December 14, 2023 - As we’ve previously noted, the LSTA in early September joined several trade associations in commencing a lawsuit (the “Private Fund Litigation”) against the SEC in connection with its Private Fund Advisers Rule (the “Rule”). We also observed that the 5th Circuit Court of Appeals dealt the SEC a significant blow by ruling in a lawsuit brought by the U.S. Chamber of Commerce (the “Chamber Litigation”) that the SEC violated the Administrative Procedure Act (“APA”) in implementing its Share Repurchase Disclosure Rule (“Share Repurchase Rule”). We predicted then that the decision in the Chamber Litigation would likely have a direct impact on the Private Fund Litigation and recent developments in that case further support our view.

Below we briefly review the decision in the Chamber Lawsuit, describe recent developments, and explain why we continue to believe that the Chamber Litigation could be very impactful on the Private Fund Litigation. 

The 5th Circuit’s Decision in U.S. Chamber of Commerce v. SEC. On October 31st, a unanimous panel of the 5th Circuit ruled that the SEC acted arbitrarily and capriciously in its enactment of its Share Repurchase Rule in violation of the APA when it “failed to respond to petitioners’ comments and failed to conduct a proper cost-benefit analysis.” The Court found that the SEC ignored the petitioners’ comments about the proposed rule’s economic implications. At the SEC’s request, the petitioners submitted three suggestions on the economic effects of the rule but the SEC admitted that they did not consider any of them. Separately, the Court found that the SEC “failed adequately to substantiate the Rules’ benefits and costs.” Specifically, the SEC failed to establish the existence of any genuine problem with share buybacks. The Court remanded the Rule for 30 days, until November 30th, to give the SEC the opportunity to correct the defects (i.e., substantiate the purported benefits).

New Developments in the Chamber Litigation.  On November 22nd, the SEC issued an order postponing the effective date of the Share Buyback Rule pending the resolution of the Chamber Litigation. On the same date, it submitted a motion requesting the court to extend the time to correct the defects in its analysis. The Chamber opposed the motion, and, on November 26th, the Court denied the motion. On December 4th, the SEC’s Office of General Counsel advised the Court that it would not be able to correct the defects in the rule by the deadline.  Most recently, on December 8th, the Chamber submitted a motion (on which the SEC took no position) requesting the Court to vacate the rule.

Given that the SEC did not correct the defects and did not oppose the Chamber’s motion for vacatur, it is very likely that the 5th Circuit will vacate the Share Buyback Rule.

Takeaways from the 5th Circuit decision.  The joint trades assert similar claims to those made by the Chamber. These include a failure by the SEC to substantiate its claims that private fund investors need the “protections” imposed by the Rule and that the SEC substantially changed the Rule without giving the public the opportunity to comment. Although the Private Fund Litigation will be heard by a different 5th Circuit panel, the result in the Chamber Litigation is very encouraging.

Please reach out to Elliot Ganz if you have any questions.

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