In a significant legal turnaround, the U.S. 5th Circuit Court of Appeals has nullified SEC regulations intended for private funds, marking a pivotal moment for private lenders and fund managers.

During the past year, you may have heard about the Securities and Exchange Commission (SEC) adopting a sweeping new set of rules and regulations to be applied to private funds. It was reported in Private Lender and through numerous other sources. If you have been eagerly waiting to hear more about the rulingís applicability to debt funds or were already sifting through the cumbersome 600-plus-page ruling to determine what the changes meant for your fund, you can breathe a sigh of relief (at least for now).

On June 5, 2024, the U.S. 5th Circuit Court of Appeals vacated the Private Funds Advisers Rules recently enacted by the SEC, effectively striking down the ruling.

Although the SEC does have options for the next steps (it can either petition the Supreme Court in hopes of having the case heard or pursue its objectives through investigations or enforcement actions), the ruling is a large blow to the SEC and puts the new rules and sweeping changes on the sidelines for now.

According to the SEC, the Private Funds Advisers Rules were ìdesigned to protect investors who directly or indirectly invest in private funds by increasing visibility into certain practices involving compensation schemes, sales practices, and conflicts of interest.î Fund managers and many industry groups, however, viewed the rules as overly burdensome and an overreach of the SEC’s authority. Several of these industry groups filed a lawsuit against the SEC, which ultimately resulted in the 5th Circuit Court of Appeals June ruling.

Implications of the court’s ruling

The 5th Circuit specifically emphasized the nuance of the original intent of the cited legislation, Section 211(h), and the SEC’s use of that legislation, which they believed to be at odds. The 5th Circuit believed Congress, which enacted the legislation in the wake of the 2008 financial crisis, intended for reference to ìinvestorsî to mean retail investors, not private fund investors. They went further to say Congress intentionally did not impose the same rules on private funds as they did on registered investment companies. The 5th Circuit clearly did not agree with the SEC’s point of view that they had the authority to protect private fund investors with their sweeping new set of rules.

As noted in the earlier AAPL article, the original SEC ruling contained a variety of new rules that were applicable to various private funds and registered investment advisors, with varying timelines and degrees of effort required. Those rules are no longer relevant or applicable.

Future of fund regulation

If you are a debt fund manager, at a minimum, the 5th Circuit’s ruling buys you more time. That being said, you should continue to monitor petitions, investigation announcements, or enforcement efforts to stay abreast of any shifts that could impact your fund strategy going forward.