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In a blow to the SEC’s alleged authority over the hedge fund sector, a U.S. appeals court struck down a rule requiring hedge funds and private equity firms to be more transparent about their fees and expenses.
The Fifth Circuit Court of Appeals ruled June 5 in a unanimous three-judge panel that the SEC exceeded its statutory authority in enforcing the law.
The court’s ruling came in response to challenges filed by six industry groups that argued the SEC’s 656-page rule would significantly change the sector’s operations and increase compliance costs. The rules mandated quarterly performance and fee reports, annual audits, and the elimination of preferential treatment for certain investors.
Representing the panel, Judge Kurt Engelhardt rejected the SEC’s argument that the Dodd-Frank Act, passed to reform the financial sector after the 2008 financial crisis, expanded its supervisory authority over private funds. I did. Engelhardt emphasized that the two provisions of the law cited by the SEC did not give the commission such authority, saying:
“Promulgation of the final rule was unauthorized and no part of it is effective.”
The court’s decision was echoed by critics of the SEC within the cryptocurrency industry, who have raised similar concerns about the regulator’s authority in recent years. In a series of lawsuits against cryptocurrency companies, the SEC used the Howey test as its legal framework, arguing that many cryptocurrencies qualify as securities under its jurisdiction. But cryptocurrency companies pushed back, arguing that the SEC lacks authority to regulate cryptocurrencies without explicit approval from Congress.
The SEC now faces potential action from Congress that could change the authority it asserts over the U.S. cryptocurrency industry. The Financial Innovation and Technology for the 21st Century Act (FIT21), which would largely transfer authority over the cryptocurrency industry to the Commodity Futures Trading Commission, recently passed the House of Representatives with strong bipartisan support.
Additionally, the SEC narrowly avoided a congressional resolution to repeal Staff Accounting Bulletin (SAB) 121, which would ban banks from owning cryptocurrencies, thanks to President Joe Biden’s veto.
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