Monday, March 14, 2011

In Letter to SEC, Hedge Fund Industry Interprets Dodd-Frank as Requiring Aggregate Rather than Individual Public Reporting of Short Positions

The hedge fund industry believes that the plain language and legislative history of Section 929X of Dodd-Frank clearly indicates the intent of Congress to require a public report disclosing aggregate information about short sales and not information about individual short sales or short positions. In a letter to the SEC, the Managed Funds Association said that the legislative intent is to move away from a requirement to publicly disclose information about individual short sales towards a regime of aggregate disclosure.

Section 929X directs the SEC to adopt rules providing for the public disclosure of the name of the issuer and the title, class, CUSIP number, aggregate amount of the number of short sales of each security, and any failures to deliver the security following the end of the reporting period. At a minimum, such public disclosure must occur every month.

According to the MFA, the genesis of Section 929X was a bill proposed in October of 2009 by then House Majority Leader Steny Hoyer that, among other things, required the SEC to publish aggregate short sale information publicly. The intent of the Hoyer legislation was that the SEC would privately collect individual short sale positions and then aggregate short sale information and make it public. The MFA reasoned that reading the bill to require public reporting of individual short positions would render meaningless a FOIA exemption since there would be no reason to provide a FOIA exemption for publicly available information.

House Financial Services Committee Chairman Barney Frank included a modified version of the Hoyer language in his manager’s amendment to H.R. 4173, the House version of Dodd-Frank. Section 7422 of H.R. 4173, as passed by the House, included this revised version of the provision, which provided for two different reporting regimes: individualized reporting to the SEC on a confidential basis and aggregate and anonymous reporting by the SEC.

The version of the bill passed by the Senate prior to the House-Senate conference that produced Dodd-Frank did not contain an analogous provision to Section 7422. The only provision in the Senate bill relevant to short selling was Section 415, which called for an SEC study and a report to Congress with any recommendations for market improvements.

During the House-Senate conference, House leaders proposed amending the Senate bill by including the text in Section 7422 in the final conference report. The Senate accepted the House amendment, with one change. As a result of the agreement in conference, the paragraph requiring private, daily reporting on a confidential basis was deleted from Section 929X, but the paragraph on public, aggregate reporting by the SEC was retained. There is no indication that the Senate proposal to delete the paragraph requiring daily, private reporting to the SEC was intended to affect the clear meaning of the paragraph requiring public, aggregate reporting by the SEC.

While recognizing the sentiment of some that because Section 929X amends Section 13(f) of the Exchange Act this somehow indicates a Congressional intent to require individualized disclosure of short sales, the MFA believes that trying to interpret Section 929X as an extension of the existing individualized reporting provision for long positions in Section 13(f) ignores both the specific statutory language, the evolution of the provision and the clear legislative intent to require aggregate reporting and not individualized reporting of short positions.

The MFA also understands that, given that the exchanges and FINRA currently report aggregate short positions, some persons might question why Congress would enact a provision that reflected current practice. But the MFA said that it is not unusual for Congress to codify an existing practice in order to ensure that it continues. Moreover, while FINRA and the exchanges currently make public certain reports with aggregate short positions, there is no publicly available report containing comprehensive, market-wide, aggregate short sale information, such as a report aggregating short sale information by security across all exchanges, over-the-counter transactions, and so-called arranged stock lending. As such, the MFA interpreted Section 929X to require a new, market-wide public report on the aggregate number of short sales of a security.

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