On August 25, the United States Court of Appeals for the Fifth Circuit remanded two rules adopted by the Gensler-era SEC: the Securities Lending Reporting Rule and the Short Interest Reporting Rules (the Rules).
While the court’s decision did not vacate the rules outright, it found that the SEC's rulemaking process was flawed because the agency failed to consider and quantify the cumulative economic impact of the two rules, which meant the process did not meet the requirements of the Administrative Procedure Act (APA) and the Securities Exchange Act of 1934 (Exchange Act). The court reasoned that there is a “serious possibility” that the SEC can cure the defect by providing the required analysis.
Because the rules were not vacated, they are still technically in effect. While compliance with the rules is currently delayed through SEC exemptive orders, market participants will have to wait and see how the SEC decides to react to its latest loss in the Fifth Circuit.
Background
- The Securities Lending Reporting Rule (Rule 10c-1a) was adopted under the Dodd-Frank Act to improve transparency in securities lending transactions. It requires intermediaries, lenders and broker-dealers to report certain securities loan data to FINRA, which then publishes the information. FINRA created the SLATE Rules (5600 series) to implement these requirements.
- The Short Interest Reporting Rule (Rule 13f-2), also adopted under the Dodd-Frank Act, requires institutional investment managers to report monthly short sale data to the SEC through the EDGAR system.
Legal Challenges
The rules were challenged on several grounds, but the prevailing argument was that the SEC failed to consider the combined economic impact of both rules. The court pointed out that these rules are closely related and were adopted at the same time, so their effects should have been analyzed together.
The court rejected other arguments, including claims that the SEC lacked authority to issue the rules, did not provide enough opportunity for public comment, or issued rules that were arbitrary and capricious. The court found that the SEC acted within its authority and provided adequate public input.
Compliance Dates and Delays
The SEC has already delayed compliance dates for both rules:
- For the Securities Lending Rule, reporting is now required by September 28, 2026, and data publication by March 29, 2027.
- For the Short Sale Rule, compliance is delayed until February 2026.
These extensions are meant to give FINRA and market participants more time to prepare for the new requirements.
Impact on FINRA’s SLATE Rules
FINRA’s SLATE Rules, which require detailed reporting of securities lending transactions, are based on the SEC’s Rule 10c-1a. Because the Fifth Circuit sent this rule back for further review, the future of the SLATE Rules is now uncertain. The compliance date for SLATE was initially set for January 2, 2026, but this may change further depending on what the SEC does next.
What’s next?
While the rules remain in effect for now, their future depends on how the SEC responds to the court’s concerns. Options for the SEC include:
- Reopening the comment period to solicit additional public input on the cumulative economic impact of the two rules.
- Conducting and publishing a new economic analysis that quantifies the combined effects of the Rules.
- Proposing amendments to one or both rules to address concerns raised by the court and commenters.
- Re-adopting the rules with revised justifications or, if warranted, withdrawing or revising them.
The Fifth Circuit’s decision highlights the need for the SEC to fully consider the combined economic impact of related rules. Market participants should continue to monitor developments and prepare for possible changes in compliance timelines.
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