On August 25, 2025, the Fifth Circuit Court of Appeals vacated two regulations introduced during President Joe Biden’s administration, which were designed to enhance transparency in short-selling activities. The court determined that the U.S. Securities and Exchange Commission (SEC) had not adequately assessed the combined economic impact of implementing both rules simultaneously.
The challenged regulations aimed to increase disclosure requirements for short-selling and related securities lending transactions. These measures were part of the SEC’s response to market volatility observed during events like the 2021 GameStop “meme stock” surge, where retail investors significantly influenced stock prices, leading to substantial losses for hedge funds engaged in short-selling.
In December 2023, industry groups—including the National Association of Private Fund Managers, the Managed Funds Association (MFA), and the Alternative Investment Management Association (AIMA)—filed a lawsuit in the Fifth Circuit, arguing that the new rules could expose confidential trading positions and potentially invite retaliation. They also contended that the SEC had violated the Administrative Procedure Act by not properly considering the economic implications of the regulations.
The appellate court’s decision acknowledged that the SEC had overstepped by failing to evaluate the cumulative economic effects of the rules. Judge Cory Wilson, writing for the panel, stated that the SEC “erred by failing to consider the economic impact the Short Sale Rule would have on the Securities Lending Rule when the rules were promulgated in tandem and were adopted concurrently.” Consequently, the court remanded the matter back to the SEC for further review.
This ruling represents a partial victory for the hedge fund industry. Bryan Corbett, CEO of the MFA, welcomed the decision, emphasizing that the regulations were “fatally flawed from the start” due to the SEC’s concurrent adoption of related rules without analyzing their combined impact.
The SEC, now under the leadership of Republican Chair Paul Atkins following President Donald Trump’s appointment, has not yet commented on the ruling. Industry observers anticipate that the agency may re-propose revised versions of the rules rather than abandon them entirely.
This case is part of a broader trend where the Fifth Circuit has scrutinized and overturned several SEC regulations. In June 2024, the court vacated the SEC’s private fund adviser rules, concluding that the agency had exceeded its statutory authority. Similarly, in December 2023, the court invalidated the SEC’s share repurchase disclosure rule, citing the agency’s failure to conduct a proper cost-benefit analysis.
These decisions underscore the judiciary’s increasing role in shaping financial regulation and highlight the challenges the SEC faces in implementing new rules amid legal challenges from industry groups.