PF rules will crack down on ‘problematic practices,’ claims SEC

Agency disputes trade groups' standing, claims Congress authorized sweeping changes to protect ordinary Americans.

The SEC’s sweeping new private funds rules will help protect millions of ordinary Americans from “problematic practices by private fund advisers,” lawyers for the agency said when urging appellate judges to dismiss a challenge to the new rules by six trade groups.

“In Dodd-Frank, Congress overhauled the Investment Advisers Act of 1940, substantially increasing the Securities and Exchange Commission’s oversight of private fund advisers,” commission attorney Ezekiel Hill wrote for the agency, referring to the Dodd-Frank Act in a reply brief filed in the US Fifth Circuit Court of Appeals in Texas.

“In the 13 years since – a period that coincides with significant growth in the private fund sector – the commission has observed problematic practices by private fund advisers arising from conflicts of interest, insufficient transparency and a lack of effective governance mechanisms. Those practices, which have persisted despite the commission’s examination and enforcement efforts, create a risk of harm for private fund investors and their stakeholders, particularly smaller investors with less bargaining power and less access to information.”

A divided commission adopted the new rules in August. Within days of the SEC’s vote on the new rules, six trade associations – 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 – filed a suit in Texas to vacate them.

Hill’s December 15 reply brief is the most robust defense of the new rules since they were adopted. Among other things, Hill argues that the Fifth Circuit should reject the groups’ appeal because only one of them – the National Association of Private Fund Managers – is based in Texas, and it hasn’t properly identified members that will be harmed if the new rule was implemented. Industry advocates have been clear that they brought a suit in Texas because the Fifth Circuit is considered the most hostile to federal regulation. Hill argues that the case ought to be heard in the DC Circuit.

“In addition to standing and venue issues that preclude this court’s review, petitioners’ challenge fails on the merits,” Hill added. “Congress authorized the commission to adopt the rules. The public had a meaningful opportunity to engage with the rulemaking. And the commission reasonably explained its decision to adopt the rules, reasonably assessed the rules’ likely economic effects, and provided reasonable interpretations of the federal fiduciary duty imposed by the Advisers Act.”