Managed Funds Association (MFA) statement on court vacating Private Fund Adviser Rule: "Unfortunately, this is just one instance of SEC overreach as it looks to push through the most aggressive agenda in decades."

Today, MFA President and CEO Bryan Corbett issued the following statement after the Fifth Circuit Court of Appeals vacated the Private Fund Adviser Rule:

"Unfortunately, this is just one instance of SEC overreach as it looks to push through the most aggressive agenda in decades"

In September 2023, six private equity and hedge fund trade groups sued the SEC, arguing the agency overstepped its statutory authority when adopting sweeping new expenses and fees rules last week.

• "The rules exceed the Commission's statutory authority, were adopted without compliance with notice-and-comment requirements, and are otherwise arbitrary, capricious, an abuse of discretion, and contrary to law, all in violation of the Administrative Procedure Act," the associations wrote in the lawsuit.
• They asked the court to vacate the rules.
• Today MFA is celebrating that they won since the court vacated the rules.

What were they so upset about?:

• "The final rules would have restricted certain other private fund adviser activity that is contrary to the public interest and the protection of investors."
• Would require private fund advisers registered with the Commission to provide investors with quarterly statements detailing certain information regarding fund fees, expenses, and performance.
• Would require a private fund adviser registered with the Commission to obtain and distribute to investors an annual financial statement audit of each private fund it advises and, in connection with an adviser-led secondary transaction, a fairness opinion or valuation opinion.
• Prohibit all private fund advisers from providing investors with preferential treatment regarding redemptions and information if such treatment would have a material, negative effect on other investors.

Press Release:

The Securities and Exchange Commission today adopted new rules and rule amendments to enhance the regulation of private fund advisers and update the existing compliance rule that applies to all investment advisers. The new rules and amendments are designed to protect private fund investors by increasing transparency, competition, and efficiency in the private funds market.“Private funds and their advisers play an important role in nearly every sector of the capital markets,” said SEC Chair Gary Gensler. “By enhancing advisers’ transparency and integrity, we will help promote greater competition and thereby efficiency. Consistent with our mission and Congressional mandate, we advance today’s rules on behalf of all investors — big or small, institutional or retail, sophisticated or not.”To enhance transparency, the final rules will require private fund advisers registered with the Commission to provide investors with quarterly statements detailing certain information regarding fund fees, expenses, and performance. In addition, the final rules will require a private fund adviser registered with the Commission to obtain and distribute to investors an annual financial statement audit of each private fund it advises and, in connection with an adviser-led secondary transaction, a fairness opinion or valuation opinion.To better protect investors, the final rules will prohibit all private fund advisers from providing investors with preferential treatment regarding redemptions and information if such treatment would have a material, negative effect on other investors. In all other cases of preferential treatment, the Commission adopted a disclosure-based exception to the proposed prohibition, including a requirement to provide certain specified disclosure regarding preferential terms to all current and prospective investors.In addition, the final rules will restrict certain other private fund adviser activity that is contrary to the public interest and the protection of investors. Advisers generally will not be prohibited from engaging in certain restricted activities, so long as they provide appropriate specified disclosure and, in some cases, obtain investor consent. The final rules, however, will not permit an adviser to charge or allocate to the private fund certain investigation costs where there is a sanction for a violation of the Investment Advisers Act of 1940 or its rules.To avoid requiring advisers and investors to renegotiate governing agreements for existing funds, the Commission adopted legacy status provisions applicable to certain of the restricted activities and preferential treatment provisions. Such legacy status will apply to those governing agreements entered into in writing prior to the compliance date and with respect to funds that have commenced operations as of the compliance date.

Gary Gensler Statement:

Today, the Commission is considering final rules related to private fund advisers. I am pleased to support this adoption because, by enhancing advisers’ transparency and integrity, we will help promote greater competition and thereby efficiency in this important part of the markets.Private funds and their advisers play a significant role for investors and issuers. They play an important role in nearly every sector of the capital markets. On one side are the funds’ investors, such as retirement plans or endowments. Standing behind those entities are millions of investors like municipal workers, teachers, firefighters, professors, students, and more. On the other side are issuers raising capital from private funds, ranging from startups to late-stage companies.After the 2008 financial crisis, Congress understood the important role that private funds and advisers play. In the Dodd-Frank Act of 2010, Congress effectively required most private fund advisers to register with the Securities and Exchange Commission. Congress also gave the Commission specific new authorities under the Investment Advisers Act of 1940 to prohibit or restrict advisers’ sales practices, conflicts, and compensation schemes.[1] This built upon our existing authorities to regulate advisers with respect to their books and records as well as with respect to fraudulent, deceptive, or manipulative practices, among others.[2]In addition, Congress mandated in 1996 that, in our rulemaking, the Commission must consider efficiency, competition, and capital formation in addition to investor protection and the public interest.Importantly, Congress did not cabin either of these provisions—the Dodd-Frank reforms or the 1996 requirements to consider efficiency, competition, and capital formation—only to retail investors. Thus, consistent with our mission and Congressional mandate, we advance today’s rules on behalf of all investors—big or small, institutional or retail, sophisticated or not.First, the rules will increasetransparencyand comparability in funds’ quarterly statements to investors. This will apply to advisers’ fees (such as management fees, performance fees, and portfolio investment fees), expenses, and performance metrics.Second, the rules will bring greater transparency to investors regarding preferential treatment, often arranged through side letters. Under the rules, advisers will be able to continue to offer side letters to fund investors, but only if the material economic terms of those agreements are disclosed in advance and all other terms subsequently are disclosed to all investors in that fund. With regard to preferential treatment for redemptions and portfolio holdings information, if such preferential treatment would have a material negative effect on other investors, advisers will be able to offer such terms if also offered to all investors in that fund.Third, the rules will prohibit an adviser from charging to the fund fees and expenses related to investigations that result in a court or government authority sanctioning the adviser for violating the Advisers Act. Such activity is contrary to public interest and investor protection. Further, the rule will restrict a limited number of other named activities (such as an adviser borrowing from a fund they advise) by prohibiting them unless the adviser provides disclosure, and, in some cases, receives investor consent.Fourth, the rules will require advisers to obtain a fairness or valuation opinion when the adviser directs a fund to sell assets to another fund that the adviser also advises. This will help address potential conflicts of interest that may emerge when an adviser may profit at the expense of one fund’s investors because the adviser is advising funds on both sides of a transaction.Fifth, to benefit market integrity, the rules will require an annual audit of private funds conducted consistent with audits under the existing Advisers Act custody rule.Finally, today’s adoption includes amendments regarding books and records to help ensure compliance for all advisers.In finalizing today’s rule, we benefitted from public feedback on our proposal.First, for example, as detailed in the release, the final rule was revised from the proposal to allow for more flexibility to offer preferential treatment through side letters so long as they’re disclosed and in some cases the preferential treatment is offered to all investors. Second, the prohibition on reimbursement for examination costs was revised to be permitted as long as it’s disclosed. Third, certain activities that would have been prohibited under the proposal are now being permitted in the adopting release so long as the adviser gets consent from investors in that fund. For example, reimbursement for investigation costs would be allowed other than those that result in sanctions for violations of the Advisers Act. Fourth, in addressing comments on our proposal, the adopting release no longer prohibits advisers from seeking indemnification for negligence.[3]Further, in response to commenters, the final release includes a legacy provision with regard to preferential treatment and restricted activities. This legacy provision provides that advisers would not need to renegotiate limited partnership agreements even if such agreements otherwise would have been covered by the preferential treatment and restricted activity provisions.Lastly, the annual audit requirement can be satisfied using requirements consistent with the current custody rule, rather than through a new set of requirements as proposed. Given this, earlier today, the Commission reopened for public comment our February 2023 safeguarding proposal.Today’s final rules will promote private fund advisers’ efficiency, competition, integrity, and transparency. That benefits investors, issuers, and the markets alike.

Careline Crenshaw: "I want to address the critique that the SEC should play no part in the negotiations between sophisticated investors. To me these arguments ring hollow." "Relying on the parties’ sophistication alone, in the absence of regulation, will continue to leave investors exposed to

Commissioner Hester M. Peirce on the SEC's new rules for Private funds activity that is contrary to the public interest and the protection of investors: "The rulemaking is ahistorical, unjustified, unlawful, impractical, confusing, and harmful. Accordingly, I cannot support it."

SEC Commissioner Mark T. Uyeda: "Today, the Commission seeks to impose rules for private funds – which are generally available only for sophisticated investors – that are far more burdensome and restrictive than those products for retail investors." "I am unable to support

"Unfortunately, this is just one instance of SEC overreach as it looks to push through the most aggressive agenda in decades"

Heck, Wall Street and their trade groups are so mad they are suing about it!

NAPFM, MFA, and AIMA sue to challenge the SEC's Securities Lending and Short Position Reporting Rules by filing lawsuit asking the U.S. Court of Appeals for the Fifth Circuit to invalidate and toss out the rules.

• The National Association of Private Fund Managers (NAPFM), Alternative Investment Management Association (AIMA), and Managed Funds Association (MFA) filed a lawsuit asking the U.S. Court of Appeals for the Fifth Circuit to invalidate the two rules recently adopted by the Securities and Exchange Commission (SEC) requiring reporting and public disclosure of securities loans and short selling activity.
• They call out that both rules impose extensive new requirements for the reporting and public disclosure of information pertaining to short sales of securities, whether of the short-sale activity itself (as in the Short Position Reporting Rule) or of the loans of securities to facilitate that short-sale activity (as in the Securities Loan Reporting Rule).
• They complain the Short Position Reporting Rule and its detailed disclosures about short-sale activity can impose substantial harms on market participants (including by revealing confidential investment strategies and potentially facilitating retaliation or other manipulative activities).
• They also claim the rules are invalid and believe the Court should grant their petition and invalidate the rules.

What folks are saying on Short Position and Short Activity reporting by Institutional Investment Managers:

• Gary Gensler: "Today, I’m pleased that, based upon public comment, we’re adopting a rule fulfilling that Congressional mandate. Today’s adoption will promote greater transparency about short selling both to regulators and the public."
• Caroline Crenshaw: "This could help the SEC reconstruct market events & design responses to events that take place during times of volatility similar to the “meme” stock episode that might happen in the future."
• Mark Uyeda on 'NO' for (Rule 13f-2): "Public knowledge of their short positions would render them susceptible to a short squeeze & also reduce the incentives to engage in this beneficial activity."
• Hester Peirce Statement on SEC's Short Sale Disclosure: "Because a narrower rule leveraging existing reporting requirements could have brought more meaningful transparency at lower costs, I cannot support this recommendation."

What folks are saying on Transparency in the Securities Lending Market:

• Gary Gensler: "as relates to the reporting to regulators, the final rule will require lenders to report loan data to a registered national securities association—i.e., FINRA—by the end of each trading day."
• Hester Peirce: "While providing transparency regarding securities lending is a worthy & statutorily mandated objective, the approach we are voting on today is not the right way to achieve that objective. Accordingly, I cannot support this recommendation."
• Mark Uyeda "when these changes from the proposal are taken together, to what extent can the resulting information be used to estimate particular short selling positions & is that acceptable?

TLDRS:

• The Fifth Circuit Court of Appeals vacated the SEC's Private Fund Adviser Rule, which Bryan Corbett, CEO of MFA, referred to as an example of SEC overreach and part of its aggressive agenda.
  • In September 2023, six trade groups representing private equity and hedge funds sued the SEC, claiming it exceeded its statutory authority with new rules on fees and expenses, violating the Administrative Procedure Act.
  • "The final rules would have restricted certain other private fund adviser activity that is contrary to the public interest and the protection of investors."
  • Would require private fund advisers registered with the Commission to provide investors with quarterly statements detailing certain information regarding fund fees, expenses, and performance.
  • Would require a private fund adviser registered with the Commission to obtain and distribute to investors an annual financial statement audit of each private fund it advises and, in connection with an adviser-led secondary transaction, a fairness opinion or valuation opinion.
  • Prohibit all private fund advisers from providing investors with preferential treatment regarding redemptions and information if such treatment would have a material, negative effect on other investors.
• REMINDER: NAPFM, MFA, and AIMA have also filed a lawsuit against the SEC's Securities Lending and Short Position Reporting Rules, aiming for their invalidation by the U.S. Court of Appeals for the Fifth Circuit.
  • The contested rules required detailed reporting and public disclosure of securities loans and short selling activity, which the trade groups argued could harm market participants by exposing confidential strategies.