On 18 March 2024, the National Association of Private Fund Managers, Alternative Investment Management Association, Limited and Managed Funds Association (together, Plaintiffs) jointly filed a complaint (Complaint) against the US Securities and Exchange Commission (SEC) alleging that the SEC’s newly adopted final rule (Dealer Rule) vastly overstepped and expanded the SEC’s authority. The Complaint, which was filed in federal court in Texas, details how the Dealer Rule, expanding those industry participants who would be “dealers” under the Securities Exchange Act of 1934, is overbroad and was adopted in violation of the Administrative Procedures Act.

The Complaint describes previously failed SEC efforts to impose registration on private funds, which Congress has purposely exempted from federal registration. According to the Plaintiffs, the Dealer Rule is an attempt by the SEC to (again) try and force their “aggressive agenda” on private funds. The Complaint alleges that the Dealer Rule places unnecessary regulatory burdens on private funds and would irrationally decrease liquidity. Among other things, private funds would be subject to dealer requirements including net capital rules and the prohibition on IPO investing; would lose protections afforded to them as customers of executing broker-dealers; and would be required to rewrite their governing documents to give their investors less favorable terms. In support of their arguments, Plaintiffs cite Commissioners Peirce’s and Uyeda’s critical dissents to the Dealer Rule.

The Complaint marks the first significant legal challenge to the Dealer Rule, which could have implications for other SEC rulemakings. As of now, the suit has no impact on the effectiveness of the Dealer Rule, although the Court could issue a stay.

See our client alert providing a detailed look at the Dealer Rule.