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Lawsuit Accuses SEC of Breaking the Law


Several hedge funds have filed a lawsuit against the Securities and Exchange Commission (SEC), claiming that the agency violated the law while implementing new rules related to short sales data collection. The lawsuit, brought to the U.S. Court of Appeals for the Fifth Circuit by the Managed Funds Association (MFA) and other industry groups, challenges the SEC’s recent rules that mandate reporting of short sales and securities loans. Although the reports are anonymous, hedge funds argue that the SEC disregarded the interconnected nature of these rules and failed to consider the potential harm they could cause to investors.

The Call for a Consistent Approach

MFA President Bryan Corbett expressed dissatisfaction with the SEC’s approach, criticizing the agency for not applying a consistent principle or approach in regulating these related markets. He stated, “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 resulting rules are arbitrary and capricious.” Corbett is of the opinion that the SEC needs to revisit these rules and start from scratch.

Industry Backlash Against the SEC

This latest legal challenge, led by the MFA in collaboration with the Alternative Investment Management Association and National Association of Private Fund Managers, further represents the hedge fund industry’s discontentment with the SEC. Last summer, the MFA sued the SEC over new regulations requiring fund managers to obtain investors’ consent before treating certain investors preferentially. Additionally, hedge funds have raised concerns regarding proposed rules that would oblige them to report positions in securities-based swaps.

In conclusion, this lawsuit reveals growing frustrations within the hedge fund industry towards the SEC’s regulatory actions. The industry insists on a more comprehensive and transparent approach that considers the interdependencies of various rules and their potential impact on investors.

New Lawsuit Challenges SEC’s Short-Sale and Securities Lending Rules

The fund associations have recently filed another lawsuit challenging the Securities and Exchange Commission’s (SEC) short-sale and securities lending rules. The lawsuit was filed in the Fifth Circuit, a bench known for its conservative-leaning views and preferred by industry groups that question administrative actions.

Based in Fort Worth, Texas, the National Association of Private Fund Managers, whose trade name was registered last year, falls within the jurisdiction of the Fifth Circuit.

When finalizing the short-sale rules in October, SEC Chair Gary Gensler emphasized the importance of transparency regarding short sale activity, particularly during times of market stress or volatility.

As of now, the SEC has not provided any comment regarding the lawsuit.

The reports on short-sale and securities lending are anonymized and provided after a time delay. Nevertheless, hedge fund groups argue that these new requirements could potentially expose their strategies, leaving them vulnerable to front-running by other investors.

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