November 6, 2023

Reviewing the Industry Groups’ Opening Brief Challenging the Private Funds Rules

On November 1, 2023, the industry groups (the Petitioners)1 challenging the new Private Fund Adviser Rules2 filed in the US Court of Appeals for the Fifth Circuit their opening brief (the Brief) setting forth their legal arguments for why the rules should be vacated.

Summary of The Brief’s Arguments

In summary, the Brief argues that:

  • The “private fund” exceptions in Section 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 specifically intended to exempt private funds from prescriptive regulations, and the Dodd-Frank Act changed that only with respect to the relationship between the private fund adviser and the private fund (and not the private fund adviser and the investors in the private fund).
  • Goldstein3 prevents treating private fund investors as “clients” and subjecting the relationship between the private fund adviser and the private fund investors to the protections of the Advisers Act.
  • Section 913 of the Dodd-Frank Act (which adopted Section 211(g) and (h) of the Advisers Act) applies only to (i) “retail customers” and not private funds (statutory intent) and (ii) advisory relationships and not relationships between private fund advisers and private fund investors (plain language).
  • The SEC cannot rely on Section 206(4) as the statutory basis for the rules because (i) the SEC failed to define the allegedly fraudulent acts or explain how the rules would prevent those undefined acts and (ii) the rules are not reasonably designed to prevent fraud, deception, or manipulation.
  • The SEC lacks the authority under the “major questions” doctrine (post West Virginia)4 (i.e., there is no “clear congressional authorization” for “fundamentally and dramatically” altering the regulatory regime applicable to private funds).
  • The SEC failed to provide the public meaningful opportunity to comment because (i) the public did not have opportunity to comment on the new disclosure and consent exceptions in the Restricted Activities Rule (Rule 211(h)(2)-1) (which were not a “logical outgrowth of a prohibition regime”) and (ii) the public did not have opportunity to comment on an “illiquid fund” providing performance on levered basis (and not just unlevered basis) in the Quarterly Statements Rule (Rule 211(h)(1)-2).
  • There is no factual basis for the rules because (i) too few examples of alleged wrongdoing exist, (ii) most examples of alleged wrongdoing were based on settlements of administrative proceedings (so technically were still just allegations, and the proceeding may have been unconstitutional), (iii) one example seems to cite to a settlement that only indirectly supported the SEC’s claim, (iv) some of the rules that apply only to registered advisers discussed examples of actions taken by unregistered advisers, and (v) there is other evidence that shows that investors have more bargaining power than the SEC seems to think.
  • The following provisions are unnecessary and unduly burdensome: (i) restrictions on side arrangements and “preferential treatment” in the Preferential Treatment Rule, (ii) restrictions on passing through expenses (e.g., investigation expenses and regulatory and compliance expenses) in the Restricted Activities Rule, and (iii) a one-size-fits-all requirements of the Quarterly Statements Rule.
  • Discussion in the Adopting Release on limitations of liability (and disclosure relating to hedge clauses) and charging fees for “unperformed services” is arbitrary and capricious.
  • The SEC failed to adequately consider the impact on efficiency, competition, and capital formation.

Notable Aspects of The Brief

The likelihood of the success of any or all of these arguments is difficult to determine at this stage of the litigation. However, a few items are notable about the Brief:

  • It treats as a single “Rule” the five different rules adopted together (i.e., the Private Fund Audit Rule (Rule 206(4)-10), the Quarterly Statements Rule (Rule 211(h)(1)-2), the Restricted Activities Rule (Rule 211(h)(2)-1), the Adviser-Led Secondaries Rule (Rule 211(h)(2)-2), and the Preferential Treatment Rule (Rule 211(h)(2)-3)) and seeks to vacate them all together.
  • The Brief seems focused on the Preferential Treatment Rule, the fees and expenses portions of the Restricted Activities Rule, and the Quarterly Statements Rule. There appears to be a limited focus in the Brief on the Private Fund Audit Rule, the Adviser-Led Secondaries Rule, or the general partner clawback or adviser borrowing restrictions in the Restricted Activities Rule.
  • The Brief does not address the issues related to (i) applying the Restricted Activities Rule and the Preferential Treatment Rule to investment advisers that are not SEC-registered investment advisers (including exempt reporting advisers, state-registered advisers, and unregistered investment advisers) or (ii) retroactive rulemaking with respect to the limited grandfathering/legacy provisions.
  • Some of the arguments made in the Brief appear to raise questions on the statutory authority of the SEC with respect to other rules adopted under the Advisers Act, including those generally adopted under the anti-fraud provision of Section 206(4) of the Advisers Act (e.g., the Custody Rule (Rule 206(4)-2) and the Pay-to-Play Rule (Rule 206(4)-5)), but also, particularly those that place restrictions on, or requirements with respect to, communications with private fund investors (e.g., the Marketing Rule (Rule 206(4)-1) and Pooled Investment Vehicle Anti-Fraud Rule (Rule 206(4)-8)).

The Upcoming Schedule

The remaining expected schedule is:

  • November 8, 2023 – Amicus briefs in support of Petitioners
  • December 15, 2023 – Respondent’s (i.e., the SEC’s) brief
  • December 22, 2023 – Amicus briefs in support of Respondent
  • January 22, 2024 – Petitioner’s reply brief
  • February – March 2024 – Requested oral argument
  • May 31, 2024 – Requested decision date
  • September 14, 2024, and March 14, 2025 – Compliance dates for the Private Fund Adviser Rules

We will continue to monitor the progress of this litigation for significant updates. Please let us know of any questions.


[1] The industry groups are: National Association of Private Fund Managers; Alternative Investment Management Association, Limited; American Investment Council; Loan Syndications and Trading Association; Managed Funds Association; and National Venture Capital Association.
[2] See “Private Fund Advisers; Documentation of Registered Investment Adviser Compliance,” SEC Release No. IA-6383 (Aug. 23, 2023). See also our Client Alert: SEC Adopts Expansive (Albeit Slightly Softened) Private Funds Rules (Aug. 23, 2023), available at
[3] Goldstein v. SEC, 451 F.3d 873 (D.C. Cir. 2006) (vacating a rule that would require counting private fund investors as “clients” for purposes of determining whether a private fund adviser was required to register under the Advisers Act).
[4] West Virginia v. EPA, 142 S. Ct. 2587 (2022).