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A 5th Circuit ruling


In August 2023, the Securities and Exchange Commission set out an extensive list of rules for the marketing of private investment funds. These rules covered funds that had, until then, been specifically exempt from SE regulation.  But the SEC was employing new mandates bestowed upon it by (its interpretation of) the Dodd-Frank Act, which in turn was a legislative response to the global financial crises of 2007-09.

Six financial industry trade bodies joined to file a lawsuit to strike the new rules. These bodies included the National Association of Private Fund Managers and the Alternative Investment Management Association.  They made four arguments.  I'll rank them from the most procedural to the most substantive. 

They argued that the new regulation violates the premises of notice-and-comment rule making (in re the final rule was not closely enough related to the original rule, so there had been no proper notice of the final rule); that the SEC is required to produce an adequate cost-benefit analysis of staff proposals, and that in this case it neglected that duty; that the rule exceeds the statutory mandate if the words of the statute are rightly interpreted; and that the resulting rule is arbitrary and capricious. The fourth of those could be interpreted as a constitutional complaint by, given a certain famous Carolene Products footnote, it is unlikely competent litigators would have insisted on that. I gather what the litigators at Gibson, Dunn & Crutcher were saying was that if the court is tempted to agree with the SEC's interpretation of the Dodd-Frank Act, it should consider that the results would be arbitrary and capricious, and then re-interpret the words to avoid that arbitrariness.     

On June 5, 2024, in National Ass'n of Private Fund Managers v. SEC, a three-judge panel of the fifth circuit held in favor of the petitioners. It ruled on the basis of the third of those arguments as I have listed them, saying that the private funds should remain unregulated by virtue of the plain meaning of the statutory words.

The decision in NAPFM may well be appealed, either directly to the Supreme Court or, first, to the whole of the fifth circuit en banc.

The Judge who authored the opinion, Kurt D. Engelhardt, (above) simply ignored the other arguments and went right to the statutory text. There is much more that might be said about his decision, and that I have said in my professional capacity, but I won't repeat that here and now. For now I will only observe that the other two judges (joining with Engelhardt as a unanimous panel) were: Leslie Southwick and Cory Wilson.

Engelhardt and Wilson are both Trump nominees. Southwick is the senior of the three, and a nominee of the second President Bush. I'm too lazy right now to look up the biographies of every judge on the fifth circuit court of appeals. But I think it reasonable to suppose that if the SEC appeals they will get a judge or two en banc who was a nominee of Obama or even Biden.

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