Little more than a week after the first reports of a raid at the offices of one prominent short-seller, the SEC on Friday has suddenly announced two new regulations that firms managing money in the US will now be duty-bound to follow, or risk the threat of criminal reprisal. The new rules will broaden the data that short-sellers will be required to report to the SEC.
Bloomberg said the new rules are the latest concoction dreamed up by SEC Chairman Gary Gensler to boost transparency and accountability across the financial markets. The new rules will collect more data from both large hedge funds and the megabank brokers who service them. According to Reuters, the SEC hopes these new rules will boost “transparency” by allowing the agency to gather more data on short-selling, some of which it will publish.
Perhaps the most important new rule is that short-sellers will now be required to report their positions monthly as if they were long positions. Institutional managers are required to submit data on their long positions on a quarterly basis.
Institutional money managers would have to submit monthly filings with details on large equity short positions, according to a proposal released by the agency Friday. Investors would also have to disclose some daily activity affecting their bets. While most of these details would remain confidential, the SEC wants to make some aggregate data about large positions in specific securities available to the public.
One of the rules affects brokers: it will require them to specifically record as part of their transaction data whether a given purchase of shares is intended to cover a short position. They’re calling this one the “buy to cover” mandate:
The proposals would also impose a “buy-to-cover” mandate for brokers to identify sales as “long, short or short-exempt,” said the SEC in its release, which added that the classifications would only be required if a purchaser has any short position in the same security at the time of order, and would further amend the national market system plan to include a report of such “buy-to-cover” information.
Here’s another breakdown of the data provided by Bloomberg.
Investors will be required to report the following under the new rules:
The name of the security
Information about the short position at the end of the month
Daily trading activity that affects the fund’s gross short position for each date of settlement
And then based on that data the SEC would make the following public:
The aggregate short position that money managers have in a specific security
The percentage of the aggregate gross short position that’s hedged
he new rules were inspired by the “GameStopped” trading madness from January 2021. Both new measures are subject to public consultation. Bloomberg also noted that Gensler himself had said that the agency is pushing to require even faster settlement of equity trades – something that probably would benefit retail traders.
The new monthly reporting form will apply to fund managers with a gross short position of at least $10 million or the equivalent of 2.5% of the shares outstanding. While Gensler insisted this new rule would benefit the public, there still aren’t too many people out there giving their retirement money to a garage band hedge fund to manage.
In an opinion piece, CNBC noted that Gensler has been pushing a particularly “aggressive” slate of some 50 new rules and regulations that the public will have a chance to comment n this spring. Do these new rules on short selling will allow the SEC to release some new data on the most shorted stocks, we struggle to see how this might actually benefit mom-and-pop investors.