The Fifth Circuit Court of Appeals in New Orleans ruled in favor of six private equity and hedge fund groups, finding that the Securities and Exchange Commission (SEC) exceeded its authority by adopting the Private Fund Adviser rule in August 2023. (WSJ, June 5)

Court Ruling

• The appellate panel stated in a 25-page opinion that the SEC had exceeded its authority by implementing the rule changes in a 3-0 decision.

• The rules adopted by the SEC required fund managers to submit quarterly reports detailing performance, compensation, and other fees. They also restricted the ability of fund managers to provide more favorable terms or information access to investors. (WSJ, June 5)

• The rule applied to private equity funds, hedge funds, venture capital funds, and fund managers for institutional investors.

• The industry groups challenging the SEC rule argued it was burdensome and would harm investors by suppressing capital formation and make it harder for smaller advisers to compete. (CNBC, June 6)

• The panel noted that the Dodd-Frank Act section used by the SEC to justify it “has nothing to do with private funds.” (Politico, June 6)

• A spokeswoman said that the SEC is reviewing the decision and will determine its next steps. (Reuters, June 5)

Roundtable Advocacy

• Since March 2022, The Roundtable has consistently advocated that the addition of reporting requirements presents significant compliance and operational challenges for private real estate fund sponsors with no added benefit to investors.

• While we support efforts to protect investors and monitor risk, we believe these proposals are unnecessary and would curb the entrepreneurialism, flexibility, and investment returns that make real estate private equity an increasingly attractive option for investors. (April 2022 Comment Letter)

• The Roundtable’s April 2022 letter stated, “As the real estate investment fund industry is required to bear more regulatory burdens and demands, the risk is that capital formation will be unduly hindered. We are therefore concerned that the Proposal, if finalized, could hinder real estate capital formation, the development and improvement of real properties, essential economic activity and jobs.”

The Roundtable’s Real Estate Capital Policy Advisory Committee (RECPAC) will continue to monitor and respond to the SEC’s various proposed regulatory initiatives with its industry and coalition partners.