SEC Hears Good, Bad on Short-Selling Disclosure
July 20, 2011
As the Securities and Exchange Commission decides how it wants to deal with the disclosure of short-selling activities, it finds itself in the midst of a heated debate.
On the one side is support from NYSE Euronext and corporations.to impose short sale reporting requirements and start a pilot program in which public companies would agree to allow shares to bear labels like “short,” “long” and “buy to cover.” On the other side is criticism from groups that represent buy-side firms such as the Investment Company Institute and Managed Funds Association.
The ICI cautioned that any reporting required of investment managers should be made only to regulators and not the public. That is because public disclosure could lead to frontrunning of fund sales, adversely affecting the price of the stock that the fund is buying or selling.
The SEC has estimated that orders marked “short” now account for about 50 percent of listed equity share volume.
The Dodd-Frank Wall Street Reform Act directed the SEC to do a two-part study on short selling disclosure.
The first part of the requirement instructs the SEC to examine the feasibility of compelling certain parties, which it does not define, to disclose short positions of publicly traded securities to either only the SEC, or the SEC and the Financial Industry Regulatory Authority.
The second part called for a study on the “feasibility, benefits and costs of conducting a voluntary pilot program in which public companies would agree to have all trades of their shares marked as long, short, market maker short, buy or buy to cover and reported in real time through the consolidated tape. That is the real-time quote dissemination system used by all major U.S. exchanges.
The SEC in May sent out its request for comments on how it would meet the Dodd-Frank requirements. It must give Congress a final report on July 21.
The SEC asked market players to look at the short selling rules of other jurisdictions such as Australia, the U.K., Hong Kong and European Union. It said that proposals on short selling disclosure in the U.K would require derivatives to be included in the calculation of a market participant’ short interests. However, proposals on Hong Kong and Ausgralia did not.
“Properly done the studies should result in proposals to increase transparency and investor confidence by further reducing the opacity and suspicions of market manipulation that often surround short sale trading,” wrote NYSE Euronext in its letter to the SEC. The exchange recommended that positions be reported on a net basis with daily reporting to regulators and reporting to the public over a longer timeframe.
The National Investor Relations Institute, the organization representing corporate investor relations professionals, also cited the benefits of “improving transparency and awareness” of investors that lend shares with new real time reporting on short sales. Owners of pensions and other institutional holdings could understand actions taken on their behalf and help mitigate the potential for “fails to deliver.”
However, the ICI cautioned that any reporting required of investment managers should be made only to regulators and not the public.
