On June 5, 2024, the Fifth Circuit struck down the SEC’s Private Fund Adviser Rules, adopted on August 23, 2023, and challenged shortly thereafter. These Rules had sought to establish fundamentally new and more extensive obligations for private fund advisers registered with the SEC. This included certain heightened reporting obligations as well as limitations on some common practices.

On the reporting side, the rules imposed an obligation to provide quarterly statements to investors detailing fund fees, expenses, and performance, and to provide yearly audited financial statements to each investor. Additionally, adviser-led secondary transactions would require either a fairness or valuation opinion.

The rules had further imposed restrictions on the use of side letters giving some investors preferential treatment, for example with respect to redemptions, or access to information. Finally, the rules had limited advisers from charging funds they managed for costs associated with investigations and other regulatory and compliance matters.

A core concern for the SEC was to reduce or eliminate potential conflicts between investors, and between investors and the adviser. This was the stated basis for the adviser-led secondaries rule, to ensure that when investors were offered the option of exchanging interests in a private fund into another advised by the adviser (or related persons), they were provided a fairness or valuation opinion. It was also behind the prohibitions against preferential terms for certain investors.