A recent ruling by a United States appeals court has overturned a Securities and Exchange Commission regulation that required hedge funds and private equity firms to disclose more information about their fees and expenses. The court determined that the SEC had overstepped its authority in implementing this rule, dealing a blow to the regulator’s control over the industry.
Critics within the crypto industry have long been vocal about the SEC’s perceived overreach, and this decision further highlights their concerns. The Fifth Circuit Court of Appeals’ panel of three judges unanimously sided against the SEC on June 5th. Various industry groups had challenged the rule, arguing that it would be costly to comply with and would fundamentally alter how the sector operates.
Judge Kurt Engelhardt, speaking on behalf of the panel, stated that the SEC had gone beyond its legal authority in issuing the 656-page rule. This rule mandated that funds provide quarterly reports on performance and fees, undergo annual audits, and eliminate preferential treatment for certain investors.
The SEC had justified its actions by citing the Dodd-Frank Act, passed in response to the 2008 financial crisis, as granting it expanded oversight over private funds. However, Judge Engelhardt refuted this argument, stating that the Commission did not have the authority it claimed.
The SEC’s clash with the crypto industry has further escalated, with the regulator asserting that many cryptocurrencies are securities under its jurisdiction, using the Howey test to define them. In response, crypto firms have pushed back, arguing that the SEC lacks the explicit congressional approval needed to regulate their sector.
Congress is now considering potential legislation that could alter the SEC’s authority over the U.S. crypto industry. Additionally, the House recently passed the Financial Innovation and Technology for the 21st Century Act (FIT21), which would shift regulatory power over the crypto industry to the Commodity Futures Trading Commission.
The SEC narrowly avoided a setback when President Joe Biden vetoed a resolution seeking to repeal its Staff Accounting Bulletin (SAB) 121, which restricted banks from owning crypto assets. The resolution garnered bipartisan support in both chambers of Congress, highlighting the ongoing battle between the SEC and the crypto industry.