The SEC took several actions on Friday centered around enhancing the disclosure of short sale information by institutional investment managers. The Commission’s primary move was the proposal of new 1934 Act Rule 13f-2, and corresponding Form SHO, to require certain institutional investment managers to report short sale related information on a monthly basis. The agency intends to use that disclosure to make aggregate data about large short positions, including daily short sale activity data, available to the public for each individual security (Short Position and Short Activity Reporting by Institutional Investment Managers, Release No. 34-94313; Notice of the Text of the Proposed Amendments to the National Market System Plan Governing the Consolidated Audit Trail for Purposes of Short Sale-related Data Collection, Release No. 34-94314; Reopening of Comment Period for Reporting of Securities Loans, Release No. 34-94315).
Chair Gary Gensler believes the new information would give the public and market participants greater clarity on the behavior of large short sellers. In his view, the data reported on proposed Form SHO also would help the Commission better understand the role short selling may play in market events.
As proposed, Rule 13f-2 would require institutional investment managers exercising investment discretion over short positions meeting specified thresholds to report on proposed Form SHO information relating to end-of-the-month short positions and certain daily activity affecting such short positions. The proposal would apply to institutional investment managers who hold, in an equity security of a reporting issuer, a short position of at least $10 million or the equivalent of 2.5 percent or more of the total shares outstanding, or who hold, in an equity security of a non-reporting issuer, a short position of at least $500,000.
Required disclosure. The information that would have to be reported under Rule 13f-2 is the name of the eligible security, end of month gross short position information, and daily trading activity that affects a manager’s reported gross short position for each settlement date during the calendar month reporting period.
The Commission plans to aggregate the reported data by security to protect the confidentiality of the reporting managers. It would then publicly disseminate that data to all investors.
The information that the SEC would disseminate from Form SHO is: 1) the issuer’s name and other identifying information; 2) the aggregated gross short position across all reporting managers in the reported security at the close of the last settlement date of the calendar month of the reporting period, as well as the corresponding dollar value of the reported gross short position; 3) the percentage of the reported aggregate gross short position that is reported as being fully hedged, partially hedged, or not hedged, and 4) for each reported settlement date during the calendar month reporting period, the “net” activity in the reported security, as aggregated across all reporting managers, within 14 business days of the calendar-month-end reporting deadline.
Reg. SHO Rule 205. To supplement this new disclosure, the SEC also proposed Rule 205 under Regulation SHO, as well as an amendment to the Consolidated Audit Trail (CAT). Rule 205 would establish a new “buy to cover” order marking requirement for certain purchase orders effected by a broker-dealer for its own account or for the account of another person at the broker-dealer.
Regulation SHO governs short selling and requires broker-dealers to identify each sale order that it effects as either “long,” “short,” or “short-exempt.” It does not currently have a corresponding requirement for purchase orders. Proposed Rule 205 would require a broker-dealer to mark a purchase order as “buy to cover” if the purchaser has any short position in the same security at the time the purchase order is entered. The Commission believes this information will be especially useful in reconstructing significant market events and identifying potentially abusive trading practices including short squeezes.
CAT amendment. The CAT amendment would require CAT reporting firms to report short sale data not currently required that would enhance regulators’ understanding of the lifecycle of a trade—from order origination, including an order’s mark, through order execution and allocation. Proposed Rule 205 and the CAT amendment would complement the proposed disclosure on Form SHO by mandating the reporting to CAT of “buy to cover” order marking information and requiring reliance on the bona fide market making exception in Regulation SHO.
In contrast to data related to short sales that is currently collected and published by FINRA and the exchanges, the aggregated information derived from information reported on Form SHO and published pursuant to Rule 13f-2 would reflect the timing of increases and decreases in the reported short positions, the SEC said in the Rule 13f-2 proposing release. The aggregated information would inform market participants regarding the overall short sale activity by reporting managers, and would help the Commission and SROs to overcome current challenges in using data from CAT to estimate short positions and changes in short positions, the SEC stated.
10c-1 comment period. Given the implications of proposed Rule 13f-2, the Commission also voted to reopen the comment period for 1934 Act Rule 10c-1. The rule was initially proposed on November 18, 2021, and its initial comment period ended January 7, 2022.
The proposed rule would increase the transparency and efficiency of the securities lending market by requiring any person that loans a security on behalf of itself or another person to report the material terms of those securities lending transactions and related information to a registered national securities association. The SEC said that it is reopening the comment period so that commenters may consider whether there would be any effects of proposed Rule 13f-2 that the Commission should consider in connection with proposed Rule 10c-1.
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