Hedge Funds Sue SEC Over Short-Sales, Securities Lending Rules

Three major hedge fund groups have filed a lawsuit against the Securities and Exchange Commission (SEC) to challenge two new rules intended to promote transparency in short-selling and securities lending.

The National Association of Private Fund Managers (NAPFM), Alternative Investment Management Association (AIMA), and Managed Funds Association (MFA) contend that the SEC’s rules, issued in October, take contradictory positions on investor privacy and market transparency, potentially harming investors and the broader financial markets.

The rules, according to the petition, would take “contradictory and incoherent” approaches to two components of the same underlying transaction – short sales and securities loans to support those short sales.

The groups argue that one rule safeguards the benefit of anonymity for short sellers while the other rule exposes sensitive securities loan and position information for short sellers.

The groups also claim that the SEC not only ignored the impact of one rule on the other, but also failed to conduct a cost-benefit analysis of the combined impact of both rules.

“Despite our best efforts, the SEC decided to ignore the interconnected nature of these two rulemakings and failed to apply a consistent approach or principle to regulating these related markets. The resulting rules are arbitrary and capricious,” said MFA president and CEO Bryan Corbett.

“The SEC needs to go back to the drawing board and develop a consistent, coherent approach that will protect investors and avoid undermining the resilience of our capital markets.