United States Court of Appeals Federal regulations were scrapped. While it was intended to provide investors with more protections and transparency, Wall Street argued it imposed excessive regulatory burdens and costs.
Cohort Industry groups file lawsuit Last summer, the Securities and Exchange Commission passed new rules requiring hedge funds and private equity firms to report fees and expenses to investors quarterly and conduct annual audits.
The three-judge panel agreed that the SEC “exceeded its statutory authority” and [the private funds rule] I can stand it.”
Industry groups that filed the lawsuit praised the court’s decision.
“Today’s decision is a major victory for the market, fund managers and investors, including pensions, foundations and endowments. The Court has confirmed that the SEC cannot expand its authority beyond Congress’s intent,” said Brian Corbett, president and CEO of the Managed Funds Association, a trade group that represents asset managers including hedge funds.
Drew Maloney, president and CEO of the American Investment Council (AIC), called the ruling “a victory for thousands of businesses across the country that need capital to grow and for the millions of workers who rely on private equity and credit to power their retirements.”
“By rejecting the SEC’s baseless legal theory, the Court sent a strong message to Washington regulators that they cannot ignore Congress when pursuing extreme policies,” Maloney added.
But financial reform groups were disappointed by the decision to roll back the rules, which they said would provide important protections and transparency for investors.
Steven Hall, legal director and security expert at Better Markets, called the decision “a terrible setback in many ways.”
“First and foremost, this bill would deprive private fund investors, including ordinary Americans with pension plans, of the protections the rule would have given them against unfair and opaque practices,” Hall said.
“Regulation that gives pension funds and other investors the information they need to invest in private funds is essential to protecting the retirement savings of teachers, firefighters and police officers,” Hall added.
The U.S. 5th Circuit Court of Appeals sided with the industry groups that filed the lawsuit last September: MFA, AIC, the National Association of Private Fund Managers, the National Venture Capital Association, the Alternative Investment Management Association (AIMA) and the Loan Syndication and Trading Association.
AIMA CEO Jack Inglis said the ruling would “save the private funds industry and investors from much unnecessary cost and confusion” and “protect our members’ interests from regulatory overreach and inappropriate rulemaking by the SEC, which would have had serious and adverse effects on a wide range of market participants.”
Michael Piwowar, executive vice president of finance at the Milken Institute, told The Hill last summer that private fund regulation would be “unprecedented.”
“After the SEC finalized the rule, I said it was an unprecedented and foolish attempt to circumvent a long-standing statutory framework that gives funds exemptions from certain federal securities laws, and today the court agreed,” Piwowar, a former SEC commissioner, acting chairman of the Senate Banking Committee and chief Republican economist, told The Hill on Wednesday.
An SEC spokesperson told The Hill, “The agency is reviewing this decision and will determine next steps, if necessary.”
Wednesday’s ruling marks a victory for litigious Wall Street companies and industry groups that have challenged the federal rules, saying they would increase compliance costs and burdens and eat into profits.
The Biden administration this year unveiled a series of new rules aimed at large companies, including a Federal Trade Commission ban on non-compete agreements and a new Consumer Financial Protection Bureau registry to publicize nonbank companies that repeatedly violate consumer protection laws.
President Biden has been battling negative perceptions of his handling of the economy and inflation in an attempt to draw a sharp contrast with former President Trump, the presumptive Republican presidential nominee, ahead of the 2024 election.
“This is just one example of the SEC’s abuse of power as it seeks to push through its most aggressive agenda in decades,” Corbett said. “MFA remains focused on working constructively with the SEC to improve the agency’s rushed rulemaking and ensure alternative asset managers can raise capital, invest it, and generate returns for their unitholders.”
Hall expressed concern that the decision “will further weaken the SEC’s authority and ability to protect investors, financial stability, and market integrity through its regulations.”
“The Fifth Circuit’s decision is particularly troubling because it only encourages the industry to continue the practice of so-called forum shopping, which involves using any means possible to get challenges to SEC rules heard by the Fifth Circuit,” Hall said.
Updated at 12:20 PM EDT.
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