On June 5, 2024, the U.S. Court of Appeals for the 5th Circuit issued a ruling that vacated the SEC’s Private Funds Reform Rule.
But what does that mean for your firm exactly?
In this blog, we’ll break down what was contained in the rule, why the rule was vacated, and what this means for your firm.
A Breakdown of the SEC’s Private Funds Reform Rule
The SEC’s Private Funds Reform Rule was approved on August 23, 2023, and was effective in November 2023 when it was published in the Federal Register. This Rule included:
- Quarterly Statement Rule
- Private Fund Audit Rule
- Adviser-Led Secondaries Rule
- Restricted Activities Rule
- Preferential Treatment Rule
- Annual Review Documentation Rule (applied to all Advisers)
With the exception of the Annual Review component, which was effective immediately, the rules were set to be implemented in November 2024 for large private fund advisers and May 2025 for small private fund advisers.
Why Was the SEC’s Private Funds Reform Rule Vacated?
Following the SEC’s approval of this rule, the National Association of Private Fund Managers, the Alternative Investment Management Association, Ltd., the American Investment Council, the Loan Syndications and Trading Association, the Managed Funds Association, and the National Venture Capital Association collectively sued the SEC.
In its ruling, the Court ruled that the SEC lacked the “statutory authority” to make this rule and that it was “arbitrary and capricious.”
The SEC can appeal the decision to the U.S. Supreme Court, however, given the courts current makeup and recent history, such an appeal will almost assuredly result in a high-profile loss for the SEC.
It is important to highlight that the SEC can also repropose a significantly different rule that addresses the court’s issues, but there is not much wiggle room around lacking statutory authority that would enable a meaningful new rule to address the private fund issues the SEC claimed to be addressing with the original rule.
This is a huge win for the private fund industry. The SEC’s own analysis of the rule estimated that this collection of rules would cost $5.4 billion annually. There are 5,500 private fund advisers that manage 130,000 private funds, so the savings per adviser are $1 million and per fund $40,000.
Note: The Annual Review Documentation rule was also vacated even though that was not cited as problematic by the court. I wouldn’t be surprised if that is re-proposed as a standalone rule.
What Does This Most Recent Update Mean for Your Firm?
In short? This is great news for your firm, expecially given the fact that many firms have not seen an increase in budget and resources proportionate to new rule requirements.
With this significant chunk of budget and resources now open for reallocation, firms have the opportunity to spearhead new compliance initiatives, prioritizing additional projects that may have been on hold due to budget or resource issues.
A few examples of such areas of focus for many firms?
- Addressing the requirements of other new rules: The Private Funds Reform Rule was far from the only new or proposed rule on the SEC’s docket. With budget no longer allocated towards it, firms can focus on addressing requirements for adopted rules like the SEC Marketing Rule or proactively prepare for what is likely to come, such as investing in a cryptocurrency compliance solution.
- Ensuring all operations are up to standard: While new and proposed rules may get the majority of the focus from firms, recent headline-making enforcement actions have highlighted that the SEC is focused on ensuring firms comply with new and existing rules. An example of such action are the multiple cases brought for off-channel communication issues.
- Creating efficiencies within the compliance program: For many firms, effectively addressing regulatory requirements is not the issue. Instead creating efficiencies that allow firms to manage their program with limited resources is a key focus.
The good news? COMPLY is here to help with it all.
COMPLY’s configurable solution set was designed to enable firms to proatively manage and mitigate potential risk, meeting evolving regulatory standards with ease and dexterity.
- Employee Compliance: Employees are a critical component of your firm’s growth – working with clients, running behind the scenes operations, and making the day-to-day functional. They can also be one of the most significant points of compliance risk. Mitigate this risk with COMPLY Employee Compliance Solutions.
- Firm Compliance: Get a 360-degree view of your firm’s risk points, with automated solutions designed to help you establish and maintain a comprehensive compliance program which continues to meet regulatory standards even as rules evolve.
- Expert Services: With our decades of combined expertise, COMPLY consultants can help audit and assess your compliance program to help you achieve and maintain the highest standard of regulatory compliance.
Ready to power up your program with COMPLY? Let’s talk!