SEC’s Authority Diminished: Major Win for Hedge Funds and Private Equity Firms

• The Fifth Circuit Court of Appeals ruled that the SEC overstepped its authority in mandating hedge fund transparency rules.
• The SEC’s rule required hedge funds to provide quarterly performance reports, annual audits, and eliminate preferential treatment.
• The court’s decision could influence the SEC’s regulatory approach towards the cryptocurrency industry and future legislative actions.

A US appeals court has overturned a Securities and Exchange Commission (SEC) rule mandating hedge funds and private equity firms to increase fee and expense transparency.

A three-judge panel of the Fifth Circuit Court of Appeals rendered this landmark decision on June 5, finding that the SEC had overreached its jurisdiction. Six business groups had challenged the SEC rule, which led to the court’s decision. They contended that the rule would raise compliance costs and completely change the manner in which the industry operated.

The regulation required annual audits, quarterly performance and fee reports, and the removal of exclusive privileges to certain investors. SEC’s argument that the Dodd-Frank Act significantly expanded its power was dismissed by panel Judge Kurt Engelhardt.

Engelhardt stated that the Commission did not have the authority it claimed from the two Dodd-Frank Act sections that the SEC had cited. The unanimous ruling by the court represents a severe setback to the SEC’s ability to regulate the hedge fund and private equity sectors.

The Fifth Circuit Court of Appeals’ ruling to reverse the SEC’s transparency rule for private equity firms and hedge funds is a significant setback for the SEC’s regulatory power. The SEC may now have to deal with legislative battles that could change the way it regulates businesses, especially those in the crypto industry.

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Recently, the Financial Innovation and Technology for the 21st Century Act (FIT21), which seeks to give the Commodity Futures Trading Commission (CFTC) regulatory authority over cryptocurrencies, passed the House with bipartisan support. This legislation may have a major impact on the SEC’s role in the cryptocurrency market.

The ruling will have a significant impact on the SEC’s ability to regulate, especially in the dynamic cryptocurrency market, and on the hedge fund industry in particular. The SEC’s role in financial regulation may change significantly as Congress continues to debate and approve laws like FIT21.

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