Court requires SEC to conduct collective economic analysis if flawed adoption process is to be remedied
In an Aug. 25 opinion that many will consider a victory for the hedge fund community, the U.S. Court of Appeals for the Fifth Circuit upheld a challenge to two Biden-era Securities and Exchange Commission (SEC) rules requiring disclosure of securities lending and short sale activity. If the SEC wishes to save the rules, it now will have to conduct a new analysis of their cumulative economic impact. (National Association of Private Fund Managers v. SEC, No. 23-60626, 5th Cir. Aug. 25, 2025).
Securities Lending and Short Sale Rules
The provisions at issue are Rule 10c-1a and Rule 13f-2 under the Exchange Act (together, the “Rules”). They arose from a Dodd-Frank mandate to increase transparency around securities lending and short selling activity. The Rules proceeded through the SEC proposal process in tandem and were adopted in close sequence — Rule 10c-1a followed by Rule 13f-2 — during the same open meeting in October 2023 (SEC Release Nos. 34-98737 and 34-98738).
Rule 10c-1a requires an institutional securities lender to disclose to the Financial Industry Regulatory Authority (FINRA), for next-day general publication, specified information about each securities loan the institution effects. While the identities of lenders and borrowers remain confidential, the reported information includes the name of the issuer, the type of entity borrowing, the platform on which the loan was effected, fees and other loan terms, the type of collateral securing the loan, and the lender's daily aggregate loan volume. Only the size of any particular securities loan is subject to delayed disclosure (within 20 business days after the transaction).
Rule 13f-2 requires an institutional
investment manager to report details of its monthly short sale
activity to the SEC on a confidential Form SHO. Unlike Rule 10c-1a,
Rule 13f-2 shields reported information from rapid public
disclosure. Instead, the SEC is required to analyze the Form SHO
data it receives from all reporting managers for the month in
question, then publish certain aggregated data within four weeks of
the month-end.
Interrelated Nature of the Rules and Potential Risks to Short
Sellers
An investment manager that wishes to short an issuer generally must borrow shares to do so, and the source of those shares is often an institutional securities lender. Some commenters during the proposal stage thus expressed the view that securities loans are essentially proxies for short sales, such that disclosure of the former effectively results in disclosure of the latter; in other words, the Rules together have the effect of painting an overlapping disclosure picture of the short sale ecosystem. Commenters therefore were on alert about the prospect of the Rules' combined disclosures enabling a degree of reverse engineering that could reveal managers' proprietary short sale strategies, chill the short sale market, or prompt manipulative short squeezes.
Required Analysis by SEC in the Rulemaking Context
In light of the Rules' interlinked reporting regimes and potential risk to short sellers, many commenters emphasized the need for the SEC to align the Rules' respective disclosure requirements as to both substance and timing, and to demonstrate that the Rules' combined costs were justified.
When a federal agency engages in rulemaking, the Administrative Procedure Act requires the agency's actions to be sufficiently rational and explained so as not to be arbitrary and capricious. In the securities regulatory context, Section 3(f) of the Exchange Act also requires the SEC to consider whether a proposed rule will, in addition to protecting investors, “promote efficiency, competition, and capital formation.” Courts have interpreted this to mean the SEC must “determine as best it can the economic implications” of a proposed rule.
The Fifth Circuit petitioners convinced the court that, taken together, the two Rules failed to undergo the necessary economic-impact review.
The Fifth Circuit Opinion
The petitioners first mounted several challenges to Rule 10c-1a and Rule 13f-2 individually, which the court found unconvincing. The court also rejected the petitioners' contention that the Rules, considered together, were arbitrary and capricious due to inconsistent treatment of the same subject matter; the court stated that while the types of data to be reported under each Rule might be closely correlated, the SEC had “grappled adequately” with their informational overlap for purposes of arbitrary-and-capricious review.
The petitioners succeeded, however, on their final argument — that the obviously interconnected nature of the Rules and their near contemporaneous adoption meant the SEC should have conducted an economic impact analysis on the Rules as an integrated whole. In particular the court found that while the SEC had referenced the cost-benefit impact of Rule 10c-1a (promulgated first) in the adopting release for Rule 13f-2 (promulgated minutes later), it failed to do the opposite. As a result, the adoption of the Rules together could not be said to have incorporated the statutorily mandated cost-benefit analysis.
The court accordingly remanded to the SEC, “to allow the agency to consider and quantify the cumulative economic impact of the Rules.”
What Comes Next
The Fifth Circuit has not vacated the Rules, which therefore formally remain in effect; securities lenders are currently scheduled to begin reporting under Rule 10c-1a on Sept. 28, 2026, while short sellers are slated to begin reporting under Rule 13f-2 on Feb. 17, 2026. The SEC is free to initiate the revised economic analysis the court has invited if it wishes to get the Rules back on track within these timeframes.
Whether the agency takes that step, however, remains to be seen. Given the current lineup of commissioners (three Republicans, including Chair Atkins, and one Democrat), the SEC's desire to pursue a salvage effort may be open to doubt. Notably, the two Republican commissioners who are holdovers from the prior administration voted against the adoption of both Rules in 2023. More broadly, the current SEC has shown limited interest in defending its predecessor's prior rulemaking initiatives, as evidenced by, among other things, its June withdrawal of 14 previous proposals.
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