Short-Selling Scrutiny Intensifies: Hedge Funds Push for Compliance Extension

Brad. M

1/22/20252 min read

In a recent letter submitted to the Securities and Exchange Commission (SEC), the Managed Funds Association (MFA) and the Alternative Investment Management Association (AIMA) have requested an extension of the compliance deadline for the new Short Position and Short Activity Reporting Rule (Rule 13f-2) until July 1, 2025. This move comes as hedge funds face mounting regulatory pressure and increased scrutiny under the new administration.

Under the Biden administration, hedge funds have been accused of engaging in illegal short selling practices, leveraging regulatory gaps to their advantage. SEC Chair Gary Gensler has been criticized for failing to address retail investors' concerns about market transparency and fairness. Retail investors have repeatedly raised alarms about manipulative practices such as derivatives, dark pools, and payment for order flow (PFOF), which hedge funds allegedly use to obscure their short positions and avoid regulatory oversight.

Now, with former President Donald Trump returning to office and placing a renewed focus on market integrity, hedge funds are facing heightened scrutiny. Trump's administration has been vocal about addressing market manipulation, particularly in response to the short-selling tactics used against Trump Media & Technology Group (DJT). As regulatory bodies shift their attention to these practices, hedge funds appear to be seeking ways to delay transparency measures that could expose their activities.

The Hedge Fund Response: Seeking Regulatory Delays

The letter from MFA and AIMA argues that the current compliance timeline for the Short Position Reporting Rule is impractical due to technological and operational challenges. They cite the late release of technical specifications and the short window for implementing necessary system changes as primary reasons for their request. The hedge funds claim that without additional time, their first Form SHO reports, due by February 14, 2025, may contain incomplete or inaccurate data.

However, critics argue that this delay is a calculated move to continue hiding illicit activities. The new reporting requirements mandate institutional investment managers to disclose their end-of-month gross settled short positions and daily changes. Transparency advocates argue that hedge funds are resisting these rules because they would unveil the extent of manipulative practices that have harmed retail investors.

Regulatory and Political Implications

With the Trump administration prioritizing stock market integrity, hedge funds are under increased pressure to comply with stricter regulations. The delay request has sparked concerns among market observers who believe that hedge funds are attempting to buy time to adjust their strategies and minimize exposure.

The SEC's response to this request will be closely watched. If the extension is granted, it could signal continued leniency towards hedge funds, while a rejection could indicate a tougher stance on market manipulation. Retail investors and advocacy groups are urging the SEC to deny the extension and enforce the reporting requirements as scheduled to ensure transparency and fairness in the markets.

Conclusion

The hedge fund industry's request to delay compliance with Rule 13f-2 raises significant questions about market transparency and regulatory accountability. As political and regulatory dynamics shift, all eyes are on the SEC and whether it will uphold investor interests or succumb to industry pressure. With Trump’s administration focusing on stock market reforms, the coming months will be critical in determining the future landscape of short-selling practices and financial market integrity.