A group of three hedge fund associations — The Managed Funds Association, the Alternative Investment Management Association and the National Association of Private Fund Managers — has banded together to sue the Securities and Exchange Commission (SEC) over two new short-selling rules. The groups believe that the rules, adopted last October, are “arbitrary and capricious,” conflict with each other and violate the Administrative Procedure Act.
The first rule states that securities lenders must report each loan individually to the Financial Industry Regulatory Authority (FINRA). Meanwhile, the second rule states that some institutional investors must disclose and report short-selling information that will then be publicized on an aggregate basis 14 days after the end of the month.
“In particular, the SEC protects the value of anonymity for short sellers in one rule — where it acknowledges short sellers’ contributions to liquidity and price efficiency — but then in the other rule exposes short sellers’ confidential securities lending and position information on a granular basis,” said the group.
Meme Stocks Alert: Hedge Funds Are Suing the SEC Over Short-Selling Rules
The practice of short selling received mainstream attention following the massive rise in GameStop (NYSE:GME) in early 2021. During that time, short interest of GME peaked at 140%, leading retail investors to question whether naked short selling was at play. This event led to an increased interest in meme stocks, or stocks that have gained a cult following on social media.
The hedge fund groups have also argued that the rules decrease market efficiency and price discovery. Market efficiency refers to the belief that current prices reflect all available information. Short selling can aid in market efficiency by allowing for price discovery.
In response, the SEC stated that it “undertakes rulemaking consistent with its authorities and laws governing the administrative process, and we will vigorously defend challenged rules in court.”
The lawsuit was filed in the 5th U.S. Circuit Court of Appeals, which is known as a conservative court. This may be attributed to the fact that the National Association of Private Fund Managers operates business in Texas, which is covered by the 5th circuit.
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
