On June 5, 2024, the U.S. Court of Appeals for the Fifth Circuit issued a unanimous ruling that vacates the SEC’s comprehensive Private Fund Adviser Rules. The decision came in the case National Association of Private Fund Managers v. SEC, marking a significant reversal for a regulatory package that sought to substantially increase oversight for private equity, hedge, and similar funds.
The vacated rules, initially adopted by the SEC in August 2023, mandated that registered private fund advisers: (1) obtain annual audits of each private fund; (2) distribute quarterly statements detailing fees, expenses, and standardized performance metrics; (3) secure fairness or valuation opinions on adviser-led secondary transactions; (4) restrict designated preferential activities; and (5) ban undisclosed preferential treatment to investors. These provisions were poised to take effect starting September 14, 2024, for larger advisers and March 14, 2025, for others.
In its ruling, the appellate panel determined the SEC had exceeded its statutory authority under both Sections 211(h) and 206(4) of the Investment Advisers Act of 1940. Section 211(h), expanded by the Dodd-Frank Act, was deemed limited to “retail customers”—excluding institutional and accredited private fund investors. The court further concluded that Section 206(4), which authorizes anti-fraud rulemaking, did not permit the type of broad disclosure mandates the SEC imposed without demonstrating a direct link to fraud. The court emphasized that less than 0.05% of advisers were found to have engaged in problematic conduct, calling the SEC’s rulemaking “pretextual”.
Law firms like Goodwin, Davis Polk, Holland & Knight, and MoFo hailed the opinion as a critical reinforcement of the judiciary’s role in checking federal agency power . These firms pointed out that the Fifth Circuit’s formal mandate—which vacates the rules—likely issued before the compliance deadlines, making the rules unenforceable unless the SEC secures an emergency stay.
The ruling drew swift industry approval. The coalition of private fund trade associations— including the National Association of Private Fund Managers, Managed Funds Association, American Investment Council, and others—argued that the rules would have imposed undue compliance costs and undermined negotiated agreements between fund managers and investors. Drew Maloney, CEO of the American Investment Council, described the decision as “a victory for thousands of businesses … and millions of workers” relying on private capital. Managed Funds Association president Bryan Corbett reflected similarly, stating that the court reaffirmed the limits of regulatory reach.
Not all were supportive. Investor advocates decried the decision as potentially weakening safeguards for retirement and pension funds, particularly with respect to fee transparency and preferential terms . Stephen Hall of Better Markets called it a “terrible setback,” warning of less oversight and increased opacity in an already opaque $27 trillion industry.
With the vacated rulemaking now unenforceable, the SEC has several potential paths forward. It may seek rehearing by the full Fifth Circuit en banc or petition the Supreme Court for certiorari. Either route, however, entails substantial legal delay and risks, especially given the Supreme Court’s conservative composition and recent skepticism of broad regulatory mandates. Alternatively, the SEC might redesign a narrower rule that aligns more precisely with Congress’s statutory authority, though this would require another prolonged rulemaking process.
In the interim, private fund managers gain temporary relief. Preparations for audits, valuation opinions, and new reporting infrastructures can be paused. However, industry counsel advises that many of the rule provisions may endure through contractual arrangements and investor negotiations. The SEC’s Division of Examinations has also signaled sustained scrutiny in these areas, suggesting firms should continue reviewing internal documentation, risk disclosures, and compliance systems for preferential treatment, expenses, and governance practices.
For executives overseeing alternative investment operations, this ruling alters the trajectory of compliance planning. Many fund managers will now reassess budgets and timelines tied to technology and third-party services aimed at meeting the former rules. CFOs and general counsel should monitor ongoing developments closely, as any appeal or revised rule could revive or reshape these obligations. Additionally, firms should remain alert to auditing, reporting, and valuation standards that may emerge from negotiated fund operating agreements or SEC examinations.
Beyond private fund governance, the Fifth Circuit’s decision may limit the SEC’s ability to enact other fraud-based rulemakings, particularly those tied to Sections 206(4) and 211(h). Observers note that the opinion casts doubt on SEC authority to mandate climate-related disclosures, AI governance frameworks, or outsourcing regulations without explicit statutory backing.
In sum, the court’s decision brings short-term compliance relief and reaffirms legal boundaries on agency rulemaking, but also injects uncertainty into future regulatory reforms. The SEC must now choose between an appellate fight or carefully recalibrated new rulemaking. Meanwhile, private fund advisers should maintain a cautious stance—reviewing internal practices and investor agreements—even as they anticipate possible shifts in policy and oversight.
