Court Overturns SEC Rule on Private Fund Disclosure

Citing congressional excess, a US appeals court invalidated an SEC regulation regarding fee and expense disclosure for hedge funds and equity firms.

The three-judge panel of the Fifth Circuit Court of Appeals unanimously decided against the SEC on June 5th, according to court documents.

This occurred following the challenge of the rule by six industry groups, who contended that it would significantly alter the sector and increase compliance costs.

Judge Kurt Engelhardt wrote on behalf of the three justices that the SEC “surpassed its statutory authority.” “No portion of the Final Rule may be sustained; it was issued without authorization.”

How the SEC Fund Rule Overreaches Their Authority

The 656-page SEC rule mandated that funds cease providing special treatment to confident investors, release quarterly performance and fee reports, and conduct yearly audits.

The SEC asserted that Congress extended its authority to supervise private funds, citing two Dodd-Frank Act provisions enacted following the 2008 financial crisis.

Nevertheless, Judge Engelhardt rejected these assertions, asserting that “neither section grants the Commission such authority.”

The case is a significant setback to the regulator’s assertion of congressional authority over the sector. In recent years, vocal detractors of the regulator in the crypto industry have also expressed comparable criticism.

Bill Hughes, Senior Counsel at Consensys, stated, “This is the same off-key performance from the SEC that has been the hallmark of these last three-plus years.”

The SEC has contended that numerous cryptocurrencies are securities within its jurisdiction in a series of lawsuits against crypto firms.

Joseph Lubin, the co-founder of Ethereum, criticized the SEC’s strategy, alleging that it prioritizes strategic enforcement actions over encouraging open discourse and establishing explicit regulatory guidelines.

This has resulted in regulatory uncertainty that has caused unease within the cryptocurrency industry, affecting prominent cryptocurrency initiatives and leading exchanges. Additionally, he stated:

“The SEC probably doesn’t want to see a wave of innovation that will really transform the landscape.”

FIT 21 Bill Could Losen the SEC’s Grip on Crypto

Congress may take action against the SEC, which could alter its purported authority over the US crypto industry.

The House enacted the Financial Innovation and Technology for the 21st Century Act (FIT21) with widespread bipartisan support. The Commodity Futures Trading Commission would oversee the crypto industry under the proposed legislation.

Most digital assets would be classified as commodities rather than securities if they were placed under the jurisdiction of the CFTC. This would result in the SEC losing regulatory supervision.

This action is particularly noteworthy in light of the Biden administration’s crypto industry assault, implemented under the SEC’s jurisdiction.

Returning the SEC’s SAB 121, which prohibits banks from holding cryptocurrency, was essential due to President Joe Biden’s veto.

The House and Senate both supported the bipartisan resolution to repeal SAB 121.