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Mar 04, 2022

SEC proposes new monthly disclosure rules for short-sellers

NIRI calls for more detail on short-selling activity

While investors in the US must disclose long positions in stocks, the same transparency has not been required for short sales.

That imbalance could be evened up, at least partially, after the SEC proposed a new rule requiring disclosure of short positions on a monthly basis – although some market participants would like the changes to go further.

Under the plan, investors would have to report short positions exceeding $10 mn or where the average size is at least 2.5 percent of issued shares. Disclosure would need to take place two weeks after the end of the month.

The SEC would then aggregate the data and make it available to the public, including daily short-sale activity. The commission estimates it could release the information within one month following the end of the reporting period.

The US regulator would also report what percentage of the aggregate short position is fully, partially or not hedged. An unhedged position suggests the investor has a negative view on the stock and expects it to fall.

‘I am pleased to support this proposal because, if adopted, it would strengthen transparency of an important area of our markets that would benefit from greater visibility and oversight,’ says SEC chair Gary Gensler in a statement.

Under scrutiny

Short-selling has often come under scrutiny during times of market stress, when it is accused of exacerbating market declines. The US Congress originally directed the SEC to look into short-selling transparency following the financial crisis in 2008.

The practice hit the headlines again last year when hedge funds, which held short positions in GameStop and other so-called meme stocks, found themselves targeted by retail investors who co-ordinated their action via the Reddit social media platform.

More broadly, the lack of transparency around short-selling means companies and investors are prevented from making informed decisions, while issuers are also limited in their ability to engage with investors, say critics of the current disclosure regime.

‘Given past market events, it’s important for the public and the commission to know more about this important market, especially in times of stress or volatility,’ says Gensler. ‘The proposed rule would help the commission address future market events, striking a balance between the need for transparency and the price discovery process.’

Daily information on short-selling is already collected and published by stock exchanges and FINRA. The SEC says the additional data it is seeking would offer ‘insights into the lifecycle of a short sale’ by showing ‘the timing of increases and decreases’ in positions.

Initial reaction

Members of the issuer community support more transparency for short-sellers but some argue for greater detail than the SEC is currently proposing.

‘NIRI has advocated for more transparency by investment managers about their short positions and this proposed rule is a good step in the right direction,’ says Gary LaBranche, president and CEO of NIRI.

‘[We are] disappointed that the SEC proposes to keep monthly investment manager disclosures confidential and only provide aggregated data to the public about each corporate issuer.’

‘Within the US, the policies that underlie the Section 13 disclosure requirements applicable to investors with long positions – transparency, fairness and efficiency – apply equally to investors with significant short positions,’ comments Brian Reynolds, vice president at Nasdaq IR Intelligence.

‘Moreover, investors with short positions can pursue strategies designed to invisibly drive down share prices or rely on regulatory processes to inexpensively challenge key intellectual property of a company, intending to profit from the uncertainty created.

‘We support extending existing disclosure requirements to investors with short positions. At the end of the day, providing greater transparency on short-selling activity brings mutual data-related benefits to the impacted companies and their investors.’

The proposed rule is the latest action by the SEC to improve market transparency. Last month, the regulator revealed a tougher disclosure regime for investors that build a stake of more than 5 percent in a company. A comment period on the new rule will now take place.