ArVision Quarterly Newsletter: SEC Setbacks: Implications for the Financial Sector

The SEC has suffered a series of stunning upsets in recent months — and financial firms should brace themselves for extended regulatory uncertainty.

A notable setback came from the US Court of Appeals for the Fifth Circuit, which vacated the SEC's 2023 Private Fund Advisor (PFA) rules in their entirety in June 2024.¹ This came after the National Association of Private Fund Managers sued, claiming the PFA rules "exceed the Commission's statutory authority… and are otherwise arbitrary, capricious, an abuse of discretion, and contrary to law."

The court agreed.

The SEC regulations aimed to compel private fund advisers — including those exempted from oversight by Congress — to take on an array of new compliance responsibilities, including expanded quarterly reporting and an annual financial statement audit.

Six months earlier, the SEC faced another wholesale dismissal when the Fifth Circuit vacated the agency’s new share repurchase disclosure rules.²

And in the controversial Jarkesy case this summer, the Supreme Court ruled the SEC may no longer adjudicate fraud cases through in-house tribunals presided over by SEC-employed Administrative Law Judges.³

Judges concluded the practice, which dates to 2010, violates a defendant’s Seventh Amendment right to trial by jury. This landmark decision means all fraud defendants must now be referred to federal court for trial — eradicating a major SEC enforcement mechanism in the process.

Why these cases matter to US financial firms

Legal push-and-pull is endemic to our system. But these recent battles carry particular significance for the finance sector.

The vacating of the PFA rules offers private markets funds a win big enough to entice other players to forge their own lobbying initiatives and legal resistance. Meanwhile, the Jarkesy ruling establishes “constitutionality” as a viable avenue to contest regulatory authority on major cases.

We've seen an uptick in SEC rule-making since 2021 under Chairman Gary Gensler's leadership. It might be hyperbolic to say we're heading for a collision but make no mistake: The stakes are growing for regulators and industry alike.

Industry fights back

Regulatory activity spiked on the heels of the 2008 financial crisis, leading to the rollout of the Dodd-Frank Act of 2010, which introduced over 400 provisions for consumer protection, systemic risk monitoring, proprietary trading restrictions for banks, and increased oversight of financial products.

Since then, rule-making has only intensified. Major reforms hit the market in 2020 for investment advisor marketing practices, in 2021 for share repurchase disclosures, in 2022 for climate-related disclosures, and for money market funds in 2024.

The number of new rules did not necessarily grow every year. But the new rules have increased in breadth and scope, and have carried heavier economic ramifications than rules from previous years.

Industry pushback against perceived overreach has stepped up as well. Banks big and small, industry groups, and even fintech companies, are marshaling resources for battle — to some success.

Opposition to the SEC’s ESG Emissions Disclosure rules by the Chamber of Commerce’s Center for Capital Markets Competitiveness and other players has already driven the agency to scale back the rules.^4,5 Similarly, opposition against the SEC’s rule proposal restricting use of predictive analytics technologies is likely headed in the same direction.⁶

Lobbyist headcount for banks and industry groups reached an all-time high of 255 last year. Mid-sized banks, the biggest drivers of growth in lobbying, overtook the Big Eight banks’ expenditure in 2014, reaching almost $35 million in 2022.⁷

FinTech is not far behind. Industry players activated a typical year’s worth of lobbyist headcount in just the first half of 2024.⁸

What’s next

On one hand, companies and industry groups have certainly scored significant victories against regulators in recent months — even bringing into question the constitutional basis of some SEC actions.

On the other hand, federal regulators show no signs of slowing down. Basel III Endgame, some of the most aggressive — and hotly contested — banking regulations the industry has seen since Dodd-Frank, will take effect next year.

As regulatory conflict reaches a fever pitch, many financial firms have entered administrative limbo — contemplating their next steps in anticipation of an SEC response to the latest pushback, but unable to take decisive action.

However, attempts to anticipate one-off regulatory actions and account for probable backlash may be futile. Instead, firms would be better served considering more fundamental, long-term adaptations.

A piece of advice often attributed to Sun Tzu, author of The Art of War, applies today: “In the midst of chaos, there is also opportunity.” Perhaps in this case, the opportunity lies in playing offense instead of defense.

To get ahead of regulatory turmoil, firms should build responsive systems, invest in flexible, future-proof compliance technology, stock up on contacts and expertise, and if possible, try to get a seat at the table.

Keep reading to understand the major upcoming rule changes and how to think about reshaping your technology and operational needs.