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AIMA joins legal action over SEC short-selling rules

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AIMA, a global representative body for the alternative investment industry, along with the National Association of Private Fund Managers (NAPFM) and Managed Funds Association (MFA), has filed a lawsuit challenging two new SEC rules.

The organisation have asked the US Court of Appeals for the Fifth Circuit to invalidate teh rules which require reporting and public disclosure of securities loans and short selling activity.

According to the suit, despite finalising the two closely related rules on the same day, the SEC disregarded the interconnectedness of the rules and adopted vastly different reporting requirements. As a result, the rules would apply contradictory and incoherent approaches to two aspects of the same underlying transaction: the short sales themselves and the loans of securities to facilitate those short sales.

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. The suite claims that the SEC entirely disregarded the impact of one rule on the other, including by failing to conduct a sufficient cost-benefit analysis of both rules’ cumulative impact.

Because of these and other flaws, the petitioners argue the rules are arbitrary and capricious under the Administrative Procedure Act and run counter to the SEC’s stated mission to protect investors and maintain fair, orderly, and efficient markets. The petitioners say they worked constructively to raise these issues during the rulemaking process and chose to litigate only as a last resort.

The petitioners are represented by Jeff Wall and Judd Littleton of Sullivan & Cromwell LLP.

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