The National Association of Private Fund Managers (NAPFM), along with the Alternative Investment Management Association (AIMA) and Managed Funds Association (MFA) have filed a lawsuit asking the US Court of Appeals for the Fifth Circuit to invalidate two rules recently adopted by the Securities and Exchange Commission (SEC) that require reporting and public disclosure of securities loans and short selling activity.

The petition notes that 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 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

The trade bodies hold that the newly adopted rules create inconsistent and burdensome reporting regimes that will increase the frequency and detail of disclosure of securities loan and short positions data, allowing market participants to imitate or trade against the underlying position holder, harming investors. In effect, the rules will discourage short selling.