By Mark S. Nelson, J.D.
The National Association of Private Fund Managers, the Managed Funds Association, and the Alternative Investment Management Association collectively filed a petition for review in the Fifth Circuit challenging the Commission’s adoption of new rules for disclosing short sales activity. The petition asserts that the Commission failed to mull how two related rules interact while also failing to explain why the Commission adopted divergent regulatory approaches for disclosures of ostensibly the same short sales activities (National Association of Private Fund Managers v. SEC, December 12, 2023).
Twin short sales rules. On October 13, 2023, the Commission adopted Rule 10c-1a to require disclosures that will bring to light the material terms of securities lending transactions, which previously were not generally available. Specifically, Rule 10c-1a requires a “covered person” who agrees to a “covered securities loan” to provide specified information to a registered national securities association. According to the Commission, gaps in publicly available information about these types of transactions can lead to market inefficiencies.
On the same day, the Commission also adopted Rule 13f-2, Form SHO, and amended the NMS plan that governs the consolidated audit trail (CAT) for the purpose of enhancing the transparency of short sale-related data. The rules were adopted under authority contained in the Dodd-Frank Act directing the Commission to improve the public availability of short sale-related data.
The petition for review. The petition for review picks up on a theme that had been voiced in public comments on some other recent SEC rules—that the Commission was putting out for comment (and in some cases adoption) too many related rules. The concern was that public commenters did not have adequate time to express their views on numerous interrelated rulemakings.
With respect to the petition for review, the claim is much the same but focused on two specific rulemakings in which the SEC adopted rules mandating disclosures related to short sales. In one of the rulemakings, the petition noted, the Commission itself acknowledged that the frequent short sales disclosures can “substantial[ly] harm[]” markets.
Specifically, the petition noted the divergent regulatory approaches adopted by the Commission in the two rules. For purposes of Rule 10c-1a, disclosures would be made daily regarding individual transactions. By comparison, disclosures to be made under Rule 13f-2 would be on a delayed basis and would be made in the aggregate.
According to the petition, the Commission acted arbitrarily and capriciously by adopting related final rules that failed to adequately explain why data about the same types of short sale transactions are to be handled differently under the twin short sale rules.
“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,” said a press release announcing the filing of the petition for review. “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.”