March 1, 2022

SEC Proposes Monthly Disclosures About “Big Shorts”

On Friday, the SEC announced a proposal that would increase public info of short sale data. Even though I’ve been mainlining news alerts for about 8 hours/day this past week, it has mostly been about war, sanctions, heroism & tragedy. So, this one slipped by me – especially because the SEC didn’t share its usual series of emails when it was issued (maybe our friends at the Commission were also focused on other things). Anyway, here’s the gist of it:

New Exchange Act Rule 13f-2 and the corresponding Form SHO would require certain institutional investment managers to report short sale related information to the Commission on a monthly basis. The Commission then would make aggregate data about large short positions, including daily short sale activity data, available to the public for each individual security.

The fact sheet explains that proposed Rule 13f-2 and the related proposed Form SHO are designed to fulfill the SEC’s Dodd-Frank mandate to make short sale data publicly available. It gives this additional detail on what would be required:

The proposed rule would require institutional money managers to file confidential Proposed Form SHO with the Commission via EDGAR, within 14 calendar days after the end of each calendar month, with regard to each equity security and all accounts over which the manager meets or exceeds either of the following thresholds:

● For any equity security of an issuer that is registered pursuant to Section 12 of the Exchange Act or for which the issuer is required to file reports pursuant to section 15(d) of the Exchange Act in which the manager meets or exceeds either (1) a gross short position in the equity security with a US dollar value of $10 million or more at the close of any settlement date during the calendar month, or (2) a monthly average gross short position as a percentage of shares outstanding in the equity security of 2.5 percent or more; or

● For any equity security of an issuer that is not a reporting company issuer as described above in which the manager meets or exceeds a gross short position in the equity security with a US dollar value of $500,000 or more at the close of any settlement date during the calendar month.

The information a manager would report includes:

● The name of the eligible security;

● End of month gross short position information;

● Daily trading activity that affects a manager’s reported gross short position for each settlement date during the calendar month reporting period.

The Commission would publish, based on information reported in Proposed Form SHO:

● The issuer’s name and other identifying information related to the issuer;

● 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 this reported gross short position;

● The percentage of the reported aggregate gross short position that is reported as being fully hedged, partially hedged, or not hedged; and

● 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.

To supplement the short sale data, the release also proposes a new Rule 205 under Regulation SHO – which would require brokers to include new “buy to cover” marking on purchase orders if they have any short position in the same security at the time the order is entered. This amendment would expand on the markings currently required on the sales side for “long,” “short,” or “short-exempt” orders. The Commission also issued related proposed amendments to the consolidated audit trail under Rule 613 of the Exchange Act that would require CAT reporting firms to report the “buy to cover” info to CAT and to indicate where it’s asserting the “bona fide market making exception” under Regulation SHO. The idea with this fine-tuning to the order process is that it would help the Commission identify short squeezes and other abusive trading practices that may contribute to market volatility.

As this MarketWatch article explains, this proposal fits in nicely with SEC Chair Gary Gensler’s overall goal of market transparency. His supporting statement reinforces the goal of public visibility into short sale activity and the ongoing effort of the Commission to understand market volatility & stress – specifically, the role that short selling might play in market events. Commissioner Hester Peirce also issued a statement in support of the proposal. She’s interested in hearing from commenters whether these disclosure obligations are appropriate in light of the transparency objectives of Section 929X and the proposed rule and how they may affect trading strategies and market making activity in our markets.

The comment period runs until 30 days after the date the proposal is published in the Federal Register or April 26th – whichever is later.

Note, this is different than the rulemaking petition about short reports that John blogged about a few weeks ago. We’ll be posting memos about this proposal in our “Short Sales” Practice Area, where members can get all the info about what it means to companies.

Liz Dunshee