ICYMI: WSJ Editorial Board Highlights Private Equity’s Victory Striking Down the SEC’s Unlawful Private Fund Adviser Rule
“Talk about a rough few days for the Securities and Exchange Commission. The Fifth Circuit Court of Appeals last Wednesday blocked its private-fund disclosure rule.”
The Wall Street Journal recently published an editorial highlighting private equity’s role in leading a successful legal challenge that struck down the Securities and Exchange Commission’s (SEC) Private Fund Advisers rule, which would have made it harder for thousands of businesses to receive investments from private capital. The editorial highlighted how SEC Chairman Gary Gensler was “seeking to expand the agency’s power over America’s growing private markets” even “though Congress has never given him the power.”
Read the full Wall Street Journal editorial below:
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The Gensler SEC Loses Again
The Wall Street Journal
By The Editorial Board | June 10, 2024
Talk about a rough few days for the Securities and Exchange Commission. The Fifth Circuit Court of Appeals last Wednesday blocked its private-fund disclosure rule. And the agency announced it is closing a regional office after getting sanctioned by a federal judge.
Unsatisfied with his day job, Chairman Gary Gensler has been seeking to expand the agency’s power over America’s growing private markets. Over the past decade, the number of private funds has tripled while their value has grown to $26.6 trillion from $9.8 trillion. Government pension funds chasing higher returns are among their biggest investors. Mr. Gensler wants a regulatory piece of this action, though Congress has never given him the power.
The SEC last year nonetheless imposed new burdensome obligations on private fund advisers similar to those for public fund ones, including quarterly statements and audits. Its regulation also limited funds’ ability to provide preferential treatment to certain investors and fees they could charge. One political goal was to improve investing terms for public pension funds.
A Fifth Circuit panel ruled 3-0 that the SEC lacked the statutory authority to do all this. Congress exempted private funds from regulation under the Investment Company Act. But the SEC invoked a Dodd-Frank Act provision requiring it to “facilitate the provision of simple and clear disclosures to investors” and “promulgate rules prohibiting or restricting certain sales practices, conflicts of interest, and compensation schemes.”
Yet this provision applies protections only for retail customers, not private fund investors “who have a significant hand in determining the terms on which they invest,” Judge Kurt Engelhardt explained for the Fifth Circuit panel. This isn’t the first time the agency under Mr. Gensler’s watch has been rebuked for playing fast and loose with the law—or the truth.
Judge Robert Shelby, a Barack Obama appointee, sanctioned the SEC in March for abusing its power and making material misrepresentations to the court to obtain a restraining order against a crypto company. SEC attorneys and the director at the agency’s Salt Lake City office that brought the crypto case later resigned.
Last week the agency said it is closing the Salt Lake City office because of “significant attrition” and the need for “budget and organizational efficiency.” Mr. Gensler is stretching the agency’s power and in doing so has compromised its ability to do its main job competently. One result is that its rules and enforcement actions are wilting under judicial scrutiny.
