The U.S. Securities and Exchange Commission
FORT WORTH, Texas, November 21, 2024 – A federal judge in Texas invalidated the review of the Treasury Dealer’s Rules by the US Securities and Change Commission (SEC), giving another setback to the agency’s regulatory efforts under Gary Gensler’s chairmanship. The decision, issued by United States District Judge Reed O’Connor, found that the SEC exceeded its legal authority in applying the contested rules.
The rule, adopted in February 2024, required that certain hedge funds, owners and other companies active in the $26 billion liquidity market be registered as intermediaries. To solve liquidity problems in the market, the rule has been described by many as one of the most important reforms of the market structure in decades. However, industry groups, including the Association of Managed Funds (AMF) and the Association of Alternative Investment Management Funds (AIMA), challenged the regulation, citing excessive application and overlap.
“Today’s decision saves many hedge fund managers from serious and negative consequences,” said Jack Inglis, CEO of AIMA. The applicants argued that the rules could undermine market liquidity by obliging certain undertakings to reduce or modify their commercial activities. The decision also addressed concerns raised by the cryptographic industry, as O’Connor J. based similar definitions of dealers that applied to De-Fi and other cryptographic dealers.
The SEC defended its rules, stressing the importance of ensuring that high frequency operators and other key market players are subject to adequate regulatory control. However, Justice O’Connor’s decision this year marked the third major judicial challenge to the SEC’s regulations, following judgments rendered in June and December, which decommitted the rules on the repayment of shares and the disclosure of private funds. The organization is now facing a difficult legal environment as it considers whether it should appeal to the Fifth Court of Appeal.
The decisions come as President Gensler prepares to fall in January 2025, while the growing criticisms of conservative industrial groups and legislators who claim that the SEC has exceeded its mandate. The new administration of President-elect Donald Trump should continue its more industry-friendly regulatory agenda, which could change the Agency’s priorities. Meanwhile, the ESA spokesperson stated that the Agency is assessing the implications of the court’s decision and its next steps.
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