In a significant ruling, the U.S. Court of Appeals for the Fifth Circuit has sent the Securities and Exchange Commission’s (SEC) landmark Securities Lending Rule (Rule 10c-1a) and Short Sale Rule (Rule 13f-2) back to the agency, finding a critical flaw in the SEC’s economic analysis. However, in a crucial move, the court did not vacate the rules, leaving them intact while the SEC corrects its procedural misstep.
The court’s decision hinged on a narrow but vital procedural point: the SEC had failed to assess the cumulative economic impact of the two rules properly. The petitioners successfully argued that because the rules are highly interrelated and were adopted on the same day during the same meeting, the SEC was obligated to consider their combined financial effect.
Criticism of the Economic Analysis
The SEC’s analysis included the economic effects of the already-adopted Securities Lending Rule on the Short Sale Rule, but not the other way around. The agency’s justification was that when it finalized the Securities Lending Rule, mere moments before finalizing the Short Sale Rule, the latter was still technically a “proposed rule.” “In reality, the Short Sale Rule only “remain[ed] at the proposal stage” for an hour or so after the Securities Lending Rule was adopted, and the agency clearly planned to adopt the Rules together.” The Fifth Circuit flatly rejected this logic, calling it a “short-cutting fiction” and “regulatory sleight of hand” that “does not survive scrutiny.” The court found the agency’s reasoning to be “irredeemably illogical,” stating, “It is not absurd to require that an agency’s right hand take account of what its left hand is doing.”
While the Fifth Circuit court remanded Rule 10c-1a, its decision was not about the rule’s stated goals but rather the procedural failure to properly analyze its full economic impact alongside the Short Sale Rule. The SEC’s core objective, which the court did not dispute, was to increase transparency in the securities lending market, thereby reducing the information disadvantages faced by end borrowers and beneficial owners. The agency argued that this would lead to improved price discovery, greater competition, and lower borrowing costs for some securities. In essence, the court’s remand requires the SEC to substantiate and quantify these intended benefits more effectively by performing the cumulative economic analysis it initially omitted.
Notably, the court denied all other challenges against the rules, including arguments that the SEC exceeded its statutory authority or failed to provide an adequate public comment period. The ruling, therefore, targets a specific procedural error rather than the substance of the rules themselves.
A Directive to the SEC
The court’s decision to remand without vacatur means the rules are not voided. Instead, the SEC has been given a clear directive: go back and do the math properly. The agency must now “consider and quantify the cumulative economic impact” of both rules and respond to further public comments on that analysis. The court expressed confidence that the SEC could remedy the error, stating that such a remand is appropriate “when there is at least a serious possibility that the agency will be able to substantiate its decision given an opportunity to do so.” This language suggests the court views the flaw as curable and expects the rules to ultimately survive after the SEC completes its homework.
Next Steps and New Compliance Dates
To comply with the ruling, the SEC will need to undertake a new, comprehensive economic analysis examining the joint impact of Rule 10c-1a and the Short Sale Rule. This will likely involve several steps:
- Conducting the Analysis: SEC economists will model the combined costs and benefits.
- Issuing a Release: The agency will publish its new analysis and reopen the comment period to allow the public to provide feedback on the revised assessment.
- Finalizing the Rules: After reviewing new comments, the SEC will need to formally re-adopt the rules with the strengthened economic justification.
This multi-stage process will inevitably take time. Consequently, it is highly likely that the original compliance dates for Rule 10c-1a will be delayed.[1] The complexity of the required analysis, combined with the mandatory public comment period, makes it unfeasible for the SEC to meet even the now extended reporting deadlines. The agency will almost certainly have to issue a formal postponement to give itself the time to build a legally durable record and for market participants to prepare for the eventual implementation.
[1] Covered persons (such as lenders and intermediaries) were originally expected to begin reporting securities lending information to the RNSA starting on January 2, 2026, and FINRA (the RNSA) was expected begin to publicly report the collected information on April 2, 2026. However, with the recent extensions granted to FINRA, the reporting date for covered persons was delayed until September 28, 2026, and the date on which FINRA would begin its public dissemination of covered securities loan information was extended to March 29, 2027. (See, Release No. 34-103560)