SEC Fund Rule Invalidated by Appeals Court Due to Congressional Overreach
The SEC’s rule on fee and expense disclosure for hedge funds and equity firms was overturned by a US appeals court, citing congressional overreach as the reason. The Fifth Circuit Court of Appeals’ three-judge panel unanimously ruled against the SEC on June 5th, as stated in court documents.
The decision came after six industry groups challenged the rule, arguing that it would increase compliance costs and bring about significant changes to the sector. Judge Kurt Engelhardt, speaking on behalf of the three judges, stated that the SEC had gone beyond its statutory authority. He emphasized that the Final Rule was unauthorized and could not be upheld in any form.
The SEC’s Fund Rule, which spanned 656 pages, mandated funds to disclose quarterly performance and fee reports, undergo yearly audits, and eliminate preferential treatment for certain investors. The SEC justified its actions by claiming that Congress had expanded its oversight role over private funds through two sections of the Dodd-Frank Act passed after the 2008 financial crisis.
However, Judge Engelhardt refuted these claims, stating that neither section conferred such authority to the Commission. This ruling represents a setback for the SEC’s asserted congressional authority over the sector, echoing similar criticisms from critics in the cryptocurrency industry in recent years.
Bill Hughes, Senior Counsel at Consensys, criticized the SEC’s actions, likening them to a recurring theme over the past few years. He highlighted the regulator’s enforcement actions over promoting open dialogue and providing clear regulatory guidelines.
In a series of lawsuits against crypto firms, the SEC has argued that many cryptocurrencies fall under its jurisdiction as securities. Ethereum Co-founder Joseph Lubin condemned the SEC’s approach, accusing it of prioritizing strategic enforcement actions over fostering transparent discussions and offering clear regulatory frameworks.
The uncertain regulatory environment has caused anxiety within the cryptocurrency industry, impacting major exchanges and prominent cryptocurrency projects. Lubin suggested that the proposed FIT21 bill could potentially weaken the SEC’s control over the crypto industry.
The FIT21 bill, which passed the House with bipartisan support, aims to transfer oversight of the crypto industry to the Commodity Futures Trading Commission. This move would classify most digital assets as commodities rather than securities, shifting regulatory oversight away from the SEC.
The significance of this shift is underscored by the Biden administration’s crackdown on the crypto industry under the SEC’s purview. President Joe Biden’s veto played a crucial role in upholding the SEC’s SAB 121, which prohibits banks from holding crypto assets.
The bipartisan effort to overturn SAB 121 gained traction in both the House and Senate, signaling a potential shift in regulatory oversight within the crypto industry.
