Federal Court Reverses SEC Regulations Regarding Disclosure of Fees in Private Funds

A recent ruling by the US Fifth Circuit Court of Appeals in New Orleans nullified the SEC’s regulations requiring disclosure of quarterly fees and expenses by hedge funds and private equity firms. This decision represents a significant setback for the Securities and Exchange Commission, which has been advocating for increased transparency in the private funds sector.

Court Rejects SEC Rules on Private Funds

Industry groups successfully argued that the SEC had overstepped its regulatory boundaries. Shortly after the rules were implemented in August, organizations such as the American Investment Council and the Managed Funds Association filed a lawsuit, contending that these regulations would fundamentally change the oversight of private funds in the US. They claimed that the sophisticated nature of private equity investors rendered the imposed rules redundant. Additionally, these groups stated that these investors would be hesitant to invest in a sector they believed required extensive government intervention.

The ruling also underscored the ongoing conflict between regulatory initiatives and industry norms. The judges, two appointed by former President Donald Trump and one by George W. Bush, supported the view that the 2010 Dodd-Frank Act did not justify the SEC’s expansive approach. Eugene Scalia, former Labor Secretary in the Trump administration and son of the late Supreme Court Justice Antonin Scalia, represented the industry groups and emphasized the importance of regulatory restraint in markets driven by well-informed investors.

Ripple and Debt Box Cases Impact Regulation

This legal verdict adds to a string of challenges faced by the SEC. Recently, the agency encountered difficulties in the Debt Box lawsuit, where a US district court rebuked the SEC for what it termed an egregious abuse of power. This follows another setback in the ongoing Ripple Vs. SEC case, where Judge Analisa Torres ruled that XRP, the cryptocurrency under scrutiny, does not fulfill the criteria of an investment contract, thus not qualifying as a security.

These legal defeats indicate a broader scrutiny of the SEC’s tactics under Chair Gary Gensler, whose tenure has been characterized by a proactive regulatory stance towards private funds and other sectors. The agency had not provided comment on the recent court decision at the time of publication. Nonetheless, it had previously defended its regulations as a balanced and essential measure in safeguarding investors and ensuring equitable market practices.

Also Read: SEC Chair Gensler Hints at Slower S-1 Approval for Ethereum ETFs