Center for American Progress

The Lawsuit Against a New SEC Rule Could Harm Investor Protections

The Lawsuit Against a New SEC Rule Could Harm Investor Protections

The U.S. Court of Appeals for the 5th Circuit’s decision on the legal petition against the SEC’s private fund advisers rule could open the door to broad attacks on the regulatory framework that Congress authorized the SEC to develop and enforce for capital markets.

The headquarters of the U.S. Securities and Exchange Commission is seen in Washington, D.C., on January 28, 2021. (Getty/Saul Loeb)

In February 2024, judges on the U.S. Court of Appeals for the 5th Circuit sitting in New Orleans heard oral arguments in National Association of Private Fund Managers v. Securities and Exchange Commission (SEC),1 a case that could upend American capital markets. The decision in the case could come any day and could lay the groundwork for dismantling the disclosure-based regulatory framework established by Congress over decades to protect investors and the public from fraud and other risks when they buy and sell stock for their retirement plans and other investments.

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At the center of the case is the private fund advisers rule, which the SEC adopted in August 2023. The rule will require private funds and their advisers to provide investors with regular account statements, standardized fee and expense information, and basic disclosures regarding their conflicts of interest.2 It will also require funds to have annual audits.

If the 5th Circuit rules in favor of the plaintiffs bringing the case, the SEC could be prevented from delivering key—and badly needed—investment protections for everyday Americans, and it could open the door to attacks on a broad swath of the SEC’s rulemaking.

The private fund advisers rule will help prevent fraud and provide essential information to investors

Investment funds receive money from investors and invest that capital in companies and other funds. Most Americans who participate in a retirement savings plan at work have those savings invested in one or more investment funds.

In the past decade, the private securities markets in which the private fund industry operates have grown four-fold, amassing more than $14 trillion in assets.

Congress requires investment funds that seek capital from the public and manage $150 million or more in client assets to register with the SEC3 and, unless otherwise exempt, publicly disclose information about their own financial status, fees, potential conflicts of interest, and more. Some investment funds—such as the private funds at issue in the case—claim exemption from these disclosure requirements, usually on grounds that they are managing assets only on behalf of nonpublic or certain qualified investors.4 Although many of these private funds provide information to some of their investors, they are not required to, nor are they subject to rules that ensure the information is consistent, reliable, and comparable with information from other investment companies. Meanwhile, the exemptions these funds use have expanded, enabling the fund advisers to offer securities to an ever-broader group of investors and exposing these investors to risks that have not been disclosed. Today nearly everyone who has a retirement plan is exposed—either directly or indirectly—to risky private fund investments.5

In the past decade, the private securities markets in which the private fund industry operates have grown four-fold, amassing more than $14 trillion in assets6 and generating billions of dollars in fees for the executives who manage these funds. Indeed, these executives now make up more than 5 percent of U.S. billionaires7—roughly 40 out of 735.8 In April 2023, it was reported that just 47 hedge fund managers had a combined net worth of more than $312 billion9—an amount that is higher than the gross domestic product of 133 nations10 and was largely amassed in just a few years.

Those fees also reduce the returns of investors in the funds. As explained in the SEC’s final rule, the private fund advisers rule is intended to ensure that investors “receive simple and clear disclosures of the actual fees and expenses borne by their fund in order to be able to understand and confirm effectively the accuracy of the terms of their relationship with a private fund adviser.”11 All investors need this information, even sophisticated ones, and the rule requires that the disclosures be made public—not just confidentially to the SEC—so that all investors and market participants can have the basic information necessary to make sound investment decisions.

Although the rule does not require private funds to disclose as much information as registered public investment funds are required to disclose, it is an important step forward and is clearly needed.12 After more than a decade of examinations by its own staff and following years of complaints and solicitations from investors, the SEC found that private fund advisers often do not follow through on promises they make in general investor disclosures or side letters to preferred investors. Reports on those examinations from 2014,13 2020,14 and 2022,15 for example, revealed that some private fund advisers had provided misleading information about their funds’ track records, incorrectly allocated fees and expenses to their customers, and insufficiently managed or disclosed conflicts of interest, such as conflicts surrounding the allocation of investment opportunities or the offering of preferential redemption rights. Collectively, these findings demonstrate that investors in private funds have not been getting what they need and what Congress meant for them to have.

The private fund industry’s lawsuit against the SEC is unsubstantiated

The private fund industry, an alphabet soup of trade organizations, hired Eugene Scalia, who served as U.S. secretary of labor during the Trump administration, to challenge the rule. Scalia has made a specialty of challenging regulations in the courts.16 Instead of filing this case in New York, the center of the U.S. financial industry, Scalia and the trade associations he represents filed it in the 5th Circuit,17 renowned as the most anti-regulation and conservative court in the country.18

See also

The private fund industry claims in its petition that, in promulgating the rule, the SEC exceeded its statutory authority and failed to follow appropriate processes. It also claims that the rule would be burdensome. These sweeping claims about authority, process, and burden, which have been advanced in several other recent cases attacking financial regulation, are largely unsubstantiated by facts and, if successful, would undermine the agency’s ability to fulfill its mandate.19

Statutory authority

Congress provided the SEC with broad statutory authority to require disclosures from investment advisers in Section 206 of the Investment Advisers Act as well as the Dodd-Frank Wall Street Reform and Consumer Protection (Dodd-Frank) Act. With very little explanation, the private fund industry petition claims that neither is a valid basis for the rule—but the agency’s authority is very strong under both statutes.

The Investment Advisers Act of 1940, like the securities laws adopted before it, is designed to broadly empower the SEC to stop fraud. Section 206 of the Advisers Act generally provides that investment advisers cannot “employ any device, scheme, or artifice to defraud any client or prospective client,” nor can they “engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client.”20 The statute is broader than analogous language in the other foundational securities statutes—the Securities Act of 1933 and the Securities Exchange Act of 193421—in that it does not require the fraud to be connected to the purchase or sale of securities.

Congress’ intent to provide the SEC with broad authority to require disclosures cannot be overstated. Prior to the adoption of the federal securities laws 90 years ago, investors typically had very little information about the securities they were buying or the company or fund in which they were investing.22 After the 1929 stock market crash and the ensuing Great Depression that devastated the U.S. economy and millions of people who had never invested in the stock markets, extensive congressional hearings revealed that under- and misinformed investors had not made sound investment decisions.

Rather than trying to establish a regulatory scheme to identify and restrict risky financial products, Congress instead chose to empower the government to adopt a disclosure-based regulatory regime. Regulators were tasked with ensuring market participants made full and fair disclosures so that investors could make better, more informed choices. This general approach was taken in the Securities Act of 1933, and it was thereafter replicated in the Securities Exchange Act of 1934 and the Investment Company Act of 1940,23 then expanded in the Investment Advisers Act of 1940.

While some of the SEC’s rules and actions have been successfully challenged in court,24 its broad authority under its various statutes to compel disclosures has not been meaningfully challenged in decades.

Congress expanded the agency’s general anti-fraud authority in the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in 2010. The Dodd-Frank Act was designed to address the type of financial behavior that led to the 2007–2008 financial crisis, which caused American households to lose approximately $14 trillion in net worth and sank the economy into the longest recession since World War II; unemployment peaked at 10 percent in October 2009.25

In Section 913 of the Dodd-Frank Act, Congress provided the SEC with even stronger authority to require disclosures from investment advisers by granting the agency broad power to protect so-called retail investors26—that is, ordinary people, who typically invest through individual brokerage accounts. Many in the private fund industry assert that their products are sold only to extremely sophisticated institutional investors. But even sophisticated investors, such as brokers who manage investments on behalf of retail investors, can be victims of fraud. In fact, many sophisticated investors were uninformed of the risks and ultimately harmed in the 2008 financial crisis. Moreover, the rapid expansion of exemptions from the public disclosure framework means that millions of retail investors invest directly or indirectly in private funds. Indeed, the private fund industry’s dramatic growth over the past several years can be at least partially attributed to its unprecedented outreach to individual retail investors.27 Already, many retail brokerages offer their retail customers investments in private funds with low investment thresholds.28

The danger of the lawsuit’s sweeping attacks on the SEC’s statutory authority is that, if it is successful, it could be used to challenge a wide range of SEC rulemaking.

Importantly, the private fund industry already had a small amount of access to retail investors at the time the Dodd-Frank Act was passed, but Congress did not limit the additional disclosure authority it granted to the SEC to products sold directly to retail investors. Moreover, by 2010, many of the exemptions from public disclosure that the private fund industry relies on today were already in place; it was precisely because of these exemptions, and the lack of disclosure by private funds involved in the crisis, that Congress felt the need to enact Section 913.

The danger of the lawsuit’s sweeping attacks on the SEC’s statutory authority is that, if it is successful, it could be used to challenge a wide range of SEC rulemaking. As more and more trading moves to the private markets, and private funds gain even more access to retail investors’ funds either directly or through the firms that manage their retirement plans and other investments, private funds and their advisers have an ever larger stake in protecting their fees and withholding the information that would allow investors to make better decisions. The time when private funds could claim that the investments they managed were just contractual arrangements with a handful of sophisticated wealthy individuals is long past.

The SEC relies on its anti-fraud powers under the various federal securities laws to ensure that investors receive full and fair disclosure in a number of areas.29 No investor, regardless of sophistication or wealth, can protect themselves from what they do not know or from representations that they lack the background knowledge to test. The ability to require disclosure of relevant information is a tool Congress gave the SEC to guard against fraud—and it did not provide such authority with a limit that it could never apply to private funds and their advisers. Yet, if the 5th Circuit’s decision upholds petitioners’ claims, it could effectively undermine Congress’ intent and prevent the agency from fulfilling its mandate to protect investors from fraud.


The private fund industry advocates argue that the SEC’s process for adopting the rule was inadequate to satisfy the Administrative Procedure Act (APA), which governs the way in which federal agencies regulate. Courts have ruled that the APA requires agencies to “examine the relevant data and articulate a satisfactory explanation for its action, including a rational connection between the facts found and the choice made.”30 That analysis should have a clear path to agencies’ thinking, and agencies must generally consider all important aspects of problems identified. To help ensure that happens, agencies such as the SEC release proposed rules for public comment. In the case of the private fund advisers rule, the SEC not only posted the rule for public comment, but it did so three times—in February, May, and October of 2022.31 And it received significant feedback from market participants, including private fund advisers and their advocates, throughout the period between the proposal and final adoption.32

Notably, the APA does not require agencies’ final actions to be exactly the same as their proposals, and agency actions typically are softened and moderated materially between release of the proposal and adoption of the final rule. The only requirement generally is that the final action taken be a “logical outgrowth” of the proposal.33 This standard is typically easily met, as agencies normally modify their proposals pursuant to stakeholder feedback. That is precisely what happened with the private fund advisers rule.

The private fund industry advocates’ claims that the SEC did not provide opportunities for comments from the private fund industry—despite the SEC accepting comments for more than 17 months and incorporating those comments into the final rule’s analysis—are hollow. And, if accepted by the court, they would open up a wide range of well-founded regulations to legal attack on similar grounds. No regulation would be safe, and the agency would be hamstrung.


Finally, the industry advocates argue that the private fund advisers rule would be burdensome on the industry. However, investment advisers, both registered and unregistered, are already making some of the disclosures required under the rule to regulators and many of the disclosures to private market participants, such as favored investors. The SEC, pursuant to its statutory authority, already requires private fund advisers to confidentially disclose to the agency significant relevant information, including side arrangements with certain investors and trading practices. And the Investment Advisers Act empowers the agency to require disclosure of “such other information as the Commission … determines is necessary and appropriate in the public interest and for the protection of investors or for the assessment of systemic risk.”34

Given all the disclosures and information private fund advisers already make to the agency, there is little to no concern that the final rule’s required disclosures to investors will be burdensome on private funds. Success of this argument would suggest that merely requiring already-prepared information to be made public constitutes an undue burden and could subject other similar rules to attack. Even more concerning is the fact that basic disclosures that should be fundamental to any investor would be deemed burdensome—even annual audited financials and the fees to be charged. Such a low threshold could expose almost any regulation to attack on these grounds.


If the 5th Circuit breaks with decades of judicial precedent to vacate the private fund advisers rule, a wide range of existing and future rules to protect investors and the public could be at risk. Yet even if the private fund industry’s sweeping but poorly substantiated claims fail, the fact that they are being raised in this and other lawsuits is an affront to Congress’ intent over decades to protect investors and the public interest.

The author wishes to thank Tyler Gellasch for his expert comments on this brief.


  1. NA of Private Fund Managers v. SEC, U.S. Court of Appeals for the Fifth Circuit, September 1, 2023, available at
  2. U.S. Securities and Exchange Commission, “Private Fund Advisers; Documentation of Registered Investment Adviser Compliance,” Federal Register 88 (177) (2023): 63206–63390, available at
  3. Legal Information Institute, “15 U.S. Code, Section 80b-3 – Registration of investment advisers,” available at (last accessed May 2024).
  4. Legal Information Institute, “15 U.S. Code § 80a–3 – Definition of investment company,” available at (last accessed May 2024).
  5. Commissioner Caroline A. Crenshaw, “Statement Regarding Private Fund Advisers Rulemaking,” U.S. Securities and Exchange Commission, Press release, August 23, 2023, available at
  6. Ryan Burke, “Are you harnessing the growth and resilience of private capital?”, EY, April 4, 2024, available at
  7. Matt Wirz, “Move Aside, Big Banks: Giant Funds Now Rule Wall Street,” The Wall Street Journal, April 22, 2024, available at
  8. Author’s calculation based on E. Napoletano, “Here’s How Many Billionaires And Millionaires Live in the U.S.,” Forbes, October 23, 2023, available at
  9. Hank Tucker, “The Richest Hedge Fund Managers 2023,” Forbes, April 4, 2023, available at
  10. Wikipedia, “List of countries by GDP,” available at (last accessed May 2024), citing International Monetary Fund, “World Economic Outlook Database,” April 2024, available at
  11. U.S. Securities and Exchange Commission, “Private Fund Advisers,” pp. 63229–63230.
  12. U.S. Securities and Exchange Commission, “New Private Fund Adviser Rules: Overview Chart,” (last accessed May 2024).
  13. Andrew J. Bowden, “Spreading Sunshine in Private Equity: Transcript of Director of Compliance Inspections and Examinations Andrew J. Bowden speech to the Private Fund Compliance Forum in New York,” May 6, 2014, available at
  14. Office of Compliance Inspections and Examinations, “Observations from Examinations of Investment Advisers Managing Private Funds,” U.S. Securities and Exchange Commission, June 23, 2020, available at
  15. Division of Examinations, “Observations from Examinations of Private Fund Advisers,” U.S. Securities and Exchange Commission, January 27, 2022, available at
  16. See, for example, Robert Schmidt, “Suing the Government? Call Scalia!”, Bloomberg, January 26, 2012, available at
  17. Petition for Review, Nat’l Assn. of Private Fund Managers, et al. v. Securities and Exchange Commission, U.S. Court of Appeals for the Fifth Circuit, September 1, 2023, available at
  18. See, for example, Devan Cole and Tierney Sneed, “A conservative appeals court in the South seems to be exasperating the Supreme Court,” CNN, April 7, 2024, available at; Jonathan Entin, “The Surprising History of the 5th Circuit Court of Appeals,” Governing, January 23, 2024, available at
  19. See, for example, Andrew Chung, “SEC’s in-house enforcement powers at risk in US Supreme Court case,” Reuters, November 28, 2023, available at; Lesley Clark and Avery Ellfeldt, “SEC pauses climate disclosure rule, cites litigation ‘complexities’,” E&E News, April 5, 2024, available at
  20. Section 206, Investment Advisers Act of 1940, codified at Legal Information Institute, “15 U.S. Code, Section 80b-6 – Prohibited transactions by investment advisers,” available at (last accessed May 2024). For text as amended, see Investment Advisers Act of 1940, Public Law 117-263, 117th Cong., 2nd sess. (December 23, 2022), available at
  21. Securities Act of 1933, Public Law 73-22, 73rd Cong., 1 sess. (May 27, 1933), available at; Securities Exchange Act of 1934, Public Law 73-291, 73rd Congress, 2 sess. (June 6, 1934), available at
  22. See “Alluring promises of easy wealth were freely made with little or no attempt to bring to the investor’s attention those facts essential to estimating he worth of any security.” in Federal Supervision of Traffic in Investment Securities in Interstate Commerce, H.R. 5480, 73rd Cong., 1st sess. (May 4, 1933), available at
  23. Investment Company Act of 1940, Public Law 76-768, 76th Cong., 3rd sess. (August 22, 1940), available at
  24. See, for example, Cydney Posner, “After 1576 days, DC District Court holds proxy advisor rule invalid,” Cooley PubCo, February 28, 2024, available at; Grayscale Investments, LLC v. SEC, No. 22-1142 (August 29, 2023), available at (vacating the SEC’s denial of a Bitcoin ETF); Susquehanna Int’l Grp., LLP v. SEC, 866 F.3d 442 (August 8, 2017), available at  (remanding the agency’s approval of a self-regulatory organization filing).
  25. Robert Rich, “The Great Recession,” Federal Reserve History, November 22, 2013, available at; Federal Deposit Insurance Corporation (FDIC), “Crisis and Response: An FDIC History, 2008-2013,” pp.16–18, available at (“by generating a variety of complex financial products based on pools of mortgages, private label securitizers created within the financial system an additional level of complexity, opacity, and interconnectedness.”).
  26. Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Public Law 111-203, 111th Cong., 2nd sess. (July 21, 2010), available at
  27. See, for example, John Finley, “Expanding Retail Access to Private Markets,” U.S. Securities and Exchange Commission, November 2019, available at; Alex Steger, “Blackstone raises #1.3bn for retail PE fund; BREIT redemption requests decline,” City Wire, January 8, 2024, available at
  28. Miles Weiss, “Private Equity Wants a Piece of Your Retirement Savings,” Bloomberg, October 25, 2023, available at
  29. Brunson MacChesney and Robert H. O’Brien, “Full Disclosure Under the Securities Act,” Law and Contemporary Problems 4 (1937): 133–153, available at
  30. Motor Vehicle Mfrs. Ass’n v. State Farm Mutual Automobile Ins. Co., 463 U.S. 29 (June 24, 1983), available at
  31. For links to the three postings, see: U.S. Securities and Exchange Commission, “Private Fund Advisers.”
  32. U.S. Securities and Exchange Commission, “Comments on Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews,” available at (last accessed May 2024).
  33. Legal Information Institute, “42 U.S. Code, Section 1395hh – Regulations,” available at (last accessed May 2024).
  34. Legal Information Institute, “15 U.S. Code, Section 80b-4 – Reports by investment advisers,” available at (last accessed May 2024).

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Alexandra Thornton

Senior Director, Financial Regulation


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