In a recent decision, a United States appeals court has overturned a Securities and Exchange Commission (SEC) rule that required hedge funds and private equity firms to disclose more information about their fees and expenses. The court determined that the SEC had overstepped its authority in implementing this rule, dealing a blow to the regulator’s control over the sector.
Critics, particularly in the crypto industry, have long voiced concerns about the SEC’s reach and its attempts to regulate the market. The Fifth Circuit Court of Appeals, through a unanimous ruling by a three-judge panel on June 5, sided against the SEC. Six industry groups had challenged the rule, arguing that it would lead to higher compliance costs and significant changes in how the sector operates.
Judge Kurt Engelhardt, on behalf of the panel, stated that the SEC had gone beyond its legal authority in creating the 656-page rule. This rule required funds to provide quarterly reports on performance and fees, undergo yearly audits, and eliminate preferential treatment for select investors.
The SEC had cited sections of the Dodd-Frank Act as the basis for its expanded oversight of private funds, following the 2008 financial crisis. However, Judge Engelhardt refuted this claim, asserting that the Commission did not have the authority it believed it had.
Bill Hughes, a senior counsel at Consensys, echoed the sentiment that the SEC’s actions have been questionable, especially in light of its recent clash with the crypto industry. The SEC has been attempting to classify many cryptocurrencies as securities under the Howey test, a move that has been met with resistance from crypto firms arguing that the SEC lacks the necessary authority without explicit congressional approval.
The SEC now faces potential congressional action that could alter its authority over the U.S. crypto industry. The Financial Innovation and Technology for the 21st Century Act (FIT21), which would shift regulatory power over the crypto industry to the Commodity Futures Trading Commission, has already passed the House with bipartisan support.
Additionally, President Joe Biden’s veto of a resolution aimed at repealing the SEC’s Staff Accounting Bulletin (SAB) 121, a ruling preventing banks from owning crypto, has kept the SEC’s authority intact. The bipartisan support for striking down SAB 121 in Congress indicates a growing concern over the SEC’s regulatory reach.
As the SEC continues to face legal challenges from the crypto industry, the battle between regulators and innovators shows no sign of slowing down.