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Three buy-side trade associations have filed an opening brief challenging the Securities and Exchange Commission (SEC)’s securities lending and short position reporting rules.
The Alternative Investment Management Association (AIMA), the Managed Funds Association (MFA) and the National Association of Private Fund Managers (NAPFM) argue in their petition that the SEC rules apply “contradictory and incoherent approaches” to two aspects of the same underlying transaction, specifically the short-sale and the stock borrow.
In their brief, the joint associations refer to the SEC’s final rule in Reporting of Securities Loans, Release No 34-98737. The other rule is the SEC’s final rule in Short Position and Short Activity Reporting by Institutional Investment Managers, Release No 34-98738.
The litigation relates to two SEC rules that, they suggest, impose inconsistent requirements for the public disclosure of the same market activity: short sales of securities.
“Although the rules are indisputably interconnected and were finalised on the same day, neither rule considered how the two disclosure requirements interact,” says the Associations.
The background to this legal action is detailed in an SFT article published on 13 December 2023, when the three associations announced this legal action.
The joint associations maintain that the SEC failed to evaluate the cumulative economic effect of the two rules on affected parties or the harm to price efficiency, market liquidity, competition, or capital formation.
“Instead, the SEC adopted contradictory disclosure frameworks in the rules without any acknowledgment or explanation,” they suggest.
AIMA CEO Jack Inglis comments: “The adoption of these two rules epitomises arbitrary and capricious rulemaking by adopting inconsistent disclosure frameworks for interlinked transactions. These rules will unnecessarily impair market efficiency and price discovery, thereby harming both markets and market participants.
“Accordingly, the court should vacate both rules and direct the SEC to adopt consistent reporting and disclosure regimes that take into account the interrelated nature of securities loans and short sales and are designed to protect both market efficiency and market participants."
MFA president and CEO Bryan Corbett adds: "The SEC’s defective rulemaking process produced two flawed, inconsistent rules that will harm investors and the markets. The rules should be vacated.”
“Adopting two rules with contradictory approaches to the disclosure of data regarding short selling on the same day without explanation is arbitrary and capricious. The SEC needs to go back to the drawing board and craft rules with a consistent, coherent approach that will not harm market participants or undermine the US capital markets.”
