A federal appellate court on Wednesday struck down a Securities and Exchange Commission rule intended to provide investors in hedge funds, private equity funds and venture capital firms with more information about fees and expenses.
The unanimous decision from the U.S. Court of Appeals for the Fifth Circuit in New Orleans sided with a group of associations representing the private fund industry in ruling that the S.E.C. exceeded its authority with the rule, which was enacted in August.
In its decision, the appeals court agreed with their argument, saying that the regulator had overstepped with its rule, which was based on a law meant to protect everyday investors, who typically invest in mutual funds and other public securities, rather than investors in hedge fund and private equity firms.
The S.E.C. said in a statement that it was reviewing the decision and would “ determine next steps as appropriate.”
Hedge funds, private equity firms and venture capital firms manage about $27 trillion in customer assets for pension funds, universities, charitable groups and wealthy individuals. About a decade ago, large investment funds were required to register with the S.E.C. and subject themselves to basic regulatory oversight.
The S.E.C.’s August rule created new requirements of private fund managers — to provide investors with quarterly disclosures about fees and expenses and to treat all investors in a fund equally, no matter how big the investor was. The S.E.C. said the goal was to bring more uniformity to the information private funds provide to investors.
The S.E.C. chair, Gary Gensler, said at the time that the rule would promote greater transparency and competition in the private fund industry. The S.E.C. adopted the rule in a 3-2 vote, with all Democratic commissioners in favor and Republican commissioners opposing.
Private fund managers objected to the rule and said the quarterly disclosures, in particular, would increase operating costs. A group of associations representing the private fund industry immediately filed a lawsuit challenging the rule.
The appeals court ruling drew criticism from advocates of greater transparency in financial markets.
“While the federal securities laws were created to ensure investors were provided with essential information, the court is saying the S.E.C. can’t do that for investors in private funds,” said Tyler Gellasch, president of Healthy Markets Association.
The ruling could set the stage for other legal challenges from the private fund business.
“The court affirmed that the S.E.C. cannot expand its authority beyond what Congress intended,” said Bryan Corbett, president of the Managed Funds Association, one of the industry groups that brought the lawsuit. “Unfortunately, this is just one instance of S.E.C.”
The Fifth Circuit has become among the more conservative federal appellate benches in the country. Because of its business-friendly nature, industry groups increasingly have brought lawsuits challenging regulations in federal courts in Texas and Louisiana in the hope of getting a hearing before the appellate court. The three judges on the appellate panel were all appointed by Republican presidents.
