In a significant win for private fund sponsors, the U.S. Court of Appeals for the Fifth Circuit has vacated the SEC’s highly anticipated—and highly contested—Private Funds rule. The decision marks a direct challenge to the Securities and Exchange Commission’s recent attempts to expand its regulatory reach over private fund advisers, and it has serious implications for the future of private fund oversight in the U.S.
A Brief Recap: What Was the SEC Trying to Do?
In August 2023, the SEC adopted a sweeping set of reforms targeting private fund advisers, consolidating five new rules and related amendments under the Investment Advisers Act of 1940. The so-called Private Funds rule was the most ambitious regulatory effort since Dodd-Frank—and arguably, the most controversial.
The proposed rules were designed to:
- Standardize quarterly reporting for fund performance and fees
- Mandate annual audits of private fund financials
- Require valuations or fairness opinions in adviser-led secondary transactions
- Restrict certain practices deemed harmful, unless subject to consent or disclosure (e.g., charging compliance costs to funds, or limiting adviser liability)
- Curb preferential treatment of select investors, through disclosure and/or outright prohibition
In short, the SEC sought to bring hedge funds, private equity, venture capital, and other private fund sponsors closer to the compliance burdens already faced by mutual funds and other retail-facing financial products.
The Fifth Circuit’s Response: Overreach
The Fifth Circuit disagreed—forcefully. In its ruling, the court found that the SEC had exceeded its statutory authority under Section 211(h) of the Advisers Act. That section was intended to protect retail customers, and, crucially, private fund investors are not considered retail under existing law.
The court’s rationale is consistent with earlier precedent—namely, the 2006 Goldstein v. SEC decision—which held that fund advisers owe their fiduciary duties to the fund itself, not to its investors. Dodd-Frank preserved that logic, even as it expanded the SEC’s enforcement tools.
More surprising was the court’s broader statement that Section 206(4)—a long-standing foundation for many SEC rules—does not give the SEC authority to impose generalized disclosure or reporting mandates. If that interpretation holds, it could put other cornerstone rules at risk, including:
- The Custody Rule
- The Pay-to-Play Rule
- The 2022 Marketing Rule, which redefined how RIAs use endorsements, testimonials, and performance data
What Happens Now?
For fund sponsors, this ruling offers relief—at least in the short term. The Private Funds rule as it stood is now invalid. There’s no requirement to overhaul reporting templates, scramble for fairness opinions, or renegotiate side letters for disclosure compliance.
However, this does not mean the SEC is backing off. The agency’s Division of Examinations continues to prioritize private fund advisers in its national exam program. That means:
- Fee and expense allocations will still face scrutiny
- Adviser-led secondaries may still trigger conflict-of-interest red flags
- Performance presentations must still be fair, consistent, and substantiated
And while this ruling may chill future rulemaking under Section 211(h) and 206(4), it could just as easily motivate Congress to amend the Advisers Act to give the SEC more explicit power.
Strategic Takeaway: Prepare, Don’t Pause
Fund managers should view this decision not as a full-stop reprieve, but as a strategic pause. Investor protection, transparency, and conflict mitigation are not going away. They’re just evolving—through enforcement, examinations, and, likely, litigation.
Here’s what fund sponsors should do now:
- Stay audit-ready. Maintain clear documentation for fees, expenses, and valuations.
- Review side letters. Even without mandatory disclosures, LPs are asking tough questions.
- Monitor the SEC’s next move. A rule rewrite—or legislative pressure—is almost certain.
The Fifth Circuit’s ruling reasserts legal boundaries—but it doesn’t remove the political or market pressure for private funds to become more transparent and accountable.
At a time when the SEC’s authority is being tested, private fund advisers should not confuse legal victory with regulatory invisibility.