The Securities and Exchange Commission (SEC) under Chair Gary Gensler has faced criticism for its efforts to expand its regulatory authority. A recent court decision has added fuel to this fire, raising questions about the future of the SEC’s agenda on key issues like climate change, artificial intelligence (AI), and crypto assets.
On June 5th, 2024, a three-judge panel of the Fifth Circuit Court of Appeals vacated SEC regulations aimed at private fund advisors. These regulations would have mandated detailed disclosures to investors, including regular account statements, standardized fee information, and conflict of interest reporting. The court, however, found the SEC had overstepped its legal bounds.
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Ripple CLO Slams Gensler and His SEC
Ripple’s Chief Legal Officer (CLO) Stuart Alderoty called out Gensler and the SEC for wasting taxpayer funds on failed efforts to expand the regulatory agency’s reach beyond the limits of the law.
The broader implications of the ruling extend beyond private funds. The SEC has signaled its intention to implement new regulations on climate risk disclosures, AI in finance, and crypto assets. The Fifth Circuit’s decision raises concerns about the legal basis for such future regulations.
Challenges for the SEC’s Agenda
The SEC’s proposed rules on climate disclosures aim to standardize how companies report on climate-related risks and opportunities. However, critics argue the SEC is exceeding its limit by venturing into areas traditionally under the purview of the Environmental Protection Agency (EPA).
Similarly, the proposed regulations on AI are intended to address potential risks associated with the use of AI in financial services. However, the nascent nature of AI technology and the lack of clear legal precedent make crafting effective regulations challenging.
The crypto asset space presents a unique set of complexities. The SEC has argued that certain cryptocurrencies qualify as securities and thus fall under its jurisdiction. The most prominent of these is the lawsuit with Ripple, where the SEC has lost three times, and many believe a fourth and final blow is coming with the expected final ruling.
The crypto industry maintains that existing regulations are inadequate for the rapidly evolving crypto landscape, and are seeking proper regulatory guidelines for cryptocurrencies.
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Looking Ahead
The SEC has several options in the wake of the Fifth Circuit’s decision. The SEC could appeal or pursue a different legal strategy for regulating private funds. However, none of these address Alderoty’s concerns about the waste of money.
The SEC’s practices have also stifled innovation in the crypto sector. However, Donald Trump, the front-runner for the Republican party has a pro-crypto stance and is accepting cryptocurrency donations. If he wins, the SEC might experience the restructuring the crypto market ever called for.
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