Hedge funds are fighting hard to keep short sales secret. An industry association has sued the SEC to stop new disclosure rules, according to a new report in Barron’s.
Hedge funds sued the Securities and Exchange Commission, alleging that the agency broke the law when it finalized a pair of rules aimed at collecting data on short sales earlier this year.
The lawsuit, filed in the U.S. Court of Appeals for the Fifth Circuit by the Managed Funds Association and other groups on Tuesday, is attacking rules adopted by the SEC this fall that require the reporting of short sales and securities loans. The reports are anonymized, but the funds argue the agency ignored how the rules interact and that they harm investors.
Why the SEC Is Requiring Disclosure
Before the new SEC rule, funds had to disclose what stocks they owned, but not what stocks they shorted.
Long positions must be disclosed under the fund’s own name. Given that longstanding rule, I don’t see why requiring anonymous disclosure of short positions is unlawful.
The new SEC rules are a direct result of the meme stock boom of 2021:
The SEC adopted the short-sale and securities lending rules in the wake of the GameStop fiasco, in which retail traders drove a huge short squeeze in the stock and caused large losses in some hedge funds that had bet against the company. The rules require hedge funds to report their short positions to the SEC and for companies that lend out shares to report those transactions to the Financial Industry Regulatory Authority.
Hedge Funds Fight Back
If short sales are publicly disclosed, it’s easier for retail traders and other hedge funds to attack short sellers. They can buy up shares of heavily shorted stocks, engineering a short squeeze like those in 2021.
Short sellers are doing whatever they can to avoid becoming another Melvin Capital. That now-defunct fund lost nearly $7 billion betting against meme stocks like GameStop and AMC.
A Systemic Risk
However, the public has a right to know about systemic risks to the financial system. Short sales, which can trigger huge losses for hedge funds, could pose such a risk.
In fact, the Dodd-Frank financial reforms required the SEC to collect more information on short selling. That 2010 law was designed to prevent another financial crisis.
Wrap-Up
Hedge funds may have some legitimate interest in keeping their trades confidential. But that is far outweighed by the interest of the public in preventing another 2008.
What do you think of short sellers? Leave a comment and let us know!
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