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  • The 5th Circuit Court of Appeals determined that the SEC “exceeded its statutory authority” in adopting the rules and sided with the industry groups that argued the rules were not necessary for “highly sophisticated” private fund investors.
  • In rejecting the SEC’s argument that it had the authority to adopt these rules under sections 206(4) and 211(h) of the Advisers Act, the court determined that section 211(h) only applies to retail customers, that the rules’ anti-fraud measures under section 206(4) were merely “pretextual,” and that the SEC failed to articulate a “rational connection” between fraud and any part of the final rules.  

On June 5, 2024, the U.S. Court of Appeals for the Fifth Circuit unanimously vacated a rule the Securities and Exchange Commission (SEC) enacted in August 2023 that was intended to protect investors who invest in certain private funds (e.g., hedge funds, private equity funds, and venture capital funds advised by registered or exempt reporting advisers) (Private Funds) and prevent fraud by the investment advisers to Private Funds. The Private Funds rule significantly expanded regulation of Private Funds managed by such investment advisers and was estimated to cost $5.4 billion and require millions of hours of employee time. The Private Funds rule, which a group of associations representing the Private Funds industry promptly challenged, would have imposed extensive new restrictions and disclosure requirements on investment advisers to Private Funds regarding their fees, expenses, performance, conflicts of interest and preferential treatment of certain investors.

The industry associations argued that Congress drew a “sharp line” between Private Funds and funds that serve retail customers, given that the Investment Company Act of 1940 (ICA) already extensively regulates registered investment companies (e.g., mutual funds, ETFs, and other publicly available pooled investment vehicles) and is aimed at protecting retail investors rather than investors in Private Funds, which operate in a manner exempt from the ICA and typically only are available to sophisticated investors.

The court agreed with the industry associations, concluding that the SEC exceeded its statutory rulemaking authority under sections 206(4) and 211(h) of the Investment Advisers Act of 1940 (Advisers Act) and Title IX of the Dodd-Frank Act of 2010 (Dodd-Frank Act).

The court reasoned that the Advisers Act and the ICA are “sister statutes” and should be interpreted harmoniously. Given the ICA’s significant regulation of registered investment companies and its imposition of measures designed to protect investors, the court agreed that Congress “clearly chose not to impose the same prescriptive framework on private funds.” Additionally, the court concluded that the Private Funds rule’s “anti-fraud” measure was merely “pretextual,” and that the SEC failed to articulate a “rational connection” between fraud and any part of the Private Funds rule. The court also considered the statutory construction of Title IX of the Dodd-Frank Act and the context in which it was enacted to determine whether Congress intended to grant the SEC broad rulemaking authority over private investors. It found the industry associations’ interpretation persuasive, holding that section 211(h) applies only to retail customers and could not be relied upon to regulate Private Fund advisers and their investors.

The SEC stated that it is reviewing the decision and would determine the next appropriate steps.

Investment advisers to Private Funds, managing trillions in assets, including the assets and investments by pensions, endowments, and wealthy individuals, in many cases already are mandated to register with, or at least report to, the SEC, subjecting them to regulatory oversight and requirements. However, the industry objected to the additional costs and burdens of the Private Funds rule, which included quarterly disclosures about fees and expenses and more uniformity to the information provided to investors. While the ruling drew criticism from advocates of greater transparency in financial markets, it could pave the way for further legal challenges from the Private Funds industry, which has long believed that the SEC has sought to expand its authority beyond that intended by Congress. Notwithstanding the Fifth Circuit’s ruling, a question remains whether industry groups will be as successful challenging similar regulations in this or other courts.

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Photo of Richard M. Cutshall Richard M. Cutshall

Richard M. Cutshall is Co-Chair of the firm’s Investment Management Group. Rich has experience representing clients in a variety of investment management, corporate, and general securities matters, including the representation of mutual funds and other funds registered under the Investment Company Act of…

Richard M. Cutshall is Co-Chair of the firm’s Investment Management Group. Rich has experience representing clients in a variety of investment management, corporate, and general securities matters, including the representation of mutual funds and other funds registered under the Investment Company Act of 1940, fund independent directors, unregistered investment companies, federally registered and state registered investment advisers, broker-dealers, and an array of public and private companies. He represents clients in all aspects of investment company practice, including organizing and forming new funds, registering investment companies with the SEC, the acquisition and merger of funds, and advising clients on the day-to-day aspects of corporate governance, board and adviser fiduciary responsibility, and SEC compliance.

Matthew J. Bromberg

Matthew Bromberg is a member of the firm’s Investment Management Group and Financial, Regulatory and Compliance Practice. Matt advises global investment advisers, banks, broker-dealers, transfer agents, and institutional investors. He has worked with registered investment companies, private funds, bank-maintained collective pools, and commodity

Matthew Bromberg is a member of the firm’s Investment Management Group and Financial, Regulatory and Compliance Practice. Matt advises global investment advisers, banks, broker-dealers, transfer agents, and institutional investors. He has worked with registered investment companies, private funds, bank-maintained collective pools, and commodity trusts. He has deep experience developed in leadership roles with fund sponsors and service providers, establishing and counseling exchange traded investment companies (ETFs), as well as with respect to, mutual fund to ETF conversions and ETF and investment adviser mergers and acquisitions. Matt also assists sponsors and investors with understanding the use and governance of certain investment strategies employing quantitative methodologies, algorithms, and generative AI.

Matt advises clients on the day-to-day aspects of corporate governance and fiduciary responsibility, frequently advising and serving as independent counsel to fund boards. In addition, Matt advises clients on compliance and regulatory matters under the Investment Company Act of 1940, the Investment Advisers Act of 1940, ERISA, and other federal securities laws, as well as related to federal and state registration, Securities and Exchange Commission (SEC), FINRA, and state investigations and enforcement actions, and interpretive and “no-action” letter requests, SEC exemptive orders, and related matters.

Matt has experience with complex operational matters relating to ETF authorized participant arrangements, domestic and global custody, fund administration and administrator sponsored series trusts, managed account platforms, securities lending, clearing and settlement, and related areas, such as decentralized finance. In the FinTech space Matt has been involved in considering the tokenization of securities, resulting in digitally represented ownership of an asset on a blockchain and advising other crypto-focused businesses and regulated financial technology companies, including mobile-first investing platforms and robo-advisers.

Prior to joining the firm, Matt served as the general counsel and chief compliance officer of an investment management firm, where he oversaw all commercial legal and regulatory compliance matters and supported the product development and exchange-listing activities of a thematic ETF product line. He also previously held roles with responsibility for the legal affairs, compliance, and risk management of a global asset servicing company, in connection with its investment fund services business, and he served as general counsel of a wealth management firm supporting its separately managed account, model delivery, wrap fee, and investment funds lines of business.

Photo of Ryan F. Helmrich Ryan F. Helmrich

Ryan Helmrich advises investment managers, broker-dealers, fund sponsors, custodial banks, transfer agents and other asset servicing providers on a broad range of investment management regulatory and transactional matters. He also counsels asset managers on a range of regulatory issues, including registration, interpretive guidance…

Ryan Helmrich advises investment managers, broker-dealers, fund sponsors, custodial banks, transfer agents and other asset servicing providers on a broad range of investment management regulatory and transactional matters. He also counsels asset managers on a range of regulatory issues, including registration, interpretive guidance, new product development, regulatory examinations and enforcement actions.

In addition to his general experience in asset management, Ryan regularly represents financial institutions in lift-out transactions, master servicing arrangements, derivatives-trading arrangements, as well as other matters affecting their domestic and global asset-servicing activities (custody, administrative, sub-accounting, and transfer agency). He has worked with state sponsors, private program managers and other providers involved with Section 529 college savings programs, Section 529A (ABLE) disability savings programs, and regularly represents investment advisers, broker-dealers, and program administrators with product development and contract negotiation.

Cynthia A. Marian

Cynthia A. Marian advises private equity fund sponsors, hedge fund managers, large and complex asset managers, and many smaller and start-up alternative investment advisers on the suite of corporate, tax, regulatory compliance, and operational matters germane to their investment management businesses, including a

Cynthia A. Marian advises private equity fund sponsors, hedge fund managers, large and complex asset managers, and many smaller and start-up alternative investment advisers on the suite of corporate, tax, regulatory compliance, and operational matters germane to their investment management businesses, including a wide variety of issues arising from the activities of the private investment funds and accounts that they manage, invest in, or both. Cynthia focuses on the structuring, formation, offering of interests in, and ongoing operations of, private funds and other special purpose and alternative investment vehicles globally. She also represents institutional investors making investments in private funds, including in the negotiation of seed deals, side letters, and co-investments.

Cynthia has a broad corporate background, having represented clients on an array of fund formation, transactional, regulatory compliance, and tax matters over the course of her career, including those arising in the contexts of: minority and growth equity investments, co-investments, joint ventures, public and private mergers and acquisitions, divestitures, private equity fund secondary transactions, SEC and NFA examinations, and general corporate governance and organizational matters. Frequently invited to speak at investment management industry conferences and symposia, Cynthia is sought after for her commercial approach and her experience with a range of issues that present themselves during the life cycle of a private fund manager.

Before returning to private practice, Cynthia held successive in-house General Counsel and Chief Compliance Officer positions with private equity and hedge fund managers. Her responsibilities included establishing new fund vehicles, managed accounts, and bespoke investment products; negotiating side letters and seed transaction documents with strategic investors; advising on marketing materials and placement agent relationships; counseling on management company-level business and human resources matters; creating and implementing compliance policies and procedures; and managing SEC, CFTC, and NFA registrations and examinations as well as day-to-day operational compliance with regulations imposed by domestic and international regulators. Cynthia also previously counseled several investment management firms, the founders thereof, and other entrepreneurs, as an “outsourced general counsel” and senior compliance advisor. She has co-taught an undergraduate seminar on hedge fund management and has been a guest lecturer on investment management regulations and compliance at multiple New York-area law schools.

The attorney is providing legal services through and affiliated with Greenberg Traurig, LLP, a New York Limited Liability Partnership. Results may vary depending on your particular facts and circumstances.

Photo of Melissa Peach Melissa Peach

Melissa Peach, a member of Greenberg Traurig’s Corporate Practice in New York, concentrates her practice on fund formation and investment management. Melissa represents clients in matters involving the formation, structuring, management, and related legal issues for a wide range of domestic and international

Melissa Peach, a member of Greenberg Traurig’s Corporate Practice in New York, concentrates her practice on fund formation and investment management. Melissa represents clients in matters involving the formation, structuring, management, and related legal issues for a wide range of domestic and international investment funds. She also has experience representing clients in connection with investments in private funds and secondary transaction matters.