Proposed Rule: Short Position And Short Activity Reporting By .

equity securities are generally found in Regulation SHO, which became effective on January 3, 2005. 7Regulation SHO imposes four general requirements with respect to short sales of equity securities. Itrequires broker-dealers to properly mark sale orders as “long,” “short,” or “short exempt;” 8 beforeeffecting a short sale, to locate a source of shares that the seller reasonably believes can be timelydelivered (commonly referred to as the “locate” requirement); 9 and to close out failures to deliver thatresult from long or short sales. 10 Further, Regulation SHO imposes a short sale price test circuitbreaker. 11 In addition, the Commission adopted an antifraud provision, Rule 10b-21, to address failuresto deliver in securities that have been associated with “naked” short selling. 12 As discussed below,Proposed Rule 13f-2 would apply to equity securities that are subject to Regulation SHO in order to beconsistent with those requirements.DFA Section 929X added Section 13(f)(2) of the Exchange Act, titled “Reports by institutionalinvestment managers,” which requires the Commission to prescribe rules to make certain short sale datapublicly available no less frequently than monthly. 13 Specifically, Section 13(f)(2) provides that theCommission shall prescribe rules providing for the public disclosure of the name of the issuer and thetitle, class, CUSIP number, aggregate amount of the number of short sales of each security, and any7See Regulation SHO Adopting Release, supra note 4.See 17 CFR 242.200(g). A broker or dealer must mark all sell orders of an equity security as “long,”“short,” or “short exempt.” A sell order may only be marked “long” if the seller is “deemed to own” the securitybeing sold and either (i) the security to be delivered is in the physical possession or control of the broker or dealer;or (ii) it is reasonably expected that the security will be in the physical possession or control of the broker or dealerno later than the settlement of the transaction. See id. A person is deemed to own a security only to the extent thathe has a net long position in such security. See 17 CFR 242.200(c). Once marked as long, short, or short-exempt,the order mark should not be changed regardless of any subsequent changes in the person’s net position. See OZMgmt., Exchange Act Release No. 75445 (July 14, 2015) (settled) (where OZ Management submitted short saleorders to its executing broker, but identified such sales as long sales to its prime broker, causing books and recordsof the prime broker to be inaccurate), available at .pdf.89See 17 CFR 242.203(b)(1) through (2).10See 17 CFR 242.204.11See 17 CFR 242.201.12See Exchange Act Release No. 58774 (Oct. 14, 2008), 73 FR 61666 (Oct. 17, 2008).13Pub. L. 111-203, § 929X, 124 Stat. 1376, 1870 (July 21, 2010).6

additional information determined by the Commission following the end of the reporting period. At aminimum, such public disclosure shall occur every month. 14Proposed Rule 13f-2 is designed to provide greater transparency through the publication ofcertain short sale related data to investors and other market participants by requiring certain institutionalinvestment managers to report to the Commission, on a monthly basis on Proposed Form SHO, certainshort position data and short activity data for certain equity securities. More information about the shortsale activity and short positions of institutional investment managers (“Managers”) 15 may promote greaterrisk management among market participants, and may facilitate capital formation to the extent that greatertransparency bolsters confidence in the markets.Proposed Rule 205 would establish a new “buy to cover” order marking requirement for certainpurchase orders effected by a broker-dealer for its own account or for the account of another person at thebroker-dealer. The Proposal to Amend CAT would require CAT reporting firms to report short sale datanot currently required that would enhance regulators’ understanding of the lifecycle of a trade—fromorder origination, including an order’s mark, through order execution and allocation. Proposed Rule 205and the Proposal to Amend CAT are intended to supplement the short sale data made available to theCommission in Proposed Form SHO filings by requiring the reporting to CAT of (i) “buy to cover” ordermarking information and (ii) reliance on the bona fide market making exception in Regulation SHO. TheCommission believes greater transparency of short sale activity and short position data would improve theCommission’s oversight of financial markets and compliance with existing regulations, as well asfacilitate regulators’ ability to reconstruct significant market events, which may, in turn, improve theCommission’s ability to respond to similar events in the future. 16 This could, in turn, benefit the public1415 U.S.C. 78m(f)(2).15As defined in Section 13(f)(6)(A) of the Exchange Act and for purposes of Proposed Rule 13f-2,“institutional investment manager” includes any person, other than a natural person, investing in or buying andselling securities for its own account, and any person exercising investment discretion with respect to the account ofany other person. As such, the term “institutional investment manager” typically can include investment advisers,banks, insurance companies, broker-dealers, pension funds and corporations. See also Instructions to Form 13F.See generally Part VIII.D.1 (discussing how the Commission could have used the data provided under theProposals to address market events such as the recent market volatility associated with meme stocks, and how thedata provided under the Proposals could have aided the Commission in examining that market event).167

and market participants by aiding the Commission in more effectively maintaining a fair and orderlymarket.The Commission believes that the short sale related information that would be collected under theProposals, particularly the required disclosures of Proposed Form SHO and the aggregated data publishedpursuant to Proposed Rule 13f-2, would fill an information gap for market participants and regulators byproviding insights into the lifecycle of a short sale. In contrast to data related to short sales that iscurrently collected and published by FINRA and most exchanges, the aggregated information derivedfrom information reported on Proposed Form SHO and published pursuant to Proposed Rule 13f-2 wouldreflect the timing of increases and decreases in the reported short positions. 17 Such aggregatedinformation would help inform market participants regarding the overall short sale activity by reportingManagers. The information reported on Proposed Form SHO, along with the information gleanedthrough the operation of Proposed Rule 205 and the Proposal to Amend CAT would help the Commissionand SROs to overcome current challenges in using data from CAT to estimate short positions and changesin short positions. 18The Commission acknowledges that the Proposals would entail costs to some marketparticipants—more specifically, compliance costs associated with determining whether the Manager isrequired to report on Proposed Form SHO and, if so, with filing Proposed Form SHO, pursuant toProposed Rule 13f-2, and the costs associated with accommodating the additional order marks, pursuantto Proposed Rule 205 and the Proposal to Amend CAT. Implementing Proposed Rule 13f-2 andProposed Form SHO could also reduce certain industry participants’ incentives to gather informationabout the marketplace and specific securities. For example, requiring disclosure of short positions couldfacilitate copycat trading that, in turn, could limit the profit an investor may earn using strategiesdeveloped in connection with its marketplace information gathering efforts. 19 In addition, requiring17See generally infra Part VIII.C.4 (discussing existing short selling data).See generally infra Parts VIII.B and VIII.C.4.iv (discussing challenges of extracting short saleinformation—e.g., to estimate positions and to track how those positions change over time—from CAT).18See generally infra Parts VIII.C.5 and VIII.F (discussing the impact of copycat trading strategies oncompetition).198

disclosure of large short positions, even in an aggregated format, could make holders of such shortpositions more susceptible to short squeezes. To the extent that these circumstances could reduce thevalue of marketplace information gathered to develop a short selling strategy, they could discourageinvestors from making an effort to gather marketplace information. A reduction in information collectioncould harm price efficiency, which could, in turn, affect capital allocations and managerial decisions.Aggregating short sale activity and short position information across all reporting Managers for eachreported equity security prior to publication and publishing such data on a delay would likely mitigate—though not fully eliminate—the potential negative economic effects of the reporting requirements andassociated information disclosure of Proposed Rule 13f-2 and Proposed Form SHO.Proposed Rule 13f-2 and Proposed Form SHO are designed to address the requirements ofSection 13(f)(2). In developing Proposed Rule 13f-2, the Commission recognizes the need to consider theimportant role short selling plays in the market as well as the benefits of providing more disclosure aboutshort selling. For reasons discussed more fully below, the Commission believes Proposed Rule 13f-2represents an appropriate balance by offering increased transparency into the short selling activities ofcertain Managers with large short positions through the dissemination of aggregated information reportedon new, stand-alone, Proposed Form SHO. The information reported on Proposed Form SHO wouldprovide investors, market participants, and the Commission with short sale data that supplements what iscurrently available, free or on a fee basis, from FINRA and most exchanges. 20 Proposed Rule 13f-2 andProposed Form SHO would improve the utility of information regularly available to the Commission, andmade available as appropriate to self-regulatory organizations (“SROs”), that could be used to examinemarket behavior and recreate significant market events. It would also increase information available tomarket participants and could assist in their understanding of the level of negative sentiment and theactions of short sellers collectively. While the primary focus of Proposed Rule 13f-2 and Proposed FormSHO is transparency, the Commission’s regular access to the data reported on Proposed Form SHOwould also bolster its oversight of short selling. In addition, Proposed Rule 205 and the Proposal toSee infra Parts II.B and VIII.C.4 (discussing short sale data that is currently available and how thatcompares to the data to be reported on Proposed Form SHO).209

Amend CAT would enhance the information regularly available to the Commission and other regulatorsthat could be used to oversee short selling and to reconstruct significant market events. In turn, theCommission’s more accurate and timely reconstruction and response to market events could contribute tooverall investor protections, particularly in times of increased market volatility. 21II.BackgroundA. Enhancing Short Sale TransparencyIn recent years, market volatility associated with short selling has brought heightened attention tothe difference in long and short position reporting requirements, and, more generally, the lack oftransparency into the circumstances surrounding short sale transactions. 22 The Commission has receivedrequests to increase transparency into short sale related activity through the adoption of reportingrequirements similar to those currently required by holders of long positions above certain thresholds. 2321See infra Part VIII.D.1.See, e.g., Letter from Elizabeth King, Corporate Secretary, NYSE Group, and James M. Cudahy, Presidentand CEO, National Investor Relations Institute (Oct. 7, 2015, Petition 4-689) (stating that rulemaking under 929X“provides an opportunity to implement meaningful public disclosure standards for short-sale activity, consistent withthat currently required for institutional investment managers under Section 13(f) of the Exchange Act for longposition reporting”), available at .pdf [hereinafter “NYSEPetition”]; Letter from Edward S. Knight, Executive Vice President, General Counsel and Chief Regulatory Officer,NASDAQ (Dec. 7, 2015, Petition 4-691) (requesting that the Commission “take swift action to promulgate rules torequire public disclosure by investors of short positions in parity with the disclosure regime applicable to longpositions”), available at .pdf [hereinafter “NASDAQ Petition”].See also Letter from E. Carter Esham, Executive Vice President, Emerging Companies, Biotechnology InnovationOrganization (BIO) (Mar. 11, 2016) (applauding reforms to the short disclosure framework proposed in theNASDAQ Petition and in the NYSE Petition and advocating for the promulgation of rules to ensure parity betweenpublic disclosures required of investors taking long and short positions), available athttps://www.sec.gov/comments/4-691/4691-5.pdf; Letter from Andrew D. Demott, Jr., Chief Operating Officer,Superior Uniform Group (supporting NASDAQ Petition and advocating adoption of disclosure requirements forshort sellers), available at https://www.sec.gov/comments/4-691/4691-10.pdf. Developments in the market withregard to “meme” stocks in early 2021, some of which were widely reported as involving large short sellers, alsohighlighted a need for more consistent and consolidated short sale information. See, e.g., Robert Smith, LaurenceFletcher, Madison Darbyshire, Eric Platt and Hannah Murphy, ‘Short squeeze’ spreads as day traders hunt nextGameStop, FIN. TIMES (Jan. 27, 2021), available at 05f27f21ceb2; Are “meme stocks” harmless fun, or a threat to the financial old guard?, ECONOMIST (July 6, 2021).See also Sharon Nunn and Adam Kulam, Short-Selling Restrictions During Covid-19 (Jan. 12, 2021), available strictions-during-covid-19 for a discussion of global short sellingregulatory responses to the Covid-19 pandemic.22See, e.g., NYSE Petition and NASDAQ Petition, supra note 22. See also Final Report of the 2021 SECGovernment-Business Forum on Small Business Capital Formation (May 2021), available athttps://www.sec.gov/files/2021 OASB Annual Forum Report FINAL 508.pdf (requesting the Commission act toincrease the transparency of short selling activities).2310

As noted above, Section 13(f)(2) requires the Commission to prescribe rules to make certain shortsale data publicly available no less frequently than monthly. After carefully considering the possibleeconomic effects of various approaches, the Commission believes that publication of aggregated grossshort position data of certain Managers, and certain related activity data, as discussed in more detailbelow, would provide valuable transparency to market participants and regulators. 24 The Commissionbelieves that the data resulting from Proposed Rule 13f-2 would help to provide valuable context tooverall short position data currently available by distinguishing directional short selling of Managers fromshort sale activity effected pursuant to hedging as well as that of market makers and liquidity providers. 25In addition, the Commission believes that the data would provide regulators with a more complete pictureof significant market events by shedding additional light on the potential role of short selling activity. 26In determining the proposed reporting requirements under Proposed Rule 13f-2 and ProposedForm SHO, the Commission is mindful of concerns that certain short selling activity can be carried outpursuant to potentially abusive or manipulative schemes. For instance, market manipulators may seek tospread false information about an issuer whose stock they sold short in order to profit from a resultingdecline in the stock’s price. 27 The Commission has previously noted various other forms of manipulationthat can be advanced by short sellers to illegally manipulate stock prices, such as “bear raids.” 28 AsSee infra Part VIII.D (stating that Proposed Rule 13f-2, in conjunction with Proposed Rule 205 and theProposal to Amend CAT, could help to advance the policy goal of investor protection by deterring marketmanipulation, and aid regulators in reconstructing significant market events and observing systemic risks).2425See infra Part VIII.C, VIII.D.See infra Part VIII.D.1 (stating that “because short positions often take some time to create, theCommission could have attempted to quickly identify individual short sellers with large short positions in thevarious meme stocks in January 2021 based on the most recent reports; then the Commission could have used theenhanced CAT data to understand how these short sellers traded during the heightened volatility.”).26See infra Part VIII.D.1 (stating that “[i]n ‘short and distort’ strategies, which are illegal, the goal ofmanipulators is to first short a stock and then engage in a campaign to spread unverified bad news about the stockwith the objective of panicking other investors into selling their stock in order to drive the price down”; statingfurther that “[i]f successful, the scheme can drive down the price, allowing the manipulators to profit when they‘buy-to-cover’ their short position at the reduced price.”). See also, John D. Finnerty, Short Selling, Death SpiralConvertibles, and the Profitability of Stock Manipulation, SSRN (2005) at n.8, available .pdf (stating that the posting of “false notices on electronicbulletin boards in Internet chat rooms is an example of the type of manipulative behavior that is difficult forregulators to monitor”).27Proposed Rule: Short Sales, Exchange Act Release No. 48709, (Oct. 28, 2003), 68 FR 62972 (Nov. 6,2003), available at https://www.sec.gov/rules/proposed/34-48709.htm (stating that “[a]lthough short selling servesuseful market purposes, it also may be used to illegally manipulate stock prices. One example is the ‘bear raid’2811

discussed below, greater transparency into the activities of Managers holding large short positions in asecurity could help regulators’ oversight of short selling and deter these and other types of manipulativeshort selling campaigns potentially by alerting regulators to suspicious activity. 29B. Existing Short Sale DataThere are currently multiple sources of public and nonpublic data related to short sales. 30 FINRAand most exchanges collect and publish daily aggregate short sale volume data, and on a one monthdelayed basis publish information regarding short sale transactions. 31 However, the Commissionunderstands that some exchanges only make certain data available for a

effecting a short sale, to locate a source of shares that the seller reasonably believes can be timely delivered (commonly referred to as the "locate" requirement); 9. and toclose out failures to deliver that result from long or short sales. 10. Further, Regulation SHO imposes a short sale price test circuit breaker. 11