Appeals Court Strikes Down SEC Fund Rule for Overreaching

Appeals Court Invalidates SEC Rule on Hedge Fund and Equity Firm Disclosure
A recent ruling by a US appeals court has overturned a Securities and Exchange Commission (SEC) rule regarding fee and expense disclosure for hedge funds and equity firms, citing congressional overreach as the reason for the decision. The Fifth Circuit Court of Appeals’ three-judge panel unanimously ruled against the SEC on June 5th, as detailed in court documents.
The ruling came after six industry groups challenged the rule, arguing that it would lead to increased compliance costs and significant changes within the sector. Judge Kurt Engelhardt, speaking on behalf of the three judges, stated that the SEC had exceeded its statutory authority and that the Final Rule could not stand.
The controversial 656-page SEC rule mandated that funds release quarterly performance and fee reports, conduct yearly audits, and cease providing preferential treatment to certain investors. The SEC had argued that Congress had expanded its oversight role to include private funds, citing sections of the Dodd-Frank Act passed in the aftermath of the 2008 financial crisis. However, Judge Engelhardt rejected this argument, asserting that neither section of the Dodd-Frank Act granted the SEC such authority.
The ruling represents a setback for the SEC’s purported congressional authority over the sector. Critics within the cryptocurrency industry have also raised similar concerns in recent years. Bill Hughes, Senior Counsel at Consensys, criticized the SEC’s approach, stating that it has created uncertainty within the industry.
In response to the SEC’s actions, Congress has introduced the Financial Innovation and Technology for the 21st Century Act (FIT21), which has received broad bipartisan support in the House. If enacted, the bill would transfer oversight of the crypto industry from the SEC to the Commodity Futures Trading Commission, potentially categorizing most digital assets as commodities rather than securities. This shift in regulatory oversight would significantly impact the industry, particularly in light of the Biden administration’s crackdown on the crypto sector under the SEC’s jurisdiction.
President Joe Biden’s recent veto played a crucial role in upholding the SEC’s SAB 121, which prohibits banks from holding cryptocurrencies. However, a bipartisan resolution seeking to overturn SAB 121 has gained traction in both the House and Senate, indicating growing support for reforming the regulatory landscape surrounding cryptocurrencies.