Lawyers are noticing that the opaqueness historically enjoyed by private equity firms is slowly being stripped away by the SEC, and they are seeing opportunities for themselves.
With the SEC attempting to enforce new fee disclosure and short-sale reporting rules for private fund advisers to promote transparency, Bloomberg Law survey data shows that securities and transactions lawyers expect these rules will drive an increase in securities legal work.
PE Tops Securities Lawyers’ List of Growth Areas
Bloomberg Law’s most recent State of Practice Survey asked 156 lawyers with experience in securities and transactional law to predict which areas of securities they expect to drive their legal work this year, if any. Of the 100 respondents who said they believe that securities work is going to increase this year, more than half expect private equity legal work will drive that increase.
Survey respondents held this optimistic view despite private equity having a horrible year last year, owing to economic uncertainty and high borrowing costs.
Of the lawyers who said they believe that private equity legal work will increase this year, almost half (48%) said they believe that the increase will occur due to increased inflows to investment funds.
Expecting firms to leverage excess dry powder during hard times is a common prediction. The industry currently has trillions in dry powder — money waiting to be invested — and PE cannot simply let it sit. It must invest those trillions somewhere, sooner or later. This fact is creating optimism among lawyers and members of the industry that PE will bounce back in 2024.
New Rules May Spur Enforcement/Litigation
The SEC’s newly proposed rules are making securities and transactions lawyers believe that enforcement and litigation will be almost as big of an influence on their workloads as inflows to investment funds. More than four out of 10 respondents (41%) said that an increased emphasis on enforcement and litigation by both the SEC and PE firms will be a reason behind the expected growth in legal work for private equity this year.
Since becoming chair of the SEC, Gary Gensler has made it clear that he is standing firm on requiring more disclosures from private funds. This approach has played out as intended: the SEC’s Division of Examinations consistently made private funds a top priority in 2022, 2023, and now 2024. Responses to the SEC’s fee disclosure rule indicate that lawyers and private equity fund managers alike believe that it would be difficult and costly to meet the disclosure requirements due to the rules. But steps to comply with the new rule have already begun throughout the industry. With private equity falling under the purview of private funds, it should be expected that this new important rule for the industry would spur enforcement efforts by the SEC—and lead to an influx of new clients for lawyers.
Legal Challenges to the New Rules
As Gensler has made attempts to tighten the SEC’s grip on private funds, the funds are resisting the squeeze by challenging the new fee disclosure rule in court. Lawyers for the funds argue that the SEC has exceeded its authority with the adoption of these rules.
Securities and transactions lawyers should be paying attention to the outcome of this lawsuit. An adverse ruling by the Fifth Circuit could stop the new rule in that circuit and cloud its future nationwide. At the least, enforcement might be lightened or halted pending resolution of this suit.
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