The U.S. 5th Circuit Court of Appeals heard oral arguments Monday in National Association of Fund Managers v. Securities and Exchange Commission, which challenges the SEC’s private fund advisers rule, finalized in August 2023.

Three judges heard oral arguments in New Orleans on Monday from the SEC and from the plaintiffs, a group led by the National Association of Private Fund Managers that also includes the American Investment Council and Managed Funds Association, according to court documents.

According to those present and to news reports from the courtroom, the judges asked pointed questions that cast doubt on whether the SEC has the authority to regulate private funds. They also suggested that the fast-growing private funds market is a sign of success, not that it requires sweeping regulation. Reports also noted, however, that one judge did not think the plaintiff’s arguments were strong enough to throw out the entire rule, only parts.

The SEC’s rule, which had received widespread industry pushback, requires private fund advisers to give their clients quarterly statements on the performance of the fund, as well as its fees and other expenses, and obtain an annual audit for every fund they advise. Advisers must also provide a valuation and fairness opinion for adviser-led sales of holdings in the private fund. Advisers are also forbidden under the rule “from providing investors with preferential treatment regarding redemptions and information if such treatment would have a material, negative effect on other investors.”

Lastly, advisers may not pass on expenses incurred as a result of regulatory or judicial sanction for a violation of the Advisers Act and can only pass on investigation-related expenses if their clients consent to it.

A coalition of trade groups led by the National Association of Fund Managers filed a petition for review with the 5th Circuit in September 2023. The groups argued that “the new rules would fundamentally change the way private funds are regulated in America.” The petition describes the rule as arbitrary and capricious and states that it exceeded the SEC’s statutory authority to regulate private funds, which are typically invested in only by sophisticated and deep-pocketed investors who do not require the same disclosures as retail investors.

The U.S. Chamber of Commerce, a business advocacy group, filed an amicus brief in November which argued that the SEC has effectively “claimed the authority to erase the fundamental distinction between public and private funds” and is acting beyond its authority under the Investment Company Act and Advisers Act.

The 5th Circuit hears appeals from cases in Louisiana, Mississippi and Texas. In the petition, the trade groups wrote that the venue for the review was appropriate because at least one petitioner has a “‘principal office or place of business’” in the circuit. The judges assigned to the case are all Republican appointees: Circuit Judge Leslie Southwick was appointed by President George W. Bush, and Circuit Judges Kurt Engelhardt and Cory Wilson were appointed by President Donald Trump.