Six alternative asset management industry groups have joined forces in filing a lawsuit in the U.S. Court of Appeals for the Fifth Circuit against the U.S. Securities and Exchange Commission over its newly approved Private Fund Adviser rule.
Joining the legal action are: the Managed Funds Association (MFA), the National Association of Private Fund Managers (NAPFM), the National Venture Capital Association (NVCA), the American Investment Council (AIC), the Alternative Investment Management Association (AIMA) and the Loan Syndications & Trading Association (LSTA).
“The new rules would fundamentally change the way private funds are regulated in America,” the lawsuit states. “Among other things, the rules would effectively bar many of the bespoke contractual terms investors negotiate to meet their specific needs, would effectively bar advisers from charging for certain expenses, and would require costly reporting that is wholly unnecessary.”
The law firm handling the case on behalf of the industry lobbyist groups is Gibson, Dunn & Crutcher.
“The SEC has overstepped its statutory authority and core legislative mandate, leaving us no choice but to litigate,” said MFA President and CEO Bryan Corbett. “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 MFA in its response to the new rule on Aug. 23 threatened legal action.
“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,” said AIMA CEO Jack Inglis. “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.”
The National Association of Private Fund Managers chimed in as well with concerns over how the rule impacts investors. “NAPFM believes it is important to join this litigation challenging the SEC’s newly adopted Private Fund Adviser rules. These rules will lead to higher costs and fewer choices for fund investors, ultimately limiting the ability of pension funds, endowments, and other institutions to obtain investment returns for their beneficiaries.” The group describes the rules as “a blatant overreach of the SEC’s statutory authority and violate the Administrative Procedure Act.”
“The SEC has indicated its intention to operate akin to a self-appointed legislative body, aiming to impose far-reaching regulations on the realm of private funds without proper authorization from Congress,” said National Venture Capital Association President and CEO Bobby Franklin. “The Commission should refrain from overly intrusive involvement in the operations of individual businesses, and enable capital to flow to innovative early-stage firms.”
Law firms serving the industry have also questioned the new rule and its impact on investors.
The lawsuit claims that the new rule would be detrimental in:
- Needlessly limiting the right of private fund advisers and their investors to tailor their relationships and interactions;
- Enacting overreaching prohibitions and restrictions on certain private fund adviser activities; and
- Imposing onerous, costly disclosure requirements and administrative obligations upon private fund advisers.
A spokesperson for the U.S. Securities and Exchange Commission did not respond by press time with a comment on the case.
