The SEC Private Funds Rules in the Public Light
On August 23rd, 2023, the Securities and Exchange Commission (“SEC”) issued the final order Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews, Release No. IA6383 (“Private Funds Rules”). The rules present controversial additional oversight over private funds advisers in an effort to increase transparency and establish requirements that may result in harm to investors and/or the broader public. The final order was met with extreme disapproval, with six private equity and hedge fund trade groups petitioning in the United States Court of Appeals for the Fifth Circuit for the vacation of the rules under the counsel of Eugene Scalia. The Fifth Circuit’s decision in this case could set a precedent over how much power the SEC has to regulate the private funds industry, an area that SEC Chairperson Gary Gensler is keen on expanding. It is likely to be met with exceptional scrutiny at the Fifth Circuit, a court known to be antagonistic towards the SEC, especially in the wake of the Jarkesy v. SEC decision in 20221,2. This paper analyzes whether the SEC’s new Private Funds Rules constitute an overstep of the agency’s statutory authority. I conclude that it is likely the Fifth Circuit will find the affirmative based on the SEC asserting unprecedented regulatory powers over the private funds industry and due to a flawed economic analysis with unjustifiable costs.