U.S. Securities and Exchange Commission headquarters in Washington, D.C.
Andrew Kelly | Reuters
A U.S. appeals court has struck down a Securities and Exchange Commission rule aimed at increasing investor transparency for private equity funds, but the nearly $27 trillion industry says it could fundamentally change the way it does business.
The New Orleans-based 5th U.S. Circuit Court of Appeals ruled that the SEC exceeded its authority when it adopted the rule in August 2023.
A request for comment to the Securities and Exchange Commission was not immediately responded to.
Wednesday’s decision is a victory for U.S. financial services companies and trade groups, which have increasingly turned to court to challenge rules they say will increase compliance costs and reduce profits.
Recent debates involving the Securities and Exchange Commission involve rules requiring greater transparency about short positions and for firms that frequently trade in government bonds and other securities to register as broker-dealers.
The latest decision involves rules covering fund managers of private equity funds, hedge funds, venture capital funds and institutional investors such as pension funds and endowments.
The rules require fund managers to publish quarterly performance and expense reports, conduct annual audits, and stop providing certain investors with preferential treatment over redemptions and preferential information about portfolio holdings.
They are intended to increase transparency, fairness and accountability in a notoriously opaque industry.
Industry critics say this lack of transparency harms ordinary investors who invest indirectly in private equity funds, such as through pensions and retirement plans.
The SEC adopted the rules in a 3-2 vote, with Democratic-appointed commissioners in favor and Republican-appointed commissioners opposed.
The huge cost of citing
Groups that have filed lawsuits challenging the rules include the National Association of Private Equity Managers, the Alternative Investment Management Association, the American Investment Council, the Syndicated Lending and Exchange Association, the Managed Funds Association and the National Venture Capital Association.
They said the rules were “overly burdensome” and would harm investors by forcing them to sift through “mountains” of new information to find what they want, while incurring nearly $500 million in annual compliance costs. .
The groups also said the rules could stifle capital formation and make it harder for smaller advisers to compete.
Private equity funds typically attract wealthy, sophisticated investors, so they are subject to less federal regulation than investments for ordinary investors.
As the number of private equity funds more than triples to about 101,000, assets under management by these funds will grow from $9.8 trillion in 2022 to $26.6 trillion in 2022, according to the SEC.
SEC Chairman Gary Gensler said in announcing the new rules that they would benefit “all investors, big and small, institutional and retail, sophisticated and not.”
The 5th Circuit has become the go-to court for conservative and business groups challenging federal regulatory powers.
The three judges involved in Wednesday’s ruling were all appointed by Republican presidents.
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