Category: Capital & Credit

US Appeals Court Vacates SEC’s Private Fund Rule

Posted on by Trey Jackson
Securities and Exchange Commission building

The Fifth Circuit Court of Appeals in New Orleans ruled in favor of six private equity and hedge fund groups, finding that the Securities and Exchange Commission (SEC) exceeded its authority by adopting the Private Fund Adviser rule in August 2023. (WSJ, June 5)

Court Ruling

  • The appellate panel stated in a 25-page opinion that the SEC had exceeded its authority by implementing the rule changes in a 3-0 decision.
  • The rules adopted by the SEC required fund managers to submit quarterly reports detailing performance, compensation, and other fees. They also restricted the ability of fund managers to provide more favorable terms or information access to investors. (WSJ, June 5)
  • The rule applied to private equity funds, hedge funds, venture capital funds, and fund managers for institutional investors.
  • The industry groups challenging the SEC rule argued it was burdensome and would harm investors by suppressing capital formation and make it harder for smaller advisers to compete. (CNBC, June 6)
  • The panel noted that the Dodd-Frank Act section used by the SEC to justify it “has nothing to do with private funds.” (Politico, June 6)
  • A spokeswoman said that the SEC is reviewing the decision and will determine its next steps. (Reuters, June 5)

Roundtable Advocacy

  • Since March 2022, The Roundtable has consistently advocated that the addition of reporting requirements presents significant compliance and operational challenges for private real estate fund sponsors with no added benefit to investors.
  • While we support efforts to protect investors and monitor risk, we believe these proposals are unnecessary and would curb the entrepreneurialism, flexibility, and investment returns that make real estate private equity an increasingly attractive option for investors. (April 2022 Comment Letter)
  • The Roundtable’s April 2022 letter stated, “As the real estate investment fund industry is required to bear more regulatory burdens and demands, the risk is that capital formation will be unduly hindered. We are therefore concerned that the Proposal, if finalized, could hinder real estate capital formation, the development and improvement of real properties, essential economic activity and jobs.”

The Roundtable’s Real Estate Capital Policy Advisory Committee (RECPAC) will continue to monitor and respond to the SEC’s various proposed regulatory initiatives with its industry and coalition partners.

FSOC Sees CRE Among Risks to U.S. Economy in 2024

Posted on by Trey Jackson

Last week, the Financial Stability Oversight Council (FSOC) released its 2023 Annual Report, identifying commercial real estate among the major financial risks to the U.S. economy in 2024. (FSOC 2023 Annual Report).

Report Findings

  • Developed by the FSOC, the report reviews financial market developments, describes emerging threats to U.S. financial stability, identifies vulnerabilities in the financial system, and makes recommendations to mitigate threats and vulnerabilities.
  • Citing the almost $6 trillion of commercial real estate loans outstanding in the second quarter of 2023, roughly half of which are held by U.S. banks, the report raises concerns about  â€śa substantial volume” of these loans that are set to mature in the next few years. (Marketwatch, Dec. 14)
  • The report states, “Elevated interest rates, high costs, and potential structural changes in demand for CRE have heightened concerns about CRE. Maturing loans and expiring leases amid weak demand for office space have the potential to strain office sector conditions further, which could cause stress to spread beyond this segment of the CRE market.”
  • The report also cites the July 2023 policy statement by the banking agencies on Prudent Commercial Real Estate Loan Accommodations and Workouts, as requested in the Roundtable’s March comment letter, and notes that accommodations and workouts are often in the best interest of borrowers and lenders.
  • The FSOC recommends that supervisors, financial institutions, and investors continue to monitor CRE exposures and concentrations closely and track market conditions. (U.S. Department of Treasury Press Release, Dec. 14)

Looking Ahead

  • In the op-ed, Rodgers stated, “To help rebalance these maturing loans, it is important to advance measures that will encourage additional capital formation. To that end, it is essential to bring more foreign capital into U.S. real estate by lifting legal barriers to investment, as well as to repeal or reform the archaic Foreign Investment in Real Property Tax Act (FIRPTA). Importantly, policymakers must not hike the tax rate on capital gains, end carried interest, or alter the 1031 like-kind exchange provisions.” (ULI Op-ed Dec. 18)
  • The paper also cited that around one-third of all loans, and the majority of office loans, may encounter substantial cash flow problems and refinancing challenges.
  • RER board member Scott Rechler (RXR) was quoted in the Wall Street Journal this week discussing the outlook for 2024. “In 2024, it’s game time. Owners and lenders are going to have to come to terms as to where values are, where debt needs to be, and right-sizing capital structures for these buildings to be successful.”

The Roundtable’s Real Estate Capital Policy Advisory Committee (RECPAC) will discuss many of these issues at our State of the Industry Meeting on January 23, 2024.

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