United States Appeals Court Instructs Securities & Exchange Commission (SEC) to Evaluate Costs & Benefits Impact of Proposed Reporting & Public Disclosure of Securities Loans & Short Selling Activity, Fund Associations Filed Lawsuit in 2023 to Request United States Appeals Court to Invalidate 2 New Rules
27th August | Hong Kong
The United States Appeals Court has instructed the United States Securities & Exchange Commission (SEC) to evaluate the costs & benefits impact of the proposed reporting & public disclosure of securities loans & short selling activity. In 2023, United States fund associations had filed lawsuit to request the United States Appeals Court to invalidate 2 new rules. In 2023 December, the National Association of Private Fund Managers (NAPFM), Alternative Investment Management Association (AIMA), and Managed Funds Association (MFA) filed a lawsuit asking the U.S. Court of Appeals for the Fifth Circuit to invalidate two rules recently adopted by the Securities and Exchange Commission (SEC) that require reporting and public disclosure of securities loans and short selling activity. The petition for review can be found here. As noted in the petition, despite finalizing the two closely related rules on the same day, the SEC disregarded the interconnectedness of the rules and adopted vastly different reporting requirements. As a result, the rules would apply contradictory and incoherent approaches to two aspects of the same underlying transaction: the short sales themselves and the loans of securities to facilitate those short sales. In particular, the SEC protects the value of anonymity for short sellers in one rule, —where it acknowledges short sellers’ contributions to liquidity and price efficiency—but then in the other rule exposes short sellers’ confidential securities lending and position information on a granular basis. The SEC entirely disregarded the impact of one rule on the other, including by failing to conduct a sufficient cost-benefit analysis of both rules’ cumulative impact. Because of these and other flaws, the petitioners argue the rules are arbitrary and capricious under the Administrative Procedure Act and run counter to the SEC’s stated mission to protect investors and maintain fair, orderly, and efficient markets. The petitioners worked constructively to raise these issues during the rulemaking process and chose to litigate only as a last resort. Securities lending and short selling are foundational practices for investment and portfolio management. Mutual funds, pension plans, central banks, insurance companies, private funds, broker-dealers, and other sophisticated investors are involved in the lending and borrowing of securities. Securities lending improves investor returns by providing additional portfolio income. Borrowing securities is a necessary component of effecting short sales, which support price discovery, promote market stability, and reduce market risks. The newly adopted rules create inconsistent and burdensome reporting regimes that will increase the frequency and detail of disclosure of securities loan and short positions data, allowing market participants to imitate or trade against the underlying position holder, harming investors. In effect, the rules will discourage short selling.” In 2023 August, hedge fund associations & trade industry groups filed a lawsuit against United States SEC (Securities & Exchange Commission) for mandating fee disclosures including disallowing better liquidity terms to preferred investors. The hedge funds groups include The American Investment Council, the Managed Funds Association, Alternative Investment Management Association (AIMA), National Association of Private Fund Managers (NAPFM). Earlier in August 2023, the United States Securities & Exchange Commission (SEC) amended the private fund advisors regulations, including requiring private fund advisors to provide quarterly statements to investors (including performance & fees), providing yearly audited financial statement for each fund, and prohibiting providing preferred redemption & information to selected investors. More info below.
“ United States Appeals Court Instructs Securities & Exchange Commission (SEC) to Evaluate Costs & Benefits Impact of Proposed Reporting & Public Disclosure of Securities Loans & Short Selling Activity, Fund Associations Filed Lawsuit in 2023 to Request United States Appeals Court to Invalidate 2 New Rules “
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Hedge Fund Associations & Trade Industry Groups File Lawsuit Against United States SEC for Mandating Fee Disclosures Including Disallowing Better Liquidity Terms to Preferred Investors
1st September 2023 – Hedge fund associations & trade industry groups have filed a lawsuit against United States SEC (Securities & Exchange Commission) for mandating fee disclosures including disallowing better liquidity terms to preferred investors. The hedge funds groups include The American Investment Council, the Managed Funds Association, Alternative Investment Management Association (AIMA), National Association of Private Fund Managers (NAPFM). Earlier in August 2023, the United States Securities & Exchange Commission (SEC) amended the private fund advisors regulations, including requiring private fund advisors to provide quarterly statements to investors (including performance & fees), providing yearly audited financial statement for each fund, and prohibiting providing preferred redemption & information to selected investors. More info below.
United States SEC Amends Private Fund Advisors Regulations: Provide Quarterly Statements to Investors Including Performance & Fees, Yearly Audited Financial Statement & Prohibit Providing Preferred Redemption & Information to Selected Investors
24th August 2023 – The United States Securities & Exchange Commission (SEC) has amended the private fund advisors regulations, including requiring private fund advisors to provide quarterly statements to investors (including performance & fees), providing yearly audited financial statement for each fund, and prohibiting providing preferred redemption & information to selected investors. United States SEC: “To enhance transparency, the final rules will require private fund advisers registered with the Commission to provide investors with quarterly statements detailing certain information regarding fund fees, expenses, and performance. In addition, the final rules will require a private fund adviser registered with the Commission to obtain and distribute to investors an annual financial statement audit of each private fund it advises and, in connection with an adviser-led secondary transaction, a fairness opinion or valuation opinion. To better protect investors, the final rules will prohibit all private fund advisers from providing investors with preferential treatment regarding redemptions and information if such treatment would have a material, negative effect on other investors. In all other cases of preferential treatment, the Commission adopted a disclosure-based exception to the proposed prohibition, including a requirement to provide certain specified disclosure regarding preferential terms to all current and prospective investors. In addition, the final rules will restrict certain other private fund adviser activity that is contrary to the public interest and the protection of investors. Advisers generally will not be prohibited from engaging in certain restricted activities, so long as they provide appropriate specified disclosure and, in some cases, obtain investor consent. The final rules, however, will not permit an adviser to charge or allocate to the private fund certain investigation costs where there is a sanction for a violation of the Investment Advisers Act of 1940 or its rules.”
United States SEC Chair Gary Gensler: “Private funds and their advisers play an important role in nearly every sector of the capital markets. By enhancing advisers’ transparency and integrity, we will help promote greater competition and thereby efficiency. Consistent with our mission and Congressional mandate, we advance today’s rules on behalf of all investors — big or small, institutional or retail, sophisticated or not.”
United States SEC Amends Private Fund Advisors Regulations
23rd August 2023 – The Securities and Exchange Commission today adopted new rules and rule amendments to enhance the regulation of private fund advisers and update the existing compliance rule that applies to all investment advisers. The new rules and amendments are designed to protect private fund investors by increasing transparency, competition, and efficiency in the private funds market.
To enhance transparency, the final rules will require private fund advisers registered with the Commission to provide investors with quarterly statements detailing certain information regarding fund fees, expenses, and performance. In addition, the final rules will require a private fund adviser registered with the Commission to obtain and distribute to investors an annual financial statement audit of each private fund it advises and, in connection with an adviser-led secondary transaction, a fairness opinion or valuation opinion.
To better protect investors, the final rules will prohibit all private fund advisers from providing investors with preferential treatment regarding redemptions and information if such treatment would have a material, negative effect on other investors. In all other cases of preferential treatment, the Commission adopted a disclosure-based exception to the proposed prohibition, including a requirement to provide certain specified disclosure regarding preferential terms to all current and prospective investors.
In addition, the final rules will restrict certain other private fund adviser activity that is contrary to the public interest and the protection of investors. Advisers generally will not be prohibited from engaging in certain restricted activities, so long as they provide appropriate specified disclosure and, in some cases, obtain investor consent. The final rules, however, will not permit an adviser to charge or allocate to the private fund certain investigation costs where there is a sanction for a violation of the Investment Advisers Act of 1940 or its rules.
To avoid requiring advisers and investors to renegotiate governing agreements for existing funds, the Commission adopted legacy status provisions applicable to certain of the restricted activities and preferential treatment provisions. Such legacy status will apply to those governing agreements entered into in writing prior to the compliance date and with respect to funds that have commenced operations as of the compliance date.
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