A recent Fifth Circuit Court of Appeals ruling has dealt a significant blow to the U.S. Securities and Exchange Commission. The court found that the SEC exceeded its authority with its new rules requiring hedge funds and private equity firms to disclose more about their fees and expenses. This decision may impact the SEC’s regulatory approach, especially concerning the crypto industry.
US Appeals Court Decision on SEC Authority
On June 5, 2024, a three-judge panel of the Fifth Circuit Court of Appeals ruled that the SEC’s 2023 regulations on hedge funds and private equity firms were beyond the agency’s congressional authority. These rules, intended to enhance transparency, mandated annual audits and quarterly reports detailing fees, expenses, and performance and prohibited preferential treatment for certain investors.
The Contested SEC Rules for Hedge Funds: What You Should Know
Implemented in August 2023, the SEC’s rules required private funds to:
- Conduct annual audits for each fund
- Issue quarterly reports on fees, expenses, and performance
- Disclose specific fee structures
- Eliminate preferential treatment for some investors
The rules aimed to reduce opacity in the funds’ financial activities but were criticized for overreaching the SEC’s legislative mandate.
The ruling highlights growing tensions between the SEC and various sectors, including the crypto industry, which has faced similar criticisms of regulatory overreach. The decision could influence ongoing debates about the SEC’s jurisdiction, particularly with upcoming congressional actions.
Congressional Response and Crypto Regulations: An Overview
The SEC’s overreach may prompt Congress to reconsider its authority over the crypto industry. Recently, the Financial Innovation and Technology for the 21st Century Act, which would shift regulatory power over crypto to the Commodity Futures Trading Commission, passed the House with bipartisan support. Additionally, a congressional resolution to revoke SAB 121, restricting banks from owning crypto, garnered bipartisan backing but was vetoed by US President Joe Biden.
The Fifth Circuit Court of Appeals’ ruling against the SEC underscores the agency’s challenges in expanding its regulatory scope. As Congress increasingly shows a pro-crypto stance, the SEC may face further limitations on its authority, impacting future regulatory actions in both traditional finance and the crypto sector.
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