Private equity and hedge fund groups have filed a lawsuit against the US Securities and Exchange Commission (SEC) over new rules that would require them to disclose more information about their fees, expenses and performance to investors.
The American Investment Council (AIC), the Managed Funds Association (MFA) and other industry associations claim that the SEC exceeded its authority and violated the Administrative Procedure Act by adopting the rules without proper notice and comment.
The rules, which were finalized on August 23, 2023, are part of the SEC’s efforts to increase transparency and accountability in the private funds sector, which manages more than $10 trillion in assets. The rules would require private funds to report quarterly data on their fees and expenses, as well as their net asset value, gross asset value and leverage. The rules would also prohibit private funds from offering preferential liquidity terms to some investors, such as side letters or gates, unless they are offered to all investors in the same fund.
Industry Groups Argue Rules Are Unlawful and Burdensome
The industry groups argue that the rules are unlawful and burdensome, and that they would harm the competitiveness and innovation of the private funds industry. They also contend that the rules would expose confidential and proprietary information to potential hackers, competitors and litigants.
The groups say that the SEC failed to provide adequate justification for the rules, and that it did not consider the costs and benefits of the rules or alternative approaches. They also claim that the SEC did not consult with other regulators, such as the Commodity Futures Trading Commission (CFTC), which oversees some private funds.
The groups are seeking a court order to vacate and set aside the rules, as well as an injunction to prevent the SEC from enforcing them.
SEC Says Rules Are Necessary to Protect Investors
The SEC says that the rules are necessary to protect investors and promote fair and efficient markets. The SEC says that the rules would provide investors with more information about the fees and expenses they pay to private funds, as well as the risks and returns of their investments. The SEC also says that the rules would prevent unfair treatment of investors by ensuring that they have equal access to liquidity.
The SEC says that it followed a rigorous rulemaking process, and that it considered public comments and feedback from various stakeholders, including private fund managers, investors, academics and industry groups. The SEC also says that it coordinated with other regulators, such as the CFTC, the Federal Reserve and the Treasury Department.
The SEC says that it will defend its authority and actions in court.
Implications for Private Funds Industry
The lawsuit is the latest challenge to the SEC’s oversight of the private funds industry, which has grown significantly in size and complexity in recent years. The industry has faced increased scrutiny from regulators, lawmakers and the public over its fees, performance, governance and social impact.
The outcome of the lawsuit could have significant implications for the private funds industry, as well as for investors, regulators and markets. If the rules are upheld by the court, private funds would have to comply with them by January 1, 2024. If the rules are struck down by the court, the SEC would have to reconsider its approach to regulating private funds.