Hedge Funds Are Turning to Texas to Take On Gensler and the SEC (1)

The most powerful weapon that hedge funds have against regulators like Securities and Exchange Commission Chair Gary Gensler is no longer white-shoe lawyers or silver-tongued lobbyists. It’s an address in Texas.

The National Association of Private Fund Managers, a little-known group whose main focus appears to be challenging SEC rules, has sat tucked in a Fort Worth law office since its founding in 2022. Its home is 1,500 miles from many hedge fund campuses in leafy Connecticut, and even further from London or Singapore, where its impact is being felt.

But the group’s address at 301 Commerce Street in Texas’s fifth-biggest city is serving a greater purpose. NAPFM, the clunky acronym the association goes by, is giving hedge fund and private equity titans access to what’s quickly become one of the financial world’s most important venues: The 5th US Circuit Court of Appeals in New Orleans.

The 5th US Circuit Court of Appeals in New Orleans.

Photographer: Jonathan Bachman/AP Photo

With a slate of conservative judges, the appellate tribunal in the Big Easy and its feeder district courts in Louisiana, Mississippi and Texas years ago emerged as go-to places for challenging policies on everything from abortion to immigration.

Read More: Shopping for the Judge You Want Honed to Perfection in Texas

In a new twist to that strategy, Wall Street has joined in. During the Biden administration, trade groups like the NAPFM have been sprouting up in the region.

“It’s hard to imagine a friendlier forum for those challenges at this particular moment,” says Steve Vladeck, a law professor at Georgetown University, who has for years followed the appellate court.

Many details about NAPFM like membership or advisers — the normal calling cards of trade and lobbying group influence — are closely guarded. One of the few glimpses came in March court filings when people associated with Millennium Management and HBK Capital Management identified themselves as senior officials with the association.

Unanimous Decision

This month, the 5th Circuit Court delivered a key decision in favor of private funds, and NAPFM played a starring role. Industry stalwarts like the Managed Funds Association, the Alternative Investment Management Association, and the American Investment Council teamed up with NAPFM — and the group’s address — to successfully sue the SEC in New Orleans.

In a unanimous opinion by the court, two Trump appointees and one judge tapped by former President George W. Bush slapped down new restrictions that force hedge funds and private equity firms to detail quarterly fees and more about their expenses to investors.

Read More: SEC Hedge Fund Fee Disclosure Rule Struck Down by US Court

Gary Gensler, chair of the US Securities and Exchange Commission

Photographer: T.J. Kirkpatrick/Bloomberg

Some in the industry are hailing the court’s decision as a blueprint for other challenges. The opinion marks a blow to Gensler’s policymaking as he seeks to implement a sweeping agenda in the face of fierce legal pushback from Wall Street and corporate America.

Decisions by the 5th Circuit Court are generally only binding legal precedent for courts in Louisiana, Texas and Mississippi. However, the opinion vacating the SEC rule will likely have nationwide implications, according to Ashley Parrish, a partner at King & Spalding. He said that unless the agency gets another hearing, or the Supreme Court steps in, the rule will effectively be blocked from taking effect. The judges said the agency had “exceeded its statutory authority” in adopting the regulation.

“Because the promulgation of the Final Rule was unauthorized, no part of it can stand,” the opinion said.

The SEC has yet to say whether it will appeal. In a statement, the SEC said that rules passed during Gensler’s tenure “will enhance competition, efficiency, integrity and resiliency in the US capital markets” and the vast majority have already been implemented or are in the process.

Furthermore, Parrish, the King & Spalding lawyer whose practice focuses on appellate and administrative law, cautioned against putting too much weight on one opinion. “It’s easy to over-read this type of decision and think it might be a signal of one thing or another, but these cases almost always turn on their specific facts and the particular relevant law,” he said.

$600 Billion Membership

Trying to sue in the most sympathetic jurisdiction is a common and accepted aspect of American jurisprudence. The practice, however, requires having a plaintiff with sufficient ties to the place where the case is brought. Generally, lawsuits must be filed in a court district where at least one party is based or has its principal office.

The federal judicial system is divided into 12 geographic circuits, plus the Federal Circuit located in the District of Columbia, with the appeals courts sitting at the top of each region. Cases typically start in lower courts, but those involving rules from government agencies like the SEC can often be challenged directly at the appellate level.

The life of NAPFM officially began in Texas in April 2022, when it registered as a nonprofit, using a Dallas company as its registered agent. The Fort Worth offices of Haynes and Boone, a law firm with deep Texas connections and locations in financial centers around the world, are listed as its business address.

“The association was founded for, among other things, providing education to its members and representing their legal and economic interests before the government and in the courts,” the group says in its page, emblazoned with a photo of the state capitol dome in Austin and American and Texas flags.

The March court filings in the group’s lawsuit against the SEC over its short-selling disclosure rule — different from the case decided this month — identify Simon Lorne, a senior adviser at Millennium and its former chief legal officer, as president of NAPFM. Isaac Haas, general counsel of HBK, is also named as the group’s secretary. Both Millennium and HBK were described as members.

HBK has a Dallas office, but NAPFM has noted in court filings that it filed suit in the 5th Circuit because of the group’s location.

Millennium declined to comment. HBK didn’t respond to requests for comment. Representatives for MFA, AIC, which represents private equity firms, and AIMA declined to comment for this story.

A spokesperson for NAPFM declined to discuss the group’s strategy and reason for choosing Texas. The spokesperson also wouldn’t provide any information about NAPFM’s members or funding, other than reiterating a statement on the group’s website that says it represents firms with more than $600 billion in total net assets under management as of July 2023.

Millennium disclosed net assets under management of $67.5 billion in 2023. HBK filings don’t provide figures for net assets under management, but did disclose managing $20.3 billion in regulatory AUM, which can include leverage and is typically higher than net AUM.

Trump Appointees

There are some liberal-leaning judges on the court, but overall the 5th Circuit Court’s roster includes many skeptics of expansive federal regulation.

Trump boasts the largest share of appointments to the appellate court, having named six of the court’s 17 active judges. Most cases are decided by a three-judge panel from that pool. The make-up each time is somewhat random, but the odds favor getting at least one Trump appointee.

Kurt Engelhardt, one of the three judges on the panel from US 5th Circuit Court that unanimously sided with NAPFM over the SEC on June 5.

Photographer: T.J. Kirkpatrick/Redux

To challenge the SEC’s private funds’ rule, the trade groups hired Eugene Scalia, the son of the late former Supreme Court justice and conservative icon Antonin Scalia, to represent them on the case. The younger Scalia, a partner at Gibson, Dunn & Crutcher and who served in Trump’s cabinet as Labor Secretary, didn’t return requests for comment.

In a recent interview on Bloomberg Television, MFA chief Bryan Corbett said the SEC had pushed the groups into court. “We don’t want to be in this situation, but the regulator has forced us into it,” he said.

Rush to the Courthouse

Even before this month’s opinion, financial firms had been heading to courts in Texas, Louisiana and Mississippi for a crack at a more friendly bench.

A recent study by Harvard Law School professor John Coates found that Wall Street has rushed to the 5th Circuit. Coates, who served as Gensler’s first general counsel at the SEC, says firms are challenging the regulator’s rules in court more often under the chair than his immediate predecessors. He said that, as of February, 80% of those challenges during Gensler’s tenure were in the 5th Circuit.

Source: Analysis by John Coates, professor, Harvard Law School

Several key parts of Gensler’s ambitious agenda at the SEC are already tied up in court.

NAPFM, along with out-of-town groups as co-plaintiffs, is also trying to persuade courts in the circuit to toss out SEC rules forcing hedge funds to disclose short-selling activities and subject high-speed traders to more oversight.

The SEC is also facing a legal challenge at an appellate court in Atlanta over a massive database to keep better tabs on stock trading. Business groups and Republican-led states also forced the SEC to put on ice new rules requiring corporations to disclose more about their pollution, another cornerstone of the chair’s agenda.

Meanwhile, a new trade group for the digital-asset industry, Crypto Freedom Alliance of Texas, is suing over SEC oversight. The Investment Company Institute, a large trade group for money managers, has set up ICI Southwest, which is based in Austin.

The U.S. Chamber of Commerce and banking associations brought a challenge in Texas over the Consumer Financial Protection Bureau’s recent move to cap credit card late fees. The Commodity Futures Trading Commissionhas also been sued in a Texas district court over restrictions on using derivatives to bet on elections.

“This is not the first. It will not be the last,” says Brad Caswell, a lawyer who leads Linklaters’s US financial regulation group in New York. “This is bigger than just this rule.”

(Updates with quote from court opinion in 12th paragraph.)

To contact the authors of this story:
Lydia Beyoud in Washington at lbeyoud2@bloomberg.net

Madlin Mekelburg in Austin at mmekelburg@bloomberg.net

To contact the editor responsible for this story:
Benjamin Bain at bbain2@bloomberg.net

Misyrlena Egkolfopoulou
Stephanie Stoughton

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