Hedge funds are suing the SEC over its ‘conflicting’ short-selling rules

• A group of hedge fund organizations filed a lawsuit against the Securities and Exchange Commission.

• He says the SEC’s new short selling rules are “contradictory.”

• The group said there are two laws that provide different guidelines for short sale disclosures.

A group of three hedge fund organizations have filed a lawsuit against the Securities and Exchange Commission (SEC) over recent short selling transparency regulations.

The coalition asked the 5th U.S. Circuit Court of Appeals to invalidate two regulations introduced by the SEC in October, saying they are arbitrary and potentially misleading.

“As the petition notes, despite finalizing two closely related rules on the same day, the SEC ignored the interrelationships of the rules and adopted completely different reporting requirements,” the press release said. “As a result, the rules would apply conflicting and inconsistent approaches to two aspects of the same underlying transaction: the short sales themselves and the securities lending to facilitate those short sales.”

Generally, one of the rules requires individual reporting for securities loaned to short sellers, with the data then made public the next business day.

The second rule requires certain institutional investors to report their short-selling activity, which is then published on an aggregated and delayed basis, with the names of those involved remaining anonymous.

The lawsuit also argued that frequent disclosures could expose confidential investment strategies and potentially lead to retaliation against market participants.

“The SEC needs to go back to the drawing board and develop a coherent, consistent approach that protects investors and avoids undermining the resilience of our capital markets,” Bryan Corbett, president of the Association of Managed Funds, said in a news release.

In a statement to Business Insider, the SEC said that “The Commission is taking regulatory actions consistent with its authority and laws governing the administrative process, and we will vigorously defend the challenged regulations in court.”

Short sellers, or investors who bet that an asset’s price will fall, have long been controversial in financial markets. The practice came under scrutiny recently in 2021 when retail investors decided to pump up meme stocks like GameStop to disrupt short positions.

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