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June 26, 2024

Actions in the Federal Courts – Month in Review Newsletter – June 2024

FIFTH CIRCUIT STRIKES DOWN SEC’S PRIVATE FUNDS RULE – National Association of Private Fund Managers v. SEC, No. 23-60471 (5th Cir.) (June 5, 2024). On June 05, 2024, the Fifth Circuit U.S. Court of Appeals delivered a major blow against fairness and transparency by nullifying the SEC’s Private Funds Rule. As we detailed in our comment letter, this important rule would have required private fund advisers to provide basic disclosures to investors regarding fees, fund performance, and other matters.  It also limited unfair advisor activity, such as giving preferential treatment to some investors in the fund. After the SEC adopted the rule, an industry group of private fund managers quickly challenged the rule in court, representing yet another example in a series of industry attacks to preserve their profitable status quo by seeking to nullify rules designed to protect investors and improve our markets.

Without reaching a number of the challengers’ arguments, the Fifth Circuit decided that the SEC lacked statutory authority to issue the rule. As to the general anti-fraud provision, the Fifth Circuit concluded that the SEC failed to adequately state a connection between the rule and fraud. The court also held that another provision on the SEC’s authority to require disclosures was limited strictly to retail investors, not private fund investors.

The Fifth Circuit’s decision is a setback on many levels.  First and foremost, and as Better Markets showed in its amicus brief, it will deprive investors in private funds of the protections the rule, and those investors include pension funds that manage the retirement savings of teachers, firefighters, and policemen.  Moreover, the court’s cramped reading of the SEC’s authority may also lead to the nullification of other rules based on the same statutory provisions.  And finally, the decision will further encourage forum-shopping by industry allies seeking reliably anti-regulatory courts in the Fifth Circuit, as detailed in our fact sheet.

INSURANCE INDUSTRY GROUPS CONTINUE FIGHT TO PROTECT EASY PROFITS AT THE EXPENSE OF THEIR CLIENTS – Federation of Americans for Consumer Choice, Inc. et al v. Department of Labor, No. 6:24-cv-00163, (E.D. Tex.) (May 2, 2024); American Council of Life Insurers v. United States Department of Labor, No. 4:24-cv-00482 (N.D. Tex.).   A group of insurance industry plaintiffs have launched two separate court attacks in Texas courts against the Department of Labor’s (DOL’s) landmark rule that will broaden protections for retirement savers who are losing tens of billions a year at the hands of financial advisers who give bad investment advice to enrich themselves.  So desperate is the insurance industry to protect its huge, easy, and unfair profits from being cut back by the new rule that it is seeking a preliminary injunction to halt any effect of the rule pending the litigation.  The Certified Financial Planner Board of Standards, comprised of financial planners who believe that the highest standards should apply to all financial advisers, is filing an amicus brief to side with the DOL and defend the rule.

FORUM SHOPPING IS ALIVE AND WELL IN THE FIFTH CIRCUIT – U.S. CHAMBER OF COMMERCE v. CFPB, No. 4:24-CV-00213-Y (N.D. TEX.) (Mar. 07, 2024) (Nos. 24-10248 & 24-10266, 5th Cir.).  In this assault on the CFPB’s rule that clamps down on exorbitant credit card junk fees, the Fifth Circuit has once again confirmed that it is a friend of the financial industry, even in the face of shameless forum shopping (which we detail in this report). The Texas district court judge assigned to the case has twice determined that it belongs not in Texas but in the federal court in the District of Columbia.  Yet, for the second time, the Fifth Circuit has yanked it back, claiming that the district court judge abused his discretion in transferring the matter—notwithstanding the obviously stronger connection of the case with D.C.  The Fifth Circuit’s well-deserved reputation for favoring business interests over agencies serving the public interest is once again confirmed.

D.C. DISTRICT COURT WILL SOON DECIDE IMPORANT CASE ON ELECTION GAMBLING –  KALSHIEX, LLC V. CFTC, NO. 1:23CV3257 (D.D.C.). On May 30, the federal district court in D.C. heard oral argument in Kalshi’s bid to offer gambling contracts on the outcome of congressional elections.  It’s difficult to predict outcomes based on oral argument, but clearly the judge is giving the case thorough consideration.  As we argued in our amicus brief filed on March 4, 2024, the CFTC made the right decision in rejecting Kalshi’s application, since if approved, those contracts would undermine the integrity of our federal elections, lead to rampant market manipulation, inflict huge losses on investors, and place the CFTC in the impossible position of policing elections—a responsibility for which the agency has neither the funding nor the expertise.



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