SEC Hedge Fund Fee Disclosure Rule Struck Down by US Court

A federal appeals court overturned the SEC’s rules requiring hedge funds and private equity firms to disclose quarterly fees and expenses to investors, a significant setback for the regulator's push for greater transparency in the private-funds industry according to Bloomberg. On Wednesday, a three judge panel from the US 5th Circuit Court of Appeals in New Orleans ruled in favour of industry groups, stating that the SEC overstepped its authority. Judge Kurt D. Engelhardt wrote that the SEC “exceeded its statutory authority” in adopting the rule.

These regulations were part of SEC Chair Gary Gensler’s initiative to impose stricter oversight on the $26 trillion private funds market, which he argues lacks transparency and poses financial stability risks. Gensler responded, stating, “The staff will take a look” and determine the next steps. The struck-down rule, adopted in August, also prohibited firms from giving certain investors easier cash-out options. Industry groups, including the American Investment Council and the Managed Funds Association (MFA), sued, claiming the rules would “fundamentally change the way private funds are regulated.” They argued that private equity investors are sophisticated and don’t require such oversight.

The MFA celebrated the decision as a “significant victory for markets, fund managers, and investors.” Drew Maloney, head of the American Investment Council, called the decision a “victory” and criticized the SEC’s legal basis as “unfounded.” The appeals court, known for its conservative rulings, also dismissed the SEC’s argument that the rule was needed to prevent fraud, noting the SEC's failure to clearly define the fraudulent practices the rule aimed to prevent.