July 11, 2024 - This week the LSTA joined five other trade associations (the “Associations”) in submitting a letter to the SEC requesting that it withdraw its rule proposals on Outsourcing, Conflicts in Predictive Data Analytics and Cybersecurity for Investment Advisers (collectively, the “proposed rules”). The letter is a follow-up to a letter submitted by the Associations in May 2024 in connection with the Outsourcing Rule in which they argued that the Commission lacked statutory authority to apply the proposed rule to investment advisers with respect to their services to private funds.
The new letter notes that since the submission of the first letter the Fifth Circuit Court of Appeals reached a decision in National Association of Private Fund Managers v. SEC, holding that the Commission exceeded its statutory authority in adopting the private fund adviser rule. Specifically, the court held that neither section 211(h) nor section 206(4) of the Investment Advisers Act of 1940 (“Advisers Act”) grants the Commission rulemaking authority to cover the relationship between private fund advisers and investors in the funds they advise. “By congressional design,” the court recognized, “private funds are exempt from federal regulation of their internal ‘governance structure.’”
Considering the Fifth Circuit’s holding, the Associations ask the Commission to withdraw the proposed rules given the limits of its authority under section 206(4) and suggests that, if the proposed rules are not withdrawn the Commission make it clear that the proposed rules are not applicable to investment advisers with respect to any client that is not a “retail customer,” in line with the Fifth Circuit’s holding on the application of Section 211(h).
The Association then addresses each of the proposed rules, explaining why they are outside the Commission’s statutory authority.
What’s next? The SEC this week released its “RegFlex” agenda for the Spring of 2024, listing its pending rule list. Notably, despite the Fifth Circuit’s decision on the Private Fund Advisors Rule, the Commission is poised to finalize the Outsourcing and Cybersecurity Rules in October 2024. It remains to be seen whether the Commission follows through in light of the Associations’ latest letter.
