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US private funds urge regulator to scrap other rules following appeals court victory

Published 07/09/2024, 06:20 PM
Updated 07/09/2024, 06:26 PM
© Reuters. FILE PHOTO: The seal of the U.S. Securities and Exchange Commission is seen at its headquarters in Washington, D.C., U.S., May 12, 2021. REUTERS/Andrew Kelly/File Photo

By Carolina Mandl

NEW YORK (Reuters) - Private fund groups asked the Securities and Exchange Commission on Tuesday to withdraw three proposed rules aimed at investment advisers after a U.S. appeals court last month said the agency did not have the authority to oversee the sector.

The Managed Funds Association and five other groups said the SEC should scrap its proposed rules on artificial intelligence, cybersecurity and outsourcing in light of the decision by the New Orleans-based 5th U.S. Circuit Court of Appeals last month vacating an SEC rule that imposed more transparency on private funds' fees.

That decision found that two key sections of the Investment Advisers Act had not granted the SEC the rulemaking authority over private fund advisers and their investors, as it had asserted, according to the groups and other legal experts.

"We respectfully urge the Commission to withdraw the proposed rules given the limits of its authority," the trade groups said in a letter that was filed as a formal comment on the rules.

Tuesday's letter highlights the potentially far-reaching implications of the appeals court's decision on the authority of the SEC which is under a broader legal assault by corporate groups. The agency's enforcement and rule-writing powers were also undermined by two recent Supreme Court rulings, lawyers said.

A spokesperson for the SEC declined to comment on the letter, but said in a statement that the regulator "will review all comments," adding it "benefits from robust engagement from the public."

© Reuters. FILE PHOTO: The seal of the U.S. Securities and Exchange Commission is seen at its headquarters in Washington, D.C., U.S., May 12, 2021. REUTERS/Andrew Kelly/File Photo

The SEC has proposed three rules related to funds' use of technology. The predictive data analytics proposal aims to address conflicts of interest when advisers use AI to predict or direct investment-related behaviors or outcomes, while the outsourcing rule would ban advisers from outsourcing certain investment services.

The third rule will require advisers and funds to adopt and implement written cybersecurity policies and procedures designed to address cybersecurity risks.

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