By CHRIS PRENTICE and MICHELLE PRICE Reuters
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WASHINGTON — A legal assault on the U.S. Securities and Exchange Commission is chipping away at its powers to oversee Wall Street and is likely to intensify with two imminent Supreme Court rulings.

A U.S. appeals court last week overturned a major SEC rule imposing stricter oversight of private funds, in a fresh blow for Democratic Chair Gary Gensler’s ambitious agenda to boost transparency and stamp out conflicts of interest on Wall Street.

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The court took the unusual step of denying some of the SEC’s authority to oversee investment advisers. That could make its other draft rules on cybersecurity, outsourcing, and predictive data analytics, vulnerable to litigation, lawyers said.

The ruling from the New Orleans-based 5th U.S. Circuit Court of Appeals is another example of how business groups are using conservative-leaning courts to overturn SEC rules, limit its ability to write similar ones and bring enforcement actions.

While the conservative “war on the administrative state” aims to weaken federal agencies across the board, Gensler’s ambitious agenda has made the SEC, which oversees around 40,000 entities, a top target.

“It’s happening government-wide, and it’s quite acute at the SEC,” said Satyam Khanna, a former SEC attorney who advised two former Democratic Commissioners as recently as 2021. “The SEC oversees a vast number of entities – funds, public companies, brokers, and more – and the financial stakes can be high.”

The agency is facing several other lawsuits from financial firms and their trade groups arguing the agency is overstepping its authority to impose ill-conceived and costly rules.

A Reuters review of Westlaw filings showed a sharp uptick in the number of open appeals against the SEC in the 5th Circuit Court of Appeals from 2019 to last year, although it is facing litigation in other conservative-leaning courts too.

Among the cases: hedge funds are suing in the 5th Circuit to overturn SEC short-selling disclosures and in a Texas district court to kill new Treasuries trading rules, while in March business groups including the U.S. Chamber of Commerce, as well as Republican-led states, sued to block SEC climate change rules.

The Chamber is among the most aggressive groups in litigating regulations. In December, it won a 5th Circuit challenge to SEC rules around stock buybacks and is tracking other draft rules for potential challenges.

This month, the Supreme Court is also expected to rule on two other cases with major implications for the SEC.

One relates to its authority to use in-house judges with securities law expertise to decide enforcement actions, which is often speedier than going through the courts. Conservative Justices last year expressed concern that it denies defendants a jury trial.

The case follows a 2018 Supreme Court ruling that the SEC’s process for selecting in-house judges violated the Constitution. Since then, the SEC has dramatically scaled back its use of the tribunal, SEC data shows.

The other SCOTUS case challenges a legal doctrine known as “Chevron deference” which calls for judges to defer to federal agencies’ interpretations of U.S. laws deemed to be ambiguous.

Chevron is a bedrock of agency rulemaking. According to 2017 research published in the Michigan Law Review, between 2003 and 2013, Chevron was applied 66.7% of the time when litigating SEC rules in circuit courts.