Private Equity and Hedge Fund Trade Groups Sue SEC Over New Rules

Six prominent private equity and hedge fund trade groups have filed a lawsuit against the U.S. Securities and Exchange Commission (SEC), alleging that the regulatory agency exceeded its statutory authority in implementing new rules concerning expenses and fees. The legal challenge follows the SEC's recent adoption of extensive regulations aimed at enhancing transparency and competition within the private funds industry, which manages an estimated $20 trillion in assets.

SEC Chair Gary Gensler defended the rules, asserting that they are designed to address concerns about opacity and conflicts of interest within the private funds sector. These new regulations necessitate that private funds issue quarterly fee and performance reports, conduct annual audits, disclose specific fee structures, and prohibit certain preferential treatment for select investors concerning portfolio exposures and cash-out options.

However, the legal action, filed in the 5th U.S. Circuit Court of Appeals, contends that the SEC exceeded its legal mandate. Bryan Corbett, Chief Executive Officer of the Managed Funds Association (MFA), one of the petitioners, stated, "The SEC has overstepped its statutory authority and core legislative mandate, leaving us no choice but to litigate." He further argued that these regulations would ultimately result in increased costs for investors and hinder competition within the industry.

The other trade groups participating in the lawsuit are the National Venture Capital Association, American Investment Council, Alternative Investment Management Association, National Association of Private Fund Managers, and the Loan Syndications & Trading Association. This collective legal challenge represents a substantial pushback from the private funds industry against what it perceives as overreach by the SEC.

This lawsuit adds to a growing list of legal disputes involving Gensler's SEC. Recently, a judge's panel ruled against the SEC, stating that the agency was incorrect in rejecting Grayscale Investments' proposed bitcoin exchange-traded fund (ETF) without providing adequate reasoning. Additionally, in May, the U.S. Chamber of Commerce filed a lawsuit against the SEC in response to a new regulation that requires publicly traded companies to disclose more information about their share buyback programs.

This legal action is not the first confrontation between the Chamber of Commerce and the SEC. Last year, the Chamber of Commerce initiated a lawsuit against the regulator over proxy voting rules. These ongoing legal battles underscore the contentious nature of financial regulation and the delicate balance between regulatory oversight and industry autonomy. As the private equity and hedge fund trade groups challenge the SEC's authority, the outcome of this lawsuit will have profound implications for the regulatory landscape and the private funds industry as a whole.