New US SEC rules shed light on short selling

Oct 13 (Reuters) – The U.S. Securities and Exchange Commission on Friday announced new measures aimed at improving transparency for short sellers betting on controversial stocks that have drawn new scrutiny amid the GameStop scandal. It was agreed that rules should be introduced.

The rule, first proposed in late 2021 or early 2022, would require investors to report short positions to regulators and require companies that lend out stock to the Financial Industry Regulatory Authority (FINRA), a self-regulatory agency that polices such practices. It is mandatory to report. broker.

Short selling involves borrowing a stock, selling it in the hopes that the price will go down, and then buying the stock back for the difference. If the price increases, the seller is exposed to potentially unlimited losses.

Short interest in the U.S. market totaled $927 billion as of Thursday, according to analysis firm S3 Partners. The practice has long been controversial, with short sellers accusing it of trying to harm companies and others saying it helps root out fraud and corporate misconduct.

Short selling came under renewed scrutiny from Congress in 2021 when retail investors drove up the price of GameStop (GME.N) stock, causing huge losses for the hedge funds that were shorting the company. In response to the uproar, SEC Chairman Gary Gensler told lawmakers he would increase market transparency.

“Given past market events, it is important that the (SEC) and the public know more about short selling activity in the stock market, especially during times of stress and volatility,” Gensler said in a statement Friday.

The new rules require institutional investors to report their gross short positions to the SEC monthly and to report certain “net” short selling activity on individual days when trades are settled. The SEC will then release aggregate, stock-specific data at a later date.

Such data will put regulators and the public in a “better position to prevent or respond to destabilizing events,” said Stephen Hall of Better Markets, an advocate for stricter financial rules. .

FINRA already publishes short interest reports collected from broker-dealers, but the new rules also apply to institutional investment managers, giving them a complete picture of short bets across the market. The new data also includes daily net activity for each settlement, which is data not currently available from FINRA or exchanges.

But hedge funds represented by the Managed Funds Association said Friday the rule could expose investors’ strategies. “Investment advisers face additional risks when selling short, harming investors, market participants and market efficiency,” said CEO Brian Corbett. .

activist shorts

In addition to GameStop, the rise of activist short sellers who publish negative research on companies in hopes of driving the stock price down has also come under regulatory scrutiny.

The Justice Department and SEC have also been investigating possible manipulation by short sellers and hedge funds over the publication of negative research reports since at least 2021.

SEC officials said the new rules, agreed to by the commission on a 3-2 vote, confirm the agency’s efforts to crack down on the practice.

Separately, in a 3-2 vote, the SEC required institutional investors and other companies involved in stock lending, as well as certain broker-dealers that borrow stock, to provide information regarding the loan, including the name and quantity of the stock. It also adopted regulations mandating the reporting of information. Collateral to FINRA, Loan Date, Termination Date.

FINRA will anonymize, aggregate, and publish much of this data the next day. As a concession to the industry, the final rule will cause FINRA to delay the announcement of loan amounts by 20 business days.

The rule goes into effect 60 days after it is posted on the federal registry.

Our standards: Thomson Reuters Trust Principles.