SEC Proposes Additional Short Selling Disclosures
Commentary by Steven Lofchie
The SEC proposed new rules and amendments to comply with Congress’s mandate to provide greater short sale transparency to investors.
The proposed rule changes include:
- Adopting new SEA Rule 13f-2, which would require an "institutional investment manager" to file with the SEC proposed Form SHO on a monthly basis for equity positions owned or controlled by the manager in which
- (i) the manager has a gross short position at the close of any settlement date during the month of (a) $10 million in securities of an issuer subject to SEA Section 12 or 15(d) or (b) $500K in the case of any non-reporting issuer; or
- (ii) in the case of issuers subject to Section 12 or 15(d), the manager maintained on average a gross short position of 2.5 percent or more in outstanding shares during the month.
- Adopting new Form SHO, which would require (as to the short positions referenced above) the reporting by a manager of: (i) the security name, (ii) the manager's month-end gross short position amount, and (iii) the manager's daily trading activity for the month. The SEC would make the Form SHO information public on an aggregated (not individual manager) basis.
- Adding Rule 205 to Regulation SHO, which would require a broker-dealer to identify a security purchase as "buy to cover" if it has a short position in the same security at the time of purchase.
- Amending the consolidated audit trail to require reporting firms to notify CAT of "buy to cover" information and the use of the Regulation SHO bona fide market making exception.
- Reopening the comment period for proposed SEA Rule 10c-1 that would require, as previously covered, securities lenders to report to FINRA certain terms of their transactions, within 15 minutes of the trade. See generally SEC Proposes to Require Extensive Disclosures on Securities Loans.
The term "institutional investment manager," as used in the rule proposal, is defined by reference to SEA Section 13(f)(6)(A), which defines the term to include any person, other than a natural person, who invests in securities for its own account and any person [including a natural person] who exercises investment discretion over another person's account. Note that the term is not limited to investment managers having discretion over more than $100 million of assets (unlike Section 13(f)(1)). However, the proposing release indicates that the SEC believes that the number of filers would be limited in light of the minimum size of the short positions subject to the requirements.
Comments on these proposed rules and amendments are due within 30 days after their publication in the Federal Register.
Commissioner Statements
SEC Chair Gary Gensler supported proposed Rule 13f-2 and Form SHO saying that raw data about large short positions is important, and that it will provide "visibility into the behavior of large short sellers" and allow the SEC to better regulate "this important market, especially in times of stress and volatility."
SEC Commissioner Hester M. Peirce expressed her support for the proposal noting that it would establish a framework for public disclosure of short sale information. Ms. Peirce is particularly interested in commenters' opinions on whether "these disclosure obligations are appropriate in light of the transparency objectives of Section 929X and the proposed rule and how they may affect trading strategies and market making activity in our markets."
Commentary
The new proposed reporting requirements are part of a torrent of rule proposals by the SEC, many of which impose very extensive informational requirements. For example, the SEC has proposed to (i) expand Form PF, (ii) expand SEA Sections 13(d) and 13(g) beneficial ownership reporting requirements, (iii) expand proxy voting disclosure requirements, and (iv) expand reporting as to position and security-based swaps.
The SEC has generally provided a very limited comment period for each of these rule proposals. (See, Rat Farms and Rule Comments - Statement on Comment Period Lengths (Statement by SEC Commissioner Peirce)).
In general, the SEC's justification for the rule proposals is that information is good. Commenters on the proposals should focus on the costs of compliance and as to whether the information is likely to provide meaningful benefits, whether to the regulators or the public.
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