Key Takeaways
- • The Managed Funds Association, representing 600+ hedge funds and managed futures funds, is pressing the SEC to modify emergency short-selling disclosure rules that took effect September 29, 2008, arguing the transparency requirement goes too far.
- • New SEC rules require institutional investment managers with $100 million or more in aggregate accounts to file weekly Monday disclosures of short-selling activity, with reports made public two weeks after filing—a provision the hedge fund industry views as competitively damaging.
- • Richard Baker, MFA president and CEO, stated hedge funds would accept the short-selling restrictions if disclosure reports remained private, framing public transparency as equivalent to revealing proprietary investment strategies to competitors.
- • The SEC's broader crackdown includes a two-week ban on short sales across 799 financial firms and was triggered by complaints from major financial institutions, including Morgan Stanley, that short-selling artificially depressed their stock prices during the financial crisis.
- • The hedge fund association planned to present its case to the SEC and Congress beginning Tuesday (September 23, 2008), with the SEC indicating it is actively evaluating the disclosure requirement.
Summary
The nation's largest hedge fund association is mobilizing to challenge the Securities and Exchange Commission's newly implemented short-selling restrictions, specifically targeting mandatory disclosure requirements that took effect September 29, 2008. The Managed Funds Association, which represents more than 600 hedge funds and managed futures funds, plans to press the SEC and Congress for modifications to rules it characterizes as overly burdensome and competitively disadvantageous.
The core dispute centers on disclosure mechanics. New SEC rules require institutional investment managers with aggregate accounts valued at $100 million or more to file regular Monday disclosures detailing their stock-shorting activity from the preceding week. These reports will be made public two weeks after each filing. Richard Baker, president and CEO of the MFA, articulated the industry's core objection, stating: "By disclosing where we're investing … you're in essence taking Colonel Sanders' fried chicken recipe and giving it to Popeyes." He warned that such transparency could drive investors away from hedge funds by exposing proprietary trading strategies to competitors.
According to Baker and other hedge fund executives, the industry would not contest the emergency short-selling restrictions themselves—including a concurrent two-week ban on short sales of stock in 799 financial firms—if the SEC maintained the confidentiality of disclosure filings. This position signals a willingness to accept regulatory oversight while maintaining information asymmetries that underpin competitive advantage in alternative asset management.
The SEC's short-selling crackdown emerged as a response to pressure from financial institutions. Investment bank Morgan Stanley and other financial companies successfully argued that coordinated short-selling activity had artificially depressed their stock prices during the ongoing financial crisis. The SEC's enforcement action reflects broader market stabilization efforts during a period of acute financial stress, but it has triggered significant pushback from the alternative investment community, which views the transparency mandate as excessive regulatory overreach during an emergency environment.
The core dispute centers on disclosure mechanics. New SEC rules require institutional investment managers with aggregate accounts valued at $100 million or more to file regular Monday disclosures detailing their stock-shorting activity from the preceding week. These reports will be made public two weeks after each filing. Richard Baker, president and CEO of the MFA, articulated the industry's core objection, stating: "By disclosing where we're investing … you're in essence taking Colonel Sanders' fried chicken recipe and giving it to Popeyes." He warned that such transparency could drive investors away from hedge funds by exposing proprietary trading strategies to competitors.
According to Baker and other hedge fund executives, the industry would not contest the emergency short-selling restrictions themselves—including a concurrent two-week ban on short sales of stock in 799 financial firms—if the SEC maintained the confidentiality of disclosure filings. This position signals a willingness to accept regulatory oversight while maintaining information asymmetries that underpin competitive advantage in alternative asset management.
The SEC's short-selling crackdown emerged as a response to pressure from financial institutions. Investment bank Morgan Stanley and other financial companies successfully argued that coordinated short-selling activity had artificially depressed their stock prices during the ongoing financial crisis. The SEC's enforcement action reflects broader market stabilization efforts during a period of acute financial stress, but it has triggered significant pushback from the alternative investment community, which views the transparency mandate as excessive regulatory overreach during an emergency environment.
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