SEC PLAYING CATCH UP - SHORT SALE DISCLOSURE

Post by Anna Monteiro, Head of North America Sales & Client Services

Comments Closed on SEC Proposed Rule 13f-2 – Now We Wait

The comment period for SEC file S7-08-22, release number 34-94313 which proposes institutional investment managers to report short selling activity officially closed on 26 April 2022. As one would imagine, the majority of these comments were made by retail investors (over 90%). The others were from law firms, academia, market associations and just a handful from market participants, most notably T Rowe Price.

Ultimately, the Proposed Rule 13f-2 seeks to address Congress’ directive under Section 929X of the Dodd-Frank Act to provide more transparency of short selling. The SEC is behind its counterparts in other parts of the globe when it comes to market transparency. Since the downturn of 2008, there has been an ever-increasing global shift to provide greater transparency to investors. And while the U.S. is the largest capital market in the world, it is the only G7 country that does not have a short selling reporting requirement for institutional investors.

What is striking about the proposed rule, is that the SEC did not take a page from the rest of the G7 countries which require reporting on net short positions. Instead, their proposal focuses on gross short positions. The SEC statement (p.37) in the proposed rule may explain why they went for the latter, “The Reporting Thresholds are structured to make it more difficult for Managers with substantial gross short positions to avoid disclosure by trading below a Reporting Threshold, particularly with lower market capitalization securities.” The term “gross short position” means the number of shares of the equity security that are held short.

There are two threshold triggers (A and B) which would require an institutional investor to disclose their short positions if either is met within a calendar month. Together these resemble a hybrid of Hong Kong and Australia requirements.

Threshold A would measure the size of the short position in question relative to both dollar value and shares outstanding. If the institutional investor had a(n)

· gross short position in the security of at least $10 million at the close of regular trading on any settlement date during the calendar month; or

· average gross short position for the calendar month equal to at least 2.5 percent of the outstanding class of equity security.

Threshold B is designed to trigger reporting by managers that have substantial short positions in a non-reporting issuer, even if the position is relatively small compared to the issuer’s market cap. An institutional investment manager would be subject to reporting for a given calendar month if it had a gross short position in the security of at least $500,000 at the close of regular trading on any settlement date during the calendar month.

Market participants, such as T Rowe believe that the current data available to the market from FINRA (for a fee) is sufficient, they oppose any public dissemination of data under this new proposed rule and

cite significant burden in meeting this new reporting requirement if passed as outlined. Besides the financial and compliance burdens, there is the potential for imitated trading by investors and of course short squeezes. SEC Chairman Gary Gensler stated that Proposed Rule 13f-2 “would strengthen transparency of an important area of our markets that would benefit from greater visibility and oversight” and while that may be true, others believe it will also provide the enforcement division of the SEC with necessary information to target short selling that is harmful to the markets.

While we wait for the response from the SEC, it would be hard for them to ignore the loud voice from retail investors, other major markets that have short selling reporting requirements and they’re own claim of wanting to provide transparency. I think they’re going to have to put their money where their mouth is on this one.

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