Appellate Court Rejects SEC’s Private Fund Rule

By Paul Staples, CPA, Tax Senior Manager | Andrew K. Sledd, CPA, CFE, Partner

Appellate Court Rejects SEC’s Private Fund Rule

Private fund advisors steer clear of extra operational burdens

Last year, the Securities and Exchange Commission (“SEC”) adopted new rules for private fund advisors under the Investment Advisers Act of 1940 (the “Act”). These rules enhanced reporting and compliance requirements for private funds to increase investor visibility into certain private fund practices. The new rules were intended to provide transparency to investors in private funds and address certain issues such as compensation schemes, sales practices, and conflicts of interest.

Under the new rule, hedge funds, private equity and venture capital firms were required to provide investors with more detailed quarterly disclosures about fees and expenses and to treat all investors in a fund equally, regardless of size. Private fund managers opposed the rule saying that it added operational burdens and costs and provided very little additional transparency to investors.

Private fund industry challenges SEC fee disclosure rule

A group of the largest private fund related associations representing fund managers responsible for trillions of dollars in investments filed suit in federal court a week after the SEC rules were adopted late last summer. The groups argued that the SEC exceeded its authority with the new rule. On June 5, 2024, a three-judge panel on the New Orleans’ Fifth U.S. Circuit Court of Appeals unanimously sided with the associations’ argument of SEC overreach and struck down the law. The court found that the statute the SEC relied upon when making the new rules only applied to retail customers, not private funds.

What’s Next?

The SEC could appeal the decision to the U.S. Supreme Court. However, that option may not be in the best interest of the SEC given the current makeup of Justices on the Supreme Court that would likely uphold the appeal and the possibility of losing an argument at that level could weaken the SEC’s authority on other matters.

The ruling could also open the door to other challenges from the private fund industry.

Your opportunity advisors will continue to keep you updated on this and other regulations impacting private fund advisors.


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About the Authors

Paul Staples

Paul Staples, CPA, Tax Senior Manager

Paul focuses on business tax planning and compliance, general business consulting, transaction advisory, and individual tax for privately-held clients with an emphasis on limited liability companies and flow-through taxation. He works with clients in the real estate and financial service industries, equipment dealers, startup companies, and insurance brokers.

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Andrew K. Sledd

Andrew K. Sledd, CPA, CFE, Partner

​​Andrew specializes in auditing broker/dealers in securities, non-registered investment funds and registered investment advisers. He is a member of the Firm’s Financial Services Industry team and possesses a comprehensive understanding of SEC and FINRA rules and regulations. Read more of Andrew’s insights on our blog.

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The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.


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