NAPFM, MFA, and AIMA have filed a lawsuit to the US Court of Appeals following the US Securities and Exchange Commission’s (SEC) adoption of two rules related to the requirements for reporting and public disclosure of securities loans and short selling activity.
Jack Inglis
The associations are seeking to invalidate the two rules on the grounds that they are “arbitrary and capricious and will harm investors and markets,” as described by Bryan Corbett, president and chief executive of MFA.
They claim that the changes, clarified in October, have not sufficiently considered the interconnectedness of the rules when outlining the reporting requirements, and that the increased complexity will lead to a decrease in activity in the area – effectively “harming” the market.
The petition explains that despite the two closely related rules being finalised on the same day, the SEC adopted vastly different reporting requirements, leading to a contradictory approach to the two aspects of the same underlying transaction – “the short sales themselves and the loans of securities to facilitate those short sales”.
In the same overarching point about a lack of cohesion between the two rules, the associations claim that though one of the SEC’s rules protects the value of anonymity for short sellers (acknowledging short sellers’ contributions to liquidity and price efficiency), in another it exposes the confidential securities lending and position information of the short sellers 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 entities asserted in a joint statement.
Additionally, the petitioners claim that the newly adopted rules are set to create inconsistent and burdensome reporting regimes which will ultimately discourage short selling.
Corbett, said: “Despite our best efforts, the SEC decided to ignore the interconnected nature of these two rulemakings and failed to apply a consistent approach or principle to regulating these related markets […] The SEC needs to go back to the drawing board and develop a consistent, coherent approach that will protect investors and avoid undermining the resilience of our capital markets.”
Read more: SEC adopts new short selling rule to bolster transparency for market participants
The associations also made reference to other flaws, which overall go against the SEC’s stated aim of protecting investors and maintaining fair, orderly, and efficient markets. Speaking in a joint statement, the petitioners claimed that they had previously raised issues during the rulemaking process, and that this litigation is a last resort.
Jack Inglis, chief executive of AIMA, explained: “These two rules underscore how the SEC has ignored calls from industry, market participants, and Congress to consider the interconnectedness and aggregate impact of its rulemakings. The rules follow inconsistent approaches with broad extraterritorial scope and contain conflicting analyses and rationale even though they both address similar markets. The rules will impair market efficiency and price discovery and harm market participants and investors.
“The SEC should instead take into account their connected nature and apply consistent reporting and disclosure frameworks for these positions, which are designed to protect both market efficiency and market participants.”