NEW YORK — A cornerstone of SEC Chair Gary Gensler’s agenda was toppled on Wednesday after the New Orleans-based Fifth Circuit Court of Appeals struck down a landmark package of investor protection rules for the $30 trillion private assets industry. It was another major victory for investment firms that have avoided the same level of regulatory scrutiny that applies to banks or retail investment funds. Gensler’s plan to extend the SEC’s reach into that market, which includes most private equity firms and hedge funds, was the biggest swing that any chair had taken at the industry. All told, it was quite the gambit. Private equity firms and hedge funds have lots of friends on both sides of the aisle on Capitol Hill. In addition to the $100 million-plus that PE firms and their executives have spent on political contributions in the current cycle, they also usually spend about $20 million a year on lobbyists, according to OpenSecrets. Hedge funds have contributed around $145 million in 2023 and 2024. It’s no surprise then what happens when a policymaker proposes something the industry doesn’t like, such as raising taxes on its investment profits (a.k.a. carried interest). The rules, which were finalized last year, would have forced investment firms to disclose the fees and expenses they charge to investors — as well as their performance. It also would have made it harder for firms to arrange sweetheart deals with top investors. The SEC’s initial draft triggered alarms even among some of those the agency was trying to protect: Public pension officials at the California Public Employees’ Retirement System and New York City’s pension plan believed the proposed version might force them out of major investments, harming their returns. (Those institutions, as well as most investor groups, were ultimately supportive of the rules). For Wall Street, the 3-0 decision by the appellate panel was the latest sign that the campaign to strike back at Gensler’s SEC in the courts is paying off. “We feel vindicated,” Managed Funds Association (MFA) CEO Bryan Corbett told MM. “And I think that the SEC now has to hit pause on some of their other rulemakings and think about what this court decision means for them as an institution.” In a 25-page opinion, the three judges — all appointed by Republican presidents — said the SEC was exceeding its authority by implementing the rule changes. The panel wrote the Dodd-Frank Act section used by the SEC to justify it “has nothing to do with private funds.” Still, the decision left some progressives enraged. It will mean “even more money for those who already get enormous benefits under the tax code and are lavishly compensated without these excessive add-on fees,” Sen. Jack Reed (D-R.I.), a long-time critic of the industry, said in a statement. The SEC’s next steps are unclear. “It was just this morning, and I was traveling around New York to meetings,” Gensler told reporters at the ISDA/SIFMA Treasury Forum, two hours after the Fifth Circuit’s decision was announced. “The staff will take a look and make some recommendations.” But the court’s decision, along with Corbett’s warning about how it might be applied to other pending rulemakings, will cast a shadow over any future efforts on the part of the agency to rein in private fund managers. “The decision makes it clear that investors can’t rely on the SEC or the courts to protect them from private fund abuses,” said Healthy Markets Association CEO Tyler Gellasch. “So the result will be just an amplification of the current marketplace — the largest investors will get the most information and the sweetest deals, and other investors will take whatever they get.” IT’S THURSDAY — Give me a call, shoot me a DM, or send tips and suggestions to me at ssutton@politico.com or @samjsutton. And if you have a line on anything SEC or CFTC, reach Declan at dharty@politico.com.
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