A federal appeals court on Wednesday struck down a Securities and Exchange Commission rule aimed at providing investors at hedge funds, private equity funds and venture capital firms more detailed information about fees and expenses.
The U.S. 5th Circuit Court of Appeals in New Orleans unanimously sided with groups representing the private fund industry, who said the SEC exceeded its authority with the rule, which it enacted in August.
In its ruling, the appeals court agreed with their arguments, saying the regulators overstepped their authority under a law designed to protect ordinary investors, who generally invest in mutual funds and other publicly offered securities, rather than investors in hedge funds or private equity firms.
The SEC said in a statement that it is reviewing the decision and will “determine appropriate next steps.”
Hedge funds, private equity firms and venture capital firms manage about $27 trillion in assets for pension funds, universities, charities and wealthy individuals. About a decade ago, large investment funds were required to register with the SEC and receive basic regulatory oversight.
The SEC's August rule imposed new requirements on private fund managers to disclose fees and expenses to investors quarterly and to treat all investors in a fund equally, regardless of their size. The SEC said the goal is to increase uniformity in the information private funds provide to investors.
SEC Chairman Gary Gensler said at the time that the rules would promote transparency and competition in the private fund industry. The SEC adopted the rules on a 3-2 vote, with all Democrats in favor and all Republicans opposed.
Private fund managers opposed the rule, arguing that quarterly disclosures in particular would increase operating costs. Groups representing the private fund industry quickly filed lawsuits challenging the rule.
The appeals court's decision drew criticism from advocates of greater transparency in financial markets.
“The federal securities laws were enacted to ensure that important information is provided to investors, but courts have said the SEC can't do that to private fund investors,” said Tyler Gellasch, president of the Healthy Markets Association.
The ruling could spark further legal action from the private fund industry.
“The court has confirmed that the SEC cannot expand its authority beyond Congress's intent,” said Brian Corbett, president of the Managed Funds Association, one of the trade groups that filed the lawsuit. “Unfortunately, this is just one example of what the SEC is doing.”
The 5th Circuit has become one of the most conservative federal appeals courts in the country. Because of its business-friendly nature, industry groups have increasingly filed lawsuits challenging regulations in federal courts in Texas and Louisiana in the hope of hearing their cases in the appeals court. All three of the appeals court's judges were appointed by Republican presidents.