The Managed Funds Association says it is disappointed that the Securities and Exchange Commission’s short selling restrictions are not supported by empirical data.

It says most market observers agree that price declines and decreased investor confidence during the financial crisis were caused by the sudden and drastic changes in economic fundamentals, including the perceived insolvency of certain companies, and not by any short selling activity.

MFA says it fully supports the SEC’s efforts to combat manipulative short selling and other market abuses, but those activities should not be confused with legitimate short selling.

“As recognised by the SEC, short selling is an essential method by which investors – including those managing institutional assets for pension funds and endowments – mitigate risk, provide needed liquidity to markets, and assert their view that the current market price of a security is overpriced relative to the company’s economic performance,” it says.

“Economic analyses and independent studies demonstrate that restrictions on short selling impede these important functions and impose significantly greater transaction costs on investors.”

MFA has urged the SEC to carefully monitor and analyse the impact of the new restrictions on the functioning of equity markets, and commit to re-evaluating the rules based on observable impacts on markets, investors, and capital formation.