The US Fifth Circuit Court of Appeals has struck down SEC rules requiring hedge fund fee disclosure.
The US Fifth Circuit Court of Appeals has struck down the Securities and Exchange Commission’s (SEC) rules that required hedge funds and private equity firms to provide detailed quarterly information on fees and expenses to their investors. The court delivered its unanimous decision on Wednesday, siding with private funds industry representatives who contended that the SEC had exceeded its regulatory authority.
The controversial rules, adopted by the SEC in August, also included provisions to prevent firms from giving certain investors preferential treatment regarding cash withdrawals. The intent behind the SEC's regulations, under the leadership of Chair Gary Gensler, was to introduce greater transparency within the private funds sector, which is characterized by a complex structure of fees.
Groups such as the American Investment Council and the Managed Funds Association, which filed a lawsuit shortly after the rules were implemented, argued that the regulations would "fundamentally change the way private funds are regulated in America." The industry representatives asserted that the sophisticated nature of private equity investors obviated the need for what they viewed as a governmental overhaul.
The SEC defended the rules by citing the 2010 Dodd-Frank Act as a basis for their authority and described its regulations as "a flexible and measured approach to resolve problems affecting investors and their stakeholders." However, the court, which included two judges appointed by former President Donald Trump and one by George W. Bush, disagreed with the SEC's position.
Eugene Scalia, a former Trump administration Labor Secretary and son of the late Supreme Court Justice Antonin Scalia, represented the industry groups in the case known as National Association of Fund Managers v. Securities and Exchange Commission. The SEC has not responded immediately to the ruling but has indicated that it is reviewing the decision to "determine next steps as appropriate."
As it stands, the court's ruling represents a significant setback for the SEC's efforts to regulate the private funds industry more closely, which manages approximately $27 trillion in assets for various investors, including pension funds, universities, and wealthy individuals. The future implications of this ruling may include potential adjustments by the SEC or further legal challenges as the regulator considers its next steps.
