SEC Eyes Changes to Short Sale Rule After Hedge Funds’ Court Win

As the SEC goes back to the drawing board on investor short sale disclosure requirements, the Wall Street watchdog finds itself in familiar territory—grappling with a Biden-era policy rejected by a US appeals court.

Investment manager disclosures on short selling and related stock lending are poised for a regulatory overhaul after the US Court of Appeals for the Fifth Circuit sent the rules back to the Securities and Exchange Commission, ordering the agency to take a closer look at their cumulative economic effects.

The federal appeals panel was persuaded by hedge fund trade group plaintiffs that argued the SEC’s rules were overbroad, inconsistent, and beyond the agency’s authority. The short sale rules—adopted after the 2021 meme stock craze put a squeeze on hedge funds shorting the stocks—would’ve required private funds to report covered transactions on a monthly basis, while pension funds, banks, and institutional money managers that lend their stocks would’ve had to report the transactions the next day.

Unlike its previous decisions vacating rules on hedge fund fees and dealer registration, however, the Fifth Circuit placed the ball squarely in the SEC’s court on short sale disclosures in its decision last month. Chairman Paul Atkins announced he is directing his staff to evaluate the regulations and make recommendations that could include changing the rules and related compliance dates.

“They certainly could scrap it entirely by not coming back with a revised plan,” said Brenda Hamilton, a securities lawyer and founder of Hamilton & Associates Law Group PA. “There appears to be an overall pulling back on regulation by the current administration.”

The SEC is taking similar steps to reassess the economic burdens associated with the Consolidated Audit Trail, a market surveillance tool finalized under Biden-era Chair Gary Gensler, after Citadel Securities and the American Securities Association prevailed in July challenging the SEC’s funding plan for the system in the Eleventh Circuit.

The SEC was also hit with a Sept. 12 order from the Eighth Circuit requiring it to either fix Biden-era corporate emission reporting requirements or go to bat for the rule in court.

In each case, Atkins’ SEC must walk a fine line: deciding whether to abandon or retool policies finalized by his predecessor after years of deliberation, while attempting to pass muster with powerhouse industry groups and judges often skeptical of the agency’s rulemaking.

Hedge Fund Pressure

Hedge funds’ common use of short selling as a trading strategy likely explains their pushback to stricter disclosure requirements, securities lawyers said.

“The motives for the hedge funds vary from fund to fund, but certainly some of those funds don’t want the scrutiny of oversight,” Hamilton said. “They don’t want the exposure that could come along with disclosure, because you obviously have SEC regulations, but you also have private litigation against short sellers and their activity when it’s deemed to be manipulative.”

The Fifth Circuit’s remand presents a new window of opportunity for those hedge funds, along with other institutional investment managers and trade associations that want to see significant changes to the disclosure regime at the SEC.

“We would expect to see market participants revive some of the key recommendations that they previously submitted to the SEC during the notice and comment period, as well as following the rule’s adoption,” Kevin Campion, a partner in Sidley Austin LLP’s securities enforcement and regulatory practice, said in an email.

Market participants also have new information to share with the SEC since the last time the rule package was open to public input. Reporting requirements went live briefly in January before the SEC issued a temporary compliance exemption.

“As a result, institutional investment managers may be able to share their real-world experience—from building for compliance to actually complying with the rule—to help inform the Commission’s further analysis of the cumulative economic impact,” Campion said.

Scrap or Pull Back?

The SEC under Atkins has notably retreated from many regulatory stances held by the past administration, including on crypto-related enforcement.

He has some leeway to roll back aspects of the short sale disclosure rules, though he’ll be on the hook to come up with some kind of proposal since the rules were mandated by Congress in the 2010 Dodd-Frank Act. Atkins may also be receptive to the broader goal of providing greater transparency for market participants.

“He is conservative, but he’s very much a believer in the SEC’s mission, and he is the first chairman in decades to characterize it as protecting retail investors,” said Frank Zarb, a partner at Proskauer Rose LLP and member of the firm’s capital markets group. “I think he’s going to take a hard look at whether there is sufficient need for short sale reporting in terms of market transparency.”

Fellow GOP commissioner Hester Peirce opposed the final 2023 rules, but mainly because of the scope of the reporting requirements. She was broadly supportive when the SEC proposed the rule package the previous year—suggesting there may be room for the agency to strike a new compromise on the requirements.

One major critique is that the adopted disclosure requirements were overly broad, extending beyond managers with $100 million or more in assets to include relatively small funds and institutional investors, according to Zarb.

Unlike the Consolidated Audit Trail, there was no mention of plans to reappraise short seller disclosure standards in the SEC’s semiannual regulatory agenda released in early September—only Atkins’ statement that same week indicating the agency’s plans to “evaluate” the rules in light of the Fifth Circuit opinion.

“It’s possible they’ll punt and tell the court they’re withdrawing the rule,” Zarb said. Atkins “has to prioritize what he’s completely scrapping, and short sale reporting is mandated by legislation so he’ll have to replace it with an alternative or go back to Congress to ask for a legislative change.”

The case is National Association of Private Fund Managers v. SEC, 5th Cir., No. 23-60626, 8/25/25.