SEC Fund Rule Struck Down by Appeals Court For Overreach

A US appeals court overturned an SEC rule on fee and expense disclosure for hedge funds and equity firms, citing congressional overreach.

On June 5th, the Fifth Circuit Court of Appeals’ three-judge panel unanimously ruled against the SEC, according to court documents.

This came after six industry groups challenged the rule, arguing it would raise compliance costs and drastically change the sector.

The SEC “exceeded its statutory authority,” Judge Kurt Engelhardt wrote on behalf of the three judges. “The promulgation of the Final Rule was unauthorized, no part of it can stand.”

How the SEC Fund Rule Overreaches Their Authority

The 656-page SEC rule required funds to release quarterly performance and fee reports, conduct yearly audits, and stop giving special treatment to some investors.

The SEC claimed Congress expanded its role to oversee private funds, citing two sections of the Dodd-Frank Act passed after the 2008 financial crisis.

However, Judge Engelhardt shot down these claims, saying “neither section grants the Commission such authority.”

The case represents a blow to the regulator’s claimed congressional authority over the sector. Vocal critics of the regulator in the crypto industry have also floated similar criticism over the last few 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 loses in court again, and another rulemaking is vacated.

The question presented was whether the SEC had the authority from Congress under an existing statute to make the rule directed at private funds advisors. The court found that, no, it did not.

The court found… pic.twitter.com/R6D3eAgxmk

— Bill Hughes : wchughes.eth 🦊 (@BillHughesDC) June 5, 2024

In a wave of lawsuits against crypto firms, the SEC has argued many cryptocurrencies are securities under its jurisdiction.

Ethereum Co-founder Joseph Lubin criticized the SEC’s approach, alleging it favors strategic enforcement actions over fostering open discourse and providing clear regulatory guidelines.

This has created unease within the cryptocurrency industry due to regulatory uncertainty, affecting leading exchanges and prominent cryptocurrency projects. He added:

“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

The SEC is now facing possible action from Congress that could change its claimed authority over the US crypto industry.

The Financial Innovation and Technology for the 21st Century Act (FIT21), passed the House with broad bipartisan support. The bill would see oversight of the crypto industry transferred to the Commodity Futures Trading Commission.

Placing most digital assets under the jurisdiction of the CFTC would categorize them as commodities instead of securities. This would shift regulatory oversight away from the SEC.

This move is significant, especially given the Biden administration’s crypto industry crackdown initiated under the SEC’s purview.

President Joe Biden’s veto was crucial in retaining the SEC’s SAB 121, which bars banks from holding crypto.

The bipartisan resolution to strike down SAB 121 garnered support in both the House and Senate.