SEC Proposes Short Sale Disclosure Rule

'Would provide more visibility into the behavior of large short sellers'

The U.S. Securities and Exchange Commission (SEC) announced on Feb. 25, 2022, that it has voted to propose changes that would increase the public availability of data on short sales. The proposed new rule would require certain institutional investment managers to submit monthly reports on short sales. The SEC then would make aggregate data about large short positions, including daily short sale activity data, available to the public for each individual security.

In a press release, SEC Chair Gary Gensler stated: "Proposed Rule 13f-2 would make aggregate data about large short positions available to the public for individual equity securities. This would provide the public and market participants with more visibility into the behavior of large short sellers. The raw data reported to the Commission on a new Form SHO would help us to better oversee the markets and understand the role short selling may play in 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."

Key Takeaways

  • On Feb. 25, 2022, the SEC voted in favor of a proposed new rule requiring enhanced public disclosures of short sales by institutional investors.
  • The data would be aggregated by stock, the names of the investment managers would be kept confidential.
  • Short positions of at least $10 million, or which equal 2.5% or more of the shares outstanding, are the focus of the proposed rule.

Proposed New Rule 13f-2

Securities Exchange Act Proposed Rule 13f-2 would require institutional investment managers to report, on the Proposed Form SHO, information on end-of-the-month short positions and certain daily activity affecting these positions. The SEC would aggregate this data by security, maintaining the confidentiality of the reporting managers, and publicly release the data to all investors. This new data would supplement the short sale data that is currently publicly available from Financial Industry Regulatory Authority (FINRA) and the stock exchanges.

The SEC also voted to propose a new provision of Regulation SHO, Rule 205, which would establish a new "buy to cover" order marking requirement for broker-dealers. Regulation SHO is the SEC's primary short selling regulation. It requires broker-dealers to identify each sale order that it effects as either "long," "short," or "short exempt," but 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 that the purchase order is entered. The SEC believes that this information would be very helpful in "reconstructing significant market events and identifying potentially abusive trading practices including short squeezes."

Statement By SEC Chair Gary Gensler

SEC Chair Gary Gensler also issued a statement in conjunction with the press release about the proposed new rule on short sales. Highlights are quoted below.

"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."

"After the 2008 financial crisis ... Congress directed the SEC to bring more transparency to short selling. Today's proposal would fulfill that mandate under Section 929X of the Dodd-Frank Act."

"The proposal would apply to certain 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% 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."

"Finally, we are reopening the comment file on our proposed rule on the securities lending market, Proposed Rule 10c-1. The Commission voted to propose this rule in November, and we are reopening the comment period in light of the newly Proposed Rule 13f-2."

"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. The proposed rule would help the Commission address future market events, striking a balance between the need for transparency and the price discovery process."

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  1. U.S. Securities and Exchange Commission. "SEC Proposes Short Sale Disclosure Rule, Order Marking Requirement, and CAT Amendments."

  2. U.S. Securities and Exchange Commission. "Statement on Rules to Increase Transparency of Short Sale Activity by Chair Gary Gensler."

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