A U.S. appeals court has overturned an SEC rule mandating fee and expense disclosures for hedge funds and equity firms, citing an overreach of congressional authority.
On June 5th, a three-judge panel from the Fifth Circuit Court of Appeals unanimously ruled against the SEC. The decision followed challenges from six industry groups who argued the rule would significantly increase compliance costs and alter the sector’s dynamics.
Judge Kurt Engelhardt, writing on behalf of the panel, stated, “The SEC exceeded its statutory authority. The promulgation of the Final Rule was unauthorized, no part of it can stand.”
How the SEC Fund Rule Overreaches Their Authority
The SEC’s 656-page rule required funds to issue quarterly performance and fee reports, conduct annual audits, and eliminate preferential treatment for certain investors.
The SEC justified its rule by citing expanded oversight authority granted by two sections of the Dodd-Frank Act, enacted after the 2008 financial crisis. However, Judge Engelhardt dismissed these claims, asserting that “neither section grants the Commission such authority.”
This ruling represents a significant setback to the SEC’s claimed authority over the sector. Critics from the cryptocurrency industry have also voiced similar concerns about the SEC’s overreach in recent years.
Consensys Senior Counsel Bill Hughes commented, “This is the same off-key performance from the SEC that has been the hallmark of these last three-plus years.”
The SEC has maintained that many cryptocurrencies fall under its jurisdiction as securities, a position contested by industry leaders. Ethereum Co-founder Joseph Lubin criticized the SEC’s enforcement-driven approach, arguing it stifles innovation by creating regulatory uncertainty.
FIT 21 Bill Could Loosen the SEC’s Grip on Crypto
The SEC now faces potential legislative action that could redefine its authority over the U.S. crypto industry. The Financial Innovation and Technology for the 21st Century Act (FIT21), which recently passed the House with broad bipartisan support, proposes transferring oversight of the crypto industry to the Commodity Futures Trading Commission (CFTC).
Under this bill, most digital assets would be categorized as commodities, placing them under the CFTC’s jurisdiction and reducing the SEC’s regulatory reach.
This legislative move is particularly significant given the Biden administration’s crackdown on the crypto industry, led by the SEC. President Joe Biden’s veto was crucial in maintaining the SEC’s Staff Accounting Bulletin 121 (SAB 121), which prohibits banks from holding crypto. Despite this, bipartisan support for striking down SAB 121 has emerged in both the House and Senate.
