A federal appeals court on Wednesday struck down a Securities and Exchange Commission rule that forced hedge funds to disclose more about their fees to investors and prevented them from allowing some other forms of preferential treatment.
It’s a victory for hedge-fund associations such as the Managed Funds Association, whose members include behemoths Bridgewater, Millennium Management, and Renaissance Technologies. But in a bigger sense, the agency’s loss could portend trouble for a broad part of SEC Chair Gary Gensler’s legacy.
The decision Wednesday concerned a rule the SEC adopted in August that required private funds and advisors to give investors regular account statements, standardized-fee information, and conflict-of-interest disclosures. The rule also prevented funds from giving some investors preferential treatment for redemptions.
Hedge-fund industry groups, including the MFA and the National Association of Private Fund Managers, sued the SEC in the U.S. Fifth Circuit Court of Appeals in New Orleans. The appellate court said that the SEC had exceeded its authority and vacated the rule.
With the loss, the SEC can request an “en banc” hearing in front of the rest of the appellate judges in the Fifth Circuit or for a review from the Supreme Court.
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An SEC spokesperson said the agency is reviewing the decision and will determine next steps.
“Today’s ruling is a significant victory for markets, fund managers, and investors, including pensions, foundations, and endowments,” said Managed Funds Association President Bryan Corbett in a statement. “The court affirmed that the SEC cannot expand its authority beyond what Congress intended.”
The court ruling is likely just a glimpse of the challenges the SEC under Gensler will face as his ambitious regulatory agenda hits a conservative judiciary that’s expressed growing discomfort with how federal agencies are interpreting laws to write new rules. Gensler and other agency heads have said they believe their rules fall within the bounds of the law.
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In addition to the private-fund-advisor rule, hedge-fund groups have sued the SEC over rules that require greater disclosures around short sales, and that could make some funds have to register as Treasury dealers. The U.S. Chamber of Commerce has sued to prevent the SEC from requiring companies to disclose their climate impact. Crypto firms are suing the agency to require it to write new rules to govern digital assets and are fighting the SEC’s allegations that they’re breaking existing rules.
Many of those battles are taking place in the Fifth Circuit, which has a concentration of conservative judges who the funds and other firms think are most likely to rebuff the SEC. The Supreme Court has also lately expressed skepticism that agencies are remaining within the bounds of the law in making rules.
There’s at least some question around whether Gensler will be able to see through any challenges to the Fifth Circuit’s decision and those on the way. If President Donald Trump wins reelection, a new SEC chair could choose not to fight judgments striking down rules passed under Gensler. A Republican SEC could also rewrite rules that do survive.
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Gensler’s managed to push through an agenda that’s won plaudits from investor advocacy groups and ire from much of the investment-management industry. The next few years will be about how much of it survives.
Write to Joe Light at joe.light@barrons.com
