On 22 January 2024, industry groups representing private investment fund sponsors, including the Alternative Investment Management Association (AIMA), National Association of Private Fund Managers, and Managed Funds Association, filed their first reply to the Securities and Exchange Commission’s (SEC) response in the groups’ ongoing petition against the new private fund adviser rules (PFAR) adopted by the SEC on 23 August 2023.

On 1 September 2023, the industry groups filed their lawsuit against the SEC in the U.S. Court of Appeals for the Fifth Circuit, asking the Court to invalidate the PFAR “on the grounds that [they] exceed the [SEC’s] statutory authority and are arbitrary, capricious, and otherwise unlawful” (AIMA press release). In its 15 December 2023 response, the SEC contended that the groups lack standing, and that the case fails on its merits, arguing that the PFAR reflect “reasonable interpretations of the federal fiduciary duty imposed by the [Investment] Advisers Act [of 1940]” and will “protect fund clients and investors ‘by increasing visibility … and curbing practices that lead to harm to funds and their investors.’”

In Monday’s filing, the industry groups responded that the PFAR exceed the SEC’s statutory authority, that the SEC’s interpretations of governing statutes are unreasonable, and that the PFAR are actually intended to enhance the bargaining position of certain institutional investors “all because the [SEC] is dissatisfied with the contract-based model Congress established for investing in private funds.” The groups also contended that the rulemaking process for the PFAR was flawed, and that the rules should be vacated on procedural grounds. Oral arguments from both the industry groups and the SEC are scheduled for 5 February 2024.

If implemented as adopted, the most significant aspects of the PFAR will begin coming into effect for certain advisers this September. The firms guide to PFAR compliance provides a helpful overview of these substantial rules, including guidance and considerations for both private fund sponsors and investors, and can be found here.