Federal Judge Reed O’Connor struck down an SEC regulation requiring certain companies, including hedge funds, to register as dealers in the U.S. Government securities market.
He claimed that the SEC had exceeded its authority, concurring with hedge funds that the regulation was too broad and could harm liquidity.
SEC Dealer Regulation Rejected: A Blow to Gensler’s Regulatory Plan
The SEC introduced the rule in February to increase oversight of hedge funds and high-speed traders in the stock market. The regulator argues that the move is important to ensure these firms face the same scrutiny as traditional traders.
Two Cryptocurrency organizations, the Crypto Freedom Alliance of Texas (CFAT) and the Blockchain Association, challenged the regulation, arguing that the SEC regulation expanded its authority beyond the intent of Congress. Judge O’Connor agreed, declaring that the regulation was inconsistent with the Securities Act of 1934.
The Fund Management Association (MFA) has also objected to the regulation, calling it vague and onerous. They argue that compliance would impose high costs, create legal uncertainty, and discourage companies from trading in the stock market.
“The current regulations essentially eliminate the distinction between ‘trader’ and ‘dealer’ as they have been defined for nearly 100 years. The Court refused to allow a broad expansion of the Exchange Act through this regulation,” O’Connor write in the judgment.
The ruling highlights longstanding criticism of the SEC under the leadership of Chairman Gary Gensler, who has long faced accusations of abuse of regulatory power. President-elect Donald Trump has pledged to replace Gensler and create a cryptocurrency regulatory commission in his first 100 days.
In response, Gensler announced his resignation, scheduled for January 2025. The ruling deals another blow to the SEC’s current regulatory agenda.
On the contrary, this decision marks a joyous victory for the Cryptocurrency industry. Groups such as CFAT and Blockchain Association see this as a necessary measure to control abuse of regulatory power. Hedge fund advocates will also celebrate the result as a victory for liquidity and free trading in the markets.
The SEC can still appeal to the U.S. Court of Appeals for the 5th Circuit, but has not announced anything about its plans. Given the court’s history of striking down SEC initiatives, the likelihood of a successful appeal is unclear.