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A coalition of private equity, venture capital and hedge fund groups have sued to block sweeping new US regulations they claim would fundamentally and illegally change the $27tn industry.
Six industry groups told a Texas-based federal appeals court that the Securities and Exchange Commission overstepped last week when it adopted new rules for private fund managers. The package requires increased disclosure and puts new limits on the way the industry treats customers — mostly pension funds, endowments and other institutional investors.
“The commission adopted a final rule that is unwarranted, unlawful, and will harm the private fund industry and hamper the jobs, innovation, and other benefits private funds bring to the economy,” according to the lawsuit filed on Friday.
The filing sets up an epic legal struggle between a wealthy and powerful industry and an energised SEC, which, under chair Gary Gensler, has hit financial services with the biggest regulatory blitz since the aftermath of the 2008 financial crisis.
It drew immediate fire from advocacy groups supportive of the SEC’s efforts to tighten rules that have long exempted capital groups from having to provide the same disclosures required on public markets.
Challenging the agency’s power to demand additional disclosure “is like saying the SEC has the power to de-regulate, but not to re-regulate”, said Andrew Park, senior policy analyst at Americans for Financial Reform.
The industry has been threatening to sue over the package since it was first proposed last year. The regulator watered down some of the most controversial provisions when it adopted the rules by a 3-2 vote last week. But that has not assuaged private fund managers who believe that an emboldened SEC will continue to press forward with additional regulations.
“The SEC has overstepped its statutory authority and core legislative mandate, leaving us no choice but to litigate,” said Bryan Corbett, president of the Managed Funds Association, one of the plaintiffs.
Lawsuits challenging SEC rules are filed directly to appeals courts, skipping past the lower district court. The case has been filed with one of the most conservative courts in the country, the US Court of Appeals for the Fifth Circuit, because one of the plaintiffs, the National Association of Private Fund Managers is based in Fort Worth, Texas. The group was founded last year after the regulator first proposed the private fund rules package.
Dennis Kelleher, chief executive of the Better Markets campaign group, said: “If they really thought their claims had any merit, they wouldn’t go court shopping in the Fifth Circuit, which is becoming little more than a kangaroo court that rubber-stamps baseless financial industry complaints.”
If the court declines to intervene, the rules will force private equity, venture capital, private credit and hedge funds to provide investors with detailed quarterly performance reports, put limits on secret side deals that give better terms to some investors and force increased disclosure of expenses.
The other plaintiffs are the Alternative Investment Management Association, the American Investment Council, the Loan Syndications and Trading Association and the National Venture Capital Association.
The case is the latest in a series of lawsuits challenging the Gensler-led regulator’s expansive view of its responsibilities. The US Chamber of Commerce is suing to overturn new rules for corporate share buybacks, and the company behind the Ripple digital token is fighting an SEC enforcement case, arguing that it exceeds the agency’s power to regulate securities.
Earlier this week, a federal appeals court ruled that the SEC had been “arbitrary and capricious” when it turned down Grayscale’s application to offer a spot bitcoin exchange traded fund.