"US Private Funds Ask SEC to Rethink Gensler-Era Rules"

Ladies and gentlemen, buckle up! The private funds industry is in for a wild ride as it asks the SEC to rethink the Gensler-era rules. The landscape has shifted dramatically, and it's time to take a hard look at what's changed and what's next.



The Gensler era brought a tsunami of regulatory changes, aiming to impose a retail-like disclosure and restrictions framework on private funds. The Private Fund Adviser Rules (PFAR) were a cornerstone of this push, but the Fifth Circuit's decision to vacate them in June 2024 was a game-changer. The court's rebuke of the SEC's statutory authority sent shockwaves through the industry, stalling many live proposals and largely halting new rulemaking.

The SEC's enforcement actions in 2024 were relentless, with 583 enforcement actions and $8.2 billion in financial remedies. But with the departure of SEC Enforcement Director Gurbir Grewal and Acting Director Sanjay Wadhwa, the stage is set for a meaningful shift in enforcement strategy in 2025. The new leadership under Paul Atkins is expected to focus on more egregious misconduct, particularly those involving retail investor harm, rather than pursuing technical violations or novel cases.

The climate disclosure rule, finalized in March 2024, is another contentious issue. The rule requires public companies to divulge a host of climate-related information, but it faced nine lawsuits and was voluntarily halted by the SEC pending court rulings. The 8th U.S. Circuit Court of Appeals in St. Louis agreed to hear the lawsuits on a consolidated basis, adding another layer of uncertainty to the regulatory landscape.

The SEC's Division of Examinations has identified the review of investment advisers to private funds as a key priority. But under Atkins, there may be a greater emphasis on compliance examinations that include a substantive review of firms' implementation efforts, marketing materials, client disclosures, and books and records, rather than aggressive enforcement actions.

The nomination of Paul Atkins as the new SEC Chair is expected to bring a more measured approach to regulation and enforcement. The SEC under Atkins is likely to be less inclined to pursue technical violations by private fund managers or aggressively pursue novel cases. This is because of significant court decisions in 2024 that curbed much of the SEC’s private fund rulemaking agenda under Chairman Gary Gensler, and the change in presidential administration, bringing with it a shift in priorities and a change in enforcement approach.

The expectation is that the SEC staff under SEC Chair-nominee Paul Atkins will be less aggressive compared to the staff under his predecessor and instead focused on instances of more egregious misconduct, particularly those involving retail investor harm.



So, what does this mean for private fund managers and investors? The regulatory landscape is in flux, and it's crucial to stay informed and adaptable. The SEC's recent enforcement actions and rulemaking halts have the potential to shape the future of private fund management by influencing regulatory compliance, investor confidence, and the approach to ESG factors. The ongoing legal challenges and leadership changes at the SEC add layers of complexity to this evolving landscape.

In summary, the private funds industry is at a crossroads. The Gensler-era rules have been challenged, and the SEC's enforcement strategy is shifting. It's time for private fund managers to take a hard look at their compliance efforts and for investors to stay vigilant. The future of private fund management is uncertain, but one thing is clear: the industry is in for a wild ride.