whether Congress intended to exempt Private Funds and the difference between retail investors and a sophisticated private fund investor.? The Court specifically cites a prohibition in Dodd Frank from ascribing the term customer to a Private Fund investor, again making the distinction between a retail investor and a Private Fund sophisticated investor as well as how private funds have been defined across various regulations.

Finally, the Court discusses whether the rules were reasonably designed to meet the goal of the proposed regulation and found that Congress purposefully exempted Private Funds and explicitly permits Private Funds to freely negotiate fund agreements concerning investor access to periodic investor reports, investor input on advisory fees, and redemption terms.? Private Funds are exempt from federal regulations on their governance structure.?

In summary, the Court found that sophisticated investors that are permitted to invest in Private Funds do not need the same level of oversight and protection that retail investors need, and that the SEC overstepped its authority.?

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For the full text of the opinion see: gov.uscourts.ca5.215539.123.1.pdf (courtlistener.com)

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