A federal appeals court struck down the U.S. Securities and Exchange Commission’s rules requiring hedge funds and private equity firms to detail quarterly fees and expenses to investors, a significant setback for the regulator.

The U.S. Fifth Circuit Court of Appeals in New Orleans on Wednesday sided with the private funds industry, which argued that the agency overstepped its authority and that rules weren’t necessary for the “highly sophisticated” investors that pour money into private funds.

A representative for the SEC didn’t immediately respond to a request for comment.

In addition to fee disclosures, the rules adopted by the SEC in August prohibited firms from allowing some favored investors to cash out more easily than others. The SEC under Chair Gary Gensler has been tightening its grip on private funds, and the rules were aimed at bringing increased transparency to a burgeoning industry known for its opaque and complex layers of fees.

The industry groups, including the American Investment Council and the Managed Funds Association, argued in the lawsuit they filed a week after the rules were adopted that they would “fundamentally change the way private funds are regulated in America.” The groups said that private equity investors are among the most sophisticated in the world and would not be funneling their money into an industry if it was in need of a “government overhaul.” 

The SEC argued the rules are permitted under the 2010 Dodd-Frank Act. The agency has said in court filings that its regulations “are a flexible and measured approach to resolve problems affecting investors and their stakeholders.”

Two of the judges on the New Orleans-based court who issued the ruling were appointed by former President Donald Trump and one by George W. Bush.

The industry groups are represented by former Trump administration Labor Secretary Eugene Scalia, son of the late Supreme Court Justice Antonin Scalia.

The case is National Association of Fund Managers v. Securities and Exchange Commission, 23-60471, U.S. Fifth Circuit Court of Appeals (New Orleans).

This article was provided by Bloomberg News.