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Federal Appeals Court Strikes Down SEC Fee Disclosure Rules for Private Equity and Hedge Funds

S.J. Steinhardt
Published Date:
Jun 6, 2024

A federal appeals court has struck down Securities and Exchange Commission (SEC) rules that would have governed the terms that private-equity and hedge-funds set with their investors, The Wall Street Journal and others reported.

The rules would have overhauled the way private-equity and hedge funds deal with their investors by requiring them to improve how they disclose the fees they charge. The fund industry sued, led by groups representing giant managers such as  Apollo Global Management, Blackstone and Millennium Management, which now invest trillions of dollars on behalf of pensions, endowments and wealthy individuals.

The funds industry said their sophisticated investors  don't need the protection of the SEC in negotiations, but pensions representing public employees in California, Colorado, Florida and Missouri said they needed the rules for better disclosure.

The U.S. Circuit Court of Appeals for the Fifth Circuit, in New Orleans, ruled that the SEC doesn’t have the authority to impose  these rules. The SEC is reviewing the decision and will determine next steps as appropriate, a spokeswoman said in an email to the Journal. The SEC could still appeal to the U.S. Supreme Court.

“Today’s ruling is a significant victory for markets, fund managers, and investors, including pensions, foundations, and endowments,” said Bryan Corbett, president of the hedge-fund industry group the Managed Funds Association, one of the plaintiffs in the case, in an interview with the Journal.

The SEC justified the new rules by arguing that private funds play an increasingly significant role in retirement-planning for millions of Americans. Assets under management at private funds increased from $9.8 trillion to $26.6 trillion over the decade ending in 2022, according to the SEC. 

Some institutional investors, such as public and private pension funds, supported the rules. Public pensions and endowments “simply do not have the resources to match those of the advisers with which they invest,” groups representing the investors said in a court filing, according to the Journal.

“In the past, regulated industries, particularly the private funds industry, have been loath to be at odds with their primary regulator,” said Marc Elovitz, co-managing partner at law firm Schulte Roth + Zabel, which represents fund managers. The appeals court’s ruling “vindicates the approach that if something is harmful to the economy and to the industry and lacks a basis, then challenging it in court may be necessary at times.”

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