United States: SEC Proposes New Rules Aimed At Increasing Short Sale Transparency

On Feb. 25, 2022, the Securities and Exchange Commission (SEC) proposed several new rules with the goal of increasing transparency around short selling.

Rule 13f-2 would require institutional investment managers (Managers) to disclose short sale data to the SEC on a monthly basis if their short sale positions exceeded certain thresholds. Proposed Rule 205 under Regulation SHO and a proposal to amend the national market system governing the consolidated audit trail (CAT) would require broker-dealers to identify and report "buy to cover" short sale information to the SEC.

The SEC's fact sheet states that the proposed changes would fulfill Congress' mandate under Dodd-Frank to prescribe rules to make certain short sale data publicly available.

Proposed Rule 13f-2 and Form SHO

Under the proposed Rule 13f-2, a Manager would be required to submit certain short sale data to the SEC if any of the following were true:

• A Manager holds a short position of at least $10 million in equity securities of a reporting company issuer¹ at the close of regular trading hours
• A Manager holds a monthly average gross short position²of 2.5% or more of a reporting issuer's outstanding equity securities
• A Manager holds a short position of $500,000 or more in equity securities of a nonreporting issuer

If the Manager exceeded one of these reporting thresholds, the Manager would be required to file confidentially a proposed Form SHO via EDGAR within 14 calendar days of the end of the month in which the threshold was exceeded. The proposed Form SHO requires disclosure of certain short sale data including the name of the issuer of the security, the end-of-month number of shares and dollar value associated with the gross short position, and daily trading activity that affects a Manager's reported gross short position for each settlement date during the calendar month reporting period.

The SEC would then aggregate the data derived from the Form SHO reports it collects and make the aggregated data public.

Proposed 'Buy to Cover' Marking Rules

In addition to Rule 13f-2, the SEC proposed Rule 205 under Regulation SHO and a related proposal to amend CAT.

Currently under Regulation SHO, broker-dealers must mark sale orders effected as "long," "short" or "short-exempt" but do not have to mark purchase orders. The proposed Rule 205 would expand Regulation SHO to require broker-dealers to mark a purchase order as "buy to cover" if the purchase were for an account at a broker-dealer that already had a gross short position in the same equity security in the account at the time of the purchase. Under the proposal to amend CAT, certain broker-dealers must report this "buy to cover" information to the SEC. By collecting the "buy to cover" information, the SEC believes it can use the data to identify short squeeze-related purchases and potential manipulative short squeeze events.

The SEC will publish the proposed amendments in the Federal Register and has solicited comments on the proposed amendments. The comment period will be open for 30 days after the date of publication of the proposed rules in the Federal Register  or April 26, 2022, whichever is later.

Learn more about the new rules and their details.

Footnotes

1 A "reporting company issuer" is a company that is registered pursuant to Section 12 or 15(d) of the Exchange Act.

2 The SEC defines a "gross short position" as the number of shares of the equity security that are held short, without inclusion of any offsetting economic positions, including shares of the equity security or derivatives of such equity security.

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