A recent ruling by a U.S. appeals court has overturned a Securities and Exchange Commission (SEC) regulation that required hedge funds and private equity firms to disclose more information about their fees and expenses. The court found that the SEC had overstepped its authority in implementing this rule, dealing a blow to the regulator’s control over the sector. This decision has been criticized by those in the crypto industry, who have raised similar concerns in recent years.
On June 5, a three-judge panel of the Fifth Circuit Court of Appeals unanimously rejected the SEC’s rule. Six industry groups had challenged the regulation, arguing that it would lead to higher compliance costs and significant changes in the way 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 rule and that none of it could be upheld.
The rule, spanning 656 pages, mandated that funds provide quarterly reports on their performance and fees, undergo annual audits, and cease providing preferential treatment to certain investors. The SEC had argued that its expanded oversight of private funds was authorized by the Dodd-Frank Act, enacted after the 2008 financial crisis. However, Judge Engelhardt refuted this claim, stating that the referenced sections of the act did not grant the SEC such authority.
In response to the ruling, Consensys senior counsel Bill Hughes criticized the SEC’s actions, likening them to a misguided performance that has been ongoing for the past few years. This legal battle highlights the ongoing debate between the SEC and crypto firms, with the SEC asserting that many cryptocurrencies are securities subject to its regulation, while crypto companies argue that the SEC lacks the necessary authority without explicit approval from Congress.
The SEC is now facing potential legislative action that could alter its control over the U.S. crypto industry. The FIT21 Act, which would transfer oversight of the crypto sector to the Commodity Futures Trading Commission, recently passed the House with broad bipartisan support. Additionally, President Joe Biden’s veto of a resolution that sought to repeal a ruling preventing banks from owning crypto provided a temporary reprieve for the SEC. The resolution had received bipartisan backing in both the House and the Senate.
As the SEC continues to face challenges from the crypto industry, the battle between regulators and crypto legal experts is heating up, reminiscent of Godzilla vs. Kong.