SEC Private Fund Adviser Rules Vacated by Fifth Circuit

By Karen Liu, Reid & Wise LLC

On June 5, 2024, the U.S. Court of Appeals for the Fifth Circuit (the “Fifth Circuit”) vacated the full set of private fund adviser rules adopted by the U.S. Securities and Exchange Commission (the “SEC”) on August 23, 2023 (the “Disputed Rules”), holding that no part of the Disputed Rules can stand because they are unauthorized and their legal bases are untenable.

The Disputed Rules specifically include:

Applicable to all private fund advisers:

Applicable to all SEC-registered private fund advisers:

Applicable to all SEC-registered advisers:

  • Restricted Activities Rule
  • Preferential Treatment Rule
  • Quarterly Statement Rule
  • Private Fund Audit Rule
  • Adviser-Led Secondaries Rule
  • Recordkeeping Rule amendment
  • Compliance Rule amendment

Among those Disputed Rules, the three italicized rules would have had the first compliance date approaching on September 14, 2024, for larger private fund advisers.

The Fifth Circuit ruled that the SEC exceeded its statutory authority because Section 211(h) and Section 206(4) of the Investment Advisers Act of 1940, as amended (the “Advisers Act”), which the SEC relied upon in adopting those Disputed Rules, actually do not afford the SEC such rulemaking authority. In particular,

  1. with respect to Section 211(h) of the Advisers Act, the Fifth Circuit held that:
    • Section 913(h) of the Dodd-Frank Act, found in Section 211(h) of the Advisers Act, applies to “retail customers,” not private funds or their investors.
    • For private fund advisers, the Dodd-Frank Act “only stepped towards regulating the relationship between the advisers and the private funds they advise,” not the funds’ investors.
    • “By congressional design, private funds are exempt from federal regulation of their internal ‘governance structure.’”
  2. with respect to Section 206(4) of the Advisers Act, the Fifth Circuit held that:
    • The SEC “largely fails to ‘define’ the fraudulent acts or practices” that the Disputed Rules are intended to prevent.
    • The Disputed Rules do not fit within the statutory design, which exempts private funds from federal regulation of their internal “governance structure” and fund agreements negotiation.
    • Section 206(4) does not authorize the SEC to require disclosure and reporting.
    • A failure to disclose “cannot be deceptive” without a “duty to disclose.”

The SEC has not indicated whether it will seek an en banc rehearing before the full Fifth Circuit, file a petition for certiorari with the U.S. Supreme Court, or accept the Fifth Circuit’s decision. If the SEC chooses to appeal the ruling, the Disputed Rules are likely to be stayed beyond their planned compliance schedule. In addition, a more indirect, yet far-reaching impact is that the vacating of the Disputed Rules could call into question the SEC’s past and future rulemaking related to private fund advisers based on Section 211(h) or Section 206(4) of the Advisers Act.

For private fund advisers, regardless of whether the SEC decides to continue the legal battle, it is unlikely that they would need to follow the Disputed Rules in the near future. However, the SEC could raise questions and concerns similar to requirements covered in the Disputed Rules in upcoming examinations of private fund advisers. In addition, investors, either through individual negotiation or through associations like Institutional Limited Partners Association, may want to seek certain terms they would have been granted under the Disputed Rules.

Joint Statement on Application of IFRS 19 in SEC Filings

By Anna T. Pinedo, Mayer Brown

On May 17, 2024, the Director of the Division of Corporation Finance of the Securities and Exchange Commission, Erik Gerding, and the Chief Accountant, Paul Munter, issued a statement regarding International Financial Reporting Standard (“IFRS”) 19, Subsidiaries without Public Accountability: Disclosures, or IFRS 19.

What is IFRS 19? IFRS 19 allows certain subsidiaries of reporting companies to provide reduced disclosures in certain instances. In announcing the adoption of the standard, the International Accounting Standards Board (“IASB”) noted, “Applying IFRS 19 will reduce the costs of preparing subsidiaries’ financial statements while maintaining the usefulness of the information for users of their financial statements.” The IASB went on to explain that when a parent company prepares consolidated financial statements that comply with IFRS Accounting Standards, its subsidiaries are required to report to the parent using IFRS Accounting Standards. However, for their own financial statements, subsidiaries are permitted to use IFRS Accounting Standards, the IFRS for SMEs Accounting Standard, or national accounting standards, and this may mean that subsidiaries keep more than one set of accounting records and “provide disclosures that may be disproportionate to the information needs of their users.” A subsidiary is eligible to apply IFRS 19 if it does not have equities or debt listed on a securities exchange or hold assets in a fiduciary capacity for third parties, and its parent company applies IFRS Accounting Standards in its consolidated financial statements.

Interaction with SEC rules: The joint statement points out that there may be situations when financial statements that apply IFRS 19 are included in SEC filings. In these instances, the Division Director and Chief Accountant noted that they believe that the requirements of IFRS 19 are likely to necessitate additional disclosures in financial statements filed with the SEC because such financial statements are intended for use by investors in the capital markets for making investment and voting decisions.

The joint statement acknowledges the IASB’s efforts to promote efficiency but highlights the need to maintain “decision-useful information for users of financial statements in certain contexts.” The Division Director and Chief Accountant point to the requirement in IFRS 19 for entities to consider whether additional disclosures are necessary to provide an understanding of particular events or circumstances and observe that “[d]isclosures that are fit for other purposes for entities without public accountability may not be sufficient to satisfy the needs of investors in the U.S. public securities markets.”

Avoiding Cybersecurity Incident Overdisclosure: Helpful Guidance

By Anna T. Pinedo, Mayer Brown

In a statement on May 21, 2024, Director of the SEC’s Division of Corporation Finance Erik Gerding commented on the relatively new Form 8-K Item 1.05 requirement. Last summer, when the SEC adopted the final rules relating to cybersecurity incidents, the rules included a new requirement under Item 1.05 of Form 8-K relating to the occurrence of an incident that the company had concluded was material. Division Director Gerding noted in his comments that, “[a]lthough the text of Item 1.05 does not expressly prohibit voluntary filings, Item 1.05 was added to Form 8-K to require the disclosure of a cybersecurity incident ‘that is determined by the registrant to be material,’ and, in fact, the item is titled ‘Material Cybersecurity Incidents.’”

As a result, he suggested that to the extent a company elects to disclose an incident as to which it has yet to make a materiality determination, it do so under a different item of Form 8-K, such as, for example, Item 8.01. If, after the passage of time, the incident is determined to be material, the company can make a filing under Item 1.05.

This is a very helpful clarification and one that he notes is not intended to discourage disclosure, but rather to avoid diluting the significance of the Form 8-K Item 1.05 disclosures.

See his full remarks.

PCAOB Spotlights 2023 Audit Committee Conversations

By Thomas W. White, Retired Partner, WilmerHale

The Public Company Accounting Oversight Board (“PCAOB”) inspections staff regularly speaks with audit committee chairs to “provide an opportunity for the PCAOB to hear the perspectives and observations of audit committee chairs and for the PCAOB to share information and resources with audit committees to help them improve audit quality.” In June, the PCAOB issued its annual “spotlight” report setting forth observations and takeaways from staff conversations with over two hundred audit committee chairs in 2023.

The report does not contain any major new revelations about audit committees or their relationships with outside auditors. It does, however, provide some insight into matters that the PCAOB staff thinks audit committees should be considering. The matters discussed include:

  • Current Economic and Audit Workforce Environments. Many audit committee chairs noted that they had held discussions with their outside auditors regarding macroeconomic and geopolitical risk factors and how these issues could affect the risk factors to be considered in the audit. The audit committee chairs seemed satisfied with their auditors’ ability to retain a skilled workforce and with their use of technology in audits. This contrasts with concerns expressed in 2022 about personnel turnover. Some concerns continue to be expressed about the impact of remote or hybrid work environments and attracting new people into the auditing profession.
  • Significant Discussions with Auditors. Audit committee chairs generally said that they were satisfied with the level of communication they have with their auditors. Specifically, they expressed satisfaction with the communications they have had with their auditors around critical audit matters (“CAMs”). (Notably, the PCAOB staff has added a project regarding CAMs to its research agenda.)
  • Monitoring Quality Control Systems and Independence. Most audit committee chairs said they closely monitor the quality control systems and independence of their auditors through regular conversations with their auditors. These conversations include presentations from auditors and a discussion of deficiencies identified in the firm’s most recent PCAOB inspection report.


Rani Doyle

Rani Doyle

Managing Editor, Securities Law


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