On June 5, the Fifth Circuit Court of Appeals (Court) vacated the entire set of private fund adviser rules adopted by the Securities and Exchange Commission (SEC) on August 23, 2023. Many private fund advisers would have been required to begin complying with some of the most challenging aspects of the rule package by September 14, 2024. In summary, the vacated rules include the:

• preferential treatment rule;
• restricted activities rule;
• quarterly statement rule;
• adviser-led secondaries rule; and
• audit rule.

The Court also vacated amendments to rule 206(4)-7 under the Investment Advisers Act of 1940 (Advisers Act) that would have required written documentation for annual compliance reviews. More information on these rules is available here.

The Court held that the SEC exceeded its statutory authority to adopt the rules. In particular, the Court held that Section 211(h) of the Advisers Act, as added pursuant to the Dodd-Frank Act, applies to “retail customers” and not to private fund investors. The Court also rejected the SEC's reliance on Section 206(4) antifraud authority — finding that the SEC failed to define the fraud it was seeking to prevent, nor did the SEC provide a rational connection between such fraud and the final rules.

It is not clear yet whether the SEC will appeal the decision.