MFA Raises Concerns on SEC Proposed Short Sale Reporting Rules

Commentary by Steven Lofchie and Josh La Grange

The Managed Funds Association ("MFA") raised substantive concerns on an SEC proposed rule for short sale reporting by issuers and institutional investment managers. As previously covered, the proposed rule would require significant disclosure of short position information.

In its comment letter, the MFA raised the following issues:

  • Duplicative Reporting of Short Position Data. The MFA asserted that the collection of data under SEA proposed Rule 13f-2 ("Reporting by institutional investment managers regarding gross short position and activity information") and proposed Form SHO ("Reporting by Institutional Investment Managers") is burdensome and costly because there are existing sources available to collect the information sought, most notably through FINRA and the Consolidated Audit Trail.

  • Failure to Consider Consequences of Reporting Manager-level Short Position Information. The MFA recommended that the SEC "exhaust its efforts" to use existing data before adopting the proposed reporting regime that would require managers to report "daily transaction data and monthly short positions to the SEC." The MFA noted that, among other things, the SEC did not sufficiently consider "the most significant cost and consequence of manager-level reporting: the risk that commercially sensitive investment and trading information is disclosed on an attributed basis." In addition, the MFA expressed concern that the SEC proposal could deter short selling.

  • Simplifying Certain Compliance Language on Proposed Form SHO. The MFA suggested simplifying the language in proposed Form SHO by:

    • limiting the reporting requirements to the stock of U.S. reporting issuers and including a list of in-scope securities on Form SHO;

    • implementing only the dollar-based reporting thresholds in Threshold A of the SEC proposal instead of the two reporting thresholds proposed in order to reduce the burden on managers;

    • eliminating the daily activity table in proposed Form SHO;

    • eliminating hedging-related information because it "provide[s] no useful information to either the SEC or market participants"; and

    • extending the timeline for aggregated disclosure from 30 days to at least 45 days in order to "better protect managers from the risk that their positions and strategies will be used in connection with a short squeeze or other market-driven reaction."

The MFA warned that "[s]hort selling is an essential component of healthy functioning capital markets" and that the SEC should be mindful that "[e]ach new regulation raises the barrier of entry for new entrants and saddles existing market participants with significant additional costs."

Commentary

Some of the language in the comment letter - such as admonishing the SEC to reconsider its cost-benefit analysis - could portend the bringing of a legal challenge under the Administrative Procedure Act.

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Commentary

Josh La Grange

In its comment, the MFA supports the appropriate need and use for the relevant data, while making a compelling argument about the extent to which those needs can already be met without additional reporting. MFA's criticism about the estimated compliance time being no greater than under the existing narrower Form SHO regime and its APA analysis constitute a strong case that the SEC is giving only lip service to its cost-benefit analysis obligations.

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