Federal Judge Reed O’Connor struck down an SEC dealer rule requiring certain firms, including hedge funds, to register as dealers in the US Treasuries market.

He ruled that the SEC exceeded its authority, agreeing with hedge funds that argued 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 in a bid to increase oversight of hedge funds and high-frequency traders in the Treasuries market. The regulator argued this move was integral to ensure such firms faced the same scrutiny as traditional dealers.

Two crypto organizations, the Crypto Freedom Alliance of Texas (CFAT) and the Blockchain Association, challenged the rule, contending that the SEC dealer rule expanded its authority beyond congressional intent. Judge O’Connor acquiesced, declaring the dealer rule inconsistent with the Securities Exchange Act of 1934.

The Managed Funds Association (MFA) also fought 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 de facto removes the distinction between ‘trader’ and ‘dealer’ as they have commonly been defined for nearly 100 years. The Court refuses to allow such a broad expansion of the Exchange Act by way of this Rule,” O’Connor wrote in her judgement.

This ruling highlights ongoing criticisms of the SEC under Chair Gary Gensler, who has long faced accusations of regulatory overreach. President-elect Donald Trump has pledged to replace Gensler and create a regulatory committee for cryptocurrencies within his first 100 days.

In response, Gensler announced his resignation, slated for January 2025. The ruling delivers another blow to the SEC’s current regulatory agenda.

On the other hand, this decision marks a happy victory for the crypto industry. Groups like CFAT and the Blockchain Association consider it a necessary check on regulatory overreach. Hedge fund advocates will, too, celebrate the outcome as a triumph for market liquidity and trading freedom.

The SEC can still appeal the decision to the 5th US Circuit Court of Appeals but has yet to speak on its plans. Given the court’s history of striking down SEC initiatives, the chances for a successful appeal are a grey area.

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