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Private Fund Adviser Rules Vacated By the Fifth Circuit

Earlier today, United States Court of Appeals for the Fifth Circuit (the “Fifth Circuit”) fully vacated the Private Fund Adviser Rules regarding the regulation of private fund advisers (Rules) in a unanimous decision indicating that the Securities and Exchange Commission’s overstepped its statutory authority to regulate private funds.  In its opinion, the Fifth Circuit held that, “The Commission has exceeded its statutory authority in adopting the Final Rule. Under section 706 of the APA, when a court holds that an agency rule violates the APA, it “‘shall’— not may — ‘hold unlawful and set aside’ [the] agency action.” …. Because the promulgation of the Final Rule was un-authorized, no part of it can stand. Accordingly, we VACATE the Final Rule.”

The Fifth Circuit’s ruling also vacates the Rule’s amendments to the compliance rule (Rule 206(4)-7) under the Advisers Act, which became effective November 13, 2023, that required all registered advisers (including those that do not advise private funds) to document in writing the annual review of their compliance policies and procedures.

Compliance4 believes that it is a best practice for advisers to prepare an annual written report regarding the implementation and effectiveness of their compliance program.

Absent a successful appeal of the decision to the Supreme Court, the Private Fund Adviser Rules will not come into effect in November. In light of the decision by the Fifth Circuit, the SEC is more than likely to revisit its regulatory strategies regarding private fund advisers and the investment management industry, generally.

A copy of the Fifth Circuit’s decision is available below.

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