June 6, 2024 - In a decision of enormous importance to private credit funds and the broader private funds markets, the United States Circuit Court for the Fifth Circuit (the “Fifth Circuit”), in National Association of Private Fund Managers et. al. vs. Securities and Exchange Commission, today vacated in full the SEC’s Private Fund Advisers Rule (“PFA Rule”). The LSTA joined with four other trade associations (the “Trade Associations”) in bringing this suit. As we’ve noted, even though the PFA Rule appropriately exempted CLOs, it would have had deleterious consequences for other private funds and opened the door for the Commission to continue to assert dubious statutory authority over private fund advisers. (Indeed, the Commission’s proposed rules on Outsourcing and Conflicts in the use of Predictive Data Analytics rely on the same authority as the PFA Rule.)

The Trade Associations argued that the Commission exceeded its statutory authority and that the PFA Rule was otherwise arbitrary and capricious in violation of the Administrative Procedure Act (“APA”). The Fifth Circuit agreed with the Trade Associations’ statutory argument and, consequently, did not need to address their APA claims. The court held that neither section 211(h) nor Section 206(4) of the Advisers Act grants the Commission the authority to formulate the Final Rule to regulate private fund advisers and investors. In its opinion, the Fifth Circuit emphasized that “section 913 of Dodd-Frank [which added Section 211(h)]… applies to ‘retail customers,’ not private fund investors. It has nothing to do with private funds.” The court held that “[b]ecause the promulgation of the Final Rule was unauthorized, no part of it can stand. Accordingly, we vacate the Final Rule.”

As Cleary notes in its memo, “With the rules all vacated, private fund managers should feel a huge sense of relief at avoiding burdensome compliance obligations such as producing the new quarterly statements, as well as having to revisit long-standing relationships and dynamics with existing and prospective fund investors.”

What’s next? In theory, the Commission could request an en banc rehearing of the full Fifth Circuit but it is unlikely that the court would grant that request. Similarly, it could petition the United States Supreme Court for certiorari but it is not clear that this is the type of case the Supreme Court would agree to take. If they were to take either or both of those steps, the Final Rule would be stayed until a final court ruling or denial of review.

We will continue to follow events as they unfold and will publish a more fulsome review of the Fifth Circuit’s decision and its implications in the near future.