The National Association of Private Fund Managers (NAPFM), Alternative Investment Management Association (AIMA) and Managed Funds Association (MFA) have challenged two rules recently adopted by the US Securities and Exchange Commission (SEC) requiring reporting and public disclosure of securities lending and short selling activity.
The organisations have filed an opening brief in the US Court of Appeals for the Fifth Circuit claiming that the rules 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.
According to the brief, in the final Short Sale Rule, the SEC acknowledges the benefits of short selling to price discovery, liquidity, and good corporate governance. When explaining its rationale for a short sale disclosure framework with aggregated, anonymised, and delayed public reporting, the SEC cited the benefits of short selling and the Commission’s desire not to inhibit the practice.
However, on the same day, the SEC adopted the Securities Lending Rule that NAPFM, AIMA and MFA say has the opposite effect, and that the securities lending disclosure framework will reduce short selling by publishing granular data on individual securities loans almost immediately.
The brief alleges that the SEC never evaluated 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.
AIMA CEO Jack Inglis said: “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.
“The SEC’s defective rulemaking process produced two flawed, inconsistent rules that will harm investors and the markets. The rules should be vacated,” said Bryan Corbett, MFA President, and CEO. “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.”
