Judge vacates SEC investor protection rule

A U.S. appeals court tossed out a federal rule intended to provide investors more protections and transparency that Wall Street argued would impose undue regulatory burdens and costs.

A cohort of trade associations sued the Securities and Exchange Commission (SEC) last summer over new rules that would require hedge funds and private equity to report quarterly fees and expenses to investors and take on annual audits, among other changes.

The three-judge panel agreed the SEC had “exceeded its statutory authority” and ruled that “no part of [the private funds rule] can stand.”

The industry groups behind the complaint applauded the court’s decision.

“Today’s ruling is a significant victory for markets, fund managers, and investors, including pensions, foundations, and endowments. The court affirmed that the SEC cannot expand its authority beyond what Congress intended,” said Bryan Corbett, president and CEO of the Managed Funds Association (MFA), the trade association representing asset managers including hedge funds.

American Investment Council (AIC) President and CEO Drew Maloney called the ruling “a victory for thousands of businesses across America that need capital to grow and millions of workers who depend on private equity and credit to strengthen their retirements.”

“In rejecting the SEC’s unfounded legal theory, the court has sent Washington regulators a strong message that they cannot bypass Congress when pushing their extreme agenda,” Maloney added.

But financial reform groups were disappointed by the decision to vacate the rule, which they said would provide investors with key protections and transparency.

Stephen Hall, legal director and security specialist at Better Markets, called the decision “a terrible setback on many levels.”

“First and foremost, it will deprive investors in private funds—including everyday Americans with pension funds—of the protections the rule would have provided against unfair and opaque practices,” Hall said.

“Regulations that arm investors such as pension funds with the information they need to invest in private funds are essential to protect the retirement savings of teachers, firefighters, and policemen,” Hall added.

The 5th U.S. Circuit Court of Appeals sided with the trade associations who filed the suit last September: the MFA, AIC, National Association of Private Fund Managers, National Venture Capital Association, Alternative Investment Management Association (AIMA), and Loan Syndications and Trading Association.

AIMA CEO Jack Inglis said the ruling “will spare the private funds industry and investors a lot of unnecessary costs and disruption” and “protect the interests of our members against regulatory overreach and improper rulemaking by the US SEC that would have had severe and adverse impacts on a wide variety of market participants.”

Michael Piwowar, executive vice president of finance at the Milken Institute, told The Hill last summer that the private funds rule was “unprecedented.”

“After the SEC finalized the rule, I said it was an unprecedented and unwise attempt to circumvent a longstanding statutory framework that provides funds with specific exemptions from certain federal securities laws. Today, the court agreed,” Piwowar, a former SEC commissioner and acting chair and Republican chief economist for the Senate Banking Committee, told The Hill Wednesday.

An SEC spokesperson told The Hill that the agency is “reviewing the decision and will determine next steps as appropriate.”

The Wednesday decision is a win for litigious Wall Street firms and trade groups that challenge federal rules they say will increase their compliance costs and burden and eat into their profits.

The Biden administration has released a tranche of new rules this year aimed at big business, including a Federal Trade Commission ban on noncompete agreements and a new Consumer Financial Protection Bureau registry to publicly disclose nonbank companies that have repeatedly violated consumer protection laws. 

President Biden has been fighting negative perceptions about his handling of the economy and inflation to draw a sharp contrast with former President Trump, the presumed Republican presidential nominee, ahead of the 2024 election.

“This is just one instance of SEC overreach as it looks to push through the most aggressive agenda in decades,” Corbett said. “MFA will continue to work constructively with the SEC to help improve its rushed rulemakings, and we remain focused on enabling alternative asset managers to raise capital, invest it, and generate returns for their beneficiaries.”

Hall expressed concern that the decision “will continue to weaken the SEC’s authority and ability to protect investors, financial stability, and the integrity of our markets through its rules.”

“The Fifth Circuit’s ruling is especially troubling because it will only encourage industry to continue its practice of forum shopping, whereby it does everything possible to have the Fifth Circuit hear its challenges to SEC rules,” Hall said.

Updated at 12:20 p.m. EDT.