The Securities and Exchange Commission’s (SEC) recent move to mandate increased disclosure of fees and other costs by private equity funds has sparked a legal battle with the PE industry. Lawyers representing both the SEC and the PE industry engaged in a heated argument in a US federal court in New Orleans.
The new rules, finalized by the SEC last August, require private fund advisers to provide detailed quarterly statements on costs, expenses, and performance, and mandate annual audits of every managed fund.
Eugene Scalia, representing the PE industry, argued that these rules, costing the industry 5.4 billion dollars annually, overstep the SEC’s authority as granted by Congress. He contended that private funds, historically exempt from certain regulations, are now unfairly targeted by the SEC, despite their high profitability and declining fees.
The SEC, represented by Jeffrey Berger, countered that increased transparency is necessary for all investors, regardless of their sophistication, particularly for smaller institutional investors like pension funds who struggle to access relevant information from private fund managers.
The judges, predominantly appointed by Republican presidents, appeared sympathetic to the PE industry’s arguments, questioning the necessity of such sweeping regulations in a seemingly successful market. Legal experts following the case, like David Blass and Jeremiah Williams, suggested a possibility of the rule being partially or entirely overturned, though the timeline for a definitive ruling remains uncertain.
Scepticism
“I noticed a healthy dose of scepticism about the SEC’s regulatory power,” David Blass, a former SEC official who is now a partner at the law firm Simpson Thacher & Bartlett, told the Bloomberg news agency.
According to Jeremiah Williams, a partner in the litigation and enforcement department at Ropes & Gray, there is a good chance that part of the rule will be overturned. According to Williams, overturning the SEC rule entirely is a “more difficult decision”.
Despite the fact that the case will be expedited at Scalia’s request, it is still unclear when a ruling can be expected. Should the court ultimately overturn the rules, the SEC may seek review by a larger panel of judges or the US Supreme Court.
Should the court rule against the SEC, further appeals to a larger panel of judges or the US Supreme Court are anticipated.