The Securities and Exchange Commission (SEC) said on Friday that it is considering a new rule and changes to existing regulations that would force short-sellers to make more frequent disclosures on their investments.
The Wall Street’s regulator said that the proposed changes will require investors to collect and submit specific short sale data to the SEC each month. The SEC would then make aggregate data about large short positions, including daily short sale activity, available to the public for each security / company.
When short selling a security, the investor who wants to bet against a company borrows shares of its stock and then sells them on the market. The investor will in theory buy those shares back at a lower price later and return them to the brokerage or asset manager that lent them the equity in the first place.
Why brokerage firms or asset managers lend those shares to short sellers? The reason is simple, they lend them in exchange for fees.
“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.”SEC Chairman Gary Gensler said in a press release
It is important to note that the proposed changes to Regulation SHO, a collection of SEC rules on short selling, would still keep the identities of investors and individual short positions confidential.
Will these rules apply to every investor, even small retail investors? The answer is No. The new rules will apply to institutional investors who hold a short position of at least $10 million or the equivalent of 2.5% or more of the total shares outstanding.
“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.”SEC Chairman Gary Gensler
These new rules are the latest attempt by the SEC to oversee the practice of short selling. The practice came under increased scrutiny in early 2021 when individual retail investors banded together on social media platforms like Reddit to pump stocks like GameStop that had garnered heavy interest from short sellers.
In 2021, the SEC proposed a rule that required brokerages and asset managers that lend securities to short sellers to report the data on each loan to an oversight body like the within 15 minutes of making the loan.
The SEC said it is extending the public comment period on that rule in light of its latest rule change proposals.