A group of six US trade bodies representing hedge funds and private markets firms have filed a suit against the US SEC, alleging its new rules for the private fund industry around disclosure are unlawful and harmful for the industry.

The lawsuit, filed last Friday, argues that the new disclosure rules, which also prohibit groups from providing investors with preferential treatment, will “hamper the jobs, innovation, and other benefits private funds bring to the economy”.

The claim was filed by the Managed Funds Association, National Association of Private Fund Managers, National Venture Capital Association, American Investment Council, Alternative Investment Management Association and the Loan Syndications & Trading Association.

SEC statutory authority

“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 groups claim the rules exceed the SEC’s authority, as well as running counter to the regulator’s stated mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

In their lawsuit, the groups claim the rules exceed the SEC’s authority under the Investment Advisers Act of 1940, as well as running counter to the regulator’s stated mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. 

New private fund rules

Passing in a 3-2 vote in late August, the new requirements for private funds such as hedge funds and private equity groups involve disclosing quarterly performance and fees charged to investors, and to disclose certain fee structures, while also barring giving some investors preferential treatment over redemptions and portfolio exposure. The rules also require funds to perform annual audits.

Just last week, a court ruled against the securities regulator; the court said the SEC had improperly rejected an attempt by crypto asset manager Grayscale to convert its bitcoin trust into an exchange-traded fund.

So it’s an open question how the new private fund rules will fare in court against this challenge.

Commissioners Mark Uyeda and Hester Peirce, who both dissented from the final private fund rules, believe the new rules impose unnecessary and burdensome requirements over products that are generally available only for sophisticated investors.