SEC headquarters
The Managed Funds Association, National Association of Private Fund Managers and Alternative Investment Management Association sued the SEC on Dec. 12 over its rules requiring increased disclosure of short-sale-related data and securities lending data.
According to the lawsuit, the SEC disregarded the interconnected nature of the rules and took a contradictory approach to regulating interrelated markets.
"The resulting rules are arbitrary and capricious," MFA President and CEO Bryan Corbett said in a Dec. 12 news release. "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."
The SEC finalized the rules on the same day at an October meeting, with the agency's two Republican commissioners voting against both rules.
One rule would require certain institutional investment managers to report short-sale-related data to the SEC within 14 calendar days after the end of each month. The agency would then publish such data, on a slightly delayed basis, aggregating by security and keeping manager information confidential.
The other rule mandates that parties to securities lending transactions disclose specific information on those transactions to the Financial Industry Regulatory Authority by the end of the day that the loan is effected or modified. FINRA is then required to make certain information it receives public by the morning of the next business day, according to an SEC fact sheet.
But according to the lawsuit, the rules are contradictory.
The rule on short-sale reporting purposely publishes data on an aggregated and delayed basis in order to reduce harm, the SEC said. However, "the commission then contradicted and undermined those very same considerations in the securities loans reporting rule by requiring daily public disclosure of individual transaction information pertaining to loans of securities in a manner that effectively serves as a proxy for short-sale activity," the lawsuit states.
The rules are also invalid for other reasons, according to the lawsuit, including that their costs outweigh their benefits, they overstep the SEC's statutory authority and they are in violation of the Administrative Procedures Act.
The organizations filed the lawsuit in the 5th U.S. Circuit Court of Appeals, based in New Orleans, and are represented by Jeffrey B. Wall and Judson O. Littleton of the law firm Sullivan & Cromwell. They are asking the court to invalidate the rules.
"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," Alternative Investment Management Association CEO Jack Inglis said in the news release.
In a hearing last month, Rep. Ann Wagner, R-Mo., who leads the House Financial Services Subcommittee on Capital Markets, said the pace of the SEC's rule-making "raises questions about the agency's ability to comprehensively evaluate the cumulative effects, indirect costs, and cross-market implications of these rules," and leaders of two industry groups agreed.
The three trade associations that filed the Dec. 12 lawsuit were also a part of the six organizations that sued the SEC in September for its private fund adviser rule. The organizations said the SEC failed to show a need for that rule, exceeded its authority, and significantly changed the final version of the rule without allowing for public comment.
