FILE PHOTO: The seal of the U.S. Securities and Exchange Commission hangs on the wall at SEC headquarters in Washington, June 24, 2011.REUTERS/Jonathan Ernst/File Photo

By Carolina Mandl

NEW YORK (Reuters) -A U.S. appeals court ordered the Securities and Exchange Commission on Monday to assess the economic impact of President Joe Biden-era rules aimed at boosting transparency of short-sell trades, in a partial victory for hedge funds that brought the case.

Hedge fund associations in December 2023 sued in the 5th U.S. Circuit Court of Appeals to vacate the rules adopted earlier that year, arguing they could reveal confidential trading positions and potentially invite retaliation.

The National Association of Private Fund Managers, the Managed Funds Association, and the Alternative Investment Management Association also argued the rules violated the Administrative Procedure Act, which requires agencies to justify their rules and consider feedback, and that it exceeded the SEC's authority.

On Monday, a three-judge panel rejected the argument that the rules would expose confidential investor positions and were beyond the SEC's remit, but it did require the SEC to assess the costs and benefits of the rule.

Long controversial, short sales are trades that stand to profit when a stock falls. The practice drew renewed scrutiny from Congress in 2021, amid the so-called "meme stocks" frenzy when retail investors drove up the price of shares in GameStop and caused losses to hedge funds. In response, the SEC, led at the time by Democratic chair Gary Gensler, said it would introduce rules to increase transparency around short-selling.

The review will now fall to the SEC's new leadership, led by Paul Atkins, President Donald Trump's Republican SEC chair pick.

An SEC spokesperson said the regulator's rulemaking must take into account a thorough cost-benefit analysis.

"The Commission is reviewing the decision and will determine next steps as appropriate," the spokesperson said.

The hedge funds expect the agency will ultimately re-propose a new version of the rule rather than scrap it, according to one person familiar with their thinking.

Bryan Corbett, CEO of the MFA, the group which led the litigation, cheered the ruling in a statement.

"These regulations were fatally flawed from the start when the SEC adopted highly related rules on the same day without analyzing the impact one would have on the other," he said.

The associations have sued to overturn other new rules the SEC adopted in 2023 under Gensler, with the groups scoring some victories.

(Reporting by Carolina Mandl, in New York; Editing by Andrea Ricci, Stephen Coates and Nia Williams)