Six industry organizations filed a lawsuit against the SEC on Friday challenging its controversial private fund adviser rule, which the agency finalized Aug. 23.
“The SEC has exceeded its own authority, defied congressional design for private funds and advisers to those funds, and imposed significant new and unneeded burdens on private capital that fuels thousands of small businesses,” said Drew Maloney, president and CEO of the American Investment Council, in a news release Friday announcing the lawsuit.
The AIC is joining the lawsuit along with the National Association of Private Fund Managers, National Venture Capital Association, Managed Funds Association, Alternative Investment Management Association, and the Loan Syndications and Trading Association.
The organizations said the SEC exceeded its authority, failed to show the need for such a rule, and made significant changes from its original proposal without allowing for public comment.
“The SEC has overstepped its statutory authority and core legislative mandate, leaving us no choice but to litigate,” MFA President and CEO Bryan Corbett said in a separate news release Friday. “The private fund adviser rule will harm investors, fund managers and markets by increasing costs, undermining competition, and reducing investment opportunities for pensions, foundations and endowments.”
The lawsuit was filed in the 5th U.S. Circuit Court of Appeals in New Orleans, and the organizations are represented by Eugene Scalia and Helgi C. Walker of the law firm Gibson, Dunn & Crutcher.
“The court should hold unlawful, vacate, and set aside the (SEC) rules, and grant such additional relief as may be necessary and appropriate,” the lawsuit said.
On Aug. 23, the SEC finalized the rule in a 3-2 vote, with both Republican commissioners dissenting.
The rule requires increased disclosure from private fund advisers, obligating them to supply investors with quarterly statements, including information on performance, fees and expenses; obtain an annual audit for each fund it manages; and acquire a fairness opinion in connection with an adviser-led secondary transaction. It also prohibits advisers from engaging in a variety of activities and practices, such as certain types of preferential treatment, unless they disclose such activities, or in some cases, receive investor consent.
The final rule contains a series of changes from its original proposal, including the addition of several disclosure and consent exceptions for which “prohibited” activities are allowed.
The SEC enacted these changes as a way to curb industry concerns; however, the organizations said the federal regulator should have released such revisions for public comment, and overall, the rule will bring harm to the industry.
“The decision to file suit is one we must take to protect the interests of our members against the severe and adverse impacts of the new rules,” AIMA CEO Jack Inglis said in a separate news release Friday. “AIMA agrees with the public statements made by SEC Commissioners Hester Peirce and Mark Uyeda that the adoption of the rules is both harmful and unlawful and lacks proper economic analysis of the effect on the private funds industry and the essential source of capital it provides.”