A U.S. appeals court has struck down a Securities and Exchange Commission rule aimed at giving investors more transparency into private funds, handing a victory to an industry with nearly $27 trillion in assets.
In a 3-0 decision on Wednesday, the New Orleans-based U.S. 5th Circuit Court of Appeals ruled in favor of six private equity and hedge fund groups, finding that the SEC exceeded its authority when it adopted the rules in August.
An SEC spokesman said the regulator is reviewing the decision and will determine its next steps.
Industry participants applauded the decision, saying the SEC’s rules were overly burdensome and costly and threatened to fundamentally change the way business is done.
“This ruling is a victory for the thousands of businesses across the country that need capital to grow and the millions of workers who rely on private equity and credit to power their retirements,” said Drew Maloney, CEO of the American Investment Council, one of the six groups.
Investor advocacy groups criticized the decision, with Steven Hall, legal director of the nonprofit group Better Markets, calling it a “terrible setback.”
He said the decision denies ordinary Americans with pension funds their right to protection from unfair and opaque practices and weakens the SEC’s ability to protect investors, financial stability, and market integrity.
The 5th Circuit has become a favored court for conservatives and business groups challenging federal regulatory power.
The decision is a new blow to the SEC and Chairman Gary Gensler, as industry groups frequently go to conservative-leaning courts to challenge the rules, which they say are accompanied by unnecessary bureaucracy and compliance costs and expand the SEC’s powers.
Some hedge fund groups are suing the SEC over changes to short-selling disclosure rules and trading practices for U.S. Treasury securities, while business groups are suing the SEC over climate change rules.
“Nothing to do with private funds”
The rule was overturned on Wednesday. Fund Manager Needed Issue quarterly performance and fee reports, conduct annual audits, and stop giving preferential treatment to some investors with regard to redemptions and special access to portfolio holdings.
This applies to private equity funds, hedge funds, venture capital funds, and managers of institutional funds such as pension funds and endowments.
These funds generally attract wealthy, sophisticated investors and therefore enjoy less federal regulatory oversight than investments aimed at the general public.
The SEC said the rules are intended to increase transparency, fairness and accountability in an industry known for its opaqueness.
But opponents say it will ultimately have a negative impact on ordinary investors, who often have indirect exposure to private funds through pension and retirement plans.
Circuit Judge Kurt Engelhardt rejected the SEC’s argument that Congress gave the agency the authority to implement the rules through the 2010 Dodd-Frank Act.
He said the applicable regulations “have nothing to do with private funding.”
Private Fund Assets under management have ballooned to $26.6 trillion The number of private funds is expected to more than triple, to about 101,000, by 2022, up from $9.8 trillion a decade ago, according to the SEC.
