A federal appeals court has called on the Securities and Exchange Commission (SEC) to conduct a thorough economic review of its short-selling transparency regulations—an indicative win for hedge fund groups challenging the rules established during the Biden administration.
What to Know
- A three-judge panel of the 5th U.S. Circuit Court of Appeals rejected claims that the rules unlawfully exposed confidential trading data or exceeded the SEC’s authority. However, judges ruled the SEC must rigorously assess the costs and benefits of the regulations before moving forward.
- The challenge was brought by a coalition of hedge fund associations—including the National Association of Private Fund Managers, the Managed Funds Association (MFA), and the Alternative Investment Management Association (AIMA)—who charged that the SEC failed to evaluate how overlapping rules could compound economic impact.
- These rules, introduced in 2023 amid the GameStop trading frenzy, were designed to enhance transparency in short-selling and securities lending. The court’s directive now puts the ball back in the SEC’s court to justify them on empirical grounds.
- The revision process will now be overseen by the SEC’s new Republican leadership under the Trump administration, with many in the hedge fund industry anticipating a revised—rather than repealed—version of the regulations.
- MFA CEO Bryan Corbett praised the ruling, calling out the flawed rule-making process that introduced multiple interconnected rules simultaneously without a consolidated economic analysis.
What This Means for Legal and Compliance Teams
- Agency Accountability Refined: The ruling emphasizes that federal regulators must perform thorough cost-benefit assessments, especially when implementing multi-part rules.
- Rule-Making Strategy Shift: The SEC must now possibly reevaluate its analytical rigor and coordination when proposing new regulations—particularly those affecting financial market operations.
- Industry Outlook: Although repeal appears unlikely, the hedge fund industry may gain a more favorable or streamlined version of the short-selling rules. Legal advisors should stay alert for updated drafts.
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