The United States Court of Appeals has held that the SEC exceeded its authority under the Fund Act.

A U.S. appeals court has struck down a Securities and Exchange Commission rule requiring hedge funds and private equity firms to be more transparent about their fees and expenses, saying it exceeded Congress' authority.

The case challenged the regulator's congressional authority over the sector. Vocal critics of regulators in the crypto industry have also raised similar criticisms over the past few years.

A three-judge panel of the Fifth Circuit Court of Appeals ruled unanimously on June 5 against the SEC. Six industry groups opposed the August rule, which would increase compliance costs and dramatically change how the sector operates.

The SEC “exceeded its statutory authority,” Judge Kurt Engelhart wrote on behalf of the three judges. “The announcement of the last act was unauthorized, no part of it could stand.”

The 656-page rule would require funds to release quarterly performance and payout reports, conduct annual audits and end special treatment for some investors.

The SEC said Congress expanded its role in overseeing private funds through the Dodd-Frank Act to reform the financial sector after the 2008 financial crisis.

But Judge Englehart shot down two cited sections of the act that the industry used to destabilize the sector, saying “neither section gives the commission such authority.”

Consensus Senior Counsel Bill Hughes wrote in X, sharing the decision: “This is a hallmark of the past three-plus years of off-key performance from the SEC.”

In a wave of lawsuits against crypto companies, the SEC has argued that many cryptocurrencies are securities, using a legal framework known as the Howey test.

Crypto organizations have fired back, arguing that the SEC lacks the authority to regulate crypto without express congressional authorization.

The SEC is now facing potential action from Congress that could change its authority over the US crypto industry.

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The Financial Innovation and Technology for the 21st Century Act (FIT21), which essentially hands over jurisdiction over the crypto industry to the Commodity Futures Trading Commission, passed the House with a broad bipartisan vote.

The SEC was saved by President Joe Biden's veto overriding Staff Accounting Bulletin (SAB) 121, which prohibited banks from owning crypto.

Congress's decision to strike down SAB 121 received bipartisan support in both the House and Senate.

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