This rule was intended to strengthen regulation of private fund advisors and guard against fraud or manipulation by these companies, ostensibly to protect small investors who are exposed to private fund advisors through their pension funds and other vehicles that may invest in hedge funds and other private funds.
“According to the Commission, the need for supervision arises from the risks and harms linked to the protection of investors, such as the lack of transparency, conflicts of interest and the absence of governance mechanisms”, reports the Court in her decision.
However, the rule was challenged by a range of trade groups, including the Alternative Investment Management Association (AIMA), the Managed Funds Association and the National Venture Capital Association, who argued that the SEC had exceeded its authority in seeking to considerably strengthen the supervision of private funds.
The Commission argued that the Dodd-Frank Actdeveloped in response to the global financial crisis, extended its regulatory authority to advisors and private fund investors.
The Court did not share this opinion, finding that the American legislature had specifically exempted private funds from the type of normative control deemed necessary in public procurement, and that the Dodd-Frank Act had not erased this distinction.
“By the will of Congress, private funds are exempt from federal regulations relating to their internal “governance structure”, ”the Court ruled. She added that, unlike retail-focused funds, private funds are free to negotiate their fees, redemption terms and financial reporting.
” There Dodd-Frank Act merely regulated the relationship between advisors and the private funds they advise,” the Court asserts in concluding that the SEC exceeded its authority.
The Court also rejected the SEC’s argument that its anti-fraud regulatory authority gave it the ability to create the new rule, saying the SEC was confusing “lack of disclosure” with “fraud.”
The Court struck down the rule in its entirety.
“We are very pleased with the court’s decision, which will save the private funds industry and investors from many unnecessary costs and disruptions as a result of the SEC’s illegal action,” said Jack Inglis, CEO of AIMA.
He added that this decision “rewards [leur] decision to take legal action, which was made to protect the interests of our members against regulatory overreach and inappropriate rulemaking by the US SEC, which allegedly had a serious and negative impact on a wide range of market players.
