Trade groups sue to block SEC rules

Regulators overstepped, six trade groups claim in new complaint filed in Fifth Circuit.

Six trade associations representing private fund and loan syndication firms have filed suit to block the SEC’s new private fund rules.

The suit, filed in the US Court of Appeals for the Fifth Circuit on Friday, says the commission “exceeded its statutory authority and violated the requirements for agency rulemaking in multiple ways”. It asks the appellate judges to hold the sweeping new rules unlawful and to “vacate, and set aside the rules and grant such additional relief as may be necessary and appropriate”.

It’s filed on behalf of the National Association of Private Fund Managers, the Alternative Investment Management Association, the American Investment Council, the Loan Syndications and Trading Association, the Managed Funds Association and the National Venture Capital Association.

“The new rules would fundamentally change the way private funds are regulated in America,” Gibson, Dunn & Crutcher partner Eugene Scalia writes in the 13-page complaint. “Among other things, the rules would effectively bar many of the bespoke contractual terms investors negotiate to meet their specific needs, would effectively bar advisers from charging for certain expenses, and would require costly reporting that is wholly unnecessary. The rules exceed the Commission’s statutory authority, were adopted without compliance with notice-and-comment requirements, and are otherwise arbitrary, capricious, an abuse of discretion, and contrary to law, all in violation of the Administrative Procedure Act… and of the commission’s heightened obligation to consider its rules’ effects on ‘efficiency, competition, and capital formation.'”

The Fifth Circuit covers Texas, Louisiana and Mississippi. Private fund advocates planned to bring their suit there because the Fifth Circuit judges are thought to be more hostile to federal regulation than other circuits, sources familiar with the litigation tell affiliate publication Private Funds CFO.

Among other things, the Gibson, Dunn team claim, the new rules will harm private funds and their investors by:

  • “Needlessly limiting the right of private fund advisers and their investors to tailor their relationships and interactions;
  • “Enacting overreaching prohibitions and restrictions on certain private fund adviser activities; and
  • “Imposing onerous, costly disclosure requirements and administrative obligations upon private fund advisers.”

An SEC spokeswoman said in an email that the agency “undertakes rulemaking consistent with its authorities and laws governing the administrative process, and we will vigorously defend the challenged rule in court.”