nvestors in private funds — such as private equity, private credit, hedge funds, venture capital, and real estate — more information about fund fees and expenses, limit certain expenses that could be passed through to investors, and restrict preferential treatment of fund investors.Compliance requirements were set to take effect in September 2024. However, now that the Rule has been struck down in federal court, private funds need not comply unless the Fifth Circuit decision is overturned. As of now, it is unclear what action, if any, the SEC will take following the Fifth Circuit’s ruling, an enormous win for private fund sponsors that would have otherwise expended significant resources preparing to comply with the obligations required by the Rule.Overview of Vacated RuleIn August 2023, the SEC adopted the Rule by 3-2 vote. The Rule would have had significant effects on the private fund industry. Private Fund Advisors; Documentation of Registered Investment Adviser Compliance Reviews, 88 Fed. Reg. 63206 (Aug. 23, 2023). A group of trade associations challenged the Rule in the US Court of Appeals for the Fifth Circuit, arguing that, among other deficiencies, the SEC lacked statutory authority to promulgate the Rule and there was no factual basis for the key provision of the Rule, making the Rule arbitrary, capricious, and otherwise unlawful under the Administrative Procedure Act.Fifth Circuit’s DecisionLast week, the Fifth Circuit agreed and vacated the Rule in a 3-0 decision. The SEC argued that it had authority to promulgate the Rule under Sections 211(h) and 206(4) of the Investment Advisers Act of 1940 . The Fifth Circuit determined that, in private funds, it is “the fund itself” that is the client, not the individual investors in the fund. Further, the Fifth Circuit held that the term “investor” as used in Section 211(h) of the Advisers Act is limited to “retail customers,” so Section 211(h) did not provide statutory authority for the Rule. Therefore, the Fifth Circuit held that Section 206(4) o

elying on Section 206(4), including, in particular, the application of the Marketing Rule (Rule 206(4)-1) to prospective investors in private funds and the pooled investment vehicle antifraud rule (Rule 206(4)-8).WHAT COMES NEXT?First, the SEC may seek rehearing en banc before the entire Fifth Circuit. Alternatively (or after such an en banc rehearing), the SEC could file a petition for certiorari seeking review before the Supreme Court of the United States. As of the date of this Legal Update, the SEC has only said it would “determine next steps as appropriate.”While the saga of the Final Rules isn’t quite over, pending any such appeal process, the immediate takeaway for private fund advisers is clear: Any ongoing efforts to comply with the Final Rules ahead of the forthcoming September 14, 2024, compliance dates can be put on pause, perhaps permanently.1 Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews, Investment Advisers Act Release No. 6383 (Aug. 23, 2023) [88 FR 63206 (Sept. 14, 2023)] (the “Adopting Release”), available at https://www.sec.gov/files/rules/final/2023/ia-6383.pdf. See also Mayer Brown’s analysis of the Final Rule.2 For purposes of the Final Rule, a “private fund” is an issuer that would be an “investment company act but for the exception provided in Section 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940, as amended” (“Investment Company Act”).3 Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Pub. L. No. 111-203, 124 Stat. 1376 (2010).4 Under Advisers Act Section 211(g)(1), also added by the Dodd-Frank Act, the SEC is precluded from defining the term “customer” to include an investor in a private fund where the private fund has entered into an advisory contract with the adviser.5 The court does not discuss this reasoning in light of SEC v Capital Gains, 375 U.S. 180 (1963), where the Supreme Court concluded that under Section 206(1) and 206(2) of the Advisers Act, a court has the authority to require discl

ule Quarterly Statement RuleMarch 14, 2025Adviser-Led Secondaries RulePreferential Treatment RuleRestricted Activities RuleStaggered depending on an adviser's private fund AUM:$1.5 billion or more—September 14, 2024 (Note: this is a Saturday)Less than $1.5 billion—March 14, 2025Written Annual Review AmendmentsNovember 13, 2023ADDITIONAL DEVELOPMENTSOn September 1, 2023, several industry organizations, including the National Association of Private Fund Managers, filed a lawsuit challenging the SEC’s statutory authority to issue the new rules under the Advisers Act. Morgan Lewis is tracking the ongoing litigation, but currently it is unlikely to be resolved prior to May 31, 2024 at the earliest and, accordingly, investment advisers should begin preparing for compliance with the rules given the timeline.[1] Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews, Investment Advisers Act Release No. IA-6383 (August 23,2023) (Adopting Release); published at 88 Fed. Reg. 63206 (September 14, 2023). Note that the new rules apply to “private funds” as defined in the Advisers Act, which means an issuer that would be an investment company, as defined in the Investment Company Act of 1940 (Investment Company Act), but for reliance on Section 3(c)(1) or 3(c)(7) of that Act. For purposes of the application of the new rules, the definition of “private fund” would not apply to a non-US fund that is excluded from SEC regulation pursuant to Section 7(d) of the Investment Company Act.[2] In addition to these rules, the SEC also adopted amendments to Rule 204-2 (books and records rule) that require registered investment advisers to document in writing the annual review of their compliance policies and procedures.[3] Non-US advisers with both onshore and non-US funds should, nonetheless, be mindful of the “similar pool of assets” provision in the preferential treatment rule.[4] Rule 257.211(h)(2)-3. Note that these prohibitions apply only if the adviser reasonably expects that such preferent