Hedge Fund Associations Sue SEC Over New Short-Selling Reporting Rules

Three prominent hedge fund associations are challenging the Securities and Exchange Commission's (SEC) recently introduced regulations on short-selling and securities loans disclosures. The National Association of Private Fund Managers (NAPFM), the Alternative Investment Management Association (AIMA), and the Managed Funds Association (MFA) have filed a legal appeal to strike down the new rules which they believe undermine critical price discovery mechanisms in the markets.

Raising Concerns Over Market Practices

The legal action, initiated by the hedge funds' associations, targets two specific SEC requirements implemented in October. The first rule obliges select fund managers to report their monthly short positions to the SEC within 14 days after the month ends, with the SEC releasing the collected information publicly but without revealing individual fund managers' identities. The second rule mandates financial institutions engaged in securities lending to report transaction details to the Financial Industry Regulatory Authority (FINRA) on a daily basis.

Impact on Market Efficiency

This litigation highlights the hedge funds' concerns that the new regulations will disrupt market efficiency and hinder the fair valuation of securities. According to AIMA CEO Jack Inglis, the new rules could damage both market participants and investors by applying inconsistent reporting standards to related transaction types. Instead of these rules, they recommend the SEC to consider a coherent framework that recognizes the interlinked nature of short selling and securities lending.

Short selling is a strategy widely used by hedge funds where they borrow stocks and sell them, expecting the stock price to drop. Later, they aim to buy back the stocks at a lower price, thus profiting from the price difference. Hedge funds are typically private entities, but investors have the option to invest in exchange traded funds (ETFs) that follow hedge fund strategies, such as the IQ Hedge Multi-Strategy Tracker ETF (QAI). Similarly, ETFs like the ProShares UltraPro Short QQQ (SQQQ) allow investors to bet against the NASDAQ 100 index.

SEC Under Increasing Scrutiny

The lawsuit against the SEC is part of a broader trend of the investment community questioning the commission's approach. The SEC has faced multiple court filings concerning its regulatory practices, including its use of internal courts for financial prosecutions. Despite the challenges it faces, the SEC has stated that it intends to fervently defend its new regulations in court.

SEC, lawsuit, hedgefunds