Form SHO: a call for flexibility, not reversal

The Securities and Exchange Commission (SEC) adopted the rules to increase transparency in the securities lending and short sale markets following the 2008 financial crisis. The rules were a direct response to a mandate from Congress in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank). The act amended the Securities Exchange Act of 1934 and gave the SEC the authority to create rules to increase market transparency.

Specifically, Section 984(b) of Dodd-Frank gave the SEC the power to “promulgate rules that are designed to increase the transparency of information available to brokers, dealers, and investors, with respect to the loan or borrowing of securities”. Section 929X provided the authority to require “public disclosure of the name of the issuer and the title, class, CUSIP number, [3] aggregate amount of the number of short sales of each security, and any additional information determined by the Commission following the end of the reporting period”.

The SEC sought to address “perceived gaps” in market information for both securities lending and short sales. The lack of comprehensive public information makes it difficult for federal regulators to oversee transactions and ensure a fair and orderly market. The SEC also wanted to prevent abusive practices like “short and distort” and “naked” short selling.

What the Fifth Circuit Court actually says

The court ruling from the U.S. Court of Appeals for the Fifth Circuit, issued on August 25, 2025, addresses a legal challenge to two rules adopted by the Securities and Exchange Commission (SEC) aimed at increasing transparency in the securities lending and short sale markets: the Securities Lending Rule (17 C.F.R. § 240.10c-la) and the Short Sale Rule (17 C.F.R. § 240.13f-2).

The court did not vacate the rules but instead remanded them back to the SEC for further proceedings. It found that the SEC “failed to consider and quantify the cumulative economic impact” of the two rules, which were adopted nearly at the same time.

It determined that the SEC’s approach of analyzing the economic impact of the rules in isolation was a “short-cutting fiction”. The SEC’s justification that the later-adopted rule was still in the “proposal stage” when the first one was finalized was deemed illogical because the agency clearly planned to adopt them together. Given the rules’ significant interplay and concurrent promulgation, the SEC should have considered their combined economic effects.

The court rejected most of the other arguments made by the petitioners, including that the SEC lacked the statutory authority to issue the rules. Regarding the Securities Lending Rule, the court states: “The Commission thus acted within its statutory bounds in adopting the Rule, and Petitioners’ contention to the contrary lacks merit.” On the matter of the Short Sale Rule’s purported extraterritorial effects, the court concluded that the rule’s scope is confined to domestic activities, stating: “Because the Short Sale Rule, by its terms, is cabined to cover only equity securities “already subject to Regulation SHO” and because Regulation SHO solely applies to equity securities traded in the United States, it follows that the Short Sale Rule does not carry any improper extraterritorial application. Petitioners’ argument thus lacks merit.”

What this means for private fund managers

The core message for fund managers is to stay the course. The court’s ruling reinforces the need for continued preparation. While the SEC extended the timeline for the first Form SHO reports from February 2025 to February 2026, this extra time is a gift. It provides a valuable opportunity to complete your system builds, thoroughly test your processes, and refine data quality.

Don’t expect a reversal. The court’s primary issue was with the SEC’s cost-benefit analysis, not the fundamental policy itself. The broader challenges to the rule were rejected. It’s more likely the SEC will fine-tune the rule rather than roll it back completely. With that in mind, your systems and workflows should be designed with flexibility at their core, able to handle potential changes to thresholds, reporting timelines, or disclosure details without requiring a major overhaul.

Finally, strong governance is paramount. This isn’t just about a one-time filing; it’s about a repeatable process. You should be documenting how filing triggers are identified, reviewed, and approved. A robust audit trail will be your best friend if the SEC comes calling with questions down the line.

Implications for the SEC

The court’s directive is clear: the SEC must now redo its economic analysis to consider the combined costs of both the short-sale and securities-lending rules. While this adds a new layer to the SEC’s work, the broader policy direction remains intact. The court’s decision affirms the SEC’s authority to push for greater market transparency, so we can expect this initiative to continue.

A perspective for technology & service partners

For those of us in the technology and service provider space, this ruling underscores the importance of our core principles. Platforms for reporting must be built with configurable engines that allow for quick adjustments to thresholds, deadlines, and logic as the SEC implements updates.

This situation also highlights the critical need for data discipline. Clean identifiers, granular position data, and accurate instrument attributes are not just best practices, they are essential for reliable and accurate reporting.

Most importantly, we must ensure client transparency. Firms will rely on us to provide them with clear dashboards, draft reports, and direct communication on any changes the SEC makes. Our service agreements should also reflect this reality, including “change-in-law” language to anticipate regulatory shifts and prevent disputes.

The bottom line

While the legal proceedings add a layer of complexity, the main takeaway remains simple: the SEC’s short-sale transparency initiative is alive and well. The first Form SHO reports are still due on February 17, 2026, for January 2026 data. Preparation is key, and building flexible, adaptable systems will put you in the strongest position to meet both today’s requirements and any future changes.