Fifth Circuit Strikes Down SEC’s Private Fund Disclosure Rule

FILE - The seal of the U.S. Securities and Exchange Commission at SEC headquarters, June 19, 2015, in Washington. The SEC adopted rules Wednesday, July 26, 2023, to require public companies to disclose within four days all cybersecurity breaches that could affect their bottom lines. Delays will be permitted if immediate disclosure poses serious national security or public safety risks. (AP Photo/Andrew Harnik, File)

The Fifth Circuit on Wednesday vacated U.S. Securities and Exchange Commission regulations governing the private fund industry, ruling that the agency lacked the authority to demand detailed disclosures from fund advisers.

A three-judge panel of the court determined that no part of the rule adopted last August was salvageable because Congress didn’t give the SEC oversight of the governance structure of private funds, not even when it expanded the agency’s authority under the Dodd-Frank Act.

“The commission has exceeded its statutory authority in adopting the final rule,” the panel wrote. “Because the promulgation of the final rule was unauthorized, no part of it can stand.”

The private fund disclosure rule, adopted by the SEC in August, aimed to enhance transparency in the private fund market by requiring fund managers to provide detailed information to investors. This included performance metrics, fee structures, and potential conflicts of interest.

The rule was part of a broader effort to bring greater accountability and openness to the private fund sector, which includes hedge funds and private equity funds. These disclosures were intended to help investors make more informed decisions and to address concerns about the opaque nature of private fund operations. However, the Fifth Circuit found that the SEC overstepped its regulatory bounds, leading to the rule’s nullification.