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Contentious US transparency rules for private equity and hedge funds will be wiped off the books after the Securities and Exchange Commission did not ask for reconsideration of a court decision striking them down.
The Fifth Circuit Court of Appeals ruled in June that the SEC had exceeded its authority when it required private fund managers to disclose more information on earnings, expenses and separate agreements with large investors. The SEC allowed Monday’s deadline for a rehearing to pass.
The SEC could still ask the US Supreme Court to reinstate the rule, but the court’s conservative majority has been highly sceptical of administrative power recently. Outside lawyers said the odds are stacked against a successful appeal.
In the meantime, an important pillar of SEC chair Gary Gensler’s broad regulatory agenda has been removed, even as industry groups line up to oppose other rules, which run the gamut from cyber security to Treasury markets and climate disclosures.
“It’s a huge defeat. It was a signature rulemaking,” said Marc Elovitz, who heads the investment management regulatory group at Schulte, Roth & Zabel. “This decision and the implications of it are a major setback.”
The SEC declined to comment.
Gensler had sought to increase scrutiny of private funds, arguing they should disclose more about their earnings, expenses and side deals with large investors to preserve competition and protect other customers.
But several industry groups filed suit in the Fifth Circuit, which is considered the most conservative in the country, and a three-judge panel rejected the SEC’s plan. The judges also ruled that the regulator had exceeded its statutory authority and strayed too far from its traditional fraud-prevention powers.
“We appreciate the SEC’s acceptance of the court’s decision that the commission exceeded its legal authority,” said Drew Maloney, president and chief executive of the American Investment Council, one of the plaintiffs.
This is the latest in a string of legal setbacks for the SEC. The agency earlier this year paused a new rule that would have required company disclosures on climate risk, after the US Chamber of Commerce, US states and climate groups challenged the measure in court.
The US Supreme Court also rejected the SEC’s use of in-house judges in fraud cases that seek civil penalties in a case where the majority expressed scepticism about the SEC’s use of its powers.
The high court also overturned a legal doctrine known as “Chevron deference”, which for 40 years had given the SEC and other regulators significant latitude in crafting rules. Under the doctrine, courts typically deferred to agencies’ interpretation of ambiguous rules and laws written by Congress.
The new standard handed down last month would have made it that much harder for the SEC to win an appeal, because it gives judges more power to make their own decisions on whether they think agencies such as the SEC have overstepped.
Jiří Król, deputy chief of the Alternative Investment Management Association, another plaintiff, said: “We are pleased the matter is now final as the SEC is not appealing . . . Avoiding a protracted rehearing process provides certainty for in-scope firms.”
