Federal Judge Reed O’Connor struck down an SEC rule that required certain companies, including hedge funds, to register as dealers in the U.S. Treasury bond market.
He ruled that the SEC exceeded its authority, agreeing with hedge funds who argued that the rule was overly broad and could harm liquidity.
SEC Dealer Rule Rejected: Blow to Gensler’s Regulatory Agenda
The SEC introduced the rule in February with the aim of increasing oversight of hedge funds and high-frequency traders in the Treasury bond market. The regulator argued that this measure was essential to ensure that such companies faced the same level of scrutiny as traditional resellers.
Two crypto organizations, the Crypto Freedom Alliance of Texas (CFAT) and the Blockchain Association, challenged the rule, claiming that the SEC’s rule expanded its authority beyond Congress’s intent. Furthermore, Justice O’Connor agreed, declaring the rule inconsistent with the Securities Exchange Act of 1934.
The Managed Funds Association (MFA) also challenged the rule, calling it vague and burdensome. They argued that compliance would impose high costs, create legal uncertainty and discourage firms from trading in Treasuries altogether.
“The Rule, as it currently stands, actually removes the distinction between ‘merchant’ and ‘dealer’ as they have been commonly defined for nearly 100 years. The Court refuses to allow such a broad expansion of the Exchange Act through this Rule,” O’Connor wrote in his decision.
Furthermore, the decision highlights ongoing criticism of the SEC under Gary Gensler, who has long faced accusations of regulatory overreach. President-elect Donald Trump has vowed to replace Gensler and create a crypto regulatory committee within his first 100 days.
In response, Gensler announced his resignation, scheduled for January 2025. The decision represents yet another blow to the SEC's current regulatory agenda.
On the other hand, the ruling marks a victory for the crypto industry. Groups like CFAT and the Blockchain Association see it as a necessary check on regulatory overreach. Hedge fund advocates will also celebrate the outcome as a triumph for market liquidity and trading freedom.
However, the SEC can still appeal the decision to the 5th U.S. Circuit Court of Appeals, but has not yet ruled on its plans. Given the court's history of striking down SEC initiatives, the chances of a successful appeal are uncertain.
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