The battle over Wall Street’s most contentious trading tactic has taken another twist. A U.S. appeals court has ordered the Securities and Exchange Commission to go back and reassess the economic fallout of its Biden-era rules on short-selling transparency—a win, at least in part, for hedge funds that challenged the policy.
The case was launched in late 2023 by powerful hedge fund associations, who argued the SEC’s move would compromise confidential strategies, invite potential retaliation, and run afoul of basic rulemaking requirements. On Monday, the 5th Circuit Court of Appeals didn’t buy every claim. Judges ruled that the SEC had the authority to write such rules and that investor secrets weren’t at risk—but they did fault the agency for failing to properly weigh costs against benefits.
Short-selling has always lived in the shadows of Wall Street—profitable when stocks dive, loathed when markets rally. The practice grabbed national attention during the GameStop mania of 2021, when retail traders squeezed hedge funds into multibillion-dollar losses, prompting regulators to promise more sunlight on the practice.
Those promises took form under then-SEC chair Gary Gensler, who rolled out new transparency rules in 2023. Now, the responsibility for revisiting them falls to the agency’s new leadership under Paul Atkins, tapped by President Trump.
An SEC spokesperson said the Commission is “reviewing the decision” and stressed that any rulemaking must include “a thorough cost-benefit analysis.” Hedge funds, meanwhile, are betting the SEC will rewrite the rules instead of scrapping them entirely.
Bryan Corbett, head of the Managed Funds Association—the group that spearheaded the lawsuit—welcomed the decision, calling the rules “fatally flawed from the start.”
This fight is far from over. Hedge fund groups have already taken aim at other regulatory moves from the SEC’s 2023 agenda, notching occasional victories and setting the stage for more courtroom battles over how far regulators can push Wall Street.
