By Carolina Mandl

NEW YORK (Reuters) -A U.S. appeals court on Monday ordered the U.S. Securities and Exchange Commission 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, Managed Funds Association (MFA), and Alternative Investment Management Association (AIMA) 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 President Donald Trump's Republican SEC chair pick Paul Atkins. The SEC did not immediately comment on the ruling.

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.

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

"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 new rules the SEC adopted in 2023 under chair Gary Gensler, with the groups scoring some victories.

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