SEC's battle for hedge fund fee transparency dies in Supreme Court

The US Securities and Exchange Commission is ending a court fight over new hedge fund and private equity fee disclosures after a legal setback in Chair Gary Gensler’s push for more transparency.

Wall Street’s main regulator didn’t act by a Tuesday deadline to ask the Supreme Court to revive new disclosure requirements for the private funds industry over fees it charges, according to a person familiar with the matter, who asked not to be identified discussing the litigation. The SEC had said the new disclosures would benefit investors. 

The SEC rules, which it adopted in August 2023, required private fund managers to give investors more details about quarterly fees and expenses. The agency also prohibited firms from allowing some favored investors to cash out more easily than others — unless those deals are offered to all fund investors. 

Industry groups immediately pushed back on the regulations and in June a three-judge panel of the 5th US Circuit Court of Appeals said the SEC had overstepped its authority. The regulator didn’t request a full slate of judges at that court to review the decision. The Supreme Court was the last avenue for the SEC to overturn the ruling.

“We decline comment beyond public filings,” the SEC said in a statement.

Industry Victory

The end to the dispute is a victory for industry groups waging aggressive legal challenges to Gensler’s efforts to rein in hedge funds and private equity firms. The SEC chair has said so-called private funds lack transparency and can contribute to financial stability risks. The SEC could still revisit the issue in other ways.

The measures were among several rules that Wall Street’s main watchdog has been seeking for the fast-growing, multitrillion-dollar market for hedge funds and private equity firms. 

In its June decision, the New Orleans-based appellate court ruled the SEC had relied upon a law intended to protect everyday investors — not the “highly sophisticated” investors that pour money into private funds. 

The challenge to fee disclosures was filed by several industry groups representing Wall Street firms, including the Managed Funds Association and the American Investment Council. The lead plaintiff is the National Association of Private Funds.

On Wednesday, industry groups lauded the SEC’s decision not to ask the Supreme Court for a review. MFA reiterated its statement cheering the appellate court’s decision to block the rule in June. “The SEC made the right decision,” Drew Maloney, who leads the AIC, which represents private equity firms, said in a statement.

The case is National Association of Fund Managers v. Securities and Exchange Commission, 23-60471, US Fifth Circuit Court of Appeals (New Orleans).