Short Position and Short Activity Reporting by Institutional Investment Managers, 75100-75188 [2023-23050]

Download as PDF 75100 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 240 and 249 [Release No. 34–98738; File No. S7–08–22] RIN 3235–AM34 Short Position and Short Activity Reporting by Institutional Investment Managers Securities and Exchange Commission. ACTION: Final rule. AGENCY: The Securities and Exchange Commission (‘‘Commission’’) is adopting a new rule and new Form SHO pursuant to the Securities Exchange Act of 1934 (‘‘Exchange Act’’) and the DoddFrank Wall Street Reform and Consumer Protection Act (‘‘DFA’’). The new rule and related form are designed to provide greater transparency through the publication of short sale-related data to investors and other market participants. Under the new rule, institutional investment managers that meet or exceed certain specified reporting thresholds are required to report, on a monthly basis using the related form, specified short position data and short activity data for equity securities. In addition, the Commission is adopting an amendment to the national market system (‘‘NMS’’) plan governing the consolidated audit trail (‘‘CAT’’) created pursuant to the Exchange Act to require the reporting of reliance on the bona fide market making exception in the Commission’s short sale rules. The Commission is publishing the text of the amendments to the NMS plan governing the CAT (‘‘CAT NMS Plan’’) in a separate notice. DATES: Effective date: January 2, 2024. Compliance date: The applicable compliance date is discussed in Part VI of this release. FOR FURTHER INFORMATION CONTACT: Timothy M. Riley, Branch Chief; Patrice M. Pitts, Special Counsel; James R. Curley, Special Counsel; Jessica Kloss, Attorney Advisor; Brendan McLeod, Attorney Advisor; Roland Lindmayer, Attorney Advisor; Josephine J. Tao, Assistant Director, Office of Trading Practices; and Carol McGee, Associate Director, Office of Derivatives Policy and Trading Practices, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–8010, at (202) 551–5777. SUPPLEMENTARY INFORMATION: The Commission is adopting new 17 CFR 240.13f–2 (‘‘Rule 13f–2’’) and related ddrumheller on DSK120RN23PROD with RULES2 SUMMARY: VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 form 17 CFR 249.332 (‘‘Form SHO’’) under the Exchange Act to require certain institutional investment managers to report, on a monthly basis on new Form SHO, certain short position data and short activity data for certain equity securities as prescribed in Rule 13f–2. The Commission is also adopting, in a separate notice published elsewhere in this issue of the Federal Register, an amendment to the CAT NMS Plan (‘‘CAT Amendment’’), pursuant to 17 CFR 242.608(a)(2) (‘‘Rule 608(a)(2)’’) and (b)(2) (‘‘Rule 608(b)(2)’’), that enables the Commission to adopt a rule to amend any effective NMS plan. For the text of the amendment to the CAT NMS Plan, please see the Notice of the Text of the Amendment to the National Market System Plan Governing the Consolidated Audit Trail for Purposes of Short Sale-Related Data Collection.1 Table of Contents I. Overview A. Background B. The Proposals C. Overview of Proposed Rule 13f–2, Proposed Form SHO, Proposed Rule 205 and Proposed CAT Amendments 1. Overview of Comments Received 2. Final Rule 13f–2, Form SHO and CAT Amendment II. Discussion of Final Rule 13f–2 and Form SHO A. Final Rule 13f–2 1. Scope of Persons Covered by Final Rule 13f–2 2. Scope of Reported Securities 3. Reporting Thresholds 4. Form SHO B. Data Aggregation and Publication of Information by the Commission 1. Proposal 2. Comments 3. Final Rule III. Proposed Amendment to Regulation SHO To Aid Short Sale Data Collection A. Proposed Rule 205 B. Comments IV. Amendments to CAT A. Proposal To Require ‘‘Buy to Cover’’ Order Marking B. Proposal To Require Reporting of Reliance on Bona Fide Market Maker Exception V. Other Comments VI. Compliance Date VII. Paperwork Reduction Act Analysis A. Background B. Burdens for Managers Under Rule 13f– 2 and Form SHO 1. Applicable Respondents 2. Burdens and Cost C. Burdens and Costs Associated With the Amendment to CAT 1. Summary of Collections of Information 1 Notice of the Text of the Amendment to the National Market System Plan Governing the Consolidated Audit Trail for Purposes of Short Sale-Related Data Collection, Exchange Act Release No. 34–98739 (Oct. 13, 2023). PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 2. Use of Information 3. Respondents 4. Total Initial and Annual Reporting and Record Keeping Burdens D. Collection of Information Is Mandatory E. Retention Period of Recordkeeping Requirement F. Confidentiality VIII. Economic Analysis A. Introduction B. Baseline 1. Institutional Investment Managers 2. Short Selling 3. Current Short Selling Regulations 4. Existing Short Selling Data 5. Competition C. Economic Effects 1. Investor Protection and Market Manipulation 2. Effects on Stock Price Efficiency 3. Effect on Market Liquidity 4. Effect on Corporate Decision Making 5. Effect on the Securities Lending Market 6. Compliance Cost 7. Effect of Certain Electronic Filing and Dissemination Requirements 8. Potential Increased Use of Derivatives D. Efficiency, Competition and Capital Formation 1. Efficiency 2. Competition 3. Capital Formation E. Reasonable Alternatives 1. Alternative Approaches 2. Data Modifications 3. Threshold Modifications 4. Other Alternatives IX. Regulatory Flexibility Act Certification X. Other Matters Statutory Authority I. Overview A. Background Short selling involves a sale of a security that the seller does not own, or a sale that is consummated by the delivery of a security borrowed by, or for the account of, the seller.2 In order to deliver the security to the purchaser, the short seller will generally borrow the security, usually from a brokerdealer or an institutional investor, and later close out the position by purchasing equivalent securities on the open market and returning the security to the lender. Short selling is generally used to profit from an expected downward price movement, to provide liquidity in response to unanticipated demand,3 or 2 See 17 CFR 242.200(a). liquidity is generally provided through short selling by market professionals, such as market makers, who offset temporary imbalances in the buying and selling interest for securities. Short sales effected in the market add to the selling interest of stock available to purchasers and reduce the risk that the price paid by investors is artificially high because of a temporary contraction of selling interest. Short sellers covering their sales also may add to the buying interest of stock available to sellers. See Amendments to Regulation SHO, Exchange Act Release No. 61595 (Feb. 26, 2010), 75 FR 11232, 11235 (Mar. 10, 2010) (‘‘Rule 201 Adopting Release’’). 3 Market E:\FR\FM\01NOR2.SGM 01NOR2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 to hedge the risk of a long position in the same security or a related security.4 Short selling provides the market with important benefits, such as providing market liquidity and pricing efficiency.5 While short selling can serve useful market purposes, such as facilitating price discovery, there are concerns that it could be used to drive down the price of a security, to accelerate a declining market in a security, or to manipulate stock prices.6 The Commission has plenary authority under section 10(a) of the Exchange Act to regulate short sales of securities as necessary or appropriate in the public interest or for the protection of investors.7 Regulation SHO, which became effective on January 3, 2005,8 imposes four general requirements with respect to short sales of equity securities. Under 17 CFR 242.200 (‘‘Rule 200 of Regulation SHO’’), broker-dealers must properly mark sale orders as ‘‘long,’’ ‘‘short,’’ or ‘‘short exempt.’’ 9 4 See, Short Sales, Exchange Act Release No. 50103 (July 28, 2004), 69 FR 48008 (Aug. 6, 2004) (‘‘Regulation SHO Adopting Release’’). 5 See, e.g., Phil Mackintosh, How Short Selling Makes Markets More Efficient, NASDAQ (Oct. 1, 2020), available at https://www.nasdaq.com/ articles/how-short-selling-makes-markets-moreefficient-2020-10-01. Efficient markets require that prices fully reflect all buy and sell interest. Market participants who believe a stock is overvalued may engage in short sales in an attempt to profit from a perceived divergence of prices from true economic values. Such short sellers add to stock pricing efficiency in part because their transactions inform the market of their evaluation of future stock price performance. This evaluation is reflected in the resulting market price of the security. See Rule 201 Adopting Release, 75 FR 11235 nn. 29 & 30. Historically, short sellers have, at times, through doing research, uncovered fraudulent behavior. See also generally discussion in infra Parts VIII.C.2 and VIII.C.4. 6 See, e.g., Div. Econ. Risk Analysis, Short Sale Position and Transaction Reporting (June 5, 2014), at 6–7 (‘‘DERA 417(a)(2) Study’’), available at https://www.sec.gov/files/short-sale-position-andtransaction-reporting0.pdf (This is a study of the Staff of the U.S. Securities and Exchange Commission, which represents the views of Commission staff, and is not a rule, regulation, or statement of the Commission. The Commission has neither approved nor disapproved the content of this study and, like all staff statements, it has no legal force or effect, does not alter or amend applicable law, and creates no new or additional obligations for any person.); Rule 201 Adopting Release, 75 FR 11235 (describing a ‘‘bear raid’’ where an equity security is sold short in an effort to drive down the price of the security by creating an imbalance of sell-side interest, as an example of unrestricted short selling that could ‘‘exacerbate a declining market in a security by increasing pressure from the sell-side, eliminating bids, and causing a further reduction in the price of a security by creating an appearance that the security’s price is falling for fundamental reasons, when the decline, or the speed of the decline, is being driven by other factors’’). See generally discussion infra Part VIII.C.1. 7 15 U.S.C. 78j(a). 8 See Regulation SHO Adopting Release. 9 See 17 CFR 242.200(g). A broker or dealer must mark all sell orders of an equity security as ‘‘long,’’ VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 Under 17 CFR 242.203 (‘‘Rule 203 of Regulation SHO’’), a broker-dealer must locate a source of shares that the brokerdealer reasonably believes can be delivered in time for settlement (commonly referred to as the ‘‘locate requirement’’) before effecting a short sale.10 Under 17 CFR 242.204 (‘‘Rule 204’’), if the broker or dealer that is a member of a registered clearing agency fails to deliver the security to the registered clearing agency in time for settlement, the broker or dealer must take action to close out the failure to deliver if that failure results from a long or short sale.11 Separately, under 17 CFR 242.201 (‘‘Rule 201’’), trading centers 12 must have policies and procedures in place to restrict short selling when a covered security has triggered a short sale price test circuit breaker.13 In addition, the Commission adopted an antifraud provision, 17 CFR 240.10b–21 (‘‘Rule 10b-21’’), to address failures to deliver in securities that have been associated with ‘‘naked’’ short selling.14 ‘‘short,’’ or ‘‘short exempt.’’ A sell order may only be marked ‘‘long’’ if the seller is ‘‘deemed to own’’ the security being 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 dealer no later than the settlement of the transaction. See 17 CFR 242.200(g). A person is deemed to own a security only to the extent that he 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 In re OZ Mgmt., Exchange Act Release No. 75445 (July 14, 2015) (settled) (discussing where OZ Management submitted short sale orders to its executing broker, but identified such sales as long sales to its prime broker, causing books and records of the prime broker to be inaccurate), available at https://www.sec.gov/litigation/admin/2015/3475445.pdf. 10 See 17 CFR 242.203(b)(1) and (2). The Regulation SHO locate requirement provides that broker-dealers may not accept a short sale order in an equity security from another person, or effect a short sale in an equity security for its own account, unless the broker-dealer has (i) borrowed the security, or entered into a bona-fide arrangement to borrow the security; or (ii) reasonable grounds to believe that the security can be borrowed so that it can be delivered on the date delivery is due; and (iii) documented compliance with this requirement (‘‘locate requirement’’). 11 See 17 CFR 242.204. ‘‘Failures to deliver,’’ or ‘‘fails,’’ occur when a broker-dealer fails to deliver securities to the party on the other side of the transaction on the settlement date. 12 Trading center in Regulation SHO means a national securities exchange or national securities association that operates an SRO trading facility, an alternative trading system, an exchange market maker, an OTC market maker, or any other broker or dealer that executes orders internally by trading as principal or crossing orders as agent. 17 CFR 242.200. 13 See 17 CFR 242.201. 14 See ‘‘Naked’’ Short Selling Antifraud Rule, Exchange Act Release No. 58774 (Oct. 14, 2008), 73 FR 61666, 61674 (Oct. 17, 2008) (In a ‘‘naked’’ short PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 75101 Section 929X of the DFA added section 13(f)(2) of the Exchange Act, entitled ‘‘Reports by institutional investment managers,’’ requiring the Commission to prescribe rules to make certain short sale data publicly available no less frequently than monthly.15 Specifically, section 13(f)(2) provides: ‘‘[t]he Commission shall prescribe rules providing for the public disclosure of the name of the issuer and the title, class, CUSIP [Committee on Uniform Securities Identification Procedures] number, aggregate amount of the number of short sales of each security, and any additional information determined by the Commission following the end of the reporting period. At a minimum, such public disclosure shall occur every month.’’ 16 In addition, the Commission has received multiple petitions to adopt reporting requirements for short sellers similar to those required for holders of long positions.17 sale, a seller does not borrow or arrange to borrow the necessary securities in time to deliver them to the buyer within the standard settlement period. Although abusive ‘‘naked’’ short selling is not defined in the federal securities laws, it refers generally to selling short without having stock available for delivery and intentionally failing to deliver stock within the standard settlement period. In addition, a seller misrepresenting its short sale locate source or ownership of shares may intend to fail to deliver securities in time for settlement and, therefore, engage in abusive ‘‘naked’’ short selling.). 15 Public Law 111–203, sec. 929X, 124 Stat. 1376, 1870 (July 21, 2010). 16 15 U.S.C. 78m(f)(2). 17 See, e.g., Letter from Elizabeth King, Corporate Secretary, NYSE Group, et al. (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 with that currently required for institutional investment managers under section 13(f) of the Exchange Act for long position reporting’’), available at https://www.sec.gov/rules/ petitions/2015/petn4-689.pdf; 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 to require public disclosure by investors of short positions in parity with the disclosure regime applicable to long positions’’), available at https:// www.sec.gov/rules/petitions/2015/petn4-691.pdf (‘‘NASDAQ Petition’’); see also Letter from E. Carter Esham, Executive Vice President, Emerging Companies, Biotechnology Innovation Organization (BIO) (Mar. 11, 2016) (‘‘BIO Letter’’) (applauding reforms to the short disclosure framework proposed in the NASDAQ Petition and in the NYSE Petition and advocating for the promulgation of rules to ensure parity between public disclosures required of investors taking long and short positions), available at https://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 for short sellers), available at https://www.sec.gov/ comments/4-691/4691-10.pdf. Developments in the market with regard to ‘‘meme’’ stocks in early 2021, some of which were widely reported as involving large short sellers, also highlighted a need for more E:\FR\FM\01NOR2.SGM Continued 01NOR2 75102 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 B. The Proposals In February 2022, in an effort to increase transparency regarding short position and short activity data to both market participants and regulators, and to address the requirements of section 13(f)(2), the Commission proposed new rule 13f–2 (‘‘Proposed Rule 13f–2’’) and related form (‘‘Proposed Form SHO’’) under the Exchange Act.18 Proposed Rule 13f–2 would require certain institutional investment managers (‘‘Managers’’) with gross short positions that meet certain quantitative reporting thresholds to report, on a monthly basis on new Proposed Form SHO, certain short position data and short activity data for certain equity securities. Proposed Form SHO included two parts: Information Table 1–reports of information including, but not limited to, data elements explicitly referenced in section 13(f)(2), gross end-of-month short positions in equity securities that meet the reporting thresholds, and whether such positions are fully hedged, partially hedged, or not hedged; and Information Table 2–reports of information including, but not limited to, certain daily activity data (including options assignments and exercises) that affect a Manager’s gross short positions during the calendar month reporting period. Managers would file Proposed Form SHO with the Commission via the Commission’s Electronic Data Gathering, Analysis, and Retrieval system (‘‘EDGAR’’) within 14 calendar days after the end of the calendar month. The Commission would then expect to publish on EDGAR aggregated information derived from the data reported on Proposed Form SHO within one month after the end of the reporting calendar month. In the Proposing Release, the Commission stated that the required short sale disclosures that would be collected under Proposed Form SHO and the aggregated data published pursuant to Proposed Rule 13f–2 would increase transparency and provide consistent and consolidated short sale information. See, e.g., Robert Smith et al., ‘‘Short Squeeze’’ Spreads as Day Traders Hunt Next GameStop, Fin. Times (Jan. 27, 2021), available at https:// www.ft.com/content/acc1dbfe-80a4-4b63-90dd05f27f21ceb2; Are ‘‘Meme Stocks’’ Harmless Fun, or A Threat to the Financial Old Guard?, Economist (July 6, 2021) (retrieved from Factiva database). See also Sharon Nunn & Adam Kulam, Short-Selling Restrictions During Covid–19, Yale Sch. of Mgmt., Program on Fin. Stability (Jan. 12, 2021), available at https://som.yale.edu/story/2021/short-sellingrestrictions-during-covid-19 (discussing global short selling regulatory responses to the Covid–19 pandemic). 18 Short Position and Short Activity Reporting by Institutional Investment Managers, Exchange Act Release No. 34–94313 (Feb. 25, 2022), 87 FR 14950 (Mar. 16, 2022) (‘‘Proposing Release’’). VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 several important benefits to market participants and regulators. Such aggregated information would help inform market participants regarding the overall short sale activity by reporting Managers. More information about the short sale activity and gross short positions of reporting Managers may promote greater risk management among market participants and may facilitate capital formation to the extent that greater transparency bolsters confidence in the markets. As discussed in the Proposing Release, the Commission’s regular access to Proposed Form SHO data would bolster the Commission’s oversight of short selling, as Proposed Rule 13f–2 and Proposed Form SHO would improve the utility of information available to the Commission and other regulators.19 Additionally, to supplement the short sale data made available to the Commission in Proposed Form SHO filings, the Commission proposed a new rule at 17 CFR 242.205 prescribing a ‘‘buy to cover’’ order marking requirement under Regulation SHO (‘‘Proposed Rule 205’’) for certain purchase orders effected by a brokerdealer for its own account or for the account of another person at the brokerdealer, if, at the time of order entry, the purchaser had a gross short position in such security in the account for which the purchase is being made. The Commission also proposed amendments to the NMS plan governing the CAT (‘‘Proposed CAT Amendments’’) to require the reporting of ‘‘buy to cover’’ order marking information and of reliance on the bona fide market making exception in Rule 203(b)(2)(iii) of Regulation SHO (‘‘BFMM locate exception’’). Proposed Rule 205 and the Proposed CAT Amendments were designed to fill an information gap for the Commission and other regulators by providing insights into the lifecycle of a short sale that are not available under existing data sources.20 C. Overview of Proposed Rule 13f–2, Proposed Form SHO, Proposed Rule 205 and Proposed CAT Amendments 1. Overview of Comments Received The Commission received robust comment on Proposed Rule 13f–2, Proposed Form SHO, Proposed Rule 205, and the Proposed CAT Amendments (collectively, the ‘‘Proposals’’). Comments were 19 Proposing Release, at 14951. data obtained through CAT are not made public, the ‘‘buy to cover’’ and ‘‘bona fide market making’’ data reported pursuant to the Proposed CAT Amendments would not be made publicly available as a result of such reporting. 20 Because PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 submitted by individual investors as well as other market participants, such as trade associations, institutional investment managers, investment advisers, broker-dealers, non-profit organizations, and academicians. These comments, which are discussed in context below, included a variety of different viewpoints on various aspects of the Proposals.21 Many commenters were supportive of the Proposals as a step toward increasing transparency into short sale activity.22 Many commenters stated that short selling is a particularly opaque area of the market and that increasing transparency regarding short selling would be beneficial to market participants.23 21 The comment letters on the Proposing Release (File No. S7–08–22) are available at https:// www.sec.gov/comments/s7-08-22/s70822.htm. Over 98% of the over 3,000 comments received were from individual investors, most of whom (over 1,900) submitted a variation of a template letter from ‘‘We The Investors,’’ an advocacy group for retail investors. The remaining comments were from trade associations, financial services firms— including institutional investment managers and investment management firms, broker-dealers—and their advisors, non-profit organizations, academicians, and entities other than individual investors. See Comment Letter from We the Investors, available at https://www.sec.gov/ comments/s7-08-22/s70822-typea.pdf (‘‘WTI Letter’’). 22 See, e.g., Comment from Samuel Hudock (Mar. 2, 2022), available at https://www.sec.gov/ comments/s7-08-22/s70822-20118373-271244.htm; Comment from Michelle R. Bracke (Mar. 4, 2022) available at https://www.sec.gov/comments/s7-0822/s70822-20118531-271417.htm; Comment from Joshua Barbee (Mar. 4, 2022), available at https:// www.sec.gov/comments/s7-08-22/s70822-20118530271416.htm; Comment from Robert Ross (Mar. 14, 2022), available at https://www.sec.gov/comments/ s7-08-22/s70822-20119365-272251.htm; Comment from David Arkules (Feb. 28, 2022), available at https://www.sec.gov/comments/s7-08-22/s7082220118071-270876.htm; Comment from Gina Preziosi (Mar. 7, 2022), available at https:// www.sec.gov/comments/s7-08-22/s70822-20118726271589.htm; Comment from Jessica Cooke (Mar. 9, 2022), available at https://www.sec.gov/comments/ s7-08-22/s70822-20118963-271791.htm; Comment from Mauricio Gonzalez (Oct. 12, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822310835.htm; Comment from Liam Sutton (Oct. 19, 2022), available at https://www.sec.gov/comments/ s7-08-22/s70822-311965.htm; Comment from Nicholas Graham (Oct. 19, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822312051.htm; Comment from Steffen Maier (Oct. 19, 2022), available at https://www.sec.gov/comments/ s7-08-22/s70822-312049.htm; Comment from Zachary D’Elia (Oct. 19, 2022), available at https:// www.sec.gov/comments/s7-08-22/s70822312047.htm; Comment from Stephen Leachman (Oct. 19, 2022), available at https://www.sec.gov/ comments/s7-08-22/s70822-312046.htm; Comment from Sergio Herrera (Oct. 19, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822312042.htm; Comment from David P. Miller Jr. (Oct. 19, 2022), available at https://www.sec.gov/ comments/s7-08-22/s70822-312038.htm. 23 See, e.g., Comment from William Bloxham (Oct. 21, 2022), available at https://www.sec.gov/ comments/s7-08-22/s70822-313372.htm; Comment from Ricardo Gomez (Oct. 29, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822316604.htm; Comment from Victor Arriaza (Oct. 29, E:\FR\FM\01NOR2.SGM 01NOR2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 Some of these commenters stated that the increased information regarding short sales would allow investors to be better informed and make better investment decisions.24 A number of these commenters urged the Commission to strengthen the proposed reporting requirements further by, for example, lowering or eliminating the thresholds triggering reporting obligations under Proposed Rule 13f– 2.25 2022), available at https://www.sec.gov/comments/ s7-08-22/s70822-316625.htm; Comment from Kyle Byrd (Oct. 29, 2022), available at https:// www.sec.gov/comments/s7-08-22/s70822316701.htm; Comment from Tarek Elseweifi (Oct. 29, 2022), available at https://www.sec.gov/ comments/s7-08-22/s70822-316706.htm; Comment from Clay Wyant (Oct. 29, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822316708.htm; Comment from Yin Hung Lam (Oct. 29, 2022), available at https://www.sec.gov/ comments/s7-08-22/s70822-316601.htm; Comment from Evan Anderson (Oct. 29, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822316580.htm; Comment from Connor Judson (Oct. 29, 2022), available at https://www.sec.gov/ comments/s7-08-22/s70822-316599.htm; Comment from Nicky (Oct. 29, 2022), available at https:// www.sec.gov/comments/s7-08-22/s70822316638.htm. 24 See, e.g., Comment from Eric Mills (April 27, 2022), available at https://www.sec.gov/comments/ s7-08-22/s70822-20126810-287520.htm (‘‘[T]he proposals will serve the mission of the SEC by increasing transparency regarding short selling activity. On-going efforts by the SEC to increase market transparency and relieve information asymmetries promote efficiency, order, fairness, capital formation, and public trust. The result is an enhancement of investor ability to assess the market and make more informed decisions.’’); Comment from Stanley Little (Mar. 8, 2022), available at https://www.sec.gov/comments/s7-08-22/s7082220118870-271692.htm (‘‘The proposed rule is a[n] important missing link for investors. The ordinary person wishing to make money in the stock market should have all available information at their disposal to make informed decisions . . . The transparency rule is such a tool needed to make well informed decisions.’’); Comment from Brendon Withers (Feb, 27, 2022), available at https:// www.sec.gov/comments/s7-08-22/s70822-20118078270936.htm (supported ‘‘immediate implementation [of the proposals] to improve the US Stock Market and provide a more fair and free system in which market participants can have accurate information and make informed decisions based on CURRENT AND ACCURATE data.’’). 25 See, e.g., Letter from Stephen W. Hall, Legal Director and Securities Specialist, Better Markets, et al. (Apr. 26, 2022), at 12, available at https:// www.sec.gov/comments/s7-08-22/s70822-20126822287528.pdf (‘‘[T]the SEC should eliminate the proposed thresholds so as to reduce or eliminate the risk that unknown, hidden short positions could pose to investors and the markets.’’) (‘‘Better Markets Letter’’); Comment from Matthew Sinex (Oct. 31, 2022), available at https://www.sec.gov/ comments/s7-08-22/s70822-317106.htm; Comment from Noah Tewahade (Oct. 30, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822317046.htm; Comment from Luke Dansie (Oct. 31, 2022), available at https://www.sec.gov/comments/ s7-08-22/s70822-317081.htm; Comment from Mike Flowers (Oct. 30, 2022), available at https:// www.sec.gov/comments/s7-08-22/s70822317245.htm; Comment Letter from Katherine Lander (Oct. 30, 2022), available at https:// www.sec.gov/comments/s7-08-22/s70822- VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 As discussed in further detail below, some commenters recommended changes to the Proposals in response to their concerns about: the scope of Proposed Rule 13f–2; the underlying approach and levels of the proposed thresholds that would trigger a reporting obligation under Proposed Rule 13f–2; the feasibility of operationalizing Proposed Rule 205 in a manner that would result in the gathering of meaningful short sale-related data; and the necessity for the Proposed CAT Amendments. Some commenters stated that the Commission did not sufficiently articulate the benefits of, or regulatory justification for, the Proposals and did not accurately estimate or adequately justify the costs and impacts of the new reporting requirements.26 Some of these commenters expressed concern that the Proposing Release’s Economic Analysis did not adequately estimate the costs and burdens of the Proposals.27 317266.htm; Comment from Marco Alvarenga (Oct. 31, 2022), available at https://www.sec.gov/ comments/s7-08-22/s70822-316992.htm; Comment Letter from Erikka Jehle (Oct. 31, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822316930.htm. 26 E.g., Comment Letter from Robert Toomey, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association, et al. (Apr. 26, 2022), at 3, available at https://www.sec.gov/comments/s7-08-22/s7082220126803-287514.pdf (‘‘SIFMA Letter’’) (‘‘SIFMA is concerned that such an expansive reporting regime would impose burdens and costs on reporting parties that would materially outweigh the benefit of the information they might yield, and that the SEC has not provided justification for why such information is necessary and/or cannot already be obtained through other means available to the SEC’’); see also, Comment Letter from Thomas M. Merritt, Deputy General Counsel, Virtu Financial (Apr. 26, 2022), available at https://www.sec.gov/ comments/s7-08-22/s70822-20126856-287588.pdf (‘‘Virtu Letter’’); Comment Letter from Thomas Deinet, Executive Director, Standards Board for Alternative Investments (Apr. 26, 2022), available at https://www.sec.gov/comments/s7-08-22/s7082220126850-287575.pdf (‘‘SBAI Letter’’); Comment Letter from Matthew B. Siano, Managing Director and General Counsel, Two Sigma (Apr. 26, 2022), available at https://www.sec.gov/comments/s7-0822/s70822-20126808-287518.pdf (‘‘Two Sigma Letter’’); Comment Letter from Richard F. Kerr, Partner, K&L Gates LLP (Apr. 26, 2022), available at https://www.sec.gov/comments/s7-08-22/s7082220126848-287571.pdf (‘‘K&L Gates Letter’’). 27 See, e.g., SIFMA Letter, at 6 n. 15 (‘‘SIFMA is concerned that the SEC’s economic analysis of the Proposed Rules does not adequately consider that the sum total of the proposed requirements may result in a burden that far exceeds the SEC’s estimates with respect to each individual component . . .’’); Comment Letter from Jennifer Han, Executive Vice President, Chief Counsel and Head of Regulatory Affairs, Managed Funds Association (Apr. 26, 2022), at 7, 19, available at https://www.sec.gov/comments/s7-08-22/s7082220126815-287523.pdf (‘‘MFA Letter’’) (‘‘[T]he SEC’s economic analysis and, specifically, the Proposal’s estimated costs are materially understated.’’); Comment Letter from Mark A. Steffensen, Senior Executive Vice President and General Counsel, HSBC North American Holdings Inc. and HSBC PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 75103 2. Final Rule 13f–2, Form SHO and CAT Amendment For the reasons discussed more fully in Parts II–IV below, and to balance implementation and compliance costs and burdens with the Commission’s goal of enhancing transparency regarding short selling, the Commission is adopting Rule 13f–2 and related Form SHO with certain modifications in response to comments.28 The new reporting regime of Rule 13f–2 provides disclosures that supplement the short sale-related information that currently is publicly available or accessible for a fee from existing short sale reporting regimes provided by some registered national securities exchanges (‘‘exchanges’’) and registered national securities associations (‘‘RNSAs’’).29 Final Rule 13f–2 will require Managers (defined in section 13(f)(6)(A) of the Exchange Act) to report to the Commission, on a monthly basis on related Form SHO, certain short position data and short activity data for certain equity securities. In particular: • On the Cover Page of Form SHO, Managers will be required to report certain basic information including its name, mailing address, business telephone number and business email, as well as the name, title, business telephone number and business email of the Manager’s contact employee for the Form SHO report; and the date the report is filed. The Manager will also provide its non-lapsed Legal Entity Identifier (‘‘LEI’’) if it has one. If other Managers are required to be listed in the ‘‘Other Manager(s) Reporting for this Manager’’ section of the Cover Page, the Manager will also be required to include the name and non-lapsed LEI of each such ‘‘Other Manager’’ listed, if the LEI of such ‘‘Other Manager(s)’’ is available to the Manager filing the Form SHO report. • With regard to each individual equity security reported on by Managers Bank USA, N.A. (Jan. 24, 2023), at 15 n. 53, available at https://www.sec.gov/comments/s7-0822/s70822-20155771-324031.pdf (‘‘HSBC Letter’’) (‘‘We [ ] do not believe that the Commission’s economic analysis adequately considers the costs of Proposed Rule 13f–2 to market makers.’’). 28 Rule 13f–2 and Form SHO, as adopted, are responsive to the policy recommendations to increase transparency around short selling activities and improve short sale data of participants in the Government-Business Forums on Small Business Capital Formation held by the Commission in recent years. See, e.g., Report on the Report on the 41st Annual Small Business Forum, at 22, available at 2022 OASB Annual Forum Report (sec.gov); Report on the Report on the 40th Annual Small Business Forum, at 25, available at https:// www.sec.gov/files/2021_OASB_Annual_Forum_ Report_FINAL_508.pdf. 29 See infra Part II.A.4. See also Proposing Release, at 14964–65. E:\FR\FM\01NOR2.SGM 01NOR2 ddrumheller on DSK120RN23PROD with RULES2 75104 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations in the Information Tables of Form SHO, Managers will report: the issuer’s name and LEI if it has one, and the equity security’s title of class, CUSIP, and Financial Instrument Global Identifier (‘‘FIGI’’) (if any has been assigned).30 • With regard to Information Table 1 of Form SHO, the Manager will also report the number of shares of the reported equity security that represent the Managers’ gross short position at the close of the last settlement date of the calendar month reporting period, as well as the corresponding U.S. dollar value of this reported gross short position. • With regard to Information Table 2 of Form SHO, for each reported equity security, for each individual settlement date during the calendar month reporting period, a Manager will report ‘‘net’’ activity in the reported equity security. The net activity reported by a Manager will be expressed by a single identified number of shares of the reported equity security, and will reflect offsetting purchase and sale activity by Managers. A positive number of shares identified will indicate net purchase activity in the equity security on the specified settlement date, while a negative number of shares identified will indicate net sale activity in the equity security on the specified settlement date. Managers will report such information regarding each equity security if the following thresholds are met: • With respect to any equity security that is of a class of securities that is registered pursuant to Exchange Act section 12 31 or for which the issuer of that class of securities is required to file reports pursuant to Exchange Act section 15(d) 32 (a ‘‘reporting company issuer’’) in which the Manager meets or exceeds either: (1) a monthly average of daily gross short positions at the close of regular trading hours in the equity security with a U.S. dollar value of $10 million or more, or (2) a monthly average of daily gross short positions at the close of regular trading hours as a percentage of shares outstanding in the equity security of 2.5 percent or more (‘‘Threshold A’’). • With respect to any equity security that is of a class of securities of an issuer that is not a reporting company issuer as described above (a ‘‘non-reporting company issuer’’) in which the Manager meets or exceeds a gross short position in the equity security with a U.S. dollar value of $500,000 or more at the close 30 See infra nn. 36 & 218. U.S.C. 78l. 32 15 U.S.C. 78o(d). 31 15 VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 of regular trading hours on any settlement date during the calendar month. (‘‘Threshold B’’). The Commission will then publish aggregate information as follows: • With regard to Information Table 1 of Form SHO, the Commission will publish, for each class of equity securities, as an aggregated number of shares across all reporting Managers, the number of shares of the reported equity security that represent the Managers’ gross short position at the close of the last settlement date of the calendar month, as well as the corresponding aggregated U.S. dollar value of this reported gross short position. • With regard to Information Table 2 of Form SHO, for each reported equity security, for each individual settlement date during the calendar month, the Commission will publish the net activity in the reported equity security, as aggregated across all reporting Managers. The Commission is also adopting, substantially as proposed, the amendment to the CAT NMS Plan to require broker-dealers with a reporting obligation to CAT, to report whether an original receipt or origination of an order to sell an equity security is a short sale for which a market maker is claiming the BFMM locate exception. However, for the reasons discussed below, the Commission is not adopting Proposed Rule 205 or the CAT ‘‘buy to cover’’ reporting requirements. Changes Made to the Proposals: In response to comments, and as discussed in more detail below, the Commission is modifying the proposal generally by: • Streamlining Form SHO reports by not adopting as proposed the requirement to report hedging classifications on Information Table 1, and by requiring a lower level of granularity of reporting on Information Table 2; 33 • Adjusting the calculation of the dollar value prong of the reporting threshold for equity securities of reporting company issuers (i.e., Threshold A) to be based on a monthly average of daily gross short positions rather than the proposed daily calculation; • Requiring in Rule 13f–2 and in the instructions to Form SHO that, for purposes of determining whether a Manager meets or exceeds a reporting threshold, a Manager shall determine its 33 Because the proposed rule and form called for publication of only ‘‘net’’ activity based on the information reported in Information Table 2, this change in information reported on Form SHO as adopted does not affect the information published by the Commission from information derived from the Form SHO reports. PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 gross short position ‘‘at the close of regular trading hours’’ in the equity security, rather than at the ‘‘end of day’’ as was provided for in the instructions to Proposed Form SHO; • Not adopting Proposed Rule 205 and, consequently, not adopting the Proposed CAT Amendment requiring a ‘‘buy to cover’’ order mark in order receipts and order origination reports submitted to the CAT; and • Making modifications to the text of Rule 13f–2 and the instructions to Form SHO to provide context and enhance comprehensibility, such as—adding a reference in the definition of ‘‘gross short position’’ to ‘‘short sales’’ as defined in Rule 200(a) of Regulation SHO and making minor adjustments to phrasing in the definition; 34 adding language to the rule text to more precisely describe the equity securities for which information is reported in final Form SHO; 35 deleting the superfluous word ‘‘collectively’’ from the rule text to enhance overall readability; replacing the term ‘‘active LEI’’ on Proposed Form SHO with ‘‘nonlapsed LEI’’ 36 on final Form SHO; updating the contact information to be provided on the final Form SHO cover page,37 and making corresponding modifications to conform the text of Rule 13f–2 and the instructions to Form SHO. • Making non-substantive, technical changes to correct inadvertent 34 Specifically, we made a non-substantive revision to change the word ‘‘including’’ to ‘‘such as’’ and removed the amphibological comma. 35 To affirm that the Rule 13f–2 requirements apply to each class of an equity security about which information is being reported on Form SHO, and to more accurately indicate that classes of securities, not issuers, are registered pursuant to section 12 of the Exchange Act, Rules 13(a)(1) and Rule 13(a)(2) have been revised to refer to ‘‘each equity security that is of a class of securities’’ rather than ‘‘each equity security of an issuer . . . .’’ This distinction by class of security is also consistent with CUSIP procedures, under which, we understand, different classes of stock have distinct identifying codes. Rule 13f–2 requires that Managers provide CUSIP numbers for equity securities for which information is reported on Form SHO. 36 For greater precision in the terminology used in Form SHO as adopted, an LEI that is currently in effect is referred to as a ‘‘non-lapsed LEI,’’ rather than an ‘‘active LEI’’ (the terminology used in Proposed Form SHO), of a Manager. A non-lapsed LEI is an LEI for which the Manager is current on its periodic renewal fees needed to maintain the LEI. Further, to avoid any suggestion that a Manager filing a Form SHO report has an obligation to monitor the status of an issuer’s LEI, Instructions 8.c and 9.c of Form SHO—‘‘Column 3. Issuer LEI. If the issuer has an LEI, enter the issuer’s active LEI’’—have been revised to remove the term ‘‘active.’’ 37 The required Form SHO Cover Page contact information for the reporting Manager and its ‘‘Contact Employee’’ has been updated to reflect the greater reliance on the communication technology of email rather than facsimile. E:\FR\FM\01NOR2.SGM 01NOR2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations grammatical errors in the text of the adopted amendment to the CAT NMS Plan that requires a broker-dealer with a reporting obligation to CAT to indicate whether an order is a short sale effected by a market maker in connection with bona fide market making activities for which the BFMM locate exception is claimed.38 II. Discussion of Final Rule 13f–2 and Form SHO A. Final Rule 13f–2 1. Scope of Persons Covered by Final Rule 13f–2 ddrumheller on DSK120RN23PROD with RULES2 a. Proposal Exchange Act section 13(f) pertains to ‘‘Reports by Institutional Investment Managers.’’ 39 Proposed Rule 13f–2 would have required Managers to collect and file with the Commission via EDGAR certain short sale-related data on proposed Form SHO, within fourteen (14) calendar days after the end of each calendar month, with regard to each equity security over which the Manager and all accounts over which the Manager (or any other person under the Manager’s control) has investment discretion 40 that meet or exceed a quantitative reporting threshold (‘‘Reporting Threshold’’). As 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 and selling securities for its own account, and any person exercising investment discretion with respect to the account of any other person.41 As such, the term ‘‘institutional investment manager’’ typically can include brokers and dealers, investment advisers, banks, insurance companies, pension funds and corporations.42 Proposed Rule 13f–2(b)(3) states that ‘‘investment discretion’’ has the same meaning as in 17 CFR 240.13f–1(b) (‘‘Rule 13f–1(b) under the Exchange Act’’),43 and Rule 13f–1(b) states that ‘‘investment discretion’’ has the same meaning as in section 3(a)(35) of the Exchange Act. Rule 13f–1(b)’s definition 38 Specifically, the preposition ‘‘for’’ was added before ‘‘a short sale’’ to clarify that reporting is required for a short sale in which the bona fide market maker exception is claimed, the article ‘‘the’’ was added before ‘‘exception,’’ and the preposition ‘‘in’’ was added before ‘‘Rule 203(b)(2)(iii)’’ to clarify that the BFMM locate exception is found in Rule 203(b)(2)(iii). 39 15 U.S.C. 78m(f). 40 See Proposed Rule 13f–2(b)(3). 41 See Proposed Rule 13f–2(b)(1). 42 See also Instructions to Form 13F. 43 See 17 CFR 240.13f–1(b). VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 is comprehensive in that it covers all accounts over which the Manager, or any person under the Manager’s control, has investment discretion. This same definition of investment discretion was used by the Commission in adopting 17 CFR 240.10a–3T (‘‘interim final temporary Rule 10a–3T’’) in 2008, which required certain Managers to file weekly nonpublic reports with the Commission on Form SH regarding short sales and positions.44 In addition, the Rule 13f–1(b) definition of investment discretion is used for Form 13F ‘‘long’’ position reporting by certain Managers.45 b. Comments and Final Rule One commenter encouraged the Commission to expand the scope of market participants subject to reporting under Proposed Rule 13f–2 ‘‘beyond just Managers.’’ 46 This commenter believed the Commission’s determination ‘‘to omit a large group of market participants from Proposed Rule 13f–2’s scope will negatively affect the completeness and analytical sufficiency of the aggregated and disclosed short sale data, impeding the Commission’s ability to accurately reconstruct significant or unusual market events.’’ 47 This commenter believed that omitting a large group of market participants would ‘‘not provide the Commission with full visibility into the short sale market that it could otherwise achieve pursuant to Proposed Rule 13f–2’’ and believed that an ‘‘artificially narrow scope will not further the Commission’s stated goals of providing greater transparency and filling the information gaps for market participants and regulators.’’ 48 This commenter, however, did not identify what market participants were being omitted under the proposal and that should otherwise be included. As a potential alternative to Proposed Rule 13f–2, however, this commenter suggested, in part, that the current FINRA short interest reporting regime could be enhanced, and subsequently 44 See infra discussion in Part II.A.3.a. Form 13F (sec.gov), available at https:// www.sec.gov/pdf/form13f.pdf. 46 See Comment Letter from the Alternative Investment Management Association Ltd (Apr. 26, 2022), at 10–11, available at https://www.sec.gov/ comments/s7-08-22/s70822-20126829-287533.pdf (‘‘AIMA Letter’’); see also SBAI Letter, at 3 (stating that the proposed reporting only includes Managers, which would not provide a complete perspective of shorting activity). In raising concerns about reporting and monitoring burdens imposed by the reporting regime of Proposed Rule 13f–2, other commenters, however, did not question the application of the proposed rule to institutional investment managers. 47 AIMA Letter, at 11. 48 Id. 45 See PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 75105 codified, to address potential limitations in the currently available short salerelated data. However, because FINRA’s short interest reporting is applicable only to broker-dealers that are FINRA member firms, Managers represent a more diverse group of market participants than is required under FINRA reporting (as was suggested as a potential alternative by the commenter). As stated above, Managers typically can include various market participants, including brokers and dealers, as well as investment advisers, banks, insurance companies, pension funds and corporations. Accordingly, the Commission is adopting as proposed Rule 13f–2(b)(1) to define institutional investment managers as having the same meaning as in Exchange Act section 13(f)(6)(A). Short sale-related data reported by Managers on Form SHO will provide additional context to, and otherwise supplement, currently available data by, for example, distinguishing directional short selling of Managers from short sale activity effected by market makers and liquidity providers. This approach should reduce the reporting of non-directional, ‘‘transient’’ short sales activity and provide market participants with more focused information on substantial short positions held by Managers. Another commenter suggested that the Commission consider an exemption for certain types of Managers that do not regularly utilize short positions or that only utilize short positions for passive investing purposes.49 By capturing short sale-related data from Managers who hold substantial gross short positions— regardless of the purpose for which they utilize short positions, the reporting regime of Rule 13f–2 will enhance transparency and provide useful information to market participants regarding overall short sale activity. Furthermore, having the reporting obligation under Rule 13f–2 triggered by a reporting threshold that is calculated based on a monthly average of daily gross short positions in certain equity securities, rather than the proposed 49 See Comment Letter from Valerie Dahiya, Partner, Perkins Coie LLP (Apr. 26, 2022), at 3, available at https://www.sec.gov/comments/s7-0822/s70822-20126839-287549.pdf (‘‘Perkins Coie Letter’’) (stating that ‘‘for institutional investment managers that only selectively utilize short positions, or who only do so passively, these additional compliance costs in relation to the institutional investment manager’s usage of short positions could in turn impose untended risks to the manager’s underlying investors if the institutional investment manager must divert additional time and resources for compliance and oversight’’). E:\FR\FM\01NOR2.SGM 01NOR2 75106 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations daily calculation,50 is designed in part to alleviate concerns for Managers who only occasionally meet or exceed the prescribed reporting thresholds. In addition, the Commission did not receive any comments regarding the definition of ‘‘investment discretion’’ as proposed. The Commission is adopting Rule 13f–2(b)(3) as proposed to define the term ‘‘investment discretion’’ as having the same meaning as in Rule 13f–1(b) (which, among other things, incorporates the definition in section 3(a)(35) of the Exchange Act). In addition, Managers that will file reports on adopted Form SHO likely have experience reporting on Form 13F, for which this same definition is used.51 2. Scope of Reported Securities ddrumheller on DSK120RN23PROD with RULES2 a. Proposal Under the proposed rule, a Manager would have had to file a Form SHO report with regard to: • Any equity security of an issuer that is registered pursuant to section 12 of the Exchange Act 52 or for which the issuer is required to file reports pursuant to section 15(d) of the Exchange Act 53 in which the Manager meets or exceeds either (1) a gross short position in the equity security with a U.S. dollar value of $10 million or more at the close of regular trading hours on any settlement date during the calendar month; or (2) a monthly average gross short position as a percentage of shares outstanding in the equity security of 2.5 percent or more (Threshold A); and • Any equity security of an issuer that is not a reporting company issuer as described above in which the Manager meets or exceeds a gross short position in the equity security with a U.S. dollar value of $500,000 or more at the close of regular trading hours on any settlement date during the calendar month (Threshold B). As proposed, the reporting thresholds in Rule 13f–2(a)(1) and (2) (each a ‘‘Proposed Reporting Threshold’’) applied to equity securities, as the term ‘‘equity security’’ is defined in section 3(a)(11) of the Exchange Act 54 and 17 50 See infra Part II.A.3 for more discussion of the reporting thresholds in Proposed Rule 13f–2 and Rule 13f–2 as adopted. 51 See infra Part VIII.B.1. Registered investment advisers, particularly those managing hedge funds, are the primary Managers likely to be affected by Rule 13f–2. 52 15 U.S.C. 78l. 53 15 U.S.C. 78o(d). 54 Section 3(a)(11) of the Exchange Act defines ‘‘equity security’’ as any stock or similar security or any security future on any such security; or any security convertible, with or without consideration, into such a security, or carrying any warrant or right to subscribe to or purchase such a security; or any such warrant or right; or any other security which VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 CFR 240.3a11–1 (‘‘Rule 3a11–1’’).55 This scope, which included both exchangelisted and over-the-counter securities, is consistent with the securities to which Rules 200, 203, and 204 of Regulation SHO apply.56 The proposed scope would have included exchange-traded fund (‘‘ETF’’) securities, but would not have required Managers, in calculating a Proposed Reporting Threshold or Form SHO data, to consider short positions the ETF held in individual underlying equity securities.57 And because the Proposed Reporting Thresholds were based on a Manager’s gross short position in the underlying equity security itself, the proposed rule would not have required the Manager to account for derivative exposure as part of the threshold calculation for the underlying equity security, but would have required Managers to report certain changes in their gross equity short positions derived from acquiring or selling the equity in connection with derivative activity, such as exercising an option.58 b. Comments and Final Rule The Commission received several comments on Proposed Rule 13f–2’s and Proposed Form SHO’s proposed scope of securities, with commenters expressing a variety of views. Most commenters took an expansive view, exemplified by one such commenter’s statement that ‘‘all different securities and ETFs should be required to report all short sale data. The more information that is available to every investor and the Commission the better.’’ 59 As discussed below, other commenters, by contrast, recommended narrowing the universe of ‘‘in scope’’ securities by, for example, aligning with similar Commission reporting and public dissemination regimes, limiting the scope to securities of U.S. reporting companies, or excluding ETFs, options and warrants and other convertibles, and derivatives. Some commenters focused on the impact on implementation and compliance costs the Commission shall deem to be of similar nature and consider necessary or appropriate, by such rules and regulations as it may prescribe in the public interest or for the protection of investors, to treat as an equity security. 15 U.S.C. 78c(a)(11). 55 See Proposing Release, at 14956 n.59. 56 See Regulation SHO Adopting Release, at 48012. 57 Proposing Release, at 14958. 58 As stated in the Proposing Release, the Commission believed this proposed approach balances Managers’ reporting costs with the utility such data provides to regulators. See Proposing Release, at 14962. 59 Comment from Samuel Meadows (Mar. 26, 2022), at 1, available at https://www.sec.gov/ comments/s7-08-22/s70822-273456.htm (‘‘Samuel Meadows Comment’’). PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 related to Proposed Rule 13f–2 reporting requirements and recommended that derivatives, options, warrants and other convertibles, and ETFs be excluded from the scope of equity securities subject to Proposed Rule 13f–2 reporting requirements.60 Comments on the Scope of Covered Securities Most commenters supported the applicability of Proposed Rule 13f–2 to short positions in ETFs, some expressing specific concerns about ‘‘improper’’ use of ETFs to leverage short positions.61 However, one commenter advocating for the exclusion of ETFs from the universe of ‘‘in-scope’’ securities stated that, in most circumstances, Managers short ETFs largely for hedging purposes and not for the same reasons that Managers short stocks of reporting company issuers; this commenter stated that such information ‘‘will provide the public, and the SEC, very little in terms of useful information.’’ 62 The Commission disagrees with the commenter that reporting about gross short positions in ETFs will not provide useful information to the public and the Commission. Establishing short positions in an ETF can provide short exposure to a diverse set of equity securities or create a directional short strategy such as leveraged shorting. Because of their multipurpose nature, ETFs are a substantial piece of the short60 See, e.g., MFA Letter, at 11–12 (recommending that, to simplify compliance, provide clarity, and reduce costs, Commission should limit the reporting requirements to stocks of U.S. reporting company issuers, and exclude derivatives and ETFs); SIFMA Letter, at 20 (recommending reduction of compliance costs by creating a list of equity securities that would be subject to Proposed Rule 13f–2 reporting requirements that would exclude ‘‘extraneous securities, such as options, warrants, convertibles, and ETFs’’); Comment Letter from Frank Vivirito, Compliance Officer, XR Securities LLC (Apr. 25, 2022), at 2 (‘‘XR Securities Letter’’) (stating ‘‘I feel strongly that highly liquid, higher priced, active and efficient ETFs (and perhaps even some single name equities) with limited or no settlement issues’’ should be excluded from Proposed Rule 13f–2 reporting requirements). 61 See, e.g., Comment Letter from Nick Dougherty (Mar. 27, 2022), at 2, available at https:// www.sec.gov/comments/s7-08-22/s70822-20121466273451.pdf (‘‘Nick Dougherty Letter’’); Anonymously Submitted Comment (Mar. 21, 2022), at 1, available at https://www.sec.gov/comments/s708-22/s70822-20120739-272894.pdf. See generally, Anonymously Submitted Comment (Mar. 21, 2022), at 2, available at https://www.sec.gov/comments/s708-22/s70822-20122297-278355.htm (recommending that ‘‘[a]ll securities, including ETFs, OTC stocks, swaps etc. should have their positions data recorded and submitted to the SEC daily’’); Samuel Meadows Comment, at 1 (‘‘I strongly believe that all different securities and ETFs should be required to report all short sale data.’’). 62 MFA Letter, at 12. E:\FR\FM\01NOR2.SGM 01NOR2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 side market.63 ETFs are subject to the requirements of Regulation SHO, and there is a benefit to applying the Rule 13f–2 reporting requirements to the same universe of securities subject to the Commission’s short sale rules. Further, short sale-related data regarding ETFs will provide important transparency to a significant segment of market activity to both the marketplace and regulators alike.64 Some commenters recommended that fixed-income securities be added to the proposed scope of securities.65 These commenters believed that all investment vehicles, including fixed income securities, should be included within the scope of securities subject to potential reporting. These commenters generally believed that short positions in fixed income securities would provide additional transparency to the marketplace. One of these commenters believed that fixed income securities should be included under the rule because ‘‘bonds play a large role in 63 ETFs are a popular trading tool that can be used in various ways, including, for example, to hedge a long position, or to establish a directional short position. See Exchange-Traded Funds, Investment Company Act Release No. 33646 (Sept. 25, 2019), 84 FR 57162 (Oct. 24, 2019) (‘‘[ETFs] have become a popular trading tool, making up a significant portion of secondary market equities trading.’’). See also Giovanny Moriano & Brian Baker, Best inverse and short ETFs—here’s what to know before buying them, Bankrate (Feb. 16, 2023), available at https:// www.bankrate.com/investing/best-inverse-etfs/ (describing traders’ use of short ETFs to hedge against falling prices in other positions, to make directional bets on securities or indexes, or to magnify returns through leveraged short ETFs); The Renaissance of ETFs, Oliver Wyman (2023), available at https://www.oliverwyman.com/ourexpertise/insights/2023/may/exchange-tradedfunds-are-fueling-market-opportunities.html (stating ‘‘As of the end of December 2022, total ETF assets under management (AUM) have reached $6.7 trillion across the US and Europe, growing at approximately 15% compound annual growth rate (CAGR) since 2010. . . . We expect a significant part of this growth to come from active ETFs.’’). Active ETFs can include inverse and short ETFs that seek to use short strategies or leverage. 64 See Experiences of US Exchange-Traded Funds During the COVID–19 Crisis, Inv. Co. Inst. (Oct. 2020), available at https://www.sec.gov/comments/ credit-market-interconnectedness/cll10-2.pdf (‘‘Early in 2020, . . . ETF trading volume accounted for between 20 and 30 percent of total stock market trading on a daily basis . . . .’’); see also Richard B. Evans et al., ETF Short Interest and Failures-toDeliver: Naked Short-Selling or Operational Shorting?, U. Pa. Wharton Sch. (Jan. 2018), available at https:// jacobslevycenter.wharton.upenn.edu/wp-content/ uploads/2018/08/ETF-Short-Interest-and-Failuresto-Deliver.pdf (stating that ETFs constitute roughly 10% of U.S. equity market capitalization but over 20% of short interest, and that short interest for the ETF market has increased steadily over several years). 65 See, e.g., Nick Dougherty Letter (Mar. 27, 2022), at 3 (stating that ‘‘fixed income securities should be included under Proposed rule 13f–2’’); Anonymously submitted Comment (Mar. 21, 2022), at 1, available at https://www.sec.gov/comments/s708-22/s70822-20120739-272894.pdf. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 75107 market activities, along with the repo market’’ and that ‘‘corporate bond borrowing data provides an unparalleled insight into short positioning at a security and issuer level.’’ 66 Fixed income securities are not subject to the Commission’s short sale rules. Market participants, including Managers, are currently accustomed to complying with the short sale rules with regard to equity securities that meet the definition of short sales in Rule 200(a) of Regulation SHO.67 Further, the selfregulatory organizations (‘‘SROs’’) currently collect and provide data on short sales of equity securities as defined by Rule 200(a) of Regulation SHO. Consistent with the discussion in the Proposing Release, the aggregated short sale-related data that will be published by the Commission under Rule 13f–2 will provide additional context to market participants regarding equity securities that are subject to the requirements of Regulation SHO.68 For these reasons, the Commission is not including fixed income securities. Some commenters also recommended excluding options, warrants, and other convertibles from the rule.69 Other commenters recommended that derivatives be included within the scope of Proposed Rule 13f–2 70– including those not within the definition of equity security in section 3(a)(11) of the Exchange Act and Rule 3a11–1 thereunder.71 Certain derivatives, options, warrants, and convertibles are themselves equity securities for purposes of section 3(a)(11) of the Exchange Act and Rule 3a11–1 thereunder, and therefore for purposes of final Rule 13f–1.72 Derivatives and other securities that are not equity securities within the definitions of section 3(a)(11) of the Exchange Act and Rule 3a11–1 thereunder, are not within the scope of the rule. Managers are currently accustomed to complying with requirements for equity securities under Rule 200(a) of Regulation SHO. The Commission is not including derivatives and other securities that are not equity securities under the definitions of section 3(a)(11) of the Exchange Act and Rule 3a11–1 thereunder. Many commenters who requested that derivatives be included expressed concern that derivatives could be used to create substantial economic short positions, while avoiding Proposed Rule 13f–2’s reporting requirements.73 The Commission recognizes, as it did in the Proposing Release, that there is a risk that Rule 13f–2 could be a catalyst for growth in markets of economic equivalents of underlying equity securities as short sellers look for new avenues to take the economic equivalent of short positions while avoiding these proposed reporting requirements.74 Managers do not have to account for economic exposure to an underlying equity security created through the use of equity derivatives when calculating the reporting thresholds for reporting short sales of that underlying equity security. However, once a Manager meets or exceeds a reporting threshold for an underlying equity security, the Manager will then be required to report certain short activity for each settlement date during the reporting calendar month, and that disclosure will take into account activity in options, tendered conversions, secondary offering transactions,75 and other equity derivatives or activity that might affect the reported short positions on Form SHO, as discussed further below.76 Managers must also report gross short positions of each equity security resulting from short sales as defined in Rule 200(a) of Regulation SHO to the extent the Manager’s positions meet the relevant thresholds.77 Finally, large 66 Anonymously submitted Comment (Mar. 21, 2022), at 1, available at https://www.sec.gov/ comments/s7-08-22/s70822-20120739-272894.pdf. 67 See Proposing Release, at 14956 n.59. 68 See id. at 14956. 69 SIFMA Letter, at 20. 70 See, e.g., Better Markets Letter, at 9 (stating that ‘‘[i]n order for the final rule to actually serve its purpose, it must require that institutional investment managers include their short interest that arises from derivatives positions’’); WTI Letter, at 4 (stating that not including derivatives contracts such as options and security-based swaps is a ‘‘huge hole that must be remedied’’ and ‘‘will inevitably result in firms exploiting the loophole . . .’’); Samuel Meadows Comment, at 1 (stating that ‘‘[a]ny and all Short positions resulting from derivatives should be included in whether they meet a Reporting Threshold’’). 71 See supra nn. 54 & 55 and accompanying text; see generally Part II.A.2.a. 72 Id. 73 See, e.g., Comment Letter from Oliver Davies, Apr. 20, 2022, available at https://www.sec.gov/ comments/s7-08-22/s70822-20124155-280554.htm (expressing concern that ‘‘funds are using complex derivative positions like options and swaps to hide their true short positions’’); Anonymously submitted Comment, Mar. 14, 2022, available at https://www.sec.gov/comments/s7-08-22/s7082220119368-272254.htm (positing that excluding derivative positions can create opportunities to avoid triggering the reporting thresholds through other economically equivalent instruments). 74 See infra Part VIII.C.8; see also Proposing Release, at 15001. 75 See infra n. 285. 76 See infra Part II.A.4. 77 Option exercises or assignments can result in a short sale. See, e.g., Rule 201 Adopting Release, at 11263 n. 433 (explaining that short sales that result from option exercises or assignments are short sales but are not covered by the Rule 201 of PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 E:\FR\FM\01NOR2.SGM Continued 01NOR2 75108 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations positions in options are currently reportable under a separate requirement.78 In addition, there is a separate reporting regime for securitybased swaps,79 which may also lessen the likelihood of Managers attempting to avoid the requirements of Rule 13f–2 by using these instruments. Comments on Creating a List ddrumheller on DSK120RN23PROD with RULES2 Some commenters recommended narrowing the universe of ‘‘in-scope’’ securities to lessen the burden on Managers and to help to ensure compliance with Proposed Rule 13f–2. Certain commenters recommended that the Commission create and publish a list of securities subject to Form SHO reporting, much like the Commission’s Official List of Section 13(f) Securities (‘‘13F List’’) required by statute to be made available to the public pursuant to section 13(f)(4) of the Exchange Act 80 for use in the preparation of quarterly reports filed with the Commission for purposes of long position reporting under Rule 13f–1. One such commenter suggested that providing such a list would ‘‘promote greater efficiency in validating reported short positions and consistency in reporting of those positions among managers.’’ 81 Another commenter recommended aligning Proposed Rule 13f–2 with the scope of other similar reporting and public dissemination regimes (e.g., Rule 13f–1, and prior Rule 10a–3T 82) that are focused on a narrower set of securities, Reg. SHO’s price test because there is no national best bid). 78 FINRA Rule 2360 requires FINRA member firms to report large options positions to the Large Options Positions Report (‘‘LOPR’’), which FINRA uses to surveil for potentially manipulative behavior, including attempts to corner the market in the underlying equity, leverage an option position to affect the price, or move the underlying equity to change the value of a large option position. 79 See Regulation SBSR, 17 CFR 242.900 through 242.909. 80 15 U.S.C. 78m(f)(4). 81 Comment Letter from Sarah A. Bessin, Associate General Counsel & Nhan Nguyen, Assistant General Counsel, Investment Company Institute (Apr. 26, 2022), available at https:// www.sec.gov/comments/s7-08-22/s70822-20126820287527.pdf (‘‘ICI Letter’’) at 9 n.28; see also MFA Letter, at 13 (positing that having an ‘‘official list’’ of securities subject to Form SHO reporting would reduce the burden on Managers to make judgments about whether a particular security is in-scope for Form SHO reporting and would reduce inconsistencies among reporting Managers in making such judgments in the absence of such a list); see also SIFMA Letter, at 20 (suggesting that the ‘‘Form SHO List’’ include securities that are included on the 13F List while excluding securities that should not be covered by Form SHO, as well as the total shares outstanding for each security). 82 Rule 10a–3T and Form SH focused on certain section 13(f) securities and excluded options that are reportable on Form 13F. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 namely certain section 13(f) securities that are included on the 13F List.83 Narrowing the scope of securities to the 13F List would effectively exclude certain equity securities that are subject to the requirements of Regulation SHO, which the Commission continues to believe would be inconsistent with the Commission’s objective to publish short sale-related data under Rule 13f–2 that will provide additional context to market participants regarding securities that are subject to the Commission’s current short sale rules.84 As stated above, market participants, including Managers, are currently accustomed to complying with the short sale rules with regard to equity securities generally, so narrowing the scope to the 13F List that periodically changes, or to a list created for purposes of Rule 13f–2 that is similar in concept to the 13F List, could result in reduced Rule 13f–2 reporting and, consequently, less transparency of short sale-related data. Narrowing the scope to securities that are included on the 13F List could also result in additional administrative costs and burdens to Managers to the extent that Managers have to perform additional monitoring to ensure that their Form SHO reports cover, and the calculations required to determine whether a reporting obligation under Rule 13f–2 has been triggered because a Reporting Threshold has been met, apply to, only the narrower scope of securities (a subset of the equity securities currently subject to the Commission’s short sale rules). Such an outcome is inconsistent with the Commission’s objective of enhancing transparency, while balancing the interests of gathering and disclosing data that provides additional context to market participants regarding securities that are subject to the requirements of Regulation SHO against the potential costs to reporting Managers. Additionally, with respect to long position reporting, section 13(f)(1) expressly provides that the Commission shall make available to the public a list of all equity securities that are subject to such reporting.85 However, section 83 HSBC Letter, at 13–14 (recommending that Commission align the reporting requirements of Proposed Rule 13f–2 to a narrower set of securities—e.g., the securities prescribed in Rule 13f–1—rather than with securities that are ‘‘inscope’’ with Regulation SHO). 84 See Proposing Release, at 14956. 85 Section 13(f)(1) of the Exchange Act (15 U.S.C. 78m(f)(1)) requires any institutional investment manager exercising investment discretion over accounts holding at least $100 million in fair market value of certain equity securities to file reports on Form 13F with the Commission at the times set forth in 17 CFR 240.13f–1 (‘‘Rule 13f–1’’). The statute directs the Commission to make PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 13(f)(2) does not require publication of such a list. Further, existing short salerelated reporting to exchanges and RNSAs does not rely on a published list of securities. For these reasons, it is not necessary to compile and periodically provide a list of securities covered by Rule 13f–2. Comments To Limit Scope to Equity Securities of U.S. Reporting Company Issuers Some commenters recommended tailoring the scope of securities subject to Rule 13f–2 reporting to the equity securities of U.S. reporting company issuers.86 Many of these commenters raised concerns about the costs to Managers of developing new systems to capture trading of equity securities of non-reporting company issuers. Certain commenters focused on how a requirement to report short sales of equity securities of non-reporting company issuers would represent an expansion of reporting requirements beyond what is currently required under existing reporting regimes under Exchange Act sections 13(d), 13(f)(1), 13(g), and 16.87 Other commenters believed that requiring Managers to report short position information in equity securities of non-reporting company issuers would be extremely costly and provide little public benefit.88 Another such commenter stated that because securities of nonreporting company issuers can be held available to the public, for a reasonable fee, a list of all equity securities described in section 13(d)(1) of the Exchange Act and to disseminate to the public the information contained in the reports. 86 See, e.g., MFA Letter, at 11–12; Letter from Leigh R. Fraser, Partner, Ropes & Gray LLP (Apr. 26, 2022), at 9, available at https://www.sec.gov/ comments/s7-08-22/s70822-20126853-287579.pdf (‘‘Ropes & Gray Letter’’). Cf. SIFMA Letter, at 5 (recommending, rather than separate reporting thresholds for reporting company issuers and nonreporting company issuers, a single threshold apply to U.S. equity securities included in a ‘‘Form SHO List’’ akin to the 13F List that ‘‘would include securities that are included on the 13F List, while also excluding certain extraneous securities, such as options, warrants, convertibles, and ETFs that should not be covered by Proposed Form SHO reporting’’). 87 See, e.g., Ropes & Gray Letter, at 9 (stating that a requirement to report short sale-related data regarding equity securities of U.S. private companies would represent a ‘‘significant expansion’’ of reporting requirements imposed in investors beyond what currently is required under existing reporting regimes under Exchange Act sections 13(d), 13(f)(1), 13(g), 13(h), and 16). 88 See, e.g., MFA Letter, at 11–12 (stating that because non-reporting company issuer securities are not publicly traded, information about transactions in such securities would not likely have an effect on price efficiency or market liquidity, but could have negative consequences for Managers—e.g., increasing the risk of exposing Managers, their short positions, and trading strategies, which could facilitate retaliatory and manipulative trading strategies). E:\FR\FM\01NOR2.SGM 01NOR2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations by only a small number of U.S. investors, cannot be traded on U.S. securities exchanges, and can often be subject to contractual restrictions on transfer, short sales in such securities are rare due to the limitations on the number of shares available to borrow.89 Another commenter stated that trading (including short selling) in securities of non-reporting company issuers is limited, which potentially makes Managers that file Form SHO reports with respect to such securities more susceptible to retaliatory and manipulative trading strategies.90 As stated above, the Commission is adopting Rule 13f–2 and Form SHO to help enhance transparency regarding short selling in equity securities— including both exchange-listed and over-the-counter securities, and ETFs— that are already subject to Regulation SHO. Consistent with the discussion in the Proposing Release, through the publication of short sale-related data to investors and other market participants, the information published under Rule 13f–2 will provide additional context to market participants regarding equity securities that are subject to the requirements of Regulation SHO.91 To that end, the Commission continues to believe that transparency regarding short selling in over-the-counter (‘‘OTC’’) equity securities, many of which are non-reporting company issuers,92 is important to investors generally, including many retail investors. The Commission has previously stated that securities ‘‘that trade in the OTC market are primarily owned by retail investors.’’ 93 Consistent ddrumheller on DSK120RN23PROD with RULES2 89 Ropes & Gray Letter, at 8–9. 90 MFA Letter, at 11–12. 91 See Proposing Release, at 14956. 92 See, e.g., Publication or Submission of Quotations Without Specified Information, Exchange Act Release No. 89891 (Sept. 16, 2020) (‘‘Adopting Release for Amendments to Rule 15c2– 11’’), 85 FR 68124, 68125 (Oct. 27, 2020) (‘‘However, in other cases, there is no or limited current public information available about certain issuers of quoted OTC securities to allow investors or other market participants to make informed investment decisions.’’). 93 See, e.g., Publication or Submission of Quotations Without Specified Information, Exchange Act Release No. 89891 (Sept. 16, 2020), 85 FR 68124, 68125 (Oct. 27, 2020) (citing to Andrew Ang, et al., Asset Pricing in the Dark: The Cross-Section of OTC Stocks, 26 Rev. Fin. Studs. 2985–3028 (2013) (‘‘Securities that trade in the OTC market are primarily owned by retail investors[,]’’); see also Unraveling the Mystery of Over-the-Counter Trading, FINRA Inv’r Insights (Jan. 4, 2016), available at https://www.finra.org/investors/ insights/unraveling-mystery-over-counter-trading (‘‘OTC equities are largely owned by retail investors, according to a 2013 study from Columbia University, who may be attracted to the low price of many OTC equities, including so-called ‘‘penny stocks’’ that trade at under $5 a share. That activity is typically very speculative.’’). VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 with this view, it is important from a transparency perspective to include, as proposed, non-reporting issuers for purposes of reporting under Rule 13f–2. While the Commission is cognizant that information on non-reporting company issuers will be more difficult to obtain and more costly to report than information on reporting company issuers, the Commission disagrees there would be little benefit to the public from such information, particularly given the extent of trading in OTC market securities by retail investors.94 Furthermore, OTC securities typically have lower prices, lower trading volume, and are by definition not traded on exchanges, making them potentially more prone to fraud.95 In addition, as discussed further below, publication of aggregated data approximately one month following the reporting calendar month will alleviate concerns regarding potential retaliation against reporting Managers. Other commenters raised questions as to whether the Commission’s jurisdiction extended to equity securities not traded in the U.S. One such commenter, highlighting the disparity between Proposed Rule 13f–2 reporting and reporting of long positions in the same securities, questioned why it would be in the public interest to require more expansive disclosure with respect to short positions than long positions, and stated that the ‘‘proposed scope of the rule would provide U.S. investors with information that is of limited value, particularly with respect to non-U.S. securities.’’ 96 Exchange Act section 13(f)(2)’s crossborder reach is based on the territorial approach that the Commission has applied when crafting rules to implement other provisions of the Exchange Act.97 Consistent with that territorial approach (which is based on Supreme Court precedent, including Morrison v. National Australia Bank, Ltd. and its progeny) the Commission examines the relevant statutory 94 See id. See also infra Part VIII.C.6 for a discussion of costs related to tracking non-reporting companies, and infra Part II.A.3 for discussion of possible benefit. 95 See, e.g., Adopting Release for Amendments to Rule 15c2–11, 85 FR 68124, at 68185. 96 HSBC Letter, at 13–14 (recommending that the reporting requirements of Proposed Rule 13f–2 be limited to equity securities of reporting company issuers that are traded on a Commission-registered trading platform). 97 See, e.g., Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information, Exchange Act Release No. 74244 (Feb. 11, 2015), 80 FR 14563, 14649 (Mar. 19, 2015) (‘‘2015 Regulation SBSR Adopting Release’’) (discussing the territorial approach to the cross-border application of Title VII requirements for regulatory reporting and public dissemination of security-based swap transactions). PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 75109 provision to determine the domestic conduct that is covered by the provision.98 The Commission understands section 13(f)(2), by its terms, to apply to any institutional investment manager already subject to U.S. reporting requirements. This indicates that the relevant domestic conduct under section 13(f)(2) is being an institutional investment manager operating in the U.S. securities markets such that the investment manager is subject to filing reports with the Commission. Thus, when that relevant domestic conduct is present here in the United States, section 13(f)(2)’s regulatory reporting obligation will generally apply. The Commission is adopting Rule 13f–2 and Form SHO to help enhance transparency regarding short selling in equity securities—including both exchange-listed and over-the-counter securities, and ETFs. The Commission continues to believe that, through the publication of short sale-related data to investors and other market participants, the information reported by Managers will provide important additional context to market participants regarding short sale activity in these equity securities by Managers. The Commission disagrees that the reported information would be of ‘‘limited value’’ as was suggested by a commenter. Transparency regarding short selling by Managers of securities of U.S. and nonU.S. issuers is important regardless of where those sales occur. Final Rule For the reasons discussed above, the Commission is adopting the scope of securities as originally proposed. Specifically, the final rule will cover equity securities as defined in section 3(a)(11) of the Exchange Act and Rule 3a11–1 thereunder. This scope of securities includes both exchange-listed and OTC equity securities, including, inter alia, ETFs, certain derivatives, and options, warrants and other convertibles, which is consistent with the equity securities to which Rules 200, 203, and 204 of Regulation SHO apply.99 98 561 U.S. 247. See, e.g., Abitron Austria GmbH v. Hetronix Int’l, Inc, 600 U.S. **, **, 2023 WL 4239255, at *4 (June 29, 2023) (stating that ‘‘[the Supreme Court has] repeatedly and explicitly held that courts must ‘‘identif[y] ‘the statute’s ‘‘focus’’ ’ and as[k] whether the conduct relevant to that focus occurred in United States territory’’). 99 See Regulation SHO Adopting Release, at 48012. E:\FR\FM\01NOR2.SGM 01NOR2 75110 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations 3. Reporting Thresholds ddrumheller on DSK120RN23PROD with RULES2 a. Proposal To balance the interests of gathering and disclosing data and the potential costs to reporting Managers, the Commission proposed separate thresholds for short positions in reporting company issuers, or Threshold A, and non-reporting company issuers, or Threshold B.100 Threshold A, in Proposed Rule 13f–2(a)(1), involved a two-pronged approach that would have required reporting by Managers that have, with regard to each equity security of a reporting company issuer, either (i) a gross short position with a U.S. dollar value of $10 million or more at the close of regular trading hours on any settlement date during the calendar month, or (ii) a 2.5 percent or higher monthly average gross short position as a percentage of shares outstanding.101 Threshold B, in Proposed Rule 13f– 2(a)(2), involved a single-pronged approach that would have required reporting by Managers that have, with regard to each equity security of a nonreporting company issuer, a U.S. dollar value of $500,000 or more at the close of regular trading hours on any settlement date during the calendar month.102 The Proposed Reporting Thresholds were based on comment letters and analysis of Form SH data collected under Rule 10a–3T, an interim temporary rule adopted by the Commission in October 2008, which required certain institutional investment managers to file weekly nonpublic reports with the Commission on Form SH regarding their short sales and short positions in certain section 13(f) securities, other than options.103 Rule 100 As discussed above, an issuer of a class of securities that is registered pursuant to Exchange Act section 12 or for which the issuer is required to file reports pursuant to Exchange Act section 15(d) is referred to herein as a reporting company issuer; issuers not meeting those criteria are referred to herein as non-reporting company issuers. 101 Proposed Rule 13f–2(a)(1). See Proposing Release, at 14962 (describing in detail the design of Threshold A). 102 Proposed Rule 13f–2(a)(2). See Proposing Release, at 14962 (describing in detail the design of Threshold B). 103 Disclosure of Short Sales and Short Positions by Institutional Investment Managers, Exchange Act Release No. 58785 (Oct. 15, 2008), 73 FR 61678 (Oct. 17, 2008). The rule extended the reporting requirements established by the Commission’s Emergency Orders dated Sept. 18, 2008, Sept. 21, 2008, and Oct. 2, 2008, with some modifications. See Emergency Order Pursuant to Section 12(k)(2) of the Securities and Exchange Act of 1934 Taking Temporary Action to Respond to Market Developments, Exchange Act Release No. 58591 (Sept. 18, 2008), 73 FR 55175 (Sept. 24, 2008); Amendment to Emergency Order Pursuant to Section 12(k)(2) of the Securities Exchange Act of 1934 Taking Temporary Action to Respond to Market Developments, Exchange Act Release No. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 10a–3T required reporting of short positions that were either greater than 0.25 percent of shares outstanding or $10 million in fair market value.104 This temporary rule was adopted in the wake of the 2008 financial crisis in response to concerns about high levels of volatility associated with short selling.105 Proposed Threshold B was developed based on an analysis of OTC Markets data.106 The Proposed Reporting Thresholds were structured to make it more difficult for Managers with substantial gross short positions to avoid disclosure by trading below a Proposed Reporting Threshold, particularly with lower market capitalization securities. The approach to Threshold A, as described in the Proposing Release, was designed to ensure that a substantial short position in either a small capitalization security or a large capitalization security could potentially trigger a reporting obligation under Threshold A.107 For example, it would be difficult for a Manager to trigger only a dollar threshold in a given security if the market capitalization of the reporting company issuer is small; likewise, it would be difficult for a Manager to trigger only a percentage threshold in a given security if the market capitalization of the reporting 58591A (Sept. 21, 2008), 73 FR 55557 (Sept. 25, 2008) (amending the Sept. 18, 2008 Emergency Order (‘‘Order’’) to clarify certain technical issues and when the information filed by the institutional investment managers on a nonpublic basis would be made public by the Commission on a delayed basis); Amendment to Order and Order Extending Emergency Order Pursuant to Section 12(k)(2) of the Securities Exchange Act of 1934 Taking Temporary Action to Respond to Market Developments, Exchange Act Release No. 58724 (Oct. 2, 2008), 73 FR 58987 (Oct. 8, 2008) (extending effectiveness of the Order through Oct. 17, 2008, and stating that the Forms SH filed under the Order would remain nonpublic to the extent permitted by law). 104 See Proposing Release, at 14963–65 (discussing the analysis of Form SH data). 105 Rule 10a–3T remained in effect through July 2009, at which time the Commission stated that it and its staff would be working with several SROs to make certain short sale volume and transaction data publicly available through SRO websites. See Proposing Release, at 14954 (providing background on Rule 10a–3T and related Form SH). 106 See Proposing Release, at 14964 n.82 (‘‘This analysis was performed using data from OTC Markets Group Inc. available through Wharton Research Data Services, https://wrdswww.wharton.upenn.edu/pages/about/datavendors/otc-markets-group/. The data were filtered to only include equities that had a closing price and short interest on September 30, 2020. Approximately 13% of the data did not have total shares outstanding available, representing approximately 14% of the dollar value of short interest. We use these data without shares outstanding as a proxy for non-reporting issuers. The Commission used September 2020 because that is the most recent date in which a dataset containing total shares outstanding for a broad set of OTC equities was available.’’). 107 Id. at 14962. PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 company issuer is large. The Commission believed that this would help to ensure transparency into short sale-related activity that would be beneficial to both market participants and regulators. As stated above, the Proposed Reporting Thresholds were structured to make it more difficult for Managers with substantial gross short positions to avoid disclosure by trading below a Reporting Threshold, particularly with lower market capitalization securities. The proposed U.S. dollar value-based prong was designed to capture Managers with a substantial short position, even if the position was relatively small compared to the market capitalization of the issuer.108 The prong based on percentage of shares outstanding was designed to capture Managers with gross short positions that are large relative to the size of the issuer and, therefore, could have a significant impact on the issuer.109 Regarding Threshold B, as discussed in the Proposing Release, a $500,000 or more threshold for non-reporting company issuer securities is similar to the median dollar value of a position of 2.5 percent of the market capitalization of OTC stocks for which the Commission was able to obtain information on total shares outstanding.110 The Commission believed that this approach with regard to non-reporting company issuers would help to ensure added transparency into short sale-related activity that would be beneficial to both market participants and regulators, because, as discussed in the Proposing Release, it would capture Managers with substantial short positions in an equity security of a nonreporting company issuer, even if such positions are relatively small compared to the market capitalization of the issuer.111 Rather than a two-pronged reporting threshold for equity securities of non-reporting company issuers, however, the Commission proposed a single-pronged, dollar value-based, reporting threshold for non-reporting company issuer securities given its understanding that the number of total shares outstanding for non-reporting company issuers may not be readily and consistently accessible to Managers.112 As discussed in the Proposing Release, to determine whether the proposed dollar value prong of Threshold A (Proposed Rule 13f– 2(a)(1)(i)) or Threshold B (Proposed 108 Id. 109 Id. 110 Id. at 14962–63. Release, at 14962–63. 112 Id. at 14962. 111 Proposing E:\FR\FM\01NOR2.SGM 01NOR2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations Rule 13f–2(a)(2)) is met, a Manager would be required to determine its end of day gross short position on each settlement date during the calendar month and multiply that figure by the closing price at the close of regular trading hours on the relevant settlement date.113 In circumstances where such closing price was not available in calculating Threshold B, a Manager would be required to use the price at which it last purchased or sold any share of that security, which would be readily available to the Manager.114 As discussed in the Proposing Release, to determine whether the second prong of Threshold A (Proposed Rule 13f–2(a)(1)(ii))—2.5 percent or higher monthly average gross short position as a percentage of shares outstanding in the equity security—is met, the Manager would be required to (a) identify its gross short position in the equity security at the close of each settlement date during the calendar month of the reporting period, and divide that figure by the number of shares outstanding in such security at the close of that settlement date, then (b) add together the daily percentages during the calendar month as determined in (a) and divide the resulting total by the number of settlement dates during the calendar month reporting period. The number of shares outstanding of the security for which information was being reported would have been determined by reference to an issuer’s most recent annual or quarterly report, and any subsequent update thereto, filed with the Commission.115 b. Comments and Final Rule As discussed below, the Commission received numerous comments regarding various aspects related to the Proposed Reporting Thresholds. Generally, these comments varied, with some commenters recommending, for example, that the Commission raise the thresholds (which would trigger less gross short position reporting) and others recommending the Commission lower or eliminate the thresholds (which would trigger additional gross short position reporting).116 Some 113 Id. at 14957. 114 Id. ddrumheller on DSK120RN23PROD with RULES2 115 Id. 116 See, e.g., ICI Letter, at 9–10 (supporting a higher threshold, stating that ‘‘a higher threshold would still provide the Commission with information on such large positions, while reducing the burdens on managers of reporting smaller positions that likely would have a lesser market impact’’); K&L Gates Letter, at 4–5 (supporting a higher threshold, and stating that ‘‘[u]nless the Reporting Thresholds are modified, we anticipate that the Commission will be inundated with reports VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 commenters expressed general support for the Proposed Reporting Thresholds, or expressed support for certain aspects of those thresholds.117 Comments To Raise Threshold A Some commenters recommended increasing the proposed Reporting Threshold A by, for example, doubling the percent of shares outstanding threshold from 2.5 percent to 5 percent so as to be consistent with the existing reporting requirements of 17 CFR 240.13d–1 (‘‘Exchange Act Rule 13d– 1’’) 118 and the proposed reporting requirements of 17 CFR 240.10B–1 (‘‘Exchange Act Rule 10B–1’’) 119 related to large positions in security-based swaps.120 Other commenters also providing significant detail about positions that, in many cases, are not sufficiently sizable to impact the larger markets or raise the type of concerns that the Proposal was intended to address’’); but see WTI Letter (stating that ‘‘it is important to set the threshold as low as possible to mitigate any effects and impacts from firms attempting to game the threshold’’). 117 See, e.g., SIFMA Letter, at 20 (stating that ‘‘while certain SIFMA members believe that the threshold should be higher, other SIFMA members did not object to the proposed threshold of 2.5 percent of the issuer’s TSO or $10 million fair market value’’); Schulte Roth & Zabel LLP Letter (Apr. 26, 2022), at 3, available at https:// www.sec.gov/comments/s7-08-22/s70822-20126845287561.pdf (‘‘Schulte Roth & Zabel Letter’’) (stating that ‘‘[w]e believe that the 2.5 percent threshold identifies those situations where a short position could lead to market manipulation’’). 118 Rule 13d–1 (requiring long-side equity securities holders to file a Schedule 13D or Schedule 13G if the security holder owns over 5% of an issuer’s equity securities). 119 See Prohibition Against Fraud, Manipulation, or Deception in Connection With Security-Based Swaps; Prohibition Against Undue Influence Over Chief Compliance Officers; Position Reporting of Large Security-Based Swap Positions, Exchange Act Release No. 93784 (Dec. 15, 2021), 87 FR 6652, 6678 (Feb. 4, 2022) (‘‘Rule 10B–1 Proposal’’). See also Reopening of Comment Period for Position Reporting of Large Security-Based Swap Positions, Exchange Act Release No. 97762 (June 20, 2023), 88 FR 41338 (June 26, 2023) (proposing to require any person holding security-based swap positions to file a proposed Schedule 10B if they hold in excess of $300 million in equity security-based swap positions or if the notional value of those securitybased swap positions is 5% of the outstanding number of shares of a class of equity securities, whichever is less). 120 See, e.g., Ropes & Gray Letter, at 6 (recommending increasing the threshold to 5% in order to ‘‘mitigate costs to investors and provide consistency with other reporting regimes’’); K&L Gates Letter, at 5 (stating that 2.5% does not ‘‘represent a significant portion of an issuer’s outstanding equity securities,’’ and recommending increasing the threshold to more than 5% of an issuer’s voting equity securities in order to be consistent with the existing reporting requirements of Rule 13d–1); Perkins Coie Letter, at 6 (recommending alignment with requirements of Rule 13d–1(a) that require filing of Schedule 13D or 13G upon crossing a 5% threshold of ownership of any class of an equity security); ICI Letter, at 10 (stating that Commission identified 5% as a threshold over which a position could have a meaningful market impact in ‘‘recent’’ Rule 10B–1 proposal). PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 75111 recommended doubling that same percentage of shares outstanding threshold from 2.5 percent to 5 percent, because the commenters believed that the proposed 2.5 percent threshold was not sufficiently sizable to have a market impact.121 Additionally, one commenter believed that the lack of any reported instances of ‘‘short-side’’ manipulation did not justify a lower percentage threshold compared to Rule 13d–1 and proposed Rule 10B–1.122 Other commenters proposed that the U.S. dollar value-based threshold of Threshold A be raised.123 One commenter suggested that it be increased from the proposed $10 million to $100 million because a $100 million threshold would capture more substantial short positions and be consistent with the adjustment to the proposed percentage of shares outstanding threshold as compared to former Form SH (i.e., a tenfold increase from 0.25 percent under Form SH to 2.5 percent under Proposed Form SHO).124 For reasons set forth below and discussed more fully in Part VIII, increasing the proposed Threshold A percentage-based threshold from 2.5 percent or more of total shares outstanding to 5 percent (e.g., to be consistent with the existing 5 percent reporting threshold of Exchange Act Rule 13d–1 and the proposed reporting requirements of Exchange Act Rule 10B–1), as suggested by some commenters,125 is not warranted or appropriate. In this regard, because the rules are designed for different purposes and utilize different reporting thresholds to meet their respective 121 K&L Gates Letter, at 5; see also ICI Letter, at 9–10 (‘‘However, we believe that a higher threshold would still provide the Commission with information on such large positions, while reducing the burdens on managers of reporting smaller positions that likely would have a lesser market impact.’’). 122 One commenter believed that the proposed Rule 13f–2 reporting regime was overly expansive and ‘‘asymmetric’’ to existing or other proposed reporting regimes in multiples ways, such as the proposed percentage reporting threshold of 2.5% being lower than the 5% threshold in Rules 13d– 1 and 10B–1. See SIFMA Letter, at 3–4 (stating that there is ‘‘no empirical evidence’’ that short selling requires an ‘‘asymmetric’’ reporting regime and that ‘‘[t]his conclusion is consistent with the SEC’s own reported enforcement actions, i.e., any reported instances of ‘short-side’ manipulation (e.g., ‘short and distort’ campaigns) are dwarfed by the instances of ‘long-side’ manipulation (e.g., ‘pump and dumps’). There thus is simply no basis for such asymmetric regulation.’’). 123 See, e.g., Virtu Letter, at 2 (positing that dollar value thresholds ‘‘are significantly lower than is necessary’’); Perkins Coie Letter, at 2 (finding the $10 million (USD) gross short position threshold of Threshold A too low); XR Securities Letter, at 2 (citing circumstance illustrating that $10M prong of Threshold A may be too low). 124 Schulte Roth & Zabel Letter, at 3. 125 See supra nn. 121 & 122. E:\FR\FM\01NOR2.SGM 01NOR2 75112 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 objectives, the Commission does not believe, as one commenter states, that comparing Rule 13f–2 with long-side Rule 13d–1, as well as comparing perceived instances of ‘‘short-side’’ and ‘‘long-side’’ manipulation, is an accurate assessment by which to determine Rule 13f–2’s Reporting Thresholds. Reporting under Exchange Act section 13(d) is intended to provide information to the public and the affected issuer about rapid accumulations of its equity securities in the hands of persons who have the potential to change or influence control of the issuer.126 Reporting under Rule 13f–2, in contrast, is intended to capture Managers with gross short positions that are large relative to the size of the issuer and could therefore have a significant impact on the issuer, especially for issuers with a small market capitalization where the dollar-based threshold is less likely to be breached.127 An increase in the percentage-based prong of Threshold A, from 2.5 percent to 5 percent, would reduce transparency into short positions in smaller stocks. Specifically, increasing the percentage from 2.5 percent to 5 percent would reduce transparency into stocks with less than a $400 million market capitalization. This reduction could be meaningful given that, short and distort campaigns and other market manipulations are more likely to occur in stocks with lower market capitalizations and less public information.128 As a result, the appropriate threshold for Rule 13d–1 is not necessarily the appropriate threshold for Rule 13f–2. Instead, the Commission continues to believe that a broader coverage of short position reporting (i.e., using a 2.5 percent reporting threshold) is more appropriate for Rule 13f–2, especially given that the reported data are aggregated and anonymized before public dissemination with a delay. Here, the Commission is designing a reporting threshold that is appropriate for the purposes of section 13(f)(2). Based on analysis of Form SH, a 2.5 percent or higher monthly average gross short 126 See, e.g., Filing and Disclosure Requirements Relating to Beneficial Ownership, Release No. 34– 14693 (Apr. 21, 1978), 43 FR 18501, 18484 (Apr. 28, 1978) (stating that the ‘‘legislative history [of Exchange Act section 13(d)] reveals that it was intended to provide information to the public and the affected issuer about rapid accumulations of its equity securities in the hands of persons who would then have the potential to change or influence control of the issuer’’). 127 See Proposing Release, at 14961–64. 128 See infra Part VIII.C.1 (discussing market manipulations) and Part VIII.E.3 (discussing how thresholds are triggered at various dollar amounts). VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 position is an appropriate threshold.129 For example, one exchange estimates that median short interest for small-cap issuers is only about 3 percent,130 indicating that a single Manager breaching the 2.5 percent threshold would be significant for many issuers. Thus, a percentage-based Threshold A is appropriate to adopt as proposed. Nor does the Commission believe that raising the dollar-based threshold of Threshold A from $10 million to $100 million to be consistent with the tenfold increase in percentage threshold is warranted or appropriate. Based on its analysis of Form SH data as discussed in the Proposing Release,131 as well as the need to balance costs with the rule’s ultimate goal of transparency, $10 million strikes an appropriate balance of limiting costs of reporting to Managers, while increasing transparency into short positions, especially for equity securities of issuers with mid or large market capitalizations that may not be captured under the percentage threshold. While issuers with small market capitalizations may have only one or a few large short sellers, issuers with mid or large market capitalizations may have tens or even hundreds of large short sellers, which diffuses the percentage of short interest for each short seller. The Commission considered this when setting a dollarbased threshold of Threshold A such that large short sellers are captured for all equity issuers. Comments To Lower or Eliminate Reporting Thresholds Other commenters recommended that the Proposed Reporting Thresholds be reduced or eliminated. Some of these commenters were concerned that the Proposed Reporting Thresholds could 129 See infra Part VIII.E for discussion of different threshold options. 130 See Short Interest in Decline, Nasdaq (Mar. 3, 2022), available at https://www.nasdaq.com/ articles/short-interest-in-decline. 131 As discussed in the Proposing Release, the Proposed Reporting Thresholds were based on comment letters and analysis of Form SH data collected under Rule 10a–3T. Proposing Release, at 14963–64. Rule 10a–3T required reporting of short positions that were either greater than 0.25% of shares outstanding or $10 million in fair market value. Comment letters to Rule 10a–3T itself generally concurred with the dollar reporting obligation but expressed concerns that the percentage obligation was too low. Suggestions for a percentage reporting obligation ranged from 1% to 5% of shares outstanding. See, e.g., Seward Kissel LLP, available at https://www.sec.gov/ comments/s7-31-08/s73108-43.pdf; Investment Adviser Association, available at https:// www.sec.gov/comments/s7-31-08/s73108-38.pdf; and Securities Industry and Financial Markets Association, available at https://www.sec.gov/ comments/s7-31-08/s73108-52.pdf. PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 be too lenient and under-inclusive,132 and some of those commenters supported removing the thresholds entirely because of the possibility of Managers intentionally maintaining short positions just below the thresholds to avoid reporting.133 One commenter stated that the final rule should ‘‘eliminate the proposed thresholds so as to reduce or eliminate the risk that unknown, hidden short positions could pose to investors and the markets.’’ 134 However, eliminating thresholds to capture all short sale data may result in the inclusion of ‘‘transient’’ short sales,135 such as short sales due to market making or customer facilitation activity rather than directional short sales. By providing a properly calibrated threshold this type of ‘‘noise’’ should be reduced and allow market participants to instead focus on substantial short sales that are more likely to be directional. The reduction of ‘‘noisy’’ short position information also sets Rule 13f–2 apart from existing short sale data regimes, such as those provided by FINRA and the exchanges, which do not have thresholds. On the other hand, the threshold cannot be set so high that substantial short sales by Managers are out of scope. The Reporting Thresholds, as adopted, will help ensure added transparency into short sale-related activity that would be beneficial to both market participants and regulators, and will result in reporting by Managers with a substantial gross short position in both reporting and non-reporting company issuers. Recommendations to Base Reporting Thresholds on a Single Metric Some commenters, often in conjunction with recommendations to increase the Proposed Reporting Thresholds, suggested applying a single threshold metric. One commenter proposed the Commission adopt a single U.S. dollar value-based threshold for all issuers in order to limit the impact of 132 See, e.g., Comment from Peter Stauduhar (Mar. 6, 2022), available at https://www.sec.gov/ comments/s7-08-22/s70822-20118728-271591.htm (stating that ‘‘[t]he thresholds are a critical part of the success of this rule, and I urge the Commission to worry less about the burden the reporting will have on short sellers’’). 133 See, e.g., Comment from Travis Donovan (Mar. 14, 2022), available at https://www.sec.gov/ comments/s7-08-22/s70822-272287.htm; Comment from Steve B. (Mar. 14, 2022), available at https:// www.sec.gov/comments/s7-08-22/s70822-20119335272221.htm (‘‘SteveB.Comment’’); Anonymously Submitted Letter (Apr. 2, 2022), available at https:// www.sec.gov/comments/s7-08-22/s70822-20122297278355.htm (‘‘I believe that all short sales should be recorded and reported. The minimum threshold should be a single short sale.’’). 134 Better Markets Letter, at 12. 135 See Virtu Letter, at 2–3. E:\FR\FM\01NOR2.SGM 01NOR2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations any potential ambiguity around identifying the number of shares outstanding for non-reporting company issuers.136 Another commenter, however, recommended that the Commission adopt a single threshold based on percentage of shares outstanding, stating that it would ‘‘mitigate unnecessary operational and cost burdens on Managers,’’ as the commenter believed that a U.S. dollar value-based threshold would require more difficult system buildouts.137 The Reporting Thresholds are designed to require the filing of Form SHO by Managers with substantial gross short positions. The two-pronged approach of Threshold A measures the size of a Manager’s short position relative to both dollar amount and number of shares. The dollar valuebased prong (Rule 13f–2(a)(1)(i)) captures Managers with substantial short positions, even if such positions are relatively small compared to the market cap of the issuer. The percentage of total shares outstanding-based prong (Rule 13f–2(a)(1)(ii)) captures Managers with gross short positions that are large relative to the size of the issuer and, therefore, could have a significant impact on the issuer. With respect to securities of non-reporting company issuers, however, the Commission understands that the number of total shares outstanding may not be readily and consistently accessible.138 For this reason, a single-pronged, dollar valuebased Reporting Threshold is an efficient way for Managers to determine whether they trigger Threshold B (Rule 13f–2(a)(2)) that avoids the additional cost and complexity of locating the number of total shares outstanding for the securities of a non-reporting company issuer that may be difficult or impossible to locate.139 Comments Recommending the Use of the Same Threshold for Reporting Company and Non-Reporting Company Issuers ddrumheller on DSK120RN23PROD with RULES2 Another commenter recommended not having differing thresholds for reporting company issuers and non136 See MFA Letter, at 4 (stating that ‘‘[a] dollarbased approach would be more simple and less costly for managers to employ’’). 137 See, e.g., ICI Letter, at 8–9 (stating ‘‘we recommend that the Commission adopt a single reporting threshold level that is an average short position in an equity security based on a percentage of shares outstanding rather than on a dollar value’’); see also K&L Gates Letter, at 5 (recommending a threshold triggered only by ‘‘a position representing more than 5 percent of an issuer’s voting equity’’). 138 Proposing Release, at 14962. 139 Id. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 reporting company issuers.140 This commenter believed having two different reporting thresholds ‘‘would be unnecessarily complicated and burdensome.’’ 141 Furthermore, the commenter stated as an alternative the creation of a ‘‘Form SHO List’’ akin to the 13F List that would include total shares outstanding of each security to assist in threshold calculations.142 As a result of the potential difficulties in accessing the total shares outstanding for non-reporting company issuers discussed above, using a percent of total shares outstanding-based approach would not be appropriate for nonreporting company issuers. Requiring total shares outstanding for both thresholds would be operationally difficult, potentially inaccurate and therefore costly for Managers to determine for some non-reporting companies. Requiring a dollar-based metric for both thresholds could be both under-inclusive and over-inclusive, as the markets for reporting and nonreporting companies differ. For example, a high dollar threshold (e.g., $10 million) for both thresholds would under-include many non-reporting companies while a low dollar threshold (e.g., $500,000) would over-include reporting companies. For these reasons, the Commission is adopting Threshold B as proposed. For similar reasons, and as discussed in the ‘‘Scope of Reported Securities’’ section above, the Commission will not be publishing a ‘‘Form SHO List’’ with total shares outstanding to assist in Manager calculations, as one commenter suggested. The thresholds as adopted are designed to reduce operational burdens while capturing substantial short positions in both reporting and non-reporting company issuers. Adopting a much lower dollar threshold for non-reporting company issuers than that for reporting company issuers results in Managers not being required to determine percentages of total shares outstanding and, due to sparse data in non-reporting company issuer markets, Managers would avoid the difficulty of having to do so. A ‘‘Form SHO List’’ with total shares outstanding would not be necessary for Managers reporting positions in reporting company issuers 140 See SIFMA Letter, at 19–20 (stating that ‘‘the proposed distinction between the thresholds that would apply to Reporting Company securities and Non-Reporting Company securities would be unnecessarily complicated and burdensome’’). 141 Id. 142 SIFMA suggested that the ‘‘Form SHO List’’ include securities that are included on the 13F List, while excluding securities that should not be covered by Form SHO. Id. at 20. SIFMA further suggested that the ‘‘Form SHO List’’ include, for each security, the total shares outstanding. PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 75113 because, unlike Rule 13f–1 securities, Rule 13f–2 covers equity securities as discussed above,143 rendering additional guidance on what securities qualify unnecessary. Additionally, as discussed above in the Scope of Reported Securities section, section 13(f)(1) expressly provides that the Commission shall make available to the public a list of all equity securities that are subject to such reporting,144 while section 13(f)(2) does not require publication of such a list. Comments Regarding Other Concerns Related to Thresholds Implementation and Compliance Costs Some commenters stated that the Proposing Release did not adequately account for the burdens associated with monitoring for whether a Reporting Threshold is met, i.e., whether a Manager has a Form SHO reporting obligation.145 Specifically, these commenters stated that the Proposing Release did not address the costs of those Managers who would need to develop and implement reporting systems to monitor for whether a Reporting Threshold is met or exceeded, that may or may not ultimately result in a reportable gross short position.146 The 143 See supra Part II.A.2. 13(f)(1) of the Exchange Act (15 U.S.C. 78m(f)(1)) requires any institutional investment manager exercising investment discretion over accounts holding at least $100 million in fair market value of certain equity securities to file reports on Form 13F with the Commission at the times set forth in Rule 13f–1. The statute directs the Commission to make available to the public, for a reasonable fee, a list of all equity securities described in section 13(d)(1) of the Exchange Act and to disseminate to the public the information contained in the reports. 145 See, e.g., Virtu Letter, at 2 (‘‘the dollar value thresholds referenced in the Proposal are significantly lower than is necessary’’); MFA Letter, at 4 (recommending a single, dollar-based threshold only); SIFMA Letter, at 5 (recommending elimination of different thresholds for reporting and non-reporting companies in favor of one uniform threshold for U.S. equity securities); ICI Letter, at 9 (recommending a single, percentage-based threshold for both reporting and non-reporting company issuers); Ropes & Gray Letter, at 2 (recommending that all thresholds ‘‘be determined using average positions over a month rather than daily positions.’’). 146 See, e.g., MFA Letter, at 10–11; see also ICI Letter, at 5 (stating that Proposed Rule 13f–2 would require a Manager to continuously monitor and record any activity that could potentially be subject to future reporting on Form SHO). While the costs would likely be higher if Managers choose to monitor daily, Rule 13f–2 does not require daily monitoring, either for reporting or non-reporting company issuers. Managers may choose to do this threshold calculation on a rolling basis, or to do the calculation after the month has ended. While some Managers may choose to incur the higher costs of daily tracking and calculation for purposes of compliance with Rule 13f–2, the final rule’s Reporting Threshold for reporting company issuers is not based on a Manager’s gross short position on 144 Section E:\FR\FM\01NOR2.SGM Continued 01NOR2 75114 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations comments are addressed in the Economic Analysis, in Part VIII below. ddrumheller on DSK120RN23PROD with RULES2 ‘‘Gross’’ Short Position versus ‘‘Net’’ Short Position Some commenters requested that the Reporting Thresholds be calculated based on ‘‘net’’ short position rather than ‘‘gross’’ short position as proposed. Multiple commenters expressed concern that using a gross short position calculation would not accurately reflect risk in the markets.147 However, other commenters supported the use of the proposed gross short position data either instead of or in conjunction with net short position data.148 One commenter proposed requiring net short position reporting by Managers that are solely reporting on Form SHO with regard to one issuer while requiring gross short position reporting for Managers with short positions in more than one issuer.149 One commenter proposed that, if a gross short position calculation is used, market makers should not be subject to adopted Rule a single trading date, reducing the need for daily tracking. See infra Part VIII.C.6.b. 147 See, e.g., Virtu Letter, at 3 (stating that ‘‘the requirement to report such positions on a gross rather than net basis would likely distort the actual degree of short positions as it will capture circumstances where a firm is net long but may have short positions among its accounts.’’); Perkins Coie Letter, at 3–4, 6. (recommending that ‘‘[r]ather than set a low threshold and over capture short position information, the SEC should revise the requirement to $10 million net short position as opposed to gross.’’); Schulte Roth & Zabel Letter, at 2 (stating that ‘‘net short position data would more accurately reflect actual positions taken by institutional investment managers and provide useful transparency to the Commission and to the marketplace.’’); ICI Letter, at 10 (recommending that ‘‘the Commission streamline and simplify how managers account reflect hedging positions by adopting a net short position threshold and eliminating the required indication of whether a position is hedged or not in Form SHO.’’); Comment Letter from Anonymous Fund Manager at 1–2, available at https://www.sec.gov/comments/s7-0822/s70822-20126773-287490.pdf (‘‘Anonymous Fund Manager Letter’’) (recommending that the Commission ‘‘modify the proposed threshold requirements to reference short positions on a net ‘delta-adjusted’ basis as opposed to a gross basis or, in the alternative, exclude from the reporting obligations under the Proposed Rules ‘bona fide hedging activity’ as such term would be defined in the final rules.’’). 148 See, e.g., Comment from Josh Allen (Mar. 14, 2022), available at https://www.sec.gov/comments/ s7-08-22/s70822-272295.htm; Comment from An Investor (Apr. 4., 2022), available at https:// www.sec.gov/comments/s7-08-22/s70822-20122297278355.htm (supported including both net and gross short positions in reporting). 149 Perkins Coie Letter, at 4 (stating that ‘‘the SEC should consider amending its proposal to require net position reporting by certain types of managers that do not regularly utilize short positions. For instance, the SEC could require net short position reporting by filers that are solely reporting on Form SHO with regards to one issuer. For any filer reporting more than one issuer, the SEC could require gross short position reporting.’’). VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 13f–2’s reporting requirements.150 However, another commenter supported applying the rule’s requirements to market makers.151 One commenter stated that, even though market makers do not typically carry overnight positions and would likely not trigger the Proposed Reporting Thresholds, market makers would still incur the costs of end-of-day calculations to determine whether they meet or exceed the Proposed Reporting Thresholds.152 As discussed in the Proposing Release, under the proposal, a Manager would report its ‘‘gross’’ short position in an equity security without offsetting such gross short position with ‘‘long’’ shares of the equity security or economically equivalent long positions obtained through derivatives of the equity security.153 For example, if a Manager has investment discretion over multiple accounts, some of which have long positions in an equity security and some have short positions in the same equity security, only the total gross short position in the ‘‘short accounts’’ is reported, without being offset by the long positions in the ‘‘long accounts.’’ Requiring a Manager to report its daily gross short position in a security will provide a more complete view of short positions held by Managers in a security, particularly once the data is aggregated for publication.154 Permitting Managers to ‘‘net’’ positions would dilute the usefulness of the data in providing market participants with a sense of substantial short positions. For example, requiring net short position reporting by Managers that are solely reporting on Form SHO with regard to 150 HSBC Letter, at 16 (stating that ‘‘[b]ecause Proposed Rule 13f–2 requires disclosure of gross positions, market makers could be required to report large positions, even if a market makers’ [sic] net position is close to zero (i.e., because such short positions are typically hedged via options or swaps). Subjecting market makers to Proposed Rule 13f–2 may, therefore, result in market participants receiving unhelpful and misleading information about the short sale market.’’). 151 See Samuel Meadows Comment, at 2 (stating that ‘‘Market Makers should NOT be except [sic] from reporting for any reason. Market Makers should report short sales the same as everyone else should they pass the Reporting Threshold.’’). 152 See SIFMA Letter, at 11–12 (stating that ‘‘[h]owever, as the Proposing Release notes, requiring Institutional Investment Managers to consider intraday short sale activity, which would not be captured in the ‘gross short position’ as reflected on their trade date stock records, in determining whether the threshold has been exceeded, would be incredibly onerous— particularly, for example, for market makers that generally may not carry large overnight short positions.’’). 153 Proposing Release, at 14956. 154 In addition, commenters stated they would be uncertain how to ‘‘offset’’ positions when discussing the hedging indicator. See infra Part II.A.4.d.iii.(B). Netting would raise similar concerns. PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 one issuer, or for other types of Managers infrequently using short positions, as one commenter suggested, would provide minimal cost savings and create misleading data that could be difficult to aggregate and confusing to market participants. Further, the data collected and provided by FINRA 155 and the exchanges is not netted.156 By providing aggregate gross positions reported by Manager in a security, the final rule will supplement such existing short sale information with additional context on substantial gross short sale positions. In addition, the Commission is making additional modifications, discussed further below, that should alleviate burdens on market makers that may otherwise need to undertake the obligation of calculating reporting thresholds despite generally holding positions below such thresholds. Specifically, the Commission is modifying the threshold calculations to a monthly average of daily gross short positions rather than a single daily position, as discussed under the subheading ‘‘When the Reporting Obligation is Triggered’’ below. Further, as discussed in Part III below, the Commission is not adopting the proposed requirement to report ‘‘buy to cover’’ activity, which a commenter 157 stated would be more difficult if gross positions are required to be reported. The Commission, in adopting Rule 13f– 2, will require a Manager to report its ‘‘gross’’ monthly short position as 155 See, e.g., Short Interest—What It Is, What It Is Not, FINRA Inv’r Insights (Jan. 25, 2023), available at https://www.finra.org/investors/insights/shortinterest (‘‘The short interest data is just a snapshot that reflects short positions held by brokerage firms at a specific moment in time on two discrete days each month. The Short Sale Volume Daily File reflects the aggregate volume of trades within certain parameters executed as short sales on individual trade dates.’’). 156 See, e.g., Frequently Asked Questions (FAQ) about Short Interest Reporting, FINRA, available at https://www.finra.org/filing-reporting/regulatoryfiling-systems/short-interest/faq (‘‘Q1: Rule 4560 applies to short interest positions resulting from: (1) a ‘‘short sale,’’ as defined by Regulation SHO Rule 200(a); or (2) where the transaction that caused the short position was marked ‘‘long,’’ consistent with Regulation SHO Rule 200(g), due to the firm’s or the customer’s net long position at the time of the transaction. For example, a sale may be marked as ‘‘long’’ because the overall net position in the security within an aggregation unit is long at the time of the sale. If the execution results in a short position in a specific account (or subaccount) held within the aggregation unit, this position is reportable pursuant to Rule 4560.’’; Q11: ‘‘Where, as part of a strategy, an account holds both a short and long position in the same security simultaneously, the short position is reportable as short interest pursuant to Rule 4560 and must be reported in full, i.e., not netted against the long position.’’). 157 SIFMA Letter, at 24. E:\FR\FM\01NOR2.SGM 01NOR2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations proposed under Proposed Rule 13f– 2(b)(4). ddrumheller on DSK120RN23PROD with RULES2 When the Reporting Obligation Is Triggered To ease reporting burdens and reduce costs, some commenters proposed decreasing the frequency of certain aspects of the U.S. dollar value-based aspects of the Reporting Thresholds by instead using monthly average positions, instead of the proposed ‘‘close of regular trading hours on any settlement date’’ frequency.158 Alternatively, one commenter suggested that the proposed monthly reporting requirement should only be triggered if a Manager holds a short position in excess of the Proposed Reporting Thresholds as of the last settlement day of the month.159 Commenters stated that by using average monthly positions rather than the proposed rule’s use of any settlement date within the reporting period, the reporting burden required of Managers would be substantially lessened, since Managers may transiently cross the reporting thresholds through activities such as market making, hedging, and customer facilitation activity.160 Requiring reporting for Managers who temporarily cross these thresholds on an intraday basis through such activity, one commenter stated, would not adhere to the legislative intent of DFA section 929X.161 Commenters stated that transiently crossing these thresholds would not produce reported data that would be valuable to the Commission; for example, short-term market disruptions may trigger reporting under the proposed frequency for Managers that do not hold substantial short positions.162 For reasons discussed below, the Commission is modifying Proposed Rule 13f–2(a)(1)(i) (the U.S. dollar value-based prong of Threshold A) to trigger reporting requirements when a Manager has a monthly average of daily gross short positions (‘‘monthly average’’) with a U.S. dollar value of $10 million or more at the end of the 158 See, e.g., Virtu Letter, at 3 (stating that ‘‘[w]e also object to the reporting requirement being triggered by the existence of a short position on any settlement date within a reporting period.’’); Ropes & Gray Letter, at 2 (stating that ‘‘[a]ll filing thresholds should be determined using average positions over a month rather than daily positions.’’). 159 SIFMA Letter, at 15 (advocating ‘‘that the proposed monthly reporting under Information Table 1 of Proposed Form SHO should be triggered only if the Institutional Investment Manager holds a gross short position in an equity security, as of the last day of such month, in excess of the threshold(s) for reporting.’’). 160 See Virtu Letter, at 2. 161 See SIFMA Letter, at 4. 162 See Ropes & Gray Letter, at 6–7. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 calendar month, rather than, as proposed, a $10 million or more gross short position at the close of regular trading hours on any settlement date during the calendar month.163 Threshold A, as adopted, will require reporting by Managers that have, for each equity security of a reporting company issuer, either (1) a monthly average gross short position at the close of regular trading hours in the equity security with a U.S. dollar value of $10 million or more,164 or (2) a monthly average gross short position at the close of regular trading hours as a percentage of shares outstanding in the equity security of 2.5 percent or more.165 Using 163 This change to ‘‘monthly average’’ is responsive, in part, to commenters’ concerns about certain aspects of the U.S. dollar value-based Reporting Thresholds. For reasons discussed below, however, the Commission is adopting Threshold B as proposed (Proposed Rule 13f–2(a)(2)), which employs an ‘‘at the close of regular trading hours on any settlement during the calendar month’’ approach. The Form SHO ‘‘Instructions For Calculating Reporting Threshold,’’ discussed below, explain in detail the method for determining whether the modified threshold is met. 164 To determine whether this Reporting Threshold has been met, a Manager shall determine its gross short position at the close of regular trading hours in the equity security (as defined in Rule 13f–2) on each settlement date during the calendar month and multiply that figure by the closing price at the close of regular trading hours on the settlement date (‘‘end of day dollar value’’). The Manager shall then add all end of day dollar values during the calendar month and divide that sum by the number of settlement dates in the month to arrive at a ‘‘monthly average’’ for each equity security the Manager traded during that calendar month reporting period. 165 The methods of calculation of the Reporting Thresholds are prescribed in ‘‘Instructions for Calculating Reporting Threshold’’ in Form SHO. Rule 13f–2 and the instructions in Form SHO, require that for purposes of determining whether a Manager meets or exceeds a Reporting Threshold, a Manager shall determine its gross short position ‘‘at the close of regular trading hours’’ in the equity security, rather than at the ‘‘end of day’’ as was provided for in the instructions to Proposed Form SHO. Accordingly, the Commission is making a modification to the instructions for calculating Threshold A and replacing ‘‘end of day gross short position’’ with ‘‘gross short position at the close of regular trading hours.’’ Addressing any potential ambiguity in terminology should facilitate more consistency in reporting by Managers and more comparability of the data reported on Form SHO. With this change, the calculation instructions for Threshold A provide that to determine whether the percentage threshold of Threshold A has been met, a Manager shall (a) determine its gross short position at the close of regular trading hours in the equity security (as defined in Rule 13f–2) on each settlement date during the calendar month, and divide that figure by the number of shares outstanding in such security at the close of regular trading hours on the settlement date, and (b) add up the daily percentages during the calendar month as determined in (a) and divide that sum by the number of settlement dates in the month to arrive at a ‘‘monthly average’’ for each equity security the Manager traded during that calendar month reporting period. The number of shares outstanding of the security for which information is being reported shall be determined by reference to an issuer’s most recent annual or quarterly report, and PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 75115 a ‘‘monthly average’’ dollar value for reporting company issuers will result in Form SHO reporting by Managers that consistently carry large gross short positions during the reporting month. This approach should reduce the reporting of non-directional, ‘‘transient’’ short sales activity 166 and provide market participants with more focused information on substantial short positions held by Managers. The modification should also reduce the burdens of certain Managers, specifically those Managers, including market makers, that periodically meet or exceed the $10 million or more threshold on a given settlement date during a calendar month, but that do not typically carry a large gross short position throughout the month that will meet or exceed the monthly average reporting threshold, by eliminating the need to calculate (and potentially trigger) the threshold on a daily basis. This will help the Commission to distinguish directional short selling of Managers from short sale activity effected by market makers and liquidity providers.167 In addition, similar to the discussion in the Proposing Release regarding the use of a monthly average gross short position of 2.5 percent or more of total shares outstanding,168 the Commission continues to believe that using a monthly average gross short position at the close of regular trading hours of $10 million or more, rather than an end of each settlement date calculation as was originally proposed, will reduce the risk that a Manager may time its short sales to avoid triggering the adopted reporting threshold.169 any subsequent update thereto, filed with the Commission. 166 See supra n. 135 and accompanying text. 167 See Proposing Release, at 14953. 168 Proposing Release, at 14962 (‘‘In addition, the Commission believes that requiring the reporting of short positions with a 2.5% or higher monthly average gross short position would capture Managers with gross short positions that are large relative to the size of the issuer, and could therefore have a significant impact on the issuer. Using a monthly average gross short position, rather than an end of month gross short position, is also designed to prevent the scenario where a Manager engages in trading activity on the last day of the month in order to avoid reporting.’’). 169 In addition, the Commission is making a modification to specify in Rule 13f–2 and in the instructions in Form SHO that, for purposes of determining whether a Manager meets or exceeds Threshold A, a Manager shall determine its gross short position ‘‘at the close of regular trading hours’’ in the equity security, rather than at the ‘‘end of day’’ as was provided for in the instructions to Proposed Form SHO. Reducing any potential ambiguity in terminology should facilitate more consistency in reporting by Managers and more comparability of the data reported on Form SHO. E:\FR\FM\01NOR2.SGM 01NOR2 75116 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations Threshold B, as proposed, and as adopted, will require reporting by Managers that have, for each equity security of a non-reporting company issuer, a gross short position in the equity security with a U.S. dollar value of $500,000 or more at the close of regular trading hours on any settlement date during the calendar month.170 A single, dollar-based prong approach (using the $500,000 or more on any settlement date metric) for securities of non-reporting company issuers (Rule 13f–2(a)(2)) will capture Managers with large gross short positions, even if such positions are relatively small compared to the market capitalization of the issuer. As discussed above, the markets for non-reporting company issuers are more opaque and could benefit more from transparency. Additionally, due to their lower liquidity, equity securities of non-reporting companies can be more sensitive to strategic trading than those of reporting companies.171 As a result, for those securities, a single dollar threshold that can be triggered on any day of a month is more appropriate than the two-prong threshold calculated as monthly averages for equity securities issued by reporting companies. Basing Reporting Thresholds on Form SH Data Some commenters maintained that the Commission should not have based the Proposed Reporting Thresholds on Form SH data, as the Form SH data was collected during ‘‘a period of abnormal market conditions that does not reflect recent changes in the markets,’’ and urged the Commission to more robustly support its rationale for selecting the Reporting Thresholds.172 These ddrumheller on DSK120RN23PROD with RULES2 170 The methods of calculation of the Reporting Thresholds are prescribed in ‘‘Instructions for Calculating Reporting Threshold’’ in Form SHO. To determine the dollar value-based Reporting Threshold described in Threshold B has been met, a Manager shall determine its gross short position at the close of regular trading hours in the equity security (as defined in Rule 13f–2) on each settlement date during the calendar month and multiply that figure by the closing price at the close of regular trading hours on the settlement date. If such closing price is not available, a Manager shall use the price at which it last purchased or sold any share of that security. 171 See infra Part VIII.E.3 (discussing difficulty in obtaining information on non-reporting company issuers, and that data is often stale and inaccurate). 172 Comment Letter from Barbara Bliss, Associate Professor of Finance, et al. (Apr. 25, 2022), at 3, available at https://www.sec.gov/comments/s7-0822/s70822-20126591-287247.pdf (‘‘Law and Finance Professors Letter’’) (‘‘we believe the Commission could and should more robustly support its rationale for these thresholds before adopting any final rule.’’); see also AIMA Letter, at 11–12 (commenter was critical of Reporting Thresholds based on ‘‘stale and limited’’ data). For a discussion of Form SH applicability to the current period, see infra Part VIII.C.6.a. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 commenters essentially suggested that the use of Form SH data was unrealistic, and suggested that the Commission consider whether the Reporting Thresholds are appropriate based on more recent data and analysis.173 In the Proposing Release, the Commission stated that to perform the underlying Reporting Thresholds analysis, Form SH data on daily short positions for November 2008 through February 2009 were filtered and matched to Center for Research in Security Prices, LLC for daily closing prices and Compustat for daily shares outstanding. The Commission recognized that the results of an analysis of Form SH data may not fully reflect the status quo but that the analysis used appropriate data because it involved the same type of entities (Managers) and the same activity (short positions).174 As discussed in the Proposing Release, the Commission believed that it struck a reasonable balance in proposing the Reporting Thresholds with regard to the fundamental economic tradeoff of the value of the data versus the cost of collecting the data.175 The Commission disagrees with one commenter that stated that Form SH data was ‘‘stale and limited.’’ 176 The Commission continues to believe that Form SH data is highly relevant for determining the Reporting Thresholds. Form SH is the only existing data source of individual Manager-level short sale positions.177 Form SH data was collected from October 17, 2008, until August 1, 2009, and the Commission analyzed daily data submitted from November 2008 until February 2009 as representative of short positions held by Managers. By the time Form SH was in effect, the global financial crisis was winding down, and is considered by 173 See, e.g., AIMA Letter, at 12 (stating that the Commission should ‘‘review and analyze current short interest market data for reporting issuers to ensure that any final threshold based on a gross position’s dollar value accounts for the latest and most complete data’’); Law and Finance Professors Letter, at 3 (stating that the Commission should ‘‘consider more carefully whether the stated disclosure thresholds are appropriate, based on more recent data and analysis, and whether there should be a mechanism that would permit these thresholds to change over time’’); Two Sigma Letter, at 7 (stating that Form SH burden estimates are an ‘‘unrealistic benchmark’’). 174 Proposing Release, at 14963 n.80. 175 Proposing Release, at 14963–64, 15007. 176 See AIMA Letter, at 11–12. 177 While there are various limitations to be considered when using Form SH data, Form SH data are the most relevant and applicable source of data available for the purposes of estimating the costs of the design and analysis of Rule 13f–2. There are no other data sources, public or regulatory, which specifically track Managers’ short position activities in the U.S. See infra Part VIII.C.6.a. PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 some to have calmed by approximately June 2009.178 Thus, data was analyzed for several months during which the economy was returning to normalcy. Although the commenter suggested such data does not address ‘‘recent changes in the financial markets,’’ the commenter did not elaborate on what ‘‘recent changes’’ would have impacted an analysis of the Form SH data or the time period in which the data was analyzed. Markets undergo periods of volatility and stability and are constantly evolving over time. The data from Form SH involves the same type of entities (Managers) and the same activity (short positions) as Form SHO. The time period for which the Form SH data was studied is sufficiently informative to provide a reasonable assessment of appropriate reporting thresholds for purposes of Form SHO.179 4. Form SHO a. Reporting via EDGAR i. Proposal To enhance transparency of short sale-related data reported and published pursuant to Proposed Rule 13f–2, Proposed Rule 13f–2(a)(3) provided that Managers would file Form SHO (and any amendments thereto) with the Commission on EDGAR.180 The Commission believed that most Managers should be familiar with filing forms on EDGAR—for example, Form 13F 181—and relying on EDGAR to access registration statements, periodic reports, and other filings with the Commission that are made publicly available.182 The Commission believed 178 The National Bureau of Economic Research considers the global financial crisis as having officially started Dec. 2007 and ended June 2009. See, e.g., Nat’l Bureau of Econ. Research, Business Cycle Dating, available at https://www.nber.org/ research/business-cycle-dating. 179 See discussion of Form SH in Part VIII.C.6.a. 180 See Proposed Rule 13f–2(a)(3) (providing that ‘‘Form SHO and any amendments thereto must be filed with the Commission via the Commission’s Electronic Data Gathering, Analysis, and Retrieval System (‘‘EDGAR’’), in accordance with Regulation S–T. Certain information regarding each such equity security reported by institutional investment managers on Form SHO and filed with the Commission via EDGAR will be published by the Commission on an aggregated basis.’’). 181 EDGAR filing is mandatory for all public Form 13F submissions. See Rulemaking for EDGAR System, Exchange Act Release No. 34–40934 (Jan. 12, 1999), 64 FR 2843 (Jan. 19, 1999); see also Electronic Submission of Applications for Orders under the Advisers Act and the Investment Company Act, Confidential Treatment Requests for Filings on Form 13F, and Form ADV–NR; Amendments to Form 13F, Exchange Act Release No. 34–95148 (June 23, 2022), 87 FR 38943 (June 30, 2022). 182 See, e.g., About EDGAR, available at https:// www.sec.gov/edgar/about; see also Important E:\FR\FM\01NOR2.SGM 01NOR2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations that requiring Proposed Form SHO to be reported via EDGAR would enhance the accessibility, usability, and quality of the Proposed Form SHO disclosures for the Commission, and would allow the Commission to download disclosures from Form SHO directly, facilitating efficient access, organization, and evaluation of the reported information.183 The Commission further believed that the improved quality and scope of information available for the Commission’s use in examining market behavior and recreating market events would bolster the Commission’s oversight of short selling activity and enhance investor protections.184 ddrumheller on DSK120RN23PROD with RULES2 ii. Comments and Final Rule Several commenters raised concerns about how the confidentiality of the data reported on Form SHO via EDGAR would be preserved.185 Most of these commenters spoke of a need to establish robust data security protocols for the ‘‘valuable and proprietary’’ information that would be reported on Proposed Form SHO via EDGAR. Several such commenters expressed concerns about cyberattacks or other breaches of account information.186 While no technology system or infrastructure is impervious to cyberattack, the Commission employs an array of actions to safeguard and protect the confidentiality and security of all information reported to EDGAR, which will include data reported on Information about EDGAR, available at https:// www.sec.gov/edgar/searchedgar/aboutedgar.htm# :∼:text=EDGAR%2C%20the%20Electronic %20Data%20Gathering,and%20Exchange %20Commission%20(SEC) (‘‘The [EDGAR] system processes about 3,000 filings per day, serves up 3,000 terabytes of data to the public annually, and accommodates 40,000 new filers per year on average.’’). 183 Proposing Release, at 14957. 184 Id. 185 See, e.g., K&L Gates Letter, at 5–6 (any final rule or final Form SHO should ensure ‘‘indefinitely’’ the confidentiality of information that could reveal the identity of the reporting Manager). 186 See, e.g., AIMA Letter, at 14 (stating that the Commission has not explained how it will protect the commercially sensitive data that will be reported on Proposed Form SHO or acknowledged that its systems are susceptible to data breaches); MFA Letter, at 8 (positing that ‘‘the risk of increased cyberattacks or other breaches of confidential account information far outweigh any incremental benefit associated with requiring [Managers] to individually report short position information’’); Two Sigma Letter, at 3–5 (cautioning that information on Proposed Form SHO reports ‘‘will be private only so long as the Commission does not have its systems breached, its personnel do not misappropriate the information, the information is not unintentionally released, or policies do not change retroactively’’); SIFMA Letter, at 22 n.60 (citing cyber security, theft, and inadvertent data breach concerns as chief among the risks of providing sensitive and confidential information regarding short positions and short activity). VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 Form SHO.187 The Commission has stated that it has ‘‘engaged in a multiyear, multi-phase effort to modernize the EDGAR system, including both internal and public-facing components. Security and modernization enhancements were deployed in June 2020, focusing on technology upgrades internal to the system.’’ 188 Moreover, as discussed in Part I.A.4.f.ii below, the Commission is adopting an approach to the confidential treatment of information provided on Form SHO reports that all such information will be deemed subject to a confidential treatment request under 17 CFR 200.83 (‘‘Rule 83’’). Accordingly, the Commission is adopting Rule 13f– 2(a)(3) as proposed. b. Filing Form SHO Reports i. Proposal As described in the Proposing Release, Managers would use Proposed Form SHO for reports to the Commission required by Proposed Rule 13f–2. The Commission proposed that Managers would file a report on Proposed Form SHO with the Commission within 14 calendar days after the end of each calendar month with regard to each equity security in which the Manager meets or exceeds a Reporting Threshold.189 The Commission proposed that Managers would file the Form SHO with the Commission via the Commission’s EDGAR system in an eXtensible Markup Language (‘‘XML’’) specific to Form SHO (‘‘custom XML’’ or ‘‘Form SHOspecific XML’’),190 a structured machine-readable data language. The Commission also proposed that Managers would either be able to file Form SHO using a fillable web form the Commission would provide on EDGAR to input Form SHO disclosures, or a Manager could use its own software tool to file Form SHO to EDGAR directly in Form SHO-specific XML.191 Reporting via EDGAR, as described in the Proposing Release, would facilitate efficient access, organization, and 187 See Annual Report on SEC website Modernization Pursuant to Section 3(d) of the 21st Century Integrated Digital Experience Act (Dec. 2022), available at https://www.sec.gov/files/21stcentury-idea-act-report-2022-12.pdf. 188 Id. 189 Proposing Release, at 14956. 190 Id. at 14955. 191 See id. at 14955. The filing options described for Proposed Form SHO are consistent with other EDGAR filings that are filed in form-specific XMLbased languages. See, e.g., Regulation of NMS Stock Alternative Trading Systems, Exchange Act Release No. 83663 (July 18, 2018), 83 FR 38768 (Dec. 9, 2021) (requiring new EDGAR Form ATS–N to be filed in an XML-based language specific to that Form). PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 75117 evaluation of reported information by the Commission. The Commission stated in the Proposing Release that requiring Form SHO to be filed in custom XML format, since it is a structured, machinereadable data language, would facilitate more thorough review and analysis of the reported short sale disclosures by the Commission, which would increase the efficiency and effectiveness with which the Commission could identify manipulative short selling strategies.192 Furthermore, the Commission stated most Managers have experience filing EDGAR forms that use similar EDGAR Form-specific XML-based data languages, such as Form 13F and Form ATS–N.193 As proposed, if a Manager uses the web-fillable Proposed Form SHO on EDGAR and encounters a technical error when filling out the form, such Manager would be required to correct the identified technical error before being permitted to file the Proposed Form SHO through EDGAR. If a Manager uses its own software tool to file a Proposed Form SHO filing to EDGAR directly in Proposed Form SHO-specific XML, and a technical error is identified by EDGAR after the filing is sent, such Manager would receive an error message that the filing has been suspended, and would be required to correct the identified technical error and re-file the Proposed Form SHO through EDGAR.194 192 See Proposing Release, at 14997 (‘‘By requiring a structured machine-readable data language and a centralized filing location (EDGAR) for the disclosures on Proposed Form SHO, the Commission would be able to access and download large volumes of Proposed Form SHO disclosures in an efficient manner.’’). 193 See, e.g., Proposing Release at 14960, 14999 (first citing Form 13F, available at https:// www.sec.gov/pdf/form13f.pdf) (then citing Regulation of NMS Stock Alternative Trading Systems, Exchange Act Release No. 83663 (July 18, 2018), 83 FR 38768 (Aug. 7, 2018)) (requiring new EDGAR Form ATS–N to be filed in an XML-based language specific to that Form); see also Money Market Fund Reforms, Investment Company Act Release No. 34441 (Dec. 15, 2021), 87 FR 7248 (Feb. 8, 2022) (Form N–CR); Securities Offering Reform for Closed-End Investment Companies, Exchange Act Release No. 88606 (Apr. 8, 2020), 85 FR 33290 (June 1, 2020) (Form 24F–2). 194 The Commission stated in the proposing release that the XML schema (i.e., the set of technical rules associated with Proposed Form SHO-specific XML) for Proposed Form SHO would incorporate validations of each data field on Proposed Form SHO to help ensure consistent formatting and completeness. For example, letters instead of numbers in a field requiring only numbers, would be flagged by EDGAR as a ‘‘technical’’ error that would require correction by the reporting Manager in order to complete its Proposed Form SHO filing. Field validations act as an automated form completeness check when a Manager files Proposed Form SHO through EDGAR; they do not verify the accuracy of the information E:\FR\FM\01NOR2.SGM Continued 01NOR2 75118 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations As an alternative, the Commission also discussed whether Proposed Form SHO should be required to be filed in Inline eXtensible Business Reporting Language (‘‘Inline XBRL’’).195 The Commission stated that, compared to the proposal, the Inline XBRL alternative, which is both machinereadable and human-readable, would provide more sophisticated validation, presentation, and reference features for filers and data users.196 However, the Commission stated that given the fixed and constrained nature of the disclosures to be reported on Proposed Form SHO, the benefits of the Inline XBRL alternative would be muted, and therefore Managers would not be able to take advantage of customization and presentation features.197 Furthermore, the Commission stated in the Proposing Release that the alternative Inline XBRL approach would create greater initial implementation costs, such as licensing XBRL filing preparation software, because many Managers may not have prior experience structuring data in Inline XBRL.198 ii. Comments and Final Rule ddrumheller on DSK120RN23PROD with RULES2 The Commission received some comments about the use of Form SHOspecific XML in filing Form SHO. In response to Q39 in the Proposing Release,199 which asked whether the use of Form SHO-specific XML would make the reported data more useful to users, one commenter stated that data prepared in consistent, structured format would be ‘‘significantly more functional and useful.’’ 200 Regarding the costs and benefits of an Inline XBRL requirement as compared to Proposed Form SHO-specific XML, this commenter supported using XBRL in a comma-separated value (‘‘CSV’’) format, which is a text file that uses delimiters such as commas to separate data fields.201 The commenter stated that this would be the most appropriate standard ‘‘for capturing high volume, granular data in a compact format,’’ and urged the Commission to adopt XBRL rather than custom XML.202 The commenter stated that XBRL–CSV has several advantages over the Commission’s filed in Proposed Form SHO filings. Proposing Release, at 14960 n.72. 195 See Proposing Release, at 15010–11. 196 See id. 197 See id. 198 See id. 199 Proposing Release, at 15012. 200 Comment Letter from Campbell Pryde, President and CEO, XBRL US (Apr. 26, 2022), at 1 (‘‘XBRL Letter’’), available at https://www.sec.gov/ comments/s7-08-22/s70822-20126860-287597.pdf. 201 See id. at 2. 202 See id. at 2–5. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 proposed use of a custom XML format, such as reducing preparation costs and processing costs, as well as improving validation.203 In addition, the commenter disagreed with the Commission’s view in the Proposing Release that the benefits of the additional features of XBRL would be muted if used for Form SHO due to the fixed and constrained nature of the disclosures to be reported. The commenter stated that several other agencies, such as the FDIC and FERC, have recently adopted XBRL format over custom XML format. However, the commenter acknowledges that initial implementation costs will be higher and familiarization with the format will take longer for reporting entities. Alternatively, another commenter supported the use of Form SHO-specific XML, stating that ‘‘XML is a widely used language and therefore implementation and maintenance would keep costs low and efficiency high,’’ and thought it would allow for efficient review of the reported data.204 The Commission is adopting the custom XML data reporting requirement as proposed. As explained in the Proposing Release, the filing options for Form SHO are consistent with other EDGAR filings that are filed in Formspecific XML-based languages.205 The Commission also continues to believe that because many Managers have been using custom XML-based languages through other releases, they are more familiar with this language than other languages, such as XBRL, so the use of XML will promote efficiency in filing and review of Form SHO reports. Familiarity with custom XML formats will reduce implementation and ongoing compliance costs when compared to introducing XBRL-based formats that may be unfamiliar to Managers. Managers’ greater familiarity with custom XML formats should also reduce the possibility of data input errors when compared to XBRL formats. The above noted commenter likewise stated that XBRL formats would entail higher initial implementation costs and that familiarization with the XBRL formats would take longer for reporting entities. The costs of using XBRL formats in implementation and user retraining, along with the inconsistencies relative to other filings 203 See id. 204 Comment from An Investor (Apr. 4, 2022), available at https://www.sec.gov/comments/s7-0822/s70822-20122297-278355.htm. 205 See, e.g., Regulation of NMS Stock Alternative Trading Systems, Exchange Act Release No. 83663 (July 18, 2018), 83 FR 38768 (Dec. 9, 2021) (requiring EDGAR Form ATS–N to be filed in an XML-based language specific to that Form). PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 that use Form-specific XML-based languages, do not justify the potential data formatting benefits of XBRL. Further, the commenter stated a preference for using XBRL specifically in CSV format. In addition to the above concerns about XBRL-based languages generally, the Commission believes that custom XML format is more appropriate than an XBRL–CSV format for the purposes of Form SHO because XML format is more human-readable than CSV format, and XML is more flexible when using more complex data. Finally, the Commission’s XML schema is designed to include validations for each data field on Form SHO to help ensure consistent formatting and completeness. The Commission continues to believe that requiring Form SHO to be filed via Form-SHO specific XML, a structured machine-readable data language, will facilitate more thorough review and analysis of the reported short sale disclosures by the Commission, increasing the efficiency and effectiveness of the Commission’s understanding of short selling and systemic risk. Additionally, most Managers have experience filing EDGAR forms that use similar EDGAR Formspecific XML-based data languages, such as Form 13F.206 c. Timing of Reporting by Managers and Publication by Commission i. Proposal Under Proposed Rule 13f–2(a), a Manager would have been required to file the required information on Form SHO with the Commission within 14 calendar days after the end of each calendar month. Proposed Rule 13f– 2(a)(3) provides that certain information reported on Proposed Form SHO would be published by the Commission on an aggregated basis. No time frame for publication by the Commission was provided in Proposed Rule 13f–2. In the Proposing Release, however, the Commission estimated that it would publish the aggregated information within one month after the end of the calendar month. ii. Comments and Final Rule Comments on the frequency of reporting and publication varied. Some commenters called for more frequent reporting by Managers and, by implication, more frequent publishing by the Commission of information from Form SHO reports. Several of these commenters suggested that technology permits more frequent—i.e., daily, if not 206 See Form 13F, available at https:// www.sec.gov/pdf/form13f.pdf. E:\FR\FM\01NOR2.SGM 01NOR2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 monthly—reporting.207 Several of these comments also expressed concern that the Commission’s estimated month-long delay in publishing the aggregated information would produce stale data that would undermine the goal of greater transparency in the markets.208 The Commission acknowledges that the technology exists for frequent reporting of transactions and faster data processing. The Commission is concerned, however, about the accuracy of the data reported by Managers and the aggregated data published by the Commission pursuant to Rule 13f–2 reporting requirements. The Commission believes that the data reported by Managers on Form SHO is more likely to be complete and accurate if Managers are afforded sufficient time to gather, assemble, and review the reported data.209 The Commission continues to believe that 14 calendar days after the end of each month provides a reasonable period of time for Managers to meet their Rule 13f–2 reporting requirements. The Commission is also concerned that increasing the frequency of Commission publication of aggregated data may increase the risk of short squeezes or other manipulative activities that could interfere with the price discovery function of equity markets. The timeframes as proposed and as adopted balance such concerns with some commenters’ desire for faster transparency. Commenters taking the opposite view recommended that additional time be given for Manager reporting and Commission publication. One such commenter recommended that the Commission align the proposed timelines for preparing and filing Form SHO reports with existing filing requirements for other Commission 207 See, e.g., Comment from Regina Murrell (Mar. 25, 2023) available at https://www.sec.gov/ comments/s7-08-22/s70822-20121170-273336.htm (suggesting that technology be used to report short positions daily); Anonymously Submitted Comment (Mar. 14, 2022) (calling for reporting to regulators within twenty-four hours); Anonymously Submitted Comment (Apr. 26, 2022) (calling for daily, if not intraday, Form SHO reporting rather than monthly reporting, as proposed); Anonymously Submitted Comment (Mar. 17, 2022) (stating that technology permits more frequent reporting and release of short sale-related data to the public in shorter timeframes); see also Better Markets Letter, at 13 (predicting that the Commission’s ‘‘fairly significant delay’’ in publishing the aggregated information derived from Form SHO reports will lead to published information that is ‘‘less timely and less informative’’). 208 See, e.g., Comment of Estaban Oliveras (Mar. 14, 2022) available at https://www.sec.gov/ comments/s7-08-22/s70822-20119372-272258.htm (commenting ‘‘If data is neither accurate nor timely, then what is the point of collecting data?’’). 209 See Proposing Release, at 14956. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 reports and forms, to allow for better coordination of the process of including short sale-related data in multiple reporting frameworks.210 Another such commenter suggested an initial filing period be extended to within 28 calendar days upon crossing the threshold and then 14 calendar days for any subsequent filing.211 Another commenter suggested that a minimum of 45 days before publication of aggregated data by the Commission was necessary to protect Managers from the risk that their positions and strategies would be used in a ‘‘short squeeze or other market-driven reaction’’ or as part of a copycat strategy.212 While adopting the proposed timeframes will delay the public dissemination of aggregate short positions by about a month, the Commission believes a longer delay such as 28 days for initial filings or 45 days for all filings is unnecessary. FINRA’s current short interest reporting, for example, is published twice a month, resulting in a delay of about two weeks.213 The final rule here requires slightly more time than FINRA’s current reporting regimes because Managers need additional time following determination of whether they meet a Reporting Threshold at the end of each calendar month to prepare and file the data on Form SHO through EDGAR. Additionally, the Commission believes that providing Managers with a reasonable period of time to file complete and accurate short sale-related information in the first instance will reduce the need for Managers to file amendments to Form SHO. However, having an asymmetric filing deadline of 28 days for initial filing and 14 days thereafter, as one commenter suggested, would create negligible cost savings for Managers. Meanwhile, it may have detrimental effects on the timing of data aggregation and publication, which could unnecessarily affect the timing 210 ICI Letter, at 12 (stating that aligning Form SHO reporting requirements with those of Form NPort, for example, would give Managers 30 days, rather than the proposed 14 days, after the end of a calendar to file a Form SHO). 211 See Perkins Coie Letter, at 3 (stating a request to extend the initial filing period to within 28 calendar days upon crossing the threshold in order ‘‘to reduce the monitoring and compliance burdens for infrequent short position users’’). 212 MFA Letter, at 18. 213 See, e.g., FINRA, Short Interest Reporting, available at https://www.finra.org/filing-reporting/ regulatory-filing-systems/short-interest (presenting ‘‘due dates’’ for reporting short interest to FINRA and publication of short interest data by FINRA). FINRA Rule 4560 requires FINRA member firms to report their short positions in exchange-listed and over-the-counter equity securities to FINRA twice each month. FINRA publishes the short interest reports it collects from member firms for all such equity securities. PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 75119 and quality of aggregated published data. Final Rule After considering comments, the Commission is adopting Rule 13f–2(a) as proposed, and continues to estimate that it will publish aggregated data derived from Form SHO reports within one calendar month after the end of the reporting calendar month.214 For example, for data reported by Managers on Form SHO for the month of October, the Commission expects to publish aggregated information derived from such data no later than the last day of November. The Commission continues to believe that 14 calendar days after the end of each calendar month provides Managers with sufficient time for Managers that meet the Reporting Threshold to prepare and file Form SHO data. d. Contents of Form SHO Form SHO, as proposed, consists of two parts: Cover Page and Information Tables. As discussed more fully below: • The Cover Page presents certain identifying information about the Manager(s) filing the Form SHO report, the calendar month for which the Manager is reporting, the type of Form SHO report being made, and whether the Manager is filing the Form SHO report as an amendment; 215 • Information Table 1 presents a Manager’s monthly gross short position in the equity security on which information is being reported, as well as certain identifying information about that security and about the issuer of that security; 216 and • Information Table 2 presents daily activity affecting a Manager’s gross short position during a calendar month reporting period, as well as certain identifying information about that security and about the issuer of that security.217 i. Financial Identifiers (A) Proposal The Commission proposed that a Manager provide the active LEI, if any, of each Manager listed on the Cover Page. The Commission also proposed that a Manager report on each of the Proposed Form SHO Information Tables the FIGI and CUSIP number of each security on which information is being reported, and the active LEI, if any, of 214 Publication of the aggregated information may be delayed for an initial period following effectiveness of Rule 13f–2 and Form SHO. 215 See infra Part II.A.4.d.ii. 216 See infra Part II.A.4.d.iii. 217 See infra Part II.A.4.d.iv. E:\FR\FM\01NOR2.SGM 01NOR2 75120 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations the issuer of those securities. These items are discussed in Special Instructions 8.c, 8.e, and 8.f regarding Columns 3, 5, and 6 of Information Table 1, and in Special Instructions 9.c, 9.e, and 9.f regarding Columns 3, 5, and 6 of Information Table 2. (B) Comments and Final Rule The Commission received only a few comments regarding the proposed requirement to report certain financial identifiers, including CUSIP and FIGI (which identify specific securities), and LEI (which identifies specific entities) on Form SHO.218 Two commenters stated that the Commission should only require that CUSIP be reported on Form SHO, and that the inclusion of additional financial identifiers could cause confusion.219 Another commenter stated that the LEI and the FIGI of issuers is ‘‘not commonly provided’’ in other holding reports and would therefore cause Managers to incur additional costs.220 Another commenter, citing ‘‘substantial CUSIP licensing costs,’’ expressed concern that requiring the reporting of CUSIP could create an ‘‘unnecessary financial burden’’ on Managers.221 However, another commenter stated that the inclusion of multiple financial identifiers in addition to CUSIP, such as FIGI and LEI, could help foster competition that ultimately reduces costs and improves data quality.222 In DFA section 929X, Congress specifically directed the Commission to include CUSIP in short sale disclosure rules.223 CUSIP is a universally recognized identifier that has been used for a wide array of financial instruments since 1964, allowing securities ddrumheller on DSK120RN23PROD with RULES2 218 FIGI and LEI each serve different functions. FIGIs identify securities, whereas LEIs identify entities. Thus, a single issuer’s LEI could be associated with multiple FIGIs. Conversely, multiple FIGIs could be associated with the same issuer’s LEI. Furthermore, identifying reporting Managers on Form SHO would require an entity identifier (LEI) rather than a security identifier (FIGI). 219 See, e.g., Comment Letter from CUSIP Global Services (Apr. 25, 2022), available at https:// www.sec.gov/comments/s7-08-22/s70822-20126577287237.pdf (‘‘CUSIP Letter’’); Comment Letter from American Bankers Association (Apr. 26, 2022), available at https://www.sec.gov/comments/s7-0822/s70822-20126641-287311.pdf (‘‘ABA Letter’’). 220 Jennifer Han, Executive Vice President, Chief Counsel and Head of Regulatory Affairs, Managed Funds Association (June 15, 2023), at 9, available at https://www.sec.gov/comments/s7-08-22/s70822206120-414822.pdf (‘‘MFA Letter 2’’). 221 See Letter from Anonymous Fund Manager, at 9. 222 See Comment Letter from Gregory Babyak, Glob. Head Regul. Affs., Bloomberg L.P., at 5 (May 2, 2022), available at https://www.sec.gov/ comments/s7-08-22/s70822-20127745-288932.pdf. 223 Public Law 111–203, sec. 929X, 124 Stat. 1376, 1870 (July 21, 2010). VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 transactions to be easily identified, cleared, and settled, including short sales. Furthermore, market participants and investors are familiar with CUSIPs, which are widely and publicly available and used to identify most U.S. stocks.224 Many companies display their CUSIPs on their websites, and brokers and dealers often provide investors with search engines to look up stocks by CUSIPs.225 Accordingly, while the Commission recognizes that there are licensing costs associated with the CUSIP, the Commission is adopting, as proposed, the requirement that Managers report in Column 5 of each of the Form SHO Information Tables the CUSIP for the equity security for which information is reported to help facilitate market participants’ understanding of the reported data. The Commission will also adopt, as proposed, the requirement that Managers report in Column 6 of each of the Form SHO Information Tables the FIGI of the equity security for which information is being reported, if a FIGI has been assigned. Like CUSIP, FIGI provides a methodology for identifying securities, and reporting a FIGI, if assigned, will provide additional identifying information that will provide additional clarity, not confusion, to market participants and the public. Unlike CUSIPs,226 however, FIGIs are provided for free.227 To aid in the identification of the issuers referenced in Form SHO reports, the Commission is also adopting a requirement that Managers report in Column 3 of each Form SHO Information Table, the LEI, if any, of the issuer of the security about which information is reported on Form SHO.228 With respect to the proposed requirement that a Manager provide its 224 See, e.g., Fast Answers: CUSIP Number, available at https://www.sec.gov/answers/cusip (referencing CUSIP Global Services). 225 See, e.g., Chad Langager, How to Locate the CUSIP Number for a Stock, Investopedia (Apr. 6, 2022), available at https://www.investopedia.com/ ask/answers/06/cusipforspecificstock.asp. 226 See, e.g., Fees for CUSIP Assignment, CUSIP Glob. Servs., available at https://www.cusip.com/ pdf/FeesforCUSIPAssignment.pdf (‘‘For an offering requiring a single CUSIP identifier, the assignment fee is $200.’’). 227 See, e.g., Unlock the Power of Efficiency with Open Symbology, OpenFIGI, available at https:// www.openfigi.com/. 228 This practice is in keeping with current requirements of other Commission forms. For example, the registrant filing Form N–PORT need not report LEIs for counterparties that do not have one. In addition, as noted above, to avoid any suggestion that a Manager filing a Form SHO report has an obligation to monitor the status of an issuer’s LEI, Instructions 8.c and 9.c of Form SHO— ‘‘Column 3. Issuer LEI. If the issuer has an LEI, enter the issuer’s active LEI—have been revised to remove the term ‘‘active.’’ See supra n. 36. PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 own LEI, if it had one, and, if available to the Manager making the Proposed Form SHO filing, the active LEI of each Manager listed on the Form SHO Cover Page as an ‘‘Other Manager Reporting for’’ the Manager making the Proposed Form SHO filing, the Commission sought comment on whether it should require every Manager filing a Proposed Form SHO to obtain an LEI.229 One commenter supporting the requirement to report financial identifiers on Form SHO stated that all Managers should be required to obtain and maintain a nonlapsed LEI, as opposed to the proposal, which stated that Managers would be required to report their LEI, if any.230 Another commenter, however, expressed uncertainty regarding such a requirement, stating that registration or renewal of an LEI is ‘‘not monetarily costless.’’ 231 The Commission acknowledges that LEIs do provide a precise and consistent means of identification of legal entities. However, after considering the comments received, and because LEIs would supplement existing identifying information provided for Managers and issuers listed in Form SHO filings, the Commission is not requiring Managers subject to Rule 13f–2 to obtain (and maintain non-lapsed) LEIs to provide on the Cover Page of Form SHO reports and, when appropriate for the ‘‘Other Manager(s) Reporting for this Manager’’ section of the Form SHO Cover Page to be completed, to provide a non-lapsed LEI for each Manager listed in the ‘‘Other Manager(s) Reporting for this Manager’’ of the Form SHO Cover Page. However, the Commission may consider this issue in the future. ii. Cover Page (A) Proposal As proposed, and pursuant to Special Instructions 2–5 of Proposed Form SHO, a Manager would report on the Cover 229 See Proposing Release, at 14965. Because the Cover Page, as proposed, would also present the name and, if available to the Manager making the Proposed Form SHO filing, the active LEI of each Manager listed on the Form SHO Cover Page as an ‘‘Other Manager Reporting for’’ the Manager making the Proposed Form SHO filing, the query covered those Managers as well. 230 Anonymously Submitted Comment (Apr. 4, 2022), available at https://www.sec.gov/comments/ s7-08-22/s70822-20122297-278355.htm (‘‘Every manager that has a part of trading any form of security or derivative on any market should be forced to have a Legal Entity Identifier (LEI). That way, specific bad actors can be easily identified.’’). 231 See Comment Letter from Aaron Franz, available at https://www.sec.gov/comments/s7-1821/s71821-20120685-272855.pdf (‘‘I’m uncertain that Managers should be required to obtain an LEI. Registration or renewal of an LEI is not monetarily costless. The same information can be submitted by Managers without a tracking number with a cost.’’). E:\FR\FM\01NOR2.SGM 01NOR2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations Page: (i) certain basic information, including its name, mailing address, business telephone and facsimile numbers, and active LEI, if any, as well as the name, title, business telephone and facsimile numbers of the Manager’s contact employee for the Form SHO report, and the date the report is filed; (ii) the period end date—i.e., the last settlement date of the calendar month for which the Manager is reporting; (iii) the type of Form SHO report being filed; 232 and (iv) whether the Form SHO is being filed as an amendment.233 The Manager filing the report will include the representation that ‘‘all information contained herein is true, correct and complete, and that it is understood that all required items, statements, schedules, lists, and tables, are considered integral parts of this form.’’ 234 ddrumheller on DSK120RN23PROD with RULES2 (B) Comments and Final Rule Other than with respect to financial identifiers as discussed above, the Commission did not receive any comments on the contents of the Cover Page. As a result, the Commission is adopting Special Instructions 2–5 of Form SHO as proposed, with minor technical modifications. For greater precision (but no change in the meaning) in the terminology used in Form SHO as adopted, an LEI that is currently in effect is referred to as a 232 The Commission proposed that the reporting Manager designate the report type for the Form SHO by checking the appropriate box in the ‘‘Report Type’’ section of the Cover Page and include, where applicable, the name and active LEI of each other Manager reporting for this Manager. If all of the information that a Manager is required by proposed Rule 13f–2 to report on related Form SHO is reported by another Manager (or Managers), the Manager shall check the box for Report Type ‘‘FORM SHO NOTICE,’’ include on the Cover Page the name and active LEI (if available) of each of the other Managers reporting for this Manager, and omit the Information Tables. If all of the information that a Manager is required by proposed Rule 13f–2 to file on Form SHO is included in the report, the Manager shall check the box for Report Type ‘‘FORM SHO ENTRIES REPORT,’’ omit from the Cover Page the name and active LEI of each other Manager reporting for this Manager, and include the Information Tables. If only a part of the information that a Manager is required by proposed Rule 13f– 2 to file on Form SHO is included in the report filed by the Manager, the Manager shall check the box for Report Type ‘‘FORM SHO COMBINATION REPORT,’’ include on the Cover Page the name and active LEI of each of the other Managers reporting for this Manager, if available, and include the Information Tables. See Proposing Release, at 14958. 233 If the Manager is filing the Form SHO report as an amendment, then the Manager must check the ‘‘Amendment and Restatement’’ box on the Cover Page and enter the Amendment and Restatement number. Each amendment must include a complete Cover Page and Information Tables. Amendments must be filed sequentially. See Proposing Release, at 14960–61. 234 See Proposing Release, at 14958. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 ‘‘non-lapsed LEI’’ rather than an ‘‘active LEI’’ (the terminology used in Proposed Form SHO). Also, the Cover Page contact information for the reporting Manager and its ‘‘Contact Employee’’ has been updated to require the use of email rather than facsimile.235 iii. Information Table 1: ‘‘Manager’s Monthly Gross Short Position’’ (A) Proposal Under Proposed Rule 13f–2, Managers meeting a Reporting Threshold would report certain information, including end of month gross short position information regarding transactions that have settled during the calendar month being reported, and certain hedging information that would help to indicate whether the reported gross short position is directional or nondirectional in nature.236 Specifically, as proposed, the Manager would report the following information on Information Table 1: • In Column 1, a Manager would enter the last day of the calendar month being reported by the Manager on which a trade settles. This information would identify the month being reported by the Manager. • In Column 2, a Manager would enter the name of the issuer to identify the issuer of the equity security for which information is being reported. • In Column 3, a Manager would enter the issuer’s active LEI, if any. The LEI provides standardized information that would enable the Commission and market participants to more precisely identify the issuer of each equity security for which information is being reported. • In Column 4, consistent with section 13(f)(2), a Manager would enter the title of the class of the equity security for which information is being reported. • In Column 5, consistent with section 13(f)(2), a Manager would enter the nine (9) digit CUSIP number of the equity security for which information is being reported, if applicable. • In Column 6, a Manager would enter the twelve (12) character, alphanumeric FIGI of the equity security for which information is being reported, if a FIGI has been assigned. Like CUSIP, FIGI provides a methodology for identifying securities. • In Column 7, a Manager would enter the number of shares that represent the Manager’s gross short position in the equity security for which information is being reported at the close of regular trading hours on the last 235 See 236 Id. PO 00000 supra n. 37 and accompanying text. at 14959. Frm 00023 Fmt 4701 Sfmt 4700 75121 settlement date of the calendar month of the reporting period. The term ‘‘gross short position’’ means the number of shares of the security for which information is being reported that are held short, without inclusion of any offsetting economic positions (including shares of the equity security for which information is being reported or derivatives of such security). • In Column 8, a Manager would enter the U.S. dollar value of the shares reported in Column 7, rounded to the nearest dollar. A Manager would report the corresponding dollar value of the reported gross short position by multiplying the number of shares of the security for which information is being reported by the closing price at the close of regular trading hours on the last settlement date of the calendar month. In circumstances where such closing price is not available, the Manager would use the price at which it last purchased or sold any share of that security. This additional information regarding the dollar value of the reported short position would provide additional transparency and context to market participants and regulators. • In Column 9, a Manager would indicate whether the identified gross short position in Column 7 is fully hedged (‘‘F’’), partially hedged (‘‘P’’), or not hedged (‘‘0’’) at the close of the last settlement date of the calendar month of the reporting period.237 237 As stated in the proposal, a Manager would indicate that a reported gross short position in an equity security is ‘‘fully hedged’’ if the Manager also holds an offsetting position that reduces the risk of price fluctuations for its entire position in that equity security, for example, through ‘‘delta’’ hedging (in which the Manager’s reported gross short position is offset 1-for-1), or similar hedging strategies used by market participants. A Manager would report that it is ‘‘partially hedged’’ if the Manager holds an offsetting position that is less than the identified price risk associated with the reported gross short position in that equity security. This additional hedging information would help to indicate whether the reported gross short position is directional or non-directional in nature. More specifically, a short position that is not hedged could be an indicator that the short seller has a negative view of the security, believes that the price of the equity security will decrease, and accepts the market risk related to its short position. A short position that is fully hedged could be an indicator that the short seller has a neutral or positive view of the security and is engaged in hedging activity to protect against potential market risk. A short position that is partially hedged could be an indicator that the short seller has a negative, neutral, or positive view of the security. Whether the hedge itself is full, partial, or non-existent might provide further context to market participants regarding the short seller’s view of the equity security. Hedging information also can assist with distinguishing position trading, which typically has corresponding hedging activity, from other strategies such as arbitrage. E:\FR\FM\01NOR2.SGM 01NOR2 75122 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations (B) Comments and Final Rule Comments regarding the contents of Information Table 1 raised concerns about the proposal to require hedging information in Column 9. As discussed below, the Commission is adopting Information Table 1, as proposed, except that the Commission will not require Managers to report hedging information as originally proposed in Column 9 of the table. Comments Regarding Hedging Indicators Implementation Challenges The proposal would have required Managers to report on Information Table 1 whether they were ‘‘fully hedged’’ or ‘‘partially hedged’’ based on whether a Manager held an offsetting position that completely or partially reduced the risk of price fluctuations for its position in that equity security, respectively.238 Further, the proposal required Managers to report on Information Table 1 that their short position was ‘‘not hedged’’ if the Manager did not hold any offsetting positions.239 A number of commenters raised concerns about the costs to implement this proposed requirement.240 One such commenter expressed concerns that the requirement to report hedging status would be ‘‘operationally difficult to implement,’’ as the reporting would be produced by back-office systems that ‘‘generally do not have any linkage information to allow them to match a hedge to a short position,’’ necessitating the development of costly new systems.241 One industry group commenter expressed a concern about ‘‘complications that can arise from the hedging classification,’’ particularly for large portfolios for which it will not always be clear when a position is intended to be a hedge for another position, or clear or obvious whether a position acts as ‘‘one-to-one offset’’ of price risk for another position.242 Non-Universal Terminology Some commenters expressed concerns about the meaning of ‘‘fully hedged’’ and ‘‘partially hedged’’ under the proposed rule. These commenters expressed the view that because there is no universal definition of hedging in the ddrumheller on DSK120RN23PROD with RULES2 238 Proposing Release, at 14959. 239 Id. 240 See, e.g., MFA Letter, at 4 (stating that inclusion of hedging classification on Form SHO would be costly and time consuming for reporting Managers to produce); Virtu Letter, at 3 (advocating that requirement to report short positions as fully, partially, or not hedged would be ‘‘operationally difficult to implement’’ and should be eliminated). 241 Virtu Letter, at 3. 242 AIMA Letter, at 13. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 marketplace, or clear guidance on this matter from the Commission, Managers can reasonably come to different conclusions regarding the extent to which similar positions are hedged.243 Because the meanings of ‘‘fully’’ and ‘‘partially’’ hedged are subject to interpretation, these commenters believed that the reporting of hedging data would be inconsistent, imprecise, potentially misleading, and subject to misinterpretation. Several such commenters posited that due to what they described as the ambiguity of the hedging definitions, the proposed hedging reporting could result in inaccurate or misleading data—such as misleading market signals of Managers’ sentiments—as Managers may interpret the hedging indicators differently.244 Similarly, a commenter stated that due to the lack of detail surrounding the ‘‘partially hedged’’ designation in particular, the data may be misleading as to the level of price risk associated with certain positions.245 A commenter stated that there is no universal definition of what constitutes a ‘‘hedge’’ and that the Commission’s guidance in the Proposing Release and the instructions in Proposed Form SHO as to how a Manager determines whether or when a position is fully or partially hedged, or not hedged, are insufficient to create a universal understanding and consistent reporting.246 That commenter further stated that the Commission provided only one example (the use of delta hedging in a one-to-one offset between short and long positions), even though Managers use a variety of other hedging techniques, such as portfolio hedging, ETFs, baskets of securities, and securities that have historic trading correlations, among others.247 Under these circumstances, several commenters predicted, Managers would likely default to a ‘‘partially hedged’’ designation,248 resulting in data of 243 See, e.g., ICI Letter, at 10; see also Comment Letter from Mehmet Kinak, Head of Equity Trading, T. Rowe Price, et al. (Apr. 26, 2022), at 4, available at https://www.sec.gov/comments/s7-08-22/s7082220126777-287493.pdf (‘‘T. Rowe Price Letter’’) (stating that hedging data may be ‘‘especially vulnerable to lack of consistency in terms of how various managers apply the classification.’’); AIMA Letter, at 13 (predicting that hedging classification will involve ‘‘level of subjectivity that is unlikely to be applied uniformly across Managers’’ and that determining such classification will ‘‘prove even more complicated for a large quantitative portfolio’’). 244 See, e.g., AIMA Letter, at 13; MFA Letter, at 16. 245 See ICI Letter, at 10. 246 See MFA Letter, at 16–17. 247 See id. 248 See, e.g., MFA Letter, at 17. The MFA Letter suggested that ‘‘almost all short positions held by a large manager will be partially hedged—for PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 limited utility.249 These commenters stated that due to what they viewed as the ambiguous and non-universal nature of the terms, many Managers may simply default to marking transactions as ‘‘partially hedged’’ when it is unclear to what extent the positions are hedged, due to the wide range of positions encompassed by the proposed partially hedged indicator.250 To mitigate this concern and to improve transparency, some commenters critical of the hedging indicators suggested reducing the qualitative nature of the proposed terms by dividing the ‘‘partially hedged’’ term into smaller, well-defined units or even percentage increments.251 More specifically, these commenters expressed concern that the proposed hedging classifications could prove challenging to apply consistently across Managers and could result in significant example, if a manager has discretion over one fund with a short position, and another unrelated fund with a long position, the manager would be required to report the short position as ‘‘partially hedged’’ when in fact, the short position is not hedged at all.’’ Depending on the facts and circumstances, the commenter is correct that the positions in the two funds managed by the same Manager may have to be aggregated under Rule 200(c) of Regulation SHO for marking purposes. 249 See, e.g., Ropes & Gray Letter, at 5 (stating that difficulty in defining ‘‘fully,’’ ‘‘partially,’’ or ‘‘not,’’ hedged would likely lead to inconsistent reporting that, in turn would limit the ‘‘meaningfulness’’ of the reported information to investors and the Commission); T. Rowe Price Letter, at 4 (raising concern that lack of consistency in how reporting Managers would apply the hedging classification could lead to ‘‘weaknesses’’ in the hedging data reported that would make the Commission’s publication of aggregated hedging classifications across reporting Managers of little value to, and potentially misinterpreted by, the public); MFA Letter, at 4 (stating ‘‘[b]ecause (i) there is no universal definition of ‘‘hedging’’ in the industry, and (ii) the reported gross short position must encompass short positions aggregated across funds, clients and affiliated managers, any hedging-related designation would be meaningless. Inclusion of this data would result in inconsistent reporting and would be costly and time consuming for managers to produce.’’); SIFMA Letter at 21 (stating information reported in Column 9 of Proposed Form SHO would be ‘‘inherently inconsistent and precise and, therefore, of very little value to regulators in that it could be highly misleading’’); see also AIMA Letter, at 13 (stating hedging classification will involve ‘‘level of subjectivity that is unlikely to be applied uniformly across Managers’’). 250 See, e.g., Ropes & Gray Letter (arguing that the possible exaggerated use of the partially hedged indicator is ‘‘unlikely to elicit comparable reporting across managers’’). 251 See Comment from Peyton Bailey (Mar. 14, 2022) (‘‘Peyton Bailey Comment’’), available at https://www.sec.gov/comments/s7-08-22/s70822272291.htm (proposing to use percentage points or ‘‘majority’’ (≤50%) and ‘‘minority’’ (≤50%) hedging indicators instead of partially hedged); Nick Dougherty Letter (proposing to use percentage points); WTI Letter (proposing to use percentage points); Comment from Alex Fleming (Oct. 31, 2022), available at https://www.sec.gov/comments/ s7-08-22/s70822-317348.htm (proposing to use numerical or percentage scale). E:\FR\FM\01NOR2.SGM 01NOR2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations costs for data of limited value.252 One commenter stated that the act of market participants reporting the proposed hedging classification would create a chilling effect.253 Another commenter stated that although a change in hedging status may correspond with a change in manager sentiment, it is also possible that such a change may simply be the result of other unrelated objectives, such as rebalancing a portfolio.254 Similarly, another commenter agreed that the purpose of defensive tactics that hedging strategies often entail, such as hedging a long position, contrasts with the purpose of unhedged short strategies.255 That commenter expressed the view that such ‘‘defensive’’ hedging should not be included in the reporting as it would provide limited utility to the public. Some commenters took the position that reporting on ‘‘bona fide’’ hedging activity would not align with the goals in the Proposing Release and that such activity is unlikely to be abusive or manipulative.256 Some commenters that supported requiring hedging indicators generally rejected complaints about the costs and burdens related to the proposed reporting of hedging status as part of Information Table 1, stating that with modern technology, the requirements are ‘‘easily automated and with minimal cost incurrence.’’ 257 Support for the collection of hedging information generally came from commenters favoring steps to enhance the transparency of short sale-related data to facilitate a better understanding of short selling dynamics.258 One commenter stated that the hedging classification, if made public, would illustrate market sentiment, and that it would help to uncover ‘‘short and distort’’ campaigns, 252 See MFA Letter, at 4, 16–17. Comment Letter from Joshua Russell (Oct. 26, 2022), available at https://www.sec.gov/ comments/s7-08-22/s70822-20147825-314190.pdf. 254 See T. Rowe Price Letter, at 4. 255 See K&L Gates Letter, at 2. 256 See K&L Gates Letter, at 2–3, T. Rowe Price Letter, at 2–4, Anonymous Fund Manager Letter, at 1. 257 Letter from Andrew Patrick White, CEO & Founder, FundApps (Mar. 2, 2022), available at https://www.sec.gov/comments/s7-08-22/s7082220118368-271239.pdf. 258 See, e.g., Comment Letter from Anonymous (March 14, 2022) (positing that managers should report whether, and to what extent, they are hedged, along with an explanation of what that means; such information is valuable in determining a manager’s position with regard to the associated risks); see also Comment Letter from Biotechnology Innovation Organization (Apr. 25, 2022) at 3, available at https://www.sec.gov/comments/s7-0822/s70822-20126539-287214.pdf (‘‘BIO Letter’’) (positing that transparency into hedging data would facilitate understanding of price and behavior dynamics). ddrumheller on DSK120RN23PROD with RULES2 253 See VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 particularly in sectors that have higher than normal rates of short selling.259 The commenter further explained that under the status quo, it is unclear whether short positions are used for hedging long positions or whether they are being used to speculate on perceived overvaluation in the market in recent years.260 Another commenter stated that publishing hedging information regarding the actions of hedge funds and other large market participants would inform the decision making of retail investors.261 Other commenters posited that the proposed ‘‘not hedged’’ indicator would provide the most useful information to the market because unhedged short positions may be the most likely to be riskier or manipulated.262 Final Rule After considering the comments received,263 the Commission is not 259 BIO Letter, at 7. at 2. 261 Peyton Bailey Comment. 262 See Comment from Max Knaus (Oct. 30, 2022), available at https://www.sec.gov/comments/s7-0822/s70822-316957.htm; Comment Letter from Brendan Casey (Oct. 30, 2022), available at https:// www.sec.gov/comments/s7-08-22/s70822-20149998319181.pdf. 263 One commenter stated that the proposed hedging requirement ‘‘fails to appreciate the difficulty—particularly for multi-service brokerdealers that use aggregation units and investment funds with multiple strategies—of calculating and determining such information for reporting purposes.’’ SIFMA Letter, at 20. Under Regulation SHO, a person shall be deemed to own a security only to the extent it has a net long position in that security. See Rule 200(c). See also Rule 200(g)(1) (an order shall be marked long only if the seller is deemed to own the security and the security is in the physical possession or control of the broker or dealer or it is reasonably expected that the security will be in the physical possession or control of the broker or dealer by settlement date). Under Rule 200(f), a broker must aggregate all of its positions in a security to determine its net position, unless it qualifies for independent trading unit aggregation. If the broker or dealer qualifies for independent aggregation units, each independent trading unit shall aggregate all of its positions in a security to determine its net position. See Rule 200(f). Qualification requires that the independent aggregation unit meet four conditions. See Rule 200(f)(1) through (4). For instance, all traders in an aggregation unit must pursue only the particular trading objective(s) or strategy(s) of that aggregation unit and may not coordinate that strategy with any other aggregation unit. See Rule 200(f)(3). In adopting Rule 200(f), the Commission stated that ‘‘conditions are necessary to prevent potential abuses associated with establishing aggregation units within multi-service broker-dealers.’’ Regulation SHO Adopting Release, at 48011. Thus, to be eligible for the aggregation unit exception, the broker or dealer’s units must operate independently, with defined trading strategies, and one unit’s trades or positions cannot be used to offset or hedge another unit’s trades or positions. See, e.g., Rule 200(f)(3); see also Regulation SHO Adopting Release, at 48011 (each unit must be engaged in separate trading strategies). While information barriers between aggregation units may be useful, as the commenter suggests, such barriers 260 Id. PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 75123 adopting the hedging reporting requirement as proposed. Specifically, when filing Form SHO Information Table 1, a Manager will not be required to indicate whether the identified gross short position in Column 9 of Information Table 1 is fully hedged (‘‘F’’), partially hedged (‘‘P’’), or not hedged (‘‘0’’) at the close of the last settlement date of the calendar month of the reporting period; Column 9 will be removed from Information Table 1 of Form SHO as adopted. While the Commission laid out the rationale behind the hedging reporting requirement in the Proposing Release, comments received, as discussed above, persuaded the Commission that such reported data may not result in as consistent and accurate data as it originally envisioned. In addition to the definitional challenges discussed above, the Commission recognizes the challenges of applying the Rule 13f–2 reporting requirements in the scenario when a Manager has investment discretion over multiple accounts. For example, purchases and sales in different accounts may not be intended to hedge one another, but the proposal would have required that the Manager indicate that it was ‘‘partially-hedged’’ nonetheless. Such information would not be an accurate reflection of the Manager’s hedging status, and thus would not be useful. As another example, a Manager that has purchased a few shares of a security (for example, 100 shares) for which it holds a substantial short position (for example, 1 million shares) would have had to report that it was ‘‘partially hedged’’ without regard for the scale of such purchases in relation to the position for which it would have had to report it was hedging. That said, the Commission continues to believe, as did some commenters favoring the proposed requirement, that if accurate data on hedging could be collected, such information would be useful to regulators. alone are not sufficient for eligibility for Rule 200(f). See e.g., Rule 200(f)(3); see also Regulation SHO Adopting Release at 48011 (conditions are intended to limit potential for abuse associated with coordination among units and to maintain the independence of the units). Thus, a broker or dealer that has created multiple units with fungible trading strategies as a means of affecting order marking may not be eligible for aggregation unit treatment under Rule 200(f) of Regulation SHO. See e.g., In re Morgan Stanley & Co., LLC, 34–90046 (Sept. 30, 2020) (settled case), available at https:// www.sec.gov/litigation/admin/2020/34–90046.pdf (long-only and short-only aggregation units were not independent and separate trading strategies, but were instead operated by the same employees, managed by the same manager, and consisted of the same trading strategies). E:\FR\FM\01NOR2.SGM 01NOR2 75124 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations The Commission considered whether, as suggested by a commenter, the hedging indicator could be simplified so that Managers would be required only to report whether a position is not hedged.264 While short positions that are unhedged may involve greater risk, this alternative could be too easily circumvented by, for example, simply purchasing a nominal number of shares of the security and stating the position is therefore hedged (or partially hedged under the rule as proposed). The Commission also considered another commenter’s suggestion that hedged short positions should be exempted from reporting.265 This alternative would create a similar circumvention scenario to the one mentioned above (i.e., using a nominal long position to create an exempt hedged position). Accordingly, the Commission is not adopting the hedging reporting requirement as proposed. iv. Information Table 2: ‘‘Daily Activity Affecting Manager’s Gross Short Position During the Reporting Period’’ (A) Proposal ddrumheller on DSK120RN23PROD with RULES2 As proposed, Information Table 2 of Form SHO captures daily activity that increases or decreases a Manager’s short position for each settlement date during the calendar month reporting period. More specifically, on proposed Form SHO, a Manager would report the number of shares of the equity security that: (i) were sold short; (ii) were purchased to cover, in whole or in part, an existing short position in the security; (iii) were acquired through the exercise or assignment of an option, through a tendered conversion, or through a secondary offering transaction,266 that reduces or closes a 264 See Comment from Max Knaus (Oct. 30, 2022), available at https://www.sec.gov/comments/s7-0822/s70822-316957.htm; Comment Letter from Brendan Casey (Oct. 30, 2022), available at https:// www.sec.gov/comments/s7-08-22/s70822-20149998319181.pdf. 265 Perkins Coie Letter, at 6 (stating that ‘‘[o]r, alternatively, the SEC should consider exempting hedged short positions from reporting on Form SHO’’). 266 The term ‘‘sale’’ under the Securities Act includes contract of sale. See Securities Offering Reform, Exchange Act Release No. 52056 (July 19, 2005), 70 FR 44722, 44765 (Aug. 3, 2005); Short Selling in Connection With a Public Offering, Exchange Act Release No. 56206 (Aug. 6, 2007), 72 FR 45094, 45102 (Aug. 10, 2007). The Commission has previously stated that, in a short sale, the sale of securities occurs at the time the short position is established, rather than when shares are delivered to close out that short position, for purposes of section 5 of the Securities Act of 1933 (‘‘Securities Act’’). See, e.g., Commission Guidance on the Application of Certain Provisions of the Securities Act of 1933, the Securities Exchange Act of 1934, and Rules Thereunder to Trading in Security Futures Products, Exchange Act Release VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 short position on the (underlying) security; (iv) were sold through the exercise or assignment of an option that creates or increases a short position on the (underlying) security; (v) resulted from other activity not previously reported in the Information Table that reduces or closes, or creates or increases a Manager’s short position on the security, including, but not limited to, ETF creation or redemption activity. Pursuant to Proposed Rule 13f–2, Managers would assemble, review, and file the required information with the Commission on new Form SHO within fourteen (14) calendar days after the end of the calendar month. As noted above, the Commission would then publish aggregated information derived from the data reported on new Form SHO, aggregated across all reporting Managers, within one month after the end of the reporting calendar month. Specifically, as proposed, the Manager would report the following information on Information Table 2 for each date during the reporting period on which a trade settled (settlement date) during the calendar month. • In Column 1, a Manager would enter the date during the reporting period on which a trade settled for the activity reported. This would identify the settlement date activity being reported. • In Column 2, consistent with section 13(f)(2), a Manager would enter the name of the issuer, to identify the issuer of the security for which information is being reported. • In Column 3, a Manager would enter the issuer’s active LEI, if the issuer had an active LEI. The LEI provides standardized information that would enable the Commission and market participants to more precisely identify the issuer of each equity security for which information is being reported. • In Column 4, consistent with section 13(f)(2), a Manager would enter the title of the class of the security for which information is being reported. • In Column 5, consistent with section 13(f)(2), a Manager would enter the nine (9) digit CUSIP number of the equity security for which information is being reported, if applicable. • In Column 6, a Manager would enter the twelve (12) character, alphanumeric FIGI of the equity security for which information is being reported, if a FIGI has been assigned. Like CUSIP, FIGI provides a methodology for identifying securities. No. 46101 (June 21, 2022), 67 FR 43234, 43236 (June 27, 2002) (see Questions 3 and 5); Short Selling in Connection With a Public Offering, 72 FR 45094. PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 • In Column 7, for the settlement date set forth in Column 1, a Manager would enter the number of shares of the equity security for which information is being reported that resulted from short sales and settled on that date. • In Column 8, for the settlement date set forth in Column 1, a Manager would enter the number of shares of the security for which information is being reported that were purchased to cover, in whole or in part, an existing short position in that security and settled on that date. This activity information would allow the Commission and other regulators to more quickly identify a potential ‘‘short squeeze,’’ which could be evidenced by short sellers closing out short positions by purchasing shares in the open market. If it appeared that a short squeeze may have occurred through potential manipulative behavior involving short selling, the Commission could perform further analysis regarding the squeeze. Increased risk of detection could deter some market participants seeking to orchestrate a short squeeze. • In Column 9, for the settlement date set forth in Column 1, a Manager would enter the number of shares of the security for which information is being reported that are acquired in a call option exercise that reduces or closes a short position on that security and settled on that date. The exercise or assignment of an option position can reduce or close a short position in the underlying equity security. • In Column 10, for the settlement date set forth in Column 1, a Manager would enter the number of shares of the security for which information is being reported that were sold in a put option exercise that created or increased a short position on that security and settled on that date. Options can be used to create economic short exposure such that an exercise or assignment of an option could create or increase a short position in the underlying equity security. • In Column 11, for the settlement date set forth in Column 1, a Manager would enter the number of shares of the security for which information is being reported that were sold in a call option assignment that created or increased a short position on that security and settled on that date. Options can be used to create economic short exposure such that an exercise or assignment of an option could create or increase a short position in the underlying equity security. • In Column 12, for the settlement date set forth in Column 1, a Manager would enter the number of shares of the security for which information is being reported that were acquired in a put option assignment that reduced or E:\FR\FM\01NOR2.SGM 01NOR2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 closed a short position on that security and settled on that date. The exercise or assignment of an option position can reduce or close a short position in the underlying equity security. • In Column 13, for the settlement date set forth in Column 1, a Manager would enter the number of shares of the security for which information is being reported that are acquired as a result of tendered conversions that reduced or closed a short position on that security and settled on that date. Holders of convertible debt often hold short positions to hedge their convertible position. When the shares of the convertible debt are converted, they can reduce or close a short position in the equity security. • In Column 14, for the settlement date set forth in Column 1, a Manager would enter the number of shares of the security for which information is being reported that were obtained through a secondary offering transaction that reduces or closes a short position on that security and settled on that date. Purchasing securities in a secondary offering 267 can reduce or close a short position in the equity security. • In Column 15, for the settlement date set forth in Column 1, a Manager would enter the number of shares of the security for which information is being reported that resulted from other activity not previously reported in Information Table 2 that creates or increases a short position on that security and settled on that date. Other activity to be reported includes, but is not limited to, shares resulting from ETF creation or redemption activity. • In Column 16, for the settlement date set forth in Column 1, a Manager would enter the number of shares of the security for which information is being reported that resulted from other activity not previously reported on 267 Such offering purchases must be reported whether they occurred outside or within the restricted period of 17 CFR 242.105, Rule 105 of Regulation M, which makes it unlawful for a person who sells short a security that is the subject of an offering to purchase in the offering if the short sale occurred during the restricted period. Rule 105 originally prohibited persons from covering short sales with offering purchases but was amended to prohibit any purchases of offering shares if the person sold short during the restricted period (with limited exceptions) ‘‘to end the progression of schemes and structures engineered to camouflage prohibited covering.’’ Short Selling in Connection with a Public Offering, Exchange Act Release No. 34–54888 (Dec. 6, 2006), 71 FR 75002 at 75005 (Dec. 13, 2006). The amendment was designed to address a proliferation of trading strategies and structures attempting to accomplish the economic equivalent of the activity that the rule seeks to prevent, specifically, attempts to obfuscate the prohibited ‘‘covering’’ of the short sale. See, e.g., Short Selling in Connection with a Public Offering, Exchange Act Release No. 34–56206 (Aug. 6, 2007), 72 FR 45094 (Aug. 10, 2007). VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 Information Table 2 that reduces or closes a short position on that security and settled on that date. Other activity to be reported includes, but is not limited to, shares resulting from ETF creation or redemption activity. The Commission stated in the Proposing Release that it believes that the information in Columns 9, 12, 13, 14, and 16 of proposed Information Table 2 would be useful in providing the Commission additional context and transparency into how and when short positions in the reported equity security are being closed out or reduced.268 The Commission also stated that the information in Columns 10, 11, and 15 would be useful in providing the Commission additional context and transparency into how and when short positions in the reported equity security are being created or increased.269 Such daily activity information would provide market participants and regulators with additional context and transparency into whether, how, and when reported gross short positions in the reported equity security are being closed out (or alternatively, increased) as a result of the acquisition or sale of shares of the equity security resulting from call options exercises or assignments; put options exercises or assignments; tendered conversions; secondary offering transactions; 270 and other activity. The Commission stated that it believed that such activity data would also assist the Commission in assessing systemic risk and in reconstructing unusual market events, including instances of extreme volatility. (B) Comments and Final Rule The Commission solicited and received comment on the categories of short sale activity data that a Manager would be required to report on new Form SHO Information Table 2. Commenters differed on the appropriate level of transparency of the short salerelated data presented. Some commenters called for robust—if not complete—transparency of short salerelated data, while other commenters expressed concerns about the breadth of the activity information to be reported, the related cost burdens to report such information, and data security. Individual investor commenters, generally, were critical of the opacity of current short position and short activity data disclosure. A group consisting of retail investors stated there was a ‘‘lack of transparency around short positions, 268 Proposing Release, at 14960. 269 Id. 270 See PO 00000 supra n. 263. Frm 00027 Fmt 4701 Sfmt 4700 75125 the inability to adequately quantify short interest, and the ability for firms to skirt regulation through derivative positions such as options and securitybased swaps.’’ 271 Some individual investor commenters viewed Proposed Rule 13f–2 and related Form SHO as a first step toward achieving the full transparency in disclosure they perceived as necessary for a fair and efficient market.272 To these commenters, greater transparency is a means to level the playing field for retail investors.273 Other commenters acknowledged the Commission’s authority to promulgate rules to capture short sale-related data but took the position that Form SHO reporting should be limited to the bare minimum necessary to satisfy the statutory mandate of DFA section 929X (i.e., Exchange Act section 13(f)(2)).274 These commenters expressed concerns about requiring the reporting of anything beyond the data elements expressly specified in section 13(f)(2) of 271 WTI Letter. See also Anonymously Submitted Comment (Mar. 11, 2022), available at https:// www.sec.gov/comments/s7-08-22/s70822-20119226272030.htm (‘‘any and all information’’ should be accessible by any investors); Anonymously Submitted Comments (Apr. 26, 2022, May 10, 2022, Oct. 9, 2022, Oct. 26, 2022); Comment from Erin Ashford (Oct 9, 22), available at https:// www.sec.gov/comments/s7-08-22/s70822309605.htm (calling for ‘‘robust and complete transparency’’); cf. Anonymously Submitted Comment (Mar. 17, 2022) (raising concerns about data integrity when the reporting system is based on reporting). 273 See, e.g., Comment from Richards (Oct. 31, 2022), available at https://www.sec.gov/comments/ s7-08-22/s70822-317124.htm (‘‘Market fairness and transparency is an important part of this democracy. It helps to level the playing field.’’); Anonymously Submitted Comment (Oct. 19, 2022), available at https://www.sec.gov/comments/s7-0822/s70822-20146713-312005.pdf (‘‘In summary, I, like many others, support the above proposal to increase transparency in the markets, and to somewhat level the playing field for smaller, independent investors and retail alike.’’); Comment from Jonathan Patterson (Mar. 14, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822272193.htm (‘‘Shedding some light into the transactions of short sellers would be very supportive for retail investors and would help to level the playing field.’’). 274 See T. Rowe Price Letter, at 2 (urging a measured approach to meeting the 929X reporting obligation so that ‘‘the public reporting of short sale information only satisfies the specific data elements and minimum frequency of dissemination referenced in section 929X and goes no further.’’); Comment Letter from Robert Sloan, Managing Partner, S3 Partners, LLC (May 20, 2022), available at https://www.sec.gov/comments/s7-08-22/s7082220129426-295541.pdf (recommending reporting be limited to public disclosure of ‘‘only those data elements required by Section 13(f)(2)’’) (‘‘S3 Letter’’); see also AIMA Letter (positing that Information Table 1 of Form SHO, without the requirement to report hedging information, would alone be sufficient for the Commission to carry out its statutory mandate and achieve its goals). 272 Id. E:\FR\FM\01NOR2.SGM 01NOR2 75126 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 the Exchange Act.275 Expressing concerns that the data required in Information Table 2 of Proposed Form SHO is too granular and contains an excessive amount of commercially sensitive information that, if misappropriated, would lead to commercial harm, these commenters recommended that, at a minimum, the scope of information required to be reported on Information Table 2 of Proposed Form SHO be substantially limited, or that Information Table 2 be eliminated altogether.276 Some of these commenters suggested that the Commission rely instead on existing sources of short-sale related data, such as CAT or short sale-related data provided to FINRA and the exchanges.277 Other commenters questioned the utility of the reported information proposed to be required.278 275 See, e.g., SIFMA Letter, at 2 (positing that ‘‘expansive reporting regime contemplated under the Proposed Rules would extend significantly beyond what Congress intended in passing Section 929X . . . .’’); Comment Letter from James Toes, President & CEO, et al., Security Traders Association (Apr. 26, 2022), available at https:// www.sec.gov/comments/s7-08-22/s70822-20126796287509.pdf (‘‘STA Letter’’) (criticizing rulemaking proposal as going far beyond mandate of 929X of Dodd-Frank Act to prescribe rules providing for public disclosure of short sales and recommending more alignment of Proposed Rule 13f–2 reporting requirements with those of Form 13F); T. Rowe Price Letter, at 2. 276 See, e.g., Two Sigma Letter, at 3–4 (raising concerns about potential data breaches and unintended public dissemination of daily short position data); see also AIMA Letter, at 14 (citing negative ramifications for Managers, markets and the Commission if commercially sensitive and valuable data reported in Information Table 2 were to be compromised). See also discussion in supra Part II.A.4.a.ii. 277 See, e.g., AIMA Letter, at 2 (calling for elimination of Information Table 2 because it is ‘‘too granular’’); MFA Letter, at 4 (calling for elimination of Information Table 2 in favor of ‘‘less burdensome alternative’’); see also Ropes & Gray Letter, at 2 (stating that much of the information to be reported under Proposed Rule 13f–2 ‘‘is, or soon should be’’ available from existing reporting regimes—e.g., CAT, and information reported by broker-dealers to FINRA and the exchanges); SIFMA Letter, at 15–19 (recommending elimination of Information Table 2 altogether or alternatively that reporting of short activity data be limited to reporting only gross short positions at the end of each settlement day when a reporting threshold is breached (excluding detailed purchase and sale activity); cf. T. Rowe Price Letter, at 3 (recommending that Commission not use the permissive authority granted in section 13(f)(2) of the Exchange Act to gather additional information that would not be beneficial to the market and would be challenging for Managers to compile). See also discussion in supra Part II.A.4.a.i. 278 See, e.g., Ropes & Gray Letter, at 3, 6 (stating that it would be difficult to ‘‘to discern market sentiment or levels of activity from the net number published by the Commission, and the utility of publishing daily net transactions data to market participants will also likely be limited’’); see also K&L Gates Letter, at 2 (questioning the ‘‘value and impact’’ of the information called for under Proposed Rule 13f–2, that would supplement information currently available from other sources). VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 Several commenters expressly or effectively questioning the need for Information Table 2, also raised the concern that the short activity monitoring necessary to comply with the reporting requirements of Proposed Form SHO would require any Manager that engages in short selling to expend significant time and resources to enhance or revamp its systems to monitor activity continuously, without certainty as to if or when its short selling activity would meet or exceed the reporting thresholds.279 These commenters concluded that the costs to operationalize Rule 13f–2 had not been adequately weighed against any benefits to regulators or the public.280 Final Rule The Commission continues to believe that publication of aggregated short position data, on a delayed basis, is a reasonable means of minimizing the potential negative impacts of short position and short activity disclosures on short selling and allaying data security concerns raised by commenters while at the same time increasing transparency.281 This rationale applies to Information Table 2, which is about daily activities. Eliminating Information 279 See, e.g., Two Sigma Letter, at 7 (commenting that the ‘‘commercial risk and operational burdens created by daily reporting of individual short positions’’ was not adequately justified in the Proposing Release); MFA Letter, at 9–10 (raising concern that costs and consequences of Proposals would have a chilling effect on institutional investment managers’ pursuit of short strategies); Perkins Coie Letter, at 2–3 (stating that the benefits of the reported information would be outweighed by compliance costs for Managers that do not regularly utilize short positions ‘‘[F]or institutional investment managers that only selectively utilize short positions, or who only do so passively, these additional compliance costs in relation to the institutional investment manager’s usage of short positions could in turn impose untended risks to the manager’s underlying investors if the institutional investment manager must divert additional time and resources for compliance and oversight. This appears to be yet another affirmative reporting requirement that will increase compliance and overhead cost, without a [commensurate] benefit.’’). 280 See, e.g., MFA Letter, at 14 (describing categories of information required in Information Table 2 as ‘‘unclear, requir[ing] complicated judgments on the part of [M]anagers, and . . . likely to yield inconsistencies in reporting and results that are not accurate.’’); Ropes & Gray Letter, at 3 (positing that reporting under Proposed Rule 13f– 2 would impose ‘‘significant costs’’ on Managers, would not result in disclosure of ‘‘actionable information to market participants,’’ and is not necessary to allow the Commission to perform ‘‘effective market surveillance’’); see also S3 Letter, at 2 (predicting that short activity monitoring required by Information Table 2 of Form SHO will be a ‘‘substantial lift’’ for Managers’ administrative systems); SBAI Letter, at 2 (positing that proposed Form SHO data collection framework not justified from a cost benefit perspective and provides ‘‘very limited’’ additional insight in an untimely manner). 281 Proposing Release, at 14955. PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 Table 2 would not further the goal of enhancing the transparency of short sale-related data.282 And for reasons stated below, the data available from existing sources of short sale-related information have limitations, so they do not extinguish the need for additional transparency in the short sale market.283 The data to be reported in the following columns of Information Table 2 in Proposed Form SHO will provide regulators with additional context and transparency into how and when reported gross short positions were closed out or increased, which will help the Commission assess systemic risk.284 These columns are as follows: • Column 7: Number of Shares Sold Short • Column 8: Number of Shares Purchased to Cover an Existing Short Position • Column 9: Number of Shares Purchased in Exercised Call Option Contracts • Column 10: Number of Shares Sold in Exercised Put Option Contracts • Column 11: Number of Shares Sold Short in Assigned Call Option Contracts • Column 12: Number of Shares Purchased in Assigned Put Option Contracts • Column 13: Number of Shares Resulting from Tendered Conversions • Column 14: Number of Shares Obtained Through Secondary Offering Transaction 285 • Column 15: Other Activity that Creates or Increases Manager’s Short Position • Column 16: Other Activity that Reduces or Closes Manager’s Short Position However, the Commission is modifying the design of Information Table 2 of Proposed Form SHO to help reduce the costs and burdens of complying with the reporting requirements of Proposed Rule 13f–2 without sacrificing the level of 282 See Proposing Release, at 14987–14988, 14991 (discussing how existing sources of short salerelated data are not sufficiently granular, for example, to provide sufficient insights to further understanding of short selling strategies, to distinguish short sale transactions that impact short positions and those that do not, or into the timing with which short positions are established or covered). 283 See infra Part VIII.B.4. 284 Proposing Release, at 14959. 285 A secondary offering transaction for purposes of this requirement means an offering, other than an initial public offering, or ‘‘IPO,’’ for the same class of security that is the subject of the short sale. Such an offering could be made by the issuer and include newly created and or treasury shares and could also include or be made exclusively by selling shareholders. E:\FR\FM\01NOR2.SGM 01NOR2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations transparency of short sale activity data made available to market participants as prescribed in Proposed Rule 13f–2(a)(3). Under the reporting regime of Proposed Rule 13f–2, Managers would have been required to report each category of short activity information included in Columns 7–16 (above) of Information Table 2 of Proposed Form SHO.286 The Commission, for each individual column, would then tabulate the information reported to determine and publish the net activity in each reported equity security, as aggregated across all reporting Managers. That net activity would be expressed by a single identified number of shares of the reported equity security and be determined by offsetting the purchase and sale activity reported by Managers in Columns 7–16 of Information Table 2 of Proposed Form SHO. Under the adopted version of Information Table 2, Columns 7–16 of Information Table 2 of Proposed Form SHO are replaced by a single, new Column 7, in which Managers will report net activity in the security for which information is being reported (represented as a number of shares). More specifically, Special Instruction 9.g of Form SHO, as adopted, requires Managers to report net change in short position reflecting how the gross short position in shares of the security for which information is being reported are being closed out—or alternatively, increased—as a result of the acquisition or sale of share activity determined by offsetting prescribed types of purchase and sale activity. Those prescribed types of purchase and sale activities correspond to the purchase and sale activities identified in Columns 7–16 of Proposed Form SHO. The net activity will be determined by Managers—rather than by the Commission—and reported to the Commission. The Commission will then aggregate the reported daily net change numbers across Managers for public dissemination. Under the adopted version of Information Table 2, the Commission will receive less granular information from reporting Managers than was proposed. The Commission, however, will receive net activity information from reporting Managers for each settlement date during the calendar month which will provide additional context and transparency into whether the reported gross short positions in the reported equity security are being closed out (or alternatively, increased) as a result of the acquisition or sale of shares of the equity security resulting from call 286 See Special Instructions 9.g of Proposed Form SHO. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 options exercises or assignments; put options exercises or assignments; tendered conversions; secondary offering transactions; and other activity. The Commission believes that this is a reasonable approach that considers both those comments that supported additional transparency with regard to short sale-related information that would result from Information Table 2 reporting, and also comments about cost and data security concerns with regard to such reporting. This reported net activity information will assist the Commission in assessing systemic risk and in reconstructing unusual market events, including instances of extreme volatility.287 These modifications in the final rule for Information Table 2 of Form SHO result in no change to the net activity information that will be made publicly available by the Commission. Under Proposed Rule 13f–2 and Proposed Form SHO, the Commission would publish net activity information for each reported equity security, aggregated across all categories of activity in Columns 7–16 of Information Table 2 of Proposed Form SHO, and aggregated across all reporting Managers. Under Rule 13f–2 and Form SHO, the Commission will publish this same net activity information for each reported equity security as originally proposed by the Commission.288 And for this reason, Information Table 2 as adopted will not sacrifice transparency to market participants. e. Filing Amendments i. Proposal To facilitate the Commission’s process of aggregating the short sale-related information reported on Form SHO for publication, the Commission proposed that amendments to Form SHO must restate the Form SHO in its entirety. To inform the Commission that the filing is an amendment of a previously filed Form SHO, the Commission proposed that a Manager must check the box on the Form SHO Cover Page to indicate that the filing is an ‘‘Amendment and Restatement.’’ On the Cover Page of each Amendment and Restatement filed, the Commission proposed that a Manager must provide a written description of the revision being made, explain the reason for the revision, and 287 See infra Part VIII.C.1 for a discussion of how the Rule 13f–2 (and the adopted CAT amendment) will enhance the Commission’s ability to protect investors and investigate market manipulation by providing a clearer view into the short selling market and improving the Commission’s and other regulators’ reconstruction of significant market events. 288 Proposing Release, at 14961. PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 75127 indicate whether data from any additional Form SHO reporting period(s) (up to the past 12 calendar months) is/are affected by the amendment. If other reporting periods have been affected, the Commission proposed that a Manager shall complete and file a separate Amendment and Restatement for each previous calendar month so affected and provide a description of the revision being made and explain the reason for the revision. In cases where a revision is reported in an Amendment and Restatement that changes a data point reported in the Form SHO by twenty-five (25) percent or more, the Commission proposed that the Manager must notify the Commission staff via the Office of Interpretation and Guidance of the Division of Trading and Markets (‘‘TM OIG’’) at TradingAndMarkets@sec.gov within two (2) business days after filing the Amendment and Restatement. ii. Comments and Final Rule The Commission received some comments on the issue of amendments and restatements. One comment stated that the notification requirement for an amendment of 25 percent or more is too large, and that lower percentage revisions can be considered significant.289 The commenter further recommended that the notification requirement for amendments be reduced to revisions of 15 percent or more and that the number of revisions allowed for individual Managers be limited.290 Another commenter stated that if a nonmaterial error has been made, a Manager should not have to restate Form SHO in its entirety, and that a simple note or addendum should suffice.291 This commenter also encouraged the Commission to adopt a materiality threshold for other errors or omissions, i.e., if the error does not ‘‘materially impact the data the Commission intends to publish, then the Manager should not be required to restate Proposed Form SHO in its entirety,’’ stating that this would ‘‘eliminate the need for the Commission to collect even more commercially sensitive and valuable data and, in turn, relieve Managers of the time and costs that would be required to calculate, populate, and refile an entirely new Proposed Form SHO.’’ 292 289 Comment Letter from Anonymous (Mar. 21, 2022), available at https://www.sec.gov/comments/ s7-08-22/s70822-20120739-272894.pdf. 290 See id. 291 AIMA Letter, at 15. 292 Id. E:\FR\FM\01NOR2.SGM 01NOR2 ddrumheller on DSK120RN23PROD with RULES2 75128 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations The Commission is adopting procedures for filing and amending Form SHO consistent with the Proposing Release but modified to no longer require Managers to separately notify the Commission that the reporting discrepancies presented in an Amendment and Restatement have occurred. A Manager that determines or is made aware that it has filed a Form SHO with errors that affect the accuracy of the information reported must file an amended Form SHO within ten (10) calendar days of discovery of the error. The Commission continues to believe that filing an amended Form SHO within 10 calendar days of discovery of the error will provide Managers with a reasonable period of time to prepare the Form SHO amendment, while helping to ensure that accurate information is received by the Commission in a timely manner. The Commission is adopting the requirement, as proposed, that amendments to a previously filed Form SHO restate the Form SHO in its entirety, as described in Special Instruction 3 to Form SHO. Form SHO Special Instruction 3.a provides that on the Cover Page of each amended and restated Form SHO filing, a Manager must: check the box to indicate that the filing is an ‘‘Amendment and Restatement,’’ provide a written description of the revision being made, explain the reason for the revision, and indicate whether data from any additional calendar month reporting period(s) (up to the past 12 calendar months) is/are affected by the amendment. Consistent with the proposed procedures for filing an amended Form SHO, if other reporting periods have been affected, a Manager must complete and file a separate Amendment and Restatement for each previous calendar month so affected, and provide a description of the revision being made and explain the reason for the revision. As proposed and discussed further below, the Commission will provide aggregated data on a rolling twelve-month basis, with prior months’ data updated as necessary to reflect data from Amendments and Restatements. The Commission continues to believe that limiting the requirement to file an amended Form SHO to twelve months will reduce the burden and cost on Managers.293 In response to comments requesting a materiality threshold, requiring a Form SHO to be restated in its entirety should add little if any additional burden, as the Manager will have already compiled such data, and 293 Proposing VerDate Sep<11>2014 Release, at 14960. 22:05 Oct 31, 2023 Jkt 262001 thus no additional data collection will be required other than to correct the data point that is being amended. A materiality threshold could create additional complexity in determining how and when to file an amendment to Form SHO, and as such, the Commission is adopting the straightforward approach that any revision requires the Manager to restate Form SHO in its entirety when filing an amendment. The Commission is not adopting, however, the requirements that a Manager provide the Commission notice of the revision(s) reported in an Amendment and Restatement and an explanation of the reason(s) for the revision(s), as prescribed in Proposed Form SHO Special Instruction 3.b and 3.c; 294 and each of those Special Instructions in Proposed Form SHO is deleted from Form SHO as adopted. This change will reduce compliance costs for Managers filing Amendments and Restatements by not requiring them to provide a separate notice regarding information that has been reported, and therefore is available, to the Commission via EDGAR, without sacrificing transparency. Consistent with the proposed procedures for publishing data reported on or derived from Form SHO reports— including any Amendments and Restatements, the Commission plans to update prior months’ aggregated Form SHO data on EDGAR to reflect information reported in Amendments and Restatements and will add an asterisk (i.e., *) or other mark for any updated data for which a Manager notified Commission staff that it filed an Amendment and Restatement that changes a data point reported in the Form SHO by 25 percent or more to highlight for market participants that the published aggregated data includes significantly revised data. The Commission will publish the aggregated Form SHO data for the latest reporting period along with aggregated Proposed 294 Special Instruction 3.b of Proposed Form SHO provided that if a data being reported in an Amendment and Restatement affects the data reported on the Form SHO reports filed in at least three of the immediately preceding Form SHO reporting periods, the Manager, within two (2) business days after filing the Amendment and Restatement, must provide the Commission staff, via TM OIG at TradingAndMarkets@sec.gov, with notice of (1) this circumstance; and (2) an explanation of the reason for the revision. Special Instruction 3.c of Proposed Form SHO provided that if a revision reported in an Amendment and Restatement changes a data point reported in the Form SHO that is being amended by 25% or more, the Manager must notify the Commission staff via TM OIG at TradingAndMarkets@sec.gov within two business days after filing the Amendment and Restatement. PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 Form SHO data for the prior twelve months on a rolling basis. The published aggregated Form SHO data will include a disclaimer that the Commission does not ensure the accuracy of the data being published.295 Maintaining these requirements will help preserve the integrity of the reported short sale data and alert market participants to any potential issues with published data.296 f. Confidential Treatment i. Proposal The instructions to Proposed Form SHO provided that all information that would reveal the identity of a Manager filing a Proposed Form SHO report with the Commission would be deemed subject to a confidential treatment request under 17 CFR 240.24b–2 (‘‘Rule 24b–2’’).297 As discussed in the Proposing Release, the Commission proposed to publish only aggregated data derived from information provided in Proposed Form SHO reports. Proposed Form SHO, by its terms, ensured that information reported on the form that could reveal the identity of the reporting Manager would be deemed subject to a confidential treatment request. Pursuant to section 13(f) of the Exchange Act, the Commission may prevent or delay public disclosure of all other information reported on Proposed Form SHO in accordance with the Freedom of Information Act (‘‘FOIA’’), section 13(f)(4) and (5), Rule 24b–2(b) under the Exchange Act, and any other applicable law. ii. Comments and Final Rule The Commission received a single comment regarding confidential treatment. Stating that there are a variety of valid reasons beyond the example provided in the Proposing Release that a Manager might seek confidential treatment of information reported on Proposed Form SHO, the commenter urged the Commission to adopt a more flexible process for seeking confidentiality that would enable Managers and the Commission staff to determine whether confidential treatment is appropriate.298 The Commission is adopting an approach consistent with the Proposing Release but modified to refer to Rule 83 (17 CFR 200.83), and to provide that all 295 See Proposing Release, at 14961. id. 297 Id. at 14957. 298 Schulte Roth & Zabel Letter, at 5 (urging the Commission to permit confidential treatment requests with respect to the data to be included in the aggregated data to be published by the Commission on a case-by-case basis). 296 See E:\FR\FM\01NOR2.SGM 01NOR2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations information will be deemed subject to a confidential treatment request under Rule 83. As proposed, the instructions to Form SHO expressly provided that all information that would reveal the identity of a Manager filing a Proposed Form SHO report with the Commission would be deemed subject to a confidential treatment request under Rule 24b–2, as described in the ‘‘Filing of Form SHO’’ section of the General Instructions to Form SHO. Because the Commission does not intend those filings to be public, Rule 83 includes appropriate and less burdensome procedures and, accordingly, is revising the General Instructions to provide that data will also be deemed subject to a confidential treatment request under Rule 83. As with the Proposed Rule, the Commission currently plans to publish only aggregated data derived from information provided in Proposed Form SHO reports. While it is possible a person may be able to determine the identity of a Manager (or reverse engineer a Manager’s trading strategies) in a situation where only one person was selling short, especially where the short seller has publicly disclosed that it has a short position in a specific security, the Commission continues to believe that excluding such data from the aggregated data published by the Commission could affect the integrity of the data. The Commission anticipates that the risk of exposing a single short seller will be mitigated by the delay in publication of the aggregated data. The Commission does not anticipate disclosing information in Form SHO, other than to the extent the data is included in the Commission’s aggregated disclosures, and the Commission will deem the information included in Form SHO as being subject to a confidential treatment request under Rule 83. Accordingly, the Commission is further revising the General Instructions to provide that all information included in the Form SHO is deemed subject to a confidential treatment request under Rule 83. Pursuant to section 13(f) of the Exchange Act, the Commission may prevent or delay public disclosure of all other information reported on Form SHO in accordance with FOIA, section 13(f)(4) through (5), Rule 83, and any other applicable law.299 299 The Commission will follow Rule 83 procedures in addressing any requests for information reported on Form SHO deemed subject to a confidential treatment request. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 g. Preventing Duplicative Reporting i. Proposal The rules to prevent duplicative reporting of information regarding short positions and short activities of an equity security in Proposed Form SHO were partially modeled after those in Form 13F.300 More specifically, as described in the General Instructions to Proposed Form SHO, if two or more Managers, each of which would be required by Proposed Rule 13f–2 to file Proposed Form SHO for the reporting period, exercise investment discretion with respect to the same security, only one such Manager would be required to report information regarding that security in its Proposed Form SHO report. The Commission proposed that if a Manager were required to file a Proposed Form SHO report with respect to a security and chose to rely on the duplicative reporting provisions of the General Instructions to Proposed Form SHO, then such Manager would be required to identify on the cover page of its Proposed Form SHO report any other Managers filing a Proposed Form SHO report with respect to such security on behalf of the Manager, in the manner described in Special Instruction 5 of Proposed Form SHO. Duplicative reporting could result in unnecessary costs to Managers and could make the aggregated data published by the Commission less accurate. ii. Comments and Final Rule The Commission did not receive any comments regarding duplicative reporting, and for the reasons stated in the Proposing Release, is adopting Special Instruction 5 to Form SHO as proposed. h. Verification of Short Sale Data i. Proposal The Commission stated in the Proposing Release that it does not intend to verify the accuracy of the data reported by Managers, but may consider doing so in the future after assessing whether such verification would be useful or necessary to enhance the integrity of the data.301 The Commission further stated that field validations act as an automated form completeness check when a Manager files Proposed Form SHO through EDGAR, and that the validations do not verify the accuracy of the information filed in the Proposed Form SHO filings.302 300 See ‘‘Rules to Prevent Duplicative Reporting’’ in the ‘‘General Instructions’’ of Form 13F, available at https://www.sec.gov/pdf/form13f.pdf. 301 Proposing Release, at 14955. 302 Proposing Release, at 14960 n.72. PO 00000 Frm 00031 Fmt 4701 Sfmt 4700 75129 ii. Comments and Final Rule The Commission received many comments on the issue of Manager reporting and data verification. The comments supported implementing a Commission verification system for reported data, stating that reporting as proposed would lead to inconsistencies. Commenters expressed concerns regarding the self-reporting of data, citing the potential for errors or intentional manipulation of data.303 One commenter stated that Managers have incentives to report inaccurately, especially if there is concern over unveiling short selling strategies.304 Other commenters cited examples of instances of potential issues with data resulting from under-reporting, overreporting, and misreporting.305 One commenter stated, without further detail, that orders were being mismarked as short exempt in order to circumvent the short sale circuit breaker of Rule 201 of Regulation SHO.306 Other commenters suggested that the Commission verify the accuracy of reported data via a random audit, such as auditing reporting at a rate applicable to five percent of reported data per quarter.307 Several commenters also suggested that short sale transactions be placed on a publicly available, 303 See, e.g., Comment from Dale Eaglen (Feb. 25, 2022), available at https://www.sec.gov/comments/ s7-08-22/s70822-20117894-270815.htm; Comment from Michael Behrens (Feb. 25, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822270806.htm (‘‘Michael Behrens Comment’’); Comment from Stephen (Mar. 4, 2022), available at https://www.sec.gov/comments/s7-08-22/s7082220118671-271537.pdf; Comment from Kevin B. (Mar. 14, 2022), available at https://www.sec.gov/ comments/s7-08-22/s70822-20119357-272243.htm; see also Steve B. Comment (expressing concern that ‘‘[s]hort positions are currently ‘self regulated’ ’’), Comment Letter from Mike Monisky (Mar. 4, 2022) available at https://www.sec.gov/comments/s7-0822/s70822-20118657-271529.pdf (expressing concerns about misreporting of securities transactions to FINRA) (‘‘Mike Monisky Letter’’), Comment from Jonathan Dumaine (Mar. 14, 2022), available at https://www.sec.gov/comments/s7-0822/s70822-20119364-272250.htm (expressing general concern for potential for abuse whenever self-reporting on forms is involved) (‘‘Jonathan Dumaine Comment’’). 304 Comment from J. T. (Oct. 2, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822309405.htm. 305 See, e.g., Michael Behrens Comment; Mike Monisky Letter; Jonathan Dumaine Comment. 306 See Michael Behrens Comment. 307 See, e.g., Michael Behrens Comment; Comment from Jana Caperton (Mar. 12, 2022), available at https://www.sec.gov/comments/s7-0822/s70822-20119201-272007.htm; Comment from Jim Lee (May 26, 2022), available at https:// www.sec.gov/comments/s7-08-22/s70822295810.htm (‘‘Jim Lee Comment’’); Comment from Gerry T. (Oct. 31, 2022), available at https:// www.sec.gov/comments/s7-08-22/s70822317082.htm; Comment Letter from Wayne C. Smith (Dec. 3, 2022), available at https://www.sec.gov/ comments/s7-08-22/s70822-20152504-320238.pdf. E:\FR\FM\01NOR2.SGM 01NOR2 75130 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations immutable log, perhaps using blockchain technology, as a solution to the issue of verification.308 Finally, one commenter suggested that it should be the duty of exchanges and brokerdealers to report eligible short positions.309 The Commission is adopting the reporting requirement as proposed. Consistent with the Commission’s statement in the Proposing Release, the Commission does not intend to verify the accuracy of the data received from the Managers but may consider doing so after assessing whether such verification would be useful or necessary to enhance the integrity of the data. The reporting Managers are responsible for the completeness, timeliness, and accuracy of information included in their mandatory filings to the Commission. The Commission has the ability to conduct examinations to help evaluate whether reporting Managers are in compliance and, where necessary, the Commission may bring enforcement actions where potential violations are believed to have occurred. i. New Reporting Regime—Comments and Final Rule ddrumheller on DSK120RN23PROD with RULES2 Rather than create a new reporting regime by adopting the Proposals, several industry commenters urged the Commission to leverage the existing data frameworks of FINRA, CAT, and other data filed with the Commission (e.g., Form N–PORT).310 These 308 See, e.g., Comment from Joseph M. Grato (Mar. 21, 2022), available at https://www.sec.gov/ comments/s7-08-22/s70822-20120589-272777.htm (‘‘Joseph Grato Comment’’); Jim Lee Comment. 309 Jonathan Dumaine Comment. 310 See, e.g., Ropes & Gray Letter, at 2; Two Sigma Letter, at 9–10; ICI Letter, at 5; see also K&L Gates Letter, at 2 (stating that the Proposal ‘‘is unnecessary and, on balance, overly burdensome given the sufficiency of existing data availability’’); Virtu Letter, at 2 (stating that the Commission ‘‘has not proffered a regulatory need or justification for why the current reporting regime is inadequate’’); SIFMA Letter, at 13 (‘‘respectfully disagree[ing] with the Commission’s assertions that the data available to it through the existing reporting regimes is not sufficient to allow the SEC to meet its obligations under Section 929X’’); Perkins Coie Letter, at 2; AIMA Letter, at 8–10 (stating that ‘‘[w]ith tailored refinements to FINRA reporting and the combination of the proposed CAT amendments . . . the Commission can still fulfill the statutory mandate and achieve the goals outlined in the Proposal but without creating additional reporting requirements, burdens and costs for many market participants’’); SBAI Letter, at 2 (stating that instead of implementing a new reporting regime, the Commission should ‘‘[f]ocus should instead lie on making enhancements to FINRA’s existing collection and activity fit for purpose.’’); T. Rowe Price Letter, at 3 (stating that ‘‘[g]iven the extensive data already available to the SEC through FINRA’s existing short interest reporting, stock exchanges’ reporting of short sale activity, and the [CAT], the SEC should extract the short data it desires from these sources, rather than create new reporting VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 commenters stated that leveraging existing reporting frameworks would alleviate compliance burdens and associated costs,311 and that existing reporting frameworks were already sufficient for short interest reporting.312 These commenters stated, and the Commission acknowledges,313 that there are multiple sources of existing public and non-public data related to short sales. FINRA and most exchanges collect and publish daily aggregate short sale volume data, and on a one month delayed basis publish aggregated information regarding short sale transactions. FINRA collects and aggregates short interest data from broker-dealer member firms, by security, twice each month. In assessing how the Commission might leverage existing data to satisfy the mandate of section 929X, it is important to note differences in reporting entities, timing, and the specific data being collected in existing public and non-public sources of short sale-related data. The letters submitted by industry commenters critical of the Proposed Rule 13f–2 reporting regime did not explain with any specificity how the Commission could leverage existing sources of short data so that the Commission would receive equal or comparable data to that which will be reported on Form SHO, nor did Commenters articulate how short data that is currently available to market participants is comparable to data which would be reported on Form SHO and published by the Commission, rather the comments referenced leveraging of existing sources generally.314 After considering the viewpoints of commenters, the Commission believes that a new reporting regime will increase transparency into short positions consistent with the goals of DFA 929X, and that market participants and regulators alike will benefit from the required Form SHO disclosures, as they are distinct from existing short sale reporting regimes. Further, the short sale-related information that will be collected under Rule 13f–2 and Form SHO will fill an information gap for market participants and regulators by providing insights into increases and obligations for managers whose activity is already captured by these existing frameworks.’’). 311 See, e.g., Ropes & Gray Letter, at 2; SIFMA Letter, at 19. 312 See, e.g., SIFMA Letter, at 9–10; K&L Gates Letter, at 2; Virtu Letter, at 2. 313 See Proposing Release, at 14953–4. 314 See, e.g., Virtu Letter, at 2 (stating that the Commissions should ‘‘explore ways to utilize the existing sources of data that already are available to the SEC rather than establishing yet another pool of short sale data.’’). PO 00000 Frm 00032 Fmt 4701 Sfmt 4700 decreases in reported short positions. As stated in the Proposing Release, the Commission believes that the short position data reported pursuant to Rule 13f–2 on Form SHO will supplement the short sale information that is currently publicly available from FINRA and the exchanges.315 In the Proposing Release, the Commission elaborated on the limitations of using existing data, such as the CAT or FINRA data, to reconstruct market events like the ‘‘meme’’ stock events of January 2021.316 The Commission stated that while some existing sources report daily short sale volume, there are several limitations with regard to using existing data sources to accurately represent the short exposure of Managers. The short sale data reported on Form SHO will include the daily ‘‘net’’ activity by reporting Managers on each settlement date during the calendar month in the security for which information is being reported, and such information is not currently available from FINRA or the exchanges. Moreover, because FINRA’s existing short interest data reports aggregate short positions on a bimonthly basis,317 those reports do not reflect the timing with which short positions increase or decrease in the two-week period between the two reporting dates. The short sale data reported on Form SHO will help to fill that information gap. The Commission continues to believe that publication of this additional aggregated information can help to further inform market participants regarding overall short sale activity by Managers with substantial short positions and will provide regulators as well as market participants with important information regarding the timing of increases and decreases in the reported short positions.318 Finally, compared to other existing reporting regimes, the Reporting Thresholds in Rule 13f–2 are designed to require the reporting of only substantial, hence more informative, short positions.319 Further, the Commission understands that while FINRA makes publicly 315 See Proposing Release, at 14981–82. See also infra Part VIII.B.4. 316 See Proposing Release, at 14981–82. 317 The short interest data reported reflects aggregate short positions as of the specified reporting dates. 318 Proposing Release, at 14995. 319 With regard to Threshold B, as discussed in the Proposing Release, a $500,000 or more threshold for non-reporting company issuer securities is similar to the median dollar value of a position of 2.5 percent of the market capitalization of OTC stocks for which the Commission was able to obtain information on total shares outstanding. Hence, it is proportional to Threshold A in capturing substantial short positions. See supra Part II.A.3.a for additional discussion of Reporting Thresholds. E:\FR\FM\01NOR2.SGM 01NOR2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 available short sale-related data pertaining to both exchange-traded equity securities and OTC equity securities that is reported to it by its member firms,320 some of the exchanges require payment of a fee to access short sale-related data, which may make it difficult for some investors to access the data. The reporting regime under Rule 13f–2, by contrast, will provide aggregated short sale-related data in a readily accessible location (i.e., EDGAR or the Commission website), free and accessible to all investors and other market participants. The Commission continues to believe that providing free, accessible, and more complete information to market participants regarding short sale-related data will aid market participants in their understanding of the level of negative sentiment about a particular equity security and the actions of short sellers collectively and aid the Commission’s oversight of short selling.321 Other industry commenters were concerned about reporting burdens for smaller Managers, and one such commenter predicted that the increased reporting costs resulting from the Proposals and other related Commission proposed rulemakings could lead to industry consolidation and decrease competition and investor choice.322 The Commission continues to believe that application of the Reporting Thresholds will not result in Rule 13f–2 applying to a significant number of small entities, especially considering the modification to Threshold A to be based on a monthly average gross short position rather than the proposed daily calculation.323 In response to comments about reporting burdens, the Commission is not adopting the proposed hedging requirement, not adopting Proposed Rule 205 and ‘‘buy to cover’’ reporting to CAT, and is streamlining Information Table 2, thus reducing the costs of reporting from the proposed rule and form as compared to Rule 13f–2 and Form SHO as adopted.324 320 In mid-to-late Dec. 2022, FINRA began publishing short sale information for exchangetraded as well as OTC equity securities. See Equity Short Interest Files, FINRA, available at https:// www.finra.org/finra-data/browse-catalog/equityshort-interest/files. 321 Proposing Release, at 14952. 322 See, e.g., MFA Letter, at 2 (positing that combined costs of compliance with the Proposals and other related Commission proposed rulemakings would be ‘‘insurmountable for small and newly-formed advisers’’); Anonymous Fund Manager Letter, at 7–8. See infra Parts VIII.B, VIII.C.6.f, VIII.D.2 for a discussion of interactions between the economic effects of the adopted rule and other Commission rulemakings. 323 See infra Part IX. 324 See generally infra Part VIII. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 B. Data Aggregation and Publication of Information by the Commission 1. Proposal The Commission proposed to require Managers exercising investment discretion over short positions meeting specified thresholds to report information relating to end-of-themonth short positions on Information Table 1, and certain daily activity affecting such short positions on Information Table 2, of a new Form SHO. The Commission would aggregate the reported data by security, including daily short sale activity data, and then, on a delayed basis, make such aggregated data available to the public. As proposed, data would be aggregated across all reporting Managers for each reported equity security prior to publication. The Commission stated its belief that publicly disclosing the identity of individual reporting Managers may not be necessary to advance the policy goal of increasing public transparency into short selling activity, and that aggregating across reporting Managers would help safeguard against the concerns noted above related to retaliation against short sellers, including short squeezes, and the potential chilling effect that such public disclosure may have on short selling.325 As proposed, the Commission would publish aggregated information derived from data reported on Proposed Form SHO. The Commission estimated that it will publish such aggregated information within one month after the end of the reporting calendar month— e.g., for data reported by Managers on Proposed Form SHO for the month of January, the Commission would expect to publish aggregated information derived from such data no later than the last day of February. This additional time prior to publication of data by the Commission following receipt of the monthly Proposed Form SHO reports would be used to aggregate the data received from the reporting Managers, and would also help to reduce the risk of imitative trading activity by market participants and help to protect report Managers’ proprietary trading strategies.326 In proposing an approach for reporting the short sale-related information gathered, the Commission sought to balance calls to level the playing field for retail investors by, for example, taking steps to enhance the transparency of short sale-related data, with, among other things, concerns raised—primarily by institutional 325 See 326 See PO 00000 Proposing Release, at 14955. id., at 14955. Frm 00033 Fmt 4701 Sfmt 4700 75131 investors—regarding potential ‘‘chilling effect[s]’’ on short selling and potential issuer and investor retaliation against an identified short seller.327 The Commission also presented, and sought comment on, an alternative approach for its publishing of information reported on proposed Form SHO that would offer greater transparency and less anonymization of the published short sale-related data.328 Specifically, under this alternative, the Commission would publish the information reported to it at the individual Manager level rather than aggregate that information across all reporting Managers.329 Before publication, a reporting Manager’s identifying information would be removed to anonymize the information published. 2. Comments Several commenters raised concerns about potential negative consequences of more detailed short position disclosures—particularly, negative effects on liquidity and price discovery, the facilitation of copycat trading, and the greater susceptibility of holders of short positions to short squeezes.330 These commenters also preferred an ‘‘aggregation’’ approach to the alternative of publishing data at the individual Manager level, due to the commercially sensitive investment and trading information that Managers are required to report under Rule 13f–2.331 These commenters stated, however, that aggregation would not go far enough to lower the risk that the trading and investment behavior reported 327 See 328 See id., at 14955. id., at 14967. 329 Id. 330 E.g., SBAI Letter, at 2 (concluding that ‘‘only aggregate, anonymized, and delayed public reporting of short positions’’ mitigates concerns about the potential risks of short position disclosures); Two Sigma Letter, at 1–3 (expressing concerns that disclosure of individual short positions could lead to revelation of commercially sensitive systematic investment strategies and to front-running and other actions that undermine those strategies, and that such disclosures would provide incomplete information, and potentially misleading signals, to investors); see also T. Rowe Price Letter, at 2 (raising concerns about the effects the rulemaking proposal would have on liquidity and price discovery); Law and Finance Professors Letter, at 2–3 (stating potential chilling effect on short selling if identities of short sellers are publicly disclosed). 331 E.g., Schulte Roth & Zabel Letter, at 4 (alternative proposal to publish anonymized short sale-related data reported on an individual Manager would risk eviscerating potential confidentiality protections of reporting Managers and jeopardize the confidentiality of a Manager’s positions, strategies or proprietary business information); MFA Letter, at 3 (stating the need for ‘‘robust data security protocols’’ to protect information reported pursuant to Proposed Rule 13f–2). E:\FR\FM\01NOR2.SGM 01NOR2 75132 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 would be attributable to a single Manager or set of Managers.332 Commenters stated that the risk of Manager attribution would be heightened when only one Manager or a small set of Managers report a short position in the relevant security. Under these circumstances, market participants could use the information reported on Form SHO to extrapolate an individual Manager’s overall position, and potentially the Manager’s strategies or portfolio management methods across different clients.333 One commenter expressed concern that Manager attribution/identification could result in retaliation against Managers by market participants.334 By contrast, other commenters favored the alternative approach of publishing reported information at the individual Manager level after removing all identifying information of the reporting Manager that the Commission sought comment on in the Proposing Release.335 While expressing general support for rulemaking that increases transparency of short sale-related data, 332 E.g., MFA Letter, at 3 (stating that publishing aggregated short position data can help mitigate the risk of identification of Manager(s), but is not ‘‘foolproof, . . . the effectiveness will depend on what data is published and with what frequency’’); AIMA Letter, at 4 (stating that ‘‘even if the data is anonymized, market participants could still identify certain reporting Managers.’’); see also SIFMA Letter, at 5 (positing that reporting anonymized short sale data at the Manager level without first aggregating such information is inconsistent with the directive in 929X of DFA and could expose investment strategies of institutional investment managers and their clients to their detriment); T. Rowe Price Letter, at 2 (positing that ‘‘attribution or anonymized manager-level data in public reports would be inappropriate and . . . create unacceptable risks to . . . [market] participants and discourage a useful source of liquidity provision.’’). 333 See, e.g., ICI Letter, at 7–8 (further stating that risk of Manager identification ‘‘may be especially high’’ for [regulated investment] funds that currently disclose their identities as well as their individual short positions on Form N–PORT filings with the Commission). 334 MFA Letter, at 9 (citing potential for retaliation against short sellers if Manager’s confidential information reported on Proposed Form SHO is leaked). 335 See, e.g., Better Markets, at 13; Comment from An Investor (Apr. 4, 2022), available at https:// www.sec.gov/comments/s7-08-22/s70822-20122297278355.htm; Comment from Rick Sweeney (Oct. 10, 2022), available at https://www.sec.gov/comments/ s7-08-22/s70822-309597.htm (Rick Sweeney Comment). But see Samuel Meadows Comment (‘‘It would be strongly against retails best interests to have the reports published at the managers level. This would make finding and understanding the scope of shorting very difficult. I believe it is best to have the report aggregated with other reporting Managers reports. Ease of access to this information is critical in creating fairer markets.’’); Comment Letter from Matthew D. Brusch, Interim President and CEO, National Investor Relations (Apr. 28, 3033), at 4, available at https://www.sec.gov/ comments/s7-08-22/s70822-20127576-288806.pdf (‘‘NIRI Letter’’); K&L Gates Letter, at 5–6. See Proposing Release, at 14967. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 proponents of this alternative approach also criticized Proposed Rule 13f–2 for not going far enough.336 These commenters pointed to a need for complementary reporting of long and short positions, and downplayed industry concerns about potential risks of greater transparency of short sale data, including, the costs and challenges of operationalizing Rule 13f–2 and the threat of ‘‘copycat trading’’ if short positions are disclosed pursuant to Rule 13f–2.337 These commenters supported publishing short sale-related data that is ‘‘current.’’ 338 Two such commenters suggested that the Commission publish, or at least share on a confidential basis with issuers of the securities for which information is reported on Form SHO, the names of the firms shorting securities.339 Other commenters further recommended that the Commission glean more from and build upon the experience of the European Union (‘‘EU’’) with publishing short salerelated data in developing an approach 336 In addition to underscoring the need for transparency in the reporting of short sale-related data, commenters recommended ways to enhance the transparency of U.S. stock market transactions with the creation of a ‘‘transparent and publicly viewable platform’’ through which U.S. stock market securities would be traded, and the use of block chain technology to allow verification of transactions in real time. See, e.g., Joseph Grato Comment; Anonymously Submitted Comment (Mar. 7, 2022), available at https://www.sec.gov/ comments/s7-08-22/s70822-271636.htm; Comment from Jason Payne (Mar. 7, 2022), available at https://www.sec.gov/comments/s7-08-22/s7082220118798-271634.htm; Comment from Lex Stultz (Mar. 13, 2022), available at https://www.sec.gov/ comments/s7-08-22/s70822-20119199-272005.htm; Comment from Devon Turcotte (Mar. 15, 2022), available at https://www.sec.gov/comments/s7-0822/s70822-20119399-272285.htm. 337 See WTI Letter. These and other commenters expressed concern for the danger to ‘‘fair and free’’ U.S. markets posed by ‘‘the lack of transparency, the inability to adequately quantify short interest, and the ability of firms to skirt regulations through derivative positions such as options and securitybased swaps.’’ These commenters also called for symmetry in the level of disclosures and transparency for short positions as is currently the case for long positions, to allow retail and institutional investors to conduct the same type of analysis regarding short positions as is currently possible for long positions using data from Form 13F. 338 See, e.g., NIRI Letter, at 4 (stating that the alternative approach to publishing Form SHO reports would bring short position information to the marketplace faster, closer in real time to when the Form SHO is filed). 339 See id. (recommending confidential disclosures of short position and identifying Manager information reported on Form SHO to an issuer whenever a ‘‘large short position’’ is reported for a security of that issuer, or alternatively, only to those issuers that request such confidential information); Letter from Tim Quast, President and Founder, Modern Networks IR LLC (Apr. 4, 2022), available at https://www.sec.gov/comments/s7-0822/s70822-20122528-278558.pdf (urging Commission to publish the names of reporting Managers) (‘‘Modern IR Letter’’). PO 00000 Frm 00034 Fmt 4701 Sfmt 4700 for gathering and reporting such data.340 A few commenters also pointed out ways that, by monitoring the published information from Form SHO reports, the public and reporting companies could serve as watchdogs for the SEC, a ‘‘first line of defense against abusive practices.’’ 341 3. Final Rule The approach taken for publishing short sale-related data reported on Form SHO must balance competing interests of public transparency against the potential negative impacts on price discovery, and of short position and short activity disclosures on short selling as well as data security concerns. After considering the comments received, the Commission continues to believe that the indirect costs of publishing information reported at the individual Manager level would likely exceed those of publishing information aggregated across all reporting Managers.342 More specifically, the Commission continues to believe that if the Commission were to release the information reported on Form SHO as filed, there would be a greater potential to reveal a reporting Manager’s trading strategies and to signal whether a Manager has a large and potentially vulnerable short position. It would also make it easier for a market participant to deduce the identity of a reporting Manager, even if that Manager’s identity remains anonymous.343 The easier it is for a market participant to deduce the identities of individual short sellers, the greater the risk of retaliation, copycat trading and other market activity that might have an undesired chilling effect on price discovery.344 For these reasons, and in response to commenters that raised concerns about potential negative consequences of more detailed short position disclosures, the Commission believes that the anticipated benefit of enhanced transparency by publishing reported information at the individual Manager level after removing all 340 Better Markets Letter, at 13 (suggesting reliance on ‘‘EU’s experience with publishing much more comprehensive, specific, and current information’’ in developing an approach for gathering and reporting short sale data that enhances the usability of short position information to be published pursuant to Proposed Rule 13f–2 without ‘‘inviting some of the more damaging consequences’’ of doing so). More generally, a few commenters recommended harmonizing Proposed Rule 13f–2 requirements with potentially overlapping EU and UK regulations. See, e.g., WTI Letter, at 2–3; HSBC Letter, at 14–15. 341 E.g., Anonymously Submitted Comments (Oct. 14, 2022, Oct. 24, 2022, Oct. 29, 2022, Oct. 31, 2022, Nov. 1, 2022); Rick Sweeney Comment. 342 See infra Part VIII.E.2.a. 343 Id. 344 Id. E:\FR\FM\01NOR2.SGM 01NOR2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations identifying information of the reporting Manager does not justify the costs were the Commission to take that approach in publishing information reported to it on Form SHO. Some commenters suggested the Commission adopt an approach similar to that of the EU structure whereby individual short sellers’ names are made public.345 The final rule, as modified, addresses the potential risk of retaliation towards individual short sellers, and the potential chilling of the incentive of gathering information and price discovery.346 For more discussion of the EU’s approach and the Commission’s decision to aggregate and publish anonymized data instead, see Part VIII.E.1.c. Further, aggregating across reporting Managers will address certain nonfinancial costs and burdens identified by commenters by helping to safeguard against the concerns raised about potential chilling effects on short selling and data security regarding the information reported by Managers on Form SHO.347 Additionally, the Commission anticipates that many potential negative effects on the market will be mitigated by the delay in publication of the aggregated data. Accordingly, the Commission is adopting as proposed the approach of publishing, on a delayed basis, aggregated short sale-related data reported on Form SHO and treating each filed Form SHO confidentially. ddrumheller on DSK120RN23PROD with RULES2 III. Proposed Amendment to Regulation SHO To Aid Short Sale Data Collection A. Proposed Rule 205 Under Proposed Rule 205, a brokerdealer would be required to mark a purchase order as ‘‘buy to cover’’ if, at the time of order entry, the purchaser (i.e., either the broker-dealer or another person) has a gross short position in such security in the specific account for which the purchase is being made at such broker-dealer. A broker-dealer would be required to mark a purchase order as ‘‘buy to cover,’’ regardless of the size of such purchase order in relation to the size of the purchaser’s gross short position in such security in the account, and regardless of whether the gross short position is offset by a long position held in the purchaser’s account at the broker-dealer at the time of order entry. Unlike the netting requirements under Rule 200 of Regulation SHO, the ‘‘buy to cover’’ order marking determination under 345 See WTI Letter at 2–3; Better Markets Letter at 13 and 16. See also Proposing Release, at 15005. 346 See supra Part II.A.2.b. 347 Id. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 Proposed Rule 205 would be made on a ‘‘gross’’ basis. Under the proposed rule, short positions held by the purchaser in any account(s) other than the purchasing account, as well as offsetting long positions held by the purchaser in the purchasing account or any other account(s), would not be considered by a broker-dealer when making a ‘‘buy to cover’’ order marking determination. The Proposed CAT Amendments, discussed below, would require CAT reporting firms to report ‘‘buy to cover’’ order marking information to CAT. B. Comments Some commenters expressed support to adopt Proposed Rule 205, and generally applauded the potential added transparency that ‘‘buy to cover’’ order marking could help provide.348 Other commenters stated that the proposed rule would assist the Commission in monitoring short selling activity and help to ensure compliance with the requirements of Regulation SHO.349 The Commission also received numerous comments that opposed the adoption of Proposed Rule 205.350 In 348 See, e.g., Comment from Mark Tate (Mar. 1, 2022), available at https://www.sec.gov/comments/ s7-08-22/s70822-20118151-271054.htm (‘‘Mark Tate Comment’’) (believed that increased information about marking trades as ‘‘buy to cover’’ is a ‘‘good thing for the market’’); Comment from An Investor (Apr. 4, 2022), available at https://www.sec.gov/ comments/s7-08-22/s70822-20122297-278355.htm (expressing general support for Proposed Rule 205 and the ‘‘gross’’ short position approach); Comment from Jean Garcia-Gomez (Oct. 9, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822309610.htm (‘‘Jean Garciz-Gomez Comment’’) (expressing general support for ‘‘buy to cover’’ order marking); Comment from Aladdin Erzrumly (Oct. 19, 2022), available at https://www.sec.gov/ comments/s7-08-22/s70822-312058.htm (expressing general support for ‘‘buy to cover’’ order marking); Comment from Brian Herrmann (Jan. 20, 2023), available at https://www.sec.gov/comments/s7-0822/s70822-323670.htm (expressing general support for Proposed Rule 205). 349 See, e.g., Better Markets Letter (stating that ‘‘buy to cover’’ order marking should assist the Commission in monitoring short sale activity and actually ensure compliance with Regulation SHO requirements); ICI Letter (Apr. 26, 2022) (stating that, to the extent that the Commission requires information on close outs of open short positions, ICI supports the proposed approach of amending Rule 205 of Regulation SHO to require a brokerdealer to mark transactions as ‘‘buy to cover,’’ and supports the simplified single account gross short position approach as proposed); BIO Letter (stating that ‘‘buy to cover’’ reporting would assist in understanding ‘‘the full lifecycle of short positioning in the biotechnology industry’’). 350 See, e.g., SIFMA Letter; Virtu Letter; AIMA Letter; Comment Letter from Joanna Mallers, Secretary, FIA Principal Traders Group (Apr. 27, 2022), available at https://www.sec.gov/comments/ s7-08-22/s70822-20127313-288259.pdf (‘‘FIA PTG Letter’’); Comment Letter from Howard Meyerson, Managing Director, Financial Information Forum (Apr. 25, 2022), available at https://www.sec.gov/ comments/s7-08-22/s70822-20126605-287256.pdf (‘‘FIF Letter’’); STA Letter; XR Securities Letter; PO 00000 Frm 00035 Fmt 4701 Sfmt 4700 75133 opposing Proposed Rule 205, these commenters voiced concerns regarding the extensive costs and burdens associated with anticipated systems changes necessary to implement and report ‘‘buy to cover’’ order marking as proposed.351 A number of these commenters stated that a ‘‘buy to cover’’ order mark does not currently exist and would require broker-dealers to effectively redesign and update their order creation systems and communications protocols to accommodate the recording and downstream reporting of a ‘‘buy to cover’’ order mark.352 One commenter stated that all industry participants (which it described as ‘‘all institutions and all broker-dealers’’) will also need to create a new ‘‘buy to cover’’ order type and capture that in their respective books and records protocols and regulatory reporting systems.353 One commenter suggested that costs to implement changes necessary to comply with the requirements of Proposed Rule 205 could range from $5 million to $10 million, or more.354 Some commenters that opposed the adoption of Proposed Rule 205 expressed general concerns that the proposed single account ‘‘gross’’ short position methodology (which, by design, does not require the brokerdealer to consider the purchaser’s other positions held in that account, in other accounts at the broker-dealer, or elsewhere) could routinely result in inaccurate ‘‘buy to cover’’ order marking reporting by broker-dealers.355 Some commenters also questioned whether Comment Letter from Kirsten Wegner, Chief Executive Officer, Modern Markets Initiative (Apr. 4, 2022), available at https://www.sec.gov/ comments/s7-08-22/s70822-20122473-278481.pdf (‘‘MMI Letter’’). 351 See, e.g., FIA PTG Letter, at 2 (requiring the reporting of orders on an order-by-order basis with either a ‘‘buy to cover’’ or bona fide market making attestation appears unnecessary from an added transparency perspective and therefore unnecessarily costly); MMI Letter, at 2; Virtu Letter, at 3 (‘‘If this aspect of the Proposal were adopted, firms would have to reprogram their systems to recognize a ‘buy to cover’ order. We believe that this would be exceedingly burdensome, costly, and challenging for broker-dealers to make the required changes and provide the required information.’’); STA Letter, at 4 (stating that ‘‘buy to cover’’ as proposed would ‘‘impose tremendous costs on industry firms by essentially forcing them to keep two separate position aggregations’’ and suggesting that there be an exemption for firms with ‘‘low’’ amounts of ‘‘buy to cover’’ order types); FIF Letter, at 10; XR Securities Letter, at 2; SIFMA Letter, at 3; FIA PTG Letter, at 2. 352 See, e.g., SIFMA Letter, at 23–24; Virtu Letter, at 3; FIF Letter, at 3; STA Letter, at 6; XR Securities Letter, at 2; FIA PTG Letter, at 2–3. 353 See FIF Letter, at 3. 354 See SIFMA Letter, at 24. 355 See, e.g., Virtu Letter, at 5; AIMA Letter, at 16; SIFMA Letter, at 22–23; FIF Letter, a 6. E:\FR\FM\01NOR2.SGM 01NOR2 75134 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 the proposed ‘‘buy to cover’’ order marking reporting would provide regulatory benefits, including identifying signals of a ‘‘short squeeze,’’ as was suggested by the Commission in the proposing release.356 Commenters highlighted the inherent differences and resulting complexities between Proposed Rule 205’s single account ‘‘gross’’ short position methodology for purchases, and Regulation SHO’s all accounts net position order marking requirements for sales. These commenters generally stated that if Proposed Rule 205 were adopted, broker-dealers would be required to create and maintain, at great expense, two separate order marking systems that utilize very different methodologies—one for determining whether a purchase order should be marked as ‘‘buy’’ or ‘‘buy to cover,’’ and another for determining whether a sell order should be marked as ‘‘long’’ or ‘‘short.’’ 357 Some of these commenters suggested that if the Commission were intent on adopting a ‘‘buy to cover’’ order marking reporting requirement, it should instead consider utilizing the Commission’s ‘‘alternative’’ approach.358 These commenters stated that utilizing this ‘‘alternative’’ approach would help to ensure that Proposed Rule 205 would operate in a manner that is more consistent with current Regulation SHO order marking requirements, which would effectively help reduce complexity and interpretive confusion for broker-dealers. Another commenter suggested that the Commission consider an exception for 356 See e.g., Virtu Letter, at 6 (‘‘The Proposal’s rationale for requiring broker-dealers to mark transactions a ‘buy to cover’—i.e. to facilitate the identification of potential ‘short squeeze’ activity— is equally unpersuasive. As described above, the data that will be reported under this provision will bear little resemblance to a firm’s actual short sale positions and therefore will not yield meaningful information that would allow the Commission to target short squeeze activity.’’); SIFMA Letter, at 23 (believed there is only a remote chance that Proposed Rule 205 reporting might identify signals of a short squeeze that would not otherwise be identifiable to the Commission through other currently available information). 357 See, e.g., STA Letter, at 4; FIF Letter, at 8; FIA PTG Letter, at 2–3; MMI Letter, at 2; SIFMA Letter, at 24; XR Securities Letter, at 2; Virtu Letter, at 5. 358 See, e.g., MMI Letter at 2; FIF Letter, at 2. In the Proposing Release, the Commission explained that it had considered an ‘‘alternative approach’’ that would have required the broker-dealer, when making a ‘‘buy to cover’’ order marking determination, to net all positions (long positions and short positions) held by the purchaser in any account, whether at the broker-dealer itself, or elsewhere. See Proposing Release, at 14968. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 firms with ‘‘low’’ amounts of ‘‘buy to cover’’ order types.359 One commenter stated that additional guidance or clarification would be necessary if the Commission adopted Proposed Rule 205.360 Another commenter stated that Proposed Rule 205 fails to recognize that broker-dealers would need to rely on representations from purchasers/account holders in order to accurately report ‘‘buy to cover’’ order marking information, similar to how broker-dealers currently rely on account holders when marking sale orders ‘‘long’’ or ‘‘short.’’ 361 One commenter stated that this would be especially true where the broker-dealer does not custody the purchaser’s positions (i.e., where the customer’s positions are custodied ‘‘away,’’ such as at a prime broker or bank), and for a number of operational reasons, be equally true even when the brokerdealer custodies the purchaser’s positions.362 The Commission is not adopting Proposed Rule 205 in light of questions raised by commenters regarding potential operational issues with the requirement as proposed that merit further consideration, and the Commission will continue to evaluate the issues raised to determine if any further action is appropriate. IV. Amendments to CAT In July 2012, the Commission adopted 17 CFR 242.613 (‘‘Rule 613 of Regulation NMS’’), which required national securities exchanges and national securities associations (the ‘‘Participants’’) 363 to jointly develop and submit to the Commission a national market system plan to create, implement, and maintain a CAT that captures customer and order event information for orders in NMS securities.364 The goal of Rule 613 was 359 STA Letter, at 5. Securities Letter, at 2. 361 SIFMA Letter, at 23. 362 SIFMA Letter, at 23. 363 The Participants include: BOX Exchange LLC; Cboe BYX Exchange, Inc.; Cboe BZX Exchange, Inc.; Cboe C2 Exchange, Inc.; Cboe EDGA Exchange, Inc.; Cboe EDGX Exchange, Inc.; Cboe Exchange, Inc.; Financial Industry Regulatory Authority, Inc.; Investors’ Exchange LLC; Long-Term Stock Exchange, Inc.; MEMX LLC; Miami International Securities Exchange LLC; MIAX Emerald, LLC; MIAX PEARL, LLC; Nasdaq BX, Inc.; Nasdaq GEMX, LLC; Nasdaq ISE, LLC; Nasdaq MRX, LLC; Nasdaq PHLX LLC; The Nasdaq Stock Market LLC; New York Stock Exchange LLC; NYSE American LLC; NYSE Arca, Inc.; NYSE Chicago, Inc.; and NYSE National, Inc. 364 See Consolidated Audit Trail, Exchange Act Release No. 67457 (July 18, 2012), 77 FR 45722 (Aug. 1, 2012). 360 XR PO 00000 Frm 00036 Fmt 4701 Sfmt 4700 to create a modernized audit trail system that provides regulators with more timely access to a sufficiently comprehensive set of trading data, thus enabling regulators to more efficiently and effectively reconstruct market events, oversee market behavior, and investigate misconduct. On November 15, 2016, the Commission approved the national market system plan required by Rule 613, the National Market System Plan Governing the Consolidated Audit Trail (the ‘‘CAT NMS Plan’’).365 Section 6.4(d) of the CAT NMS Plan provides that each Participant, through its Compliance Rule,366 must require Industry Members 367 to record and electronically report certain information to the CAT Central Repository. Compliance rules have been adopted by each Participant. As such, any brokerdealer that is a member of a national securities exchange or a member of a national securities association must report each order and reportable event, which includes the original receipt or origination, modification, cancellation, routing, execution (in whole or in part) and allocation of an order, and receipt of a routed order to the CAT.368 This requirement is designed to provide regulators, including the Commission, access to comprehensive information regarding the lifecycle of orders, from origination to execution, as well as the post-execution allocation of shares. 365 Exchange Act Release No. 79318 (Nov. 15, 2016), 81 FR 84696 (Nov. 23, 2016) (‘‘CAT NMS Plan Approval Order’’). The CAT NMS Plan is Exhibit A to the CAT NMS Plan Approval Order. See CAT NMS Plan Approval Order, 81 FR 84943 at 84696. The CAT NMS Plan functions as the limited liability company agreement of the jointly owned limited liability company formed under Delaware state law through which the Participants conduct the activities of the CAT (the ‘‘Company’’). Each Participant is a member of the Company and jointly owns the Company on an equal basis. The Participants submitted to the Commission a proposed amendment to the CAT NMS Plan on Aug. 29, 2019, which they designated as effective on filing. Under the amendment, the limited liability company agreement of a new limited liability company named Consolidated Audit Trail, LLC serves as the CAT NMS Plan, replacing in its entirety the CAT NMS Plan. See Exchange Act Release No. 87149 (Sept. 27, 2019), 84 FR 52905 (Oct. 3, 2019). 366 ‘‘Compliance Rule’’ means, with respect to a Participant, the rule(s) promulgated by such Participant as contemplated by section 3.11 of the CAT NMS Plan. See CAT NMS Plan, section 1.1. 367 An ‘‘Industry Member’’ means a member of a national securities exchange or a member of a national securities association. See CAT NMS Plan, section 1.1. 368 ‘‘Central Repository’’ means a repository responsible for the receipt, consolidation, and retention of all information reported to the CAT pursuant to Rule 613 of Regulation NMS and the CAT NMS Plan. See CAT NMS Plan, section 1.1. E:\FR\FM\01NOR2.SGM 01NOR2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations Broker-dealers, through the Compliance Rule adopted pursuant to the CAT NMS Plan, are required to report certain short sale order data, including for sell orders, whether an order is long, short, or short exempt,369 but not other short sale order data, including when a buy order is designed to close out an existing short position, or whether a market participant is relying on the bona fide market making exception to the Regulation SHO locate requirement in Rule 203. To supplement the short sale-related data that would be reported by Managers to the Commission pursuant to Proposed Rule 13f–2 and on Proposed Form SHO, the Commission proposed to amend the CAT NMS Plan to require the Participants to require CAT reporting firms to report certain additional short sale-related data to the CAT, as discussed below. ddrumheller on DSK120RN23PROD with RULES2 A. Proposal To Require ‘‘Buy to Cover’’ Order Marking The Commission proposed that Industry Members be required to report to the CAT ‘‘buy to cover’’ information, which was proposed to be collected pursuant to Regulation SHO through Proposed Rule 205 (discussed above). Specifically, the Commission proposed to amend section 6.4(d)(ii) of the CAT NMS Plan by adding new paragraph 6.4(d)(ii)(D) which would require the Participants to update their Compliance Rules to require Industry Members to report for the original receipt or origination of an order to buy an equity security, whether such buy order is for an equity security that is a ‘‘buy to cover’’ order as defined by Proposed Rule 205(a).370 This provision would have required Industry Members to identify ‘‘buy to cover’’ equity orders received or originated by Industry Members and Customers 371 as ‘‘buy to cover’’ orders in order receipt and order origination reports submitted to the CAT Central Repository. The Commission, as discussed in Part III above, is not adopting Proposed Rule 205 which would have established a new ‘‘buy to cover’’ order marking requirement. Accordingly, the 369 Section 1.1 of CAT NMS Plan defines ‘‘Material Terms of the Order,’’ which includes, for sell orders, ‘‘whether the order is long, short, [or] short exempt[.]’’ 370 See Proposed section 6.4(d)(ii)(D) of the CAT NMS Plan; Proposed Rule 205(a) of Regulation SHO, 17 CFR 242.205(a)). 371 Section 1.1 of the CAT NMS Plan defines the term ‘‘Customer’’ as (a) the account holder(s) of the account at a registered broker-dealer originating the order; and (b) any person from whom the brokerdealer is authorized to accept trading instructions for such account, if different from the account holder(s). See also 17 CFR 242.613(j)(3). VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 Commission is likewise not adopting an amendment to add new paragraph 6.4(d)(ii)(D) to the CAT NMS Plan which would have required the Participants to update their Compliance Rules to require Industry Members to report ‘‘buy to cover’’ order marking information to CAT. B. Proposal To Require Reporting of Reliance on Bona Fide Market Making Exception The Commission also proposed to require CAT reporting firms that are reporting short sales to indicate whether such reporting firm is asserting use of the bona fide market making exception under Regulation SHO for the locate requirement in Rule 203(b)(2)(iii) (i.e., the BFMM locate exception) for the reported short sales. Specifically, the Commission proposed to amend section 6.4(d)(ii) of the CAT NMS Plan to add a new paragraph (E) which would require Participants to update their Compliance Rules to require Industry Members to report to the CAT, for the original receipt or origination of an order to sell an equity security, whether the order is a short sale effected by a market maker in connection with bona fide market making activities in the security for which the BFMM locate exception is claimed.372 The Commission believed that this information would provide valuable data to both the Commission and other regulators regarding the use of this narrow exception. The Commission believed that requiring Industry Members to identify short sales for which they are claiming the bona fide market making exception would provide the Commission and other regulators an additional tool to determine whether such activity qualifies for the exception, or instead could be indicative of, for example, proprietary trading instead of bona fide market making activity. Rule 203(b)(1) of Regulation SHO generally prohibits a broker-dealer from accepting a short sale order in an equity security from another person, or effecting a short sale in an equity security for its own account, unless the broker-dealer (i) has borrowed the security, (ii) has entered into a bona fide arrangement to borrow the security, or (iii) has reasonable grounds to believe that the security can be borrowed so that it can be delivered on the date delivery is due.373 This is generally referred to as the locate requirement. Rule 203(b)(2) of Regulation SHO provides an exception to the locate requirement for short sales 372 See Proposed section 6.4(d)(ii)(E) of the CAT NMS Plan. 373 17 CFR 242.203(b)(1). PO 00000 Frm 00037 Fmt 4701 Sfmt 4700 75135 effected by a market maker in connection with bona fide market making activities.374 To qualify for the BFMM locate exception,375 a market maker must be engaged in bona fide market making activities at the time they effect a short sale. The Commission adopted this narrow exception to Regulation SHO’s locate requirement for market makers that may need to facilitate customer orders in a fast moving market without possible delays associated with complying with such a requirement.376 Comments and Final Rule Some commenters supported requiring CAT reporting firms to report the use of the BFMM locate exception to CAT.377 These commenters were in favor of the potential added transparency that BFMM locate exception reporting could provide.378 374 17 CFR 242.203(b)(2). The Commission has provided guidance on indicia of bona fide market making activities eligible for the locate exception. See Regulation SHO Adopting Release (setting forth examples of activities that would not be considered to be bona fide market making activities); see also Exchange Act Release No. 58775 (Oct. 14, 2008), 73 FR 61698 at 61690 (Oct. 17, 2008) (‘‘2008 Regulation SHO Amendments’’) (adopting amendments to Regulation SHO and providing additional guidance on what constitutes bona fide market making). Only market makers that are engaged in bona fide market making activity in the security at the time they effect a short sale are eligible for the locate exception. See 2008 Regulation SHO Amendments, at 61699. 375 Rule 204 of Regulation SHO also provides an extended close-out period for a fail to deliver resulting from bona fide market making activities. 17 CFR 242.204. 376 See Regulation SHO Adopting Release, at 48015 n.67; see also Emergency Order Pursuant to Section 12(k)(2) of the Securities Exchange Act of 1934 Taking Temporary Action to Respond to Market Developments, Exchange Act Release No. 58166 (July 15, 2008); Amendment to Emergency Order Pursuant to Section 12(k)(2) of the Securities Exchange Act of 1934 Taking Temporary Action to Respond to Market Developments, Exchange Act Release No. 58190 (July 18, 2008) (excepting from the Emergency Order bona fide market makers); see also Proposing Release, at 14970–71 (Mar. 16, 2022) (‘‘To qualify for the bona fide market making exception, however, a firm must be engaged in bona fide market making at the time of the short sale in question. The Commission adopted this narrow exception to Regulation SHO’s locate requirement for market makers that may need to facilitate customer orders in a fast moving market without possible delays associated with complying with such a requirement.’’). 377 Virtually all these comments were submitted by individual investors, with the vast majority being submitted through an identical (or nearly identical) base letter from a grassroots advocacy campaign ‘‘by, and for, retail investors.’’ These commenters stated that they were part of a selfidentified group called ‘‘We the Investors’’ (‘‘WTI’’). WTI supported the adoption of BFMM locate exception reporting. WTI also suggested that the BFMM locate exception be eliminated altogether. See WTI Letter. 378 See e.g., Michael Behrens Comment; Mark Tate Comment; Comment from Taj Reilly (Mar. 14, E:\FR\FM\01NOR2.SGM Continued 01NOR2 75136 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 Other commenters stated that such reporting would help the Commission to monitor short selling activity and ensure compliance with Regulation SHO’s requirements, and stated that it is important that the Commission have the surveillance tools and data such as BFMM locate exception reporting to improve the Commission’s oversight of financial markets and compliance with existing regulations and otherwise ‘‘police’’ the markets.379 Other commenters opposed the adoption of BFMM locate exception reporting to CAT.380 These commenters generally believed that the costs and burdens associated with the proposal, including costs to update systems to accommodate BFMM locate exception reporting to CAT, would materially outweigh the benefit of the information reported to CAT.381 These commenters, however, did not provide cost estimates. The Commission continues to believe, as stated in the Proposing Release, that Industry Members will incur an initial, one-time external expense for software and hardware to facilitate reporting of the new data elements to CAT, and separately estimated such costs for Industry Members that report directly to the CAT, and those that use third-party reporting agents for CAT reporting. The Commission continues to believe that the ongoing burden associated with reporting to the CAT is already accounted for in the existing information collections burdens associated with Rule 613 and the CAT NMS Plan Approval Order submitted under Office of Management and Budget (OMB) number 3235–0671.382 One commenter stated that adopting the proposed BFMM locate exception would be operationally difficult and costly to implement.383 This commenter stated that, under the proposal, the BFMM locate exception information would be required to be reported at the time the short sale order is effected, requiring that order entry systems, and other downstream systems, be updated 2022), available at https://www.sec.gov/comments/ s7-08-22/s70822-20119322-272211.htm; Comment from Sebastian Stankiewicz Comment (Mar. 15, 2022), available at https://www.sec.gov/comments/ s7-08-22/s70822-272501.htm; Comment from An Investor (Apr. 4, 2022), available at https:// www.sec.gov/comments/s7-08-22/s70822-20122297278355.htm; Jean-Garcia Gomez Comment; Comment from Andrew Gatley (Oct. 31, 2022), available at https://www.sec.gov/comments/s7-0822/s70822-317527.htm. See also WTI Letter. 379 See e.g., Better Markets Letter; WTI Letter. 380 See e.g., SIFMA Letter; Virtu Letter; STA Letter; XR Securities Letter; FIA PTG Letter. 381 See e.g., SIFMA Letter, at 24–25; FIA PTG Letter, at 3; Virtu Letter, at 6. 382 See infra Part VII.C. 383 See, e.g., SIFMA Letter, at 24–25; Virtu Letter, at 5. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 to allow the BFMM locate exception information to be reported to CAT.384 To implement the rule, the Commission expects that Industry Members will incur an initial, one-time external expense for software and hardware to facilitate reporting of the new data elements to CAT but believes that the benefits of such data, as discussed further below, will justify such costs. Brokers or dealers generally include fields in order-entry systems, and related downstream systems, to indicate whether the broker or dealer obtained a locate as well as the source of such locate under Rule 203(b). As stated by the commenter, brokers or dealers may wish to update their order entry systems and related downstream systems as a convenient method to track their use of the BFMM locate exception to ensure accurate reporting of the use of the BFMM locate exception to CAT. As a result, brokers or dealers may wish to make one-time updates to such systems to add a field or notation to indicate whether the broker or dealer is claiming the BFMM locate exception for the short sale transaction. However, brokers or dealers may also use other means to ensure compliance with the final rule. This commenter agreed with the Commission that a broker-dealer is required to determine whether the firm is eligible for the BFMM locate exception at the time a short sale is effected but expressed concerns that market makers that quote and trade on multiple trading venues, for example, might encounter certain systematic or operational difficulties in making, and reporting, such determination using existing systems design. Specifically, this commenter stated that ‘‘it may be systematically and/or operationally difficult for the broker to define when it is globally acting in a bona fide market maker capacity given the granular details of a market maker’s many activities, and the existing systems design.’’ 385 However, the final rule does not alter the requirements for the use of the BFMM locate exception. The final rule requires that brokers or dealers report their use of the BFMM locate exception as provided under Regulation SHO. Rule 203(b)(2)(iii) provides an exception to the locate requirement for ‘‘[s]hort sales effected by a market maker in connection with bona-fide market making activities in the security for which this exception is claimed.’’ 386 384 SIFMA Letter, at 24–25. Letter, at 25 n.64. 386 17 CFR 242.203(b)(2)(iii). Further, the locate is required prior to each short sale order unless the broker or dealer has determined that an exception 385 SIFMA PO 00000 Frm 00038 Fmt 4701 Sfmt 4700 Thus, for purposes of qualifying for the BFMM locate exception, ‘‘a market maker must also be a market maker in the security being sold, and must be engaged in bona-fide market making in that security at the time of the short sale.’’ 387 Some commenters stated that the Commission and other regulators can currently request a particular market maker to provide information regarding its use of the BFMM locate exception, and questioned why the Commission would need to require such costly reporting to CAT.388 Another commenter stated that there is no data or evidence in the Proposing Release to suggest that the Commission’s access to such data has been limited in any way under the current request process.389 However, the Commission has stated that Regulation SHO does not require market makers to specifically record whether they are relying on the BFMM locate exception,390 although brokers or dealers should be able to identify what trading activity qualifies for the BFMM locate exception so a firm can demonstrate its eligibility for the asserted exception.391 To the extent a broker or dealer has documented such eligibility, the Commission and its staff have access to such documents.392 The final rule will capture information regarding the use of the BFMM locate applies. See Rule 203(b)(1). A broker or dealer may not accept a short sale order in an equity security from another person, or effect a short sale in an equity security for its own account, unless the broker or dealer has: (i) borrowed the security, or entered into a bona-fide arrangement to borrow the security; or (ii) reasonable grounds to believe that the security can be borrowed so that it can be delivered on the date delivery is due; and (iii) documented compliance with Rule 203(b)(1). 387 See 2008 Regulation SHO Amendments, at 61699; Shortening the Securities Transaction Settlement Cycle, Exchange Act Release No. 96930 (Feb. 15, 2023), 88 FR 13872, 13911–12 at n.411 (May 5, 2023) (‘‘Settlement Cycle Adopting Release’’). 388 See e.g., SIFMA Letter, at 24–25 (‘‘Given that the information that would result from this proposed reporting requirement is already available to the SEC and other regulators on demand, SIFMA believes that the cost and burden of implementing the requirement would materially outweigh the benefit of such information.’’); Virtu Letter, at 6 (‘‘The Proposal offers no data or evidence that its access to data about the use of the exception has been limited in any way under the current process it uses to collect such information from brokerdealers, nor that there are widespread violations or other abuses of the exception that warrant imposing substantial costs and burdens on market makers also to report this information to CAT.’’). 389 Virtu Letter, at 6. 390 Proposing Release, at 14971. 391 See Regulation SHO Adopting Release, 48011 n.27 (‘‘As with any rule, broker-dealers relying on [an] exception should be prepared to monitor for compliance with its conditions, and maintain records documenting such compliance.’’). 392 See, e.g., section 17(b) of the Exchange Act. E:\FR\FM\01NOR2.SGM 01NOR2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations exception to Regulation SHO 393 which will provide the Commission and SROs with comprehensive information about market practices with respect to the use of the BFMM locate exception.394 Because brokers or dealers asserting the BFMM locate exception are already required to demonstrate eligibility for the exception, the costs of reporting should be confined primarily to the onetime implementation costs related to updating CAT and any methods elected by the broker or dealer, such as updating order entry systems and related systems, to ensure compliance. Another commenter stated that regulators should utilize other existing short sale data available through CAT that could identify activity that is ‘‘disproportionate to the usual market making patterns of practices of the broker-dealer’’ in order to determine if the BFMM locate exception is being misused.395 The commenter, however, did not provide detail describing how disproportionate the activity would be before the Commission could determine whether the exception is being misused. Data showing the existence of short sales would not be sufficient to assess whether the exception is being misused. Another commenter suggested that CAT already has ample existing data fields, including a market maker account holder designation field, and questioned the need for a BFMM locate exception data field.396 Further, a broker or dealer’s status as a market maker under an exchange’s rules, or by self-assertion, is not sufficient by itself to establish eligibility to use the BFMM locate exception; the broker or dealer that is a market maker must be effecting short sales ‘‘in connection with bona-fide market making activities in the security for which [the] exception is being claimed.’’ 397 Further, as discussed above, the broker or dealer, whether it calls itself a market maker, or has an account it describes as a market maker account, must still determine eligibility for the BFMM locate exception for each transaction rather than globally.398 Therefore, collecting the data regarding 393 Proposing Release, at 14971. PTG Letter, at 3 (‘‘Requiring the reporting of orders on an order-by-order basis with either a ‘buy to cover’ or bona fide market making attestation appears unnecessary from an added transparency perspective and therefore unnecessarily costly.’’). 395 STA Letter, at 3. 396 XR Securities Letter, at 2. 397 See, e.g., Rule 203(b)(2)(iii), which requires that the broker or dealer (1) be a market maker; (2) that is effecting short sales in connection with bonafide market making activities, and (3) in the security for which the exception is claimed. Section 3(a)(38) defines the term ‘‘market maker.’’ 398 See supra n.374. ddrumheller on DSK120RN23PROD with RULES2 394 FIA VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 the use of the BFMM locate exception will be useful for the Commission, including to assess the use of the exception throughout the industry. Another commenter stated that there was no data or evidence in the Proposing Release to suggest that there are widespread violations or abuses of the BFMM locate exception that warrant the costs imposed by the CAT reporting requirements for the BFMM locate exception.399 As the Commission stated in the Proposing Release, there are a number of settled enforcement actions against brokers or dealers in connection with their use of the exception.400 In addition, one commenter stated that ‘‘it may be systematically and/or operationally difficult for the broker to define when it is globally acting in a bona fide market maker capacity given the granular details of a market maker’s many activities, and the existing systems design.’’ 401 However, this comment concerns compliance with Regulation SHO rather than reporting of the use of the BFMM locate exception in CAT; the new requirements do not affect compliance with Regulation SHO. Another commenter did not believe that the BFMM locate exception information reported to CAT would assist the Commission in identifying violations or misuse of the BFMM locate exception ‘‘because the data can be manipulated by bad actors and is susceptible to human errors of inappropriately marking short sales with the BFMM indicator when they are not eligible.’’ 402 The fact that bad actors may act contrary to the requirement is not an appropriate reason not to adopt a requirement. Similarly, human error is always possible. In addition, the human error the commenter describes, if widespread, could be an indication of noncompliant use of the BFMM locate exception. Another commenter stated that if BFMM locate exception reporting were adopted, ‘‘most market making firms will simply tag that new [BFMM locate exception] field with the affirmative.’’ 403 Again, the fact that a commenter speculated that some brokers or dealers may violate the requirement by providing incorrect data is not a reason to not adopt a requirement. Understanding whether market makers always claim the BFMM locate exception (as this commenter suggests), sometimes claim the exception, or never claim the exception, 399 Virtu Letter, at 6. Proposing Release, at 14971. 401 See SIFMA Letter, at 25 n.64. 402 STA Letter, at 3. 403 XR Securities Letter, at 3. 400 See PO 00000 Frm 00039 Fmt 4701 Sfmt 4700 75137 will provide important information and context regarding how market makers use the exception.404 Some commenters asked that the Commission provide additional clarity regarding what constitutes bona fide market making activities eligible for the BFMM locate exception, and requested that the Commission confirm that certain market making activity (e.g., through wholesale market making and other activities in connection with facilitating customer orders in the OTC market) was bona fide market making activity for purposes of claiming the BFMM locate exception.405 One of these commenters expressed concerns regarding recent Commission statements related to the BFMM locate exception.406 The statements that the 404 One commenter disagreed with existing Regulation SHO order marking requirements, with a specific focus on a statement made by Commission staff that a broker or dealer should generally not continue to mark orders ‘‘long’’ if it has submitted orders beyond the number of shares for which it is long. See Virtu Letter, at 3–5; see also FAQ 2.5, Responses to Frequently Asked Questions Concerning Regulation SHO, Division of Market Reg., available at https://www.sec.gov/divisions/ marketreg/mrfaqregsho1204.htm. This commenter generally stated that this results in virtually all sell orders being marked as short sales and thus, information that is reported to CAT under the proposal would not be representative of the market maker’s ‘‘actual’’ short position and would not be useful short sale-related information. Brokers or dealers must mark sell orders ‘‘long,’’ ‘‘short,’’ or ‘‘short exempt,’’ and must obtain a locate for all sales marked short unless the broker or dealer can determine that the short sale is ‘‘effected by a market maker in connection with bona-fide market making activities in the security for which this exception [BFMM locate exception] is claimed.’’ See 17 CFR 242.203(b)(2)(iii). 405 See SIFMA Letter, at 25 (‘‘Moreover, and especially to the extent that there is a requirement to identify reliance on the exception through CAT, the SEC should re-confirm that, while bona fide market making is based on certain ‘facts and circumstances’ as set forth in prior interpretive guidance, there are different ways in which brokerdealers engage in bona fide market making, including not only through making markets on exchanges, but equally through wholesale market making and other activities in connection with facilitating customer orders in the OTC market.’’); see also STA Letter, at 3 (STA recommends that the Commission clarify its views on the scope of the BFMM exception, citing as an example an ‘‘OTC market makers that provide extensive liquidity for retail trades but do not affect the trades pursuant to published quotations.’’). 406 See SIFMA Letter, at 25 n.67 (‘‘SIFMA further notes the SEC’s recent statements in its recent proposing release on registration of significant market participants that ‘bona fide market-making exceptions under Regulation SHO are only available to registered broker-dealers that publish continuous quotations for a specific security in a manner that puts the broker-dealer at economic risk’, that ‘[b]roker-dealers that do not publish continuous quotations, or publish quotations that do not subject the broker-dealer to such risk (e.g., quotations that are not publicly accessible, are not near or at the market, or are skewed directionally towards one side of the market), would not be eligible for the bona fide market maker exceptions’ and that Continued E:\FR\FM\01NOR2.SGM 01NOR2 75138 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 commenter references in particular releases are restatements of multiple prior Commission statements regarding the BFMM locate exception.407 One commenter expressed concerns that the proposal to require BFMM locate exception reporting to CAT was an effort by the Commission to further limit the availability of the BFMM locate exception in a manner that would be inconsistent with Commission’s original Regulation SHO guidance.408 This commenter expressed particular concerns with the Commission’s statement in the Proposing Release that the proposed BFMM locate exception reporting would be an additional tool to determine whether such activity qualifies for the BFMM locate exception or conversely ‘‘could be indicative of, for example, proprietary trading instead of bona fide market making.’’ The Commission has consistently stated that the BFMM was intended to be a ‘‘narrow’’ exception,409 and the collection of information about its usage will be helpful for the Commission to determine whether it is being used appropriately as such. The reported information will indeed be used as an ‘‘additional tool to determine whether such activity qualifies’’ for the BFMM locate exception as part of the Commission’s regulation of short sales, for example, by determining whether brokers or dealers are using the exception for proprietary trading, which is not appropriate. Other commenters called for the elimination of the BFMM locate exception itself.410 Such requests ‘broker-dealers that publish quotations but fill orders at different prices than those quoted would not be engaged in bona fide market making for purposes of Regulation SHO.’’). SIFMA cited to Further Definition of ‘‘As a Part of a Regular Business’’ in the Definition of Dealer and Government Securities Dealer, Exchange Act Release No. 94524 (Mar. 28, 2022), 87 FR 23054, 23068–69 at n.157 (Apr. 18, 2022). 407 See 2008 Regulation SHO Amendments, at 61698–99; Regulation SHO Adopting Release, at 48015. 408 SIFMA Letter, at 25. 409 See 2008 Regulation SHO Amendments, at 61698–99; Regulation SHO Adopting Release, at 48015. 410 See Better Markets Letter, at 14 (‘‘The SEC has correctly concluded that naked short sales are abusive. The SEC established this loophole, which permits the largest proprietary trading firms to engage in naked short selling, on the theory that it facilitates trading in hard-to-borrow securities. However, the SEC’s settlement regulations with respect to mandatory buy-ins already provide special accommodations to market-makers that cannot close out their short positions within the standard failure-to-deliver close-out timeframe. This accommodation already in place calls into serious question whether the large loophole in the locate requirement serves any legitimate purpose. At the very least, the SEC must closely monitor the information it receives regarding reliance on this exception to determine whether elimination of this exception is warranted.’’); see also WTI Letter. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 are outside the scope of this rulemaking. However, the BFMM locate exception is useful for brokers and dealers that are, for example, trying to meet demand in fast-moving markets where they might otherwise be forced to back away from published, marketable quotes being hit by prospective purchasers solely because of the locate requirement. One commenter stated that the costs imposed on market makers to implement and maintain the proposed regulatory requirements might result in wider spreads, reduced liquidity, and might represent a barrier to entry for new market participants.411 To the extent the commenter is concerned that the costs of implementing reporting may be passed on in the form of wider spreads or reduced liquidity, on balance the benefits of transparency justify such costs. Importantly, it is unclear how reporting the data would create negative results on spreads or market liquidity because the reported exception data will only be provided to regulators and not made public. If the commenter is concerned that once the data is reported, the Commission may become more aware of potential misuse of the BFMM locate exception as described by commenters, the consequences identified by the commenter would not flow from the requirement to report the use of the exception, but may instead result from the misuse of it. Collecting the data will help the Commission with its oversight of the use of the exception, including with regard to potentially abusive ‘‘naked’’ short selling.412 The BFMM locate exception, if properly utilized, benefits investors and the market by preserving market liquidity,413 but it should not be used for speculative 414 or potentially abusive ‘‘naked’’ short selling.415 Instead, the 411 See STA Letter, at 4. generally Amendments to Regulation SHO, Exchange Act Release No. 60388 (July 27, 2009), 74 FR 38266, 38267–68 (July 31, 2009) (‘‘2009 Regulation SHO Amendments’’). 413 See Regulation SHO Adopting Release, at 48025 (‘‘[e]xcepting bona-fide market making activity from the locate requirement will benefit investors and the market by preserving necessary market liquidity.’’). 414 See, e.g., 2008 Regulation SHO Amendments, at 61699 (‘‘For example, the Commission has stated that bona-fide market making does not include activity that is related to speculative selling strategies or investment purposes of the brokerdealer and is disproportionate to the usual market making patterns or practices of the broker-dealer in that security.’’); see also Regulation SHO Adopting Release, at 48015. 415 See, e.g., 2008 Regulation SHO Amendments, at 61691 (‘‘We have previously noted that abusive ‘naked’ short selling, while not defined in the federal securities laws generally refers to selling short without having stock available for delivery and intentionally failing to deliver stock within the standard . . . settlement cycle.’’). See also 412 See PO 00000 Frm 00040 Fmt 4701 Sfmt 4700 BFMM locate exception data reported to the CAT will provide the Commission with a better understanding of the use of this limited exception, which should help to ensure that the exception is not subject to misuse by brokers or dealers in violation of the Commission’s short selling rules. In response to commenters that generally requested additional guidance 416 regarding the scope of bona fide market making activity eligible for the BFMM locate exception, the primary requirement is that a broker or dealer that is a market maker provide widely accessible, continuous quotations at or near the market for which it is at risk.417 For example, the Commission has stated that for purposes of Regulation SHO, a market maker engaged in bona fide market making is a ‘‘broker-dealer that deals on a regular basis with other broker-dealers, actively buying and selling the subject security as well as regularly and continuously placing quotations in a quotation medium on both the bid and ask side of the market.’’ 418 Moreover, the Commission has stated that ‘‘[b]roker-dealers that do not publish continuous quotations, or publish quotations that do not subject the broker-dealer to such risk (e.g., quotations that are not publicly accessible, are not near or at the market, or are skewed directionally towards one side of the market), would not be eligible for the bona-fide market-maker Regulation SHO Adopting Release, at 48009, n.10; Exchange Act Release No. 56212 (Aug. 7, 2007), 72 FR 45544, n.3 (Aug. 14, 2007) (‘‘2007 Regulation SHO Final Amendments’’); Exchange Act Release No. 57511 (Mar. 17, 2008), 73 FR 15376 (Mar. 21, 2008) (‘‘Naked Short Selling Anti-Fraud Rule Proposing Release’’). 416 See, e.g., SIFMA Letter, at 25; STA Letter, at 3. 417 See, e.g., Settlement Cycle Adopting Release, at n.411 (‘‘Under Regulation SHO’s bona fide market making exceptions, the broker-dealer generally should be holding itself out as standing ready and willing to buy and sell the security by continuously posting widely accessible quotes that are near or at the market. The market maker must be at economic risk for such quotes.’’); see also 2008 Regulation SHO Amendments, at 61699. Thus, a market-maker that continually executed short sales away from its posted quotes would generally be unable to rely on the bona-fide market making exceptions of Regulation SHO. See Regulation SHO Adopting Release, at 48015 n.68. The market-maker must also be engaged in bona fide market making in that security at the time of the short sale for eligibility for the exceptions. See 2008 Regulation SHO Amendments, at 61699. 418 See, e.g., 2008 Regulation SHO Amendments, at 61699; see also Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Approving Proposed Rule Change Relating to Close-Out Requirements for Short Sales and an Interpretation on Prompt Receipt and Delivery of Securities, Exchange Act Release No. 32632 (July 14, 1993), 58 FR 39072, 39074 (July 21, 1993); see also Settlement Cycle Adopting Release, at 13911– 12 n.411. E:\FR\FM\01NOR2.SGM 01NOR2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations exceptions under Regulation SHO.’’ 419 Notably, ‘‘broker-dealers that publish quotations but fill orders at different prices than those quoted would not be engaged in bona-fide market making for purposes of Regulation SHO.’’ 420 After considering the comments received regarding the proposal to require CAT reporting firms that are reporting short sales to indicate whether such CAT reporting firm is asserting use of the BFMM locate exception, the Commission is adopting this proposed amendment to CAT with a few technical modifications to improve the readability of the amendment.421 The Commission recognizes that there will be costs to broker-dealers to implement changes to their respective systems and processes to accommodate the reporting of the BFMM locate exception information to CAT. For the reasons described above, as well as reasons stated in the Proposing Release, the Commission believes that the benefits to the Commission in its administration of short sale regulations will justify the burdens and costs to CAT reporting firms. This reporting requirement will not adversely affect short selling activity or liquidity in the market as it requires that brokers or dealers that are market makers provide information that is, or should be, readily available to the market maker at the time they effect a short sale, to the Commission without having to request access. The requirement does not change how such brokers or dealers that are market makers use the exception itself, and the data will not be published. V. Other Comments Other commenters also discussed issues that were beyond the scope of the rulemaking, such as suggestions for the Commission to ban short selling, enhance Regulation SHO’s locate or close-out requirements, address potentially abusive ‘‘naked’’ short selling, and reduce the reporting ddrumheller on DSK120RN23PROD with RULES2 419 See Settlement Cycle Adopting Release, at 13911–12 n.411. 420 Id. See also Regulation SHO Adopting Release, at 48015 n.68 (‘‘Moreover, a market maker that continually executed short sales away from its posted quotes would generally be unable to rely on the bona-fide market making exception’’ of Regulation SHO). 421 The amendment includes the following nonsubstantive, technical changes to the rule text: adding the word ‘‘for’’ preceding ‘‘a short sale’’ to clarify that reporting is required for a short sale in which the bona fide market maker exception is claimed, adding ‘‘the’’ preceding ‘‘exception’’ and adding ‘‘in’’ preceding Rule 203(b)(2)(iii) to clarify that the bona fide market making exception is found in Rule 203(b)(2)(iii). VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 timeframes or requirements for Form 13F reporting, among others.422 VI. Compliance Date The Commission received one comment regarding a compliance date for Rule 13f–2 reporting requirements; that commenter recommended that Managers be given at least 18 months to comply with the new requirements.423 Specifically, the commenter stated that ‘‘[g]iven the complexity and significance of the operational build required by the proposed rule, we think a minimum of 18 months would be an appropriate implementation timeframe to give advisers adequate time to come into compliance with any new requirements.’’ 424 Due to the modifications from the proposal which will reduce the complexity of the operational build, Managers should require less time than suggested by the commenter. Although the data that will result from the Rule 13f–2 reporting requirements will be useful to market participants and regulators as soon as it is available, it is prudent to implement the rule at a measured pace to help ensure that Managers have adequate time to update systems to meet the reporting requirements of Rule 13f–2. Accordingly, a compliance date of 12 months after the effective date of this release for Rule 13f–2 strikes the appropriate balance between the Commission’s goal of increasing transparency of short sale-related information and providing Managers with adequate time to implement systems and processes to comply with the Rule 13f–2 reporting requirements.425 The Commission will begin publishing the aggregated short sale related data collected, pursuant to Rule 422 One commenter understood the rule as a ‘‘selfreporting’’ rule rather than as a mandatory reporting rule. Comment from Sarah (Feb. 25, 2022), available at https://www.sec.gov/comments/s7-08-22/s7082220117824-270590.htm. 423 MFA Letter 2, at 3 (stating that the Commission should ‘‘provide an appropriate amount of time for firms to comply with any new requirements [under Rule 13f–2] (18 months at a minimum)’’ due to the operational build required for compliance with Proposed Rule 13f–2 and Proposed Form SHO). 424 Id. 425 In addition, with respect to the compliance date, several commenters requested the Commission to consider interactions between the proposed rule and other recent Commission rules. In determining compliance dates, the Commission considers the benefits of the rules as well as the costs of delayed compliance dates and potential overlapping compliance dates. For the reasons discussed throughout the release, to the extent that there are costs from overlapping compliance dates, the benefits of the rule justify such costs. See infra Parts VIII.B, VIII.C.6.f, and VIII.D.2 for a discussion of the interactions of the final rule with certain other Commission rules. PO 00000 Frm 00041 Fmt 4701 Sfmt 4700 75139 13f–2, three months after the above stated compliance date of 12 months after the effective date of this release. The three-month window for the Commission to publish aggregated Form SHO data is intended to ensure that Commission systems are operating as designed in order to publish the aggregated data. Consistent with a suggestion by the commenter, the compliance date for the CAT amendments will be 18 months after the effective date of this release, as there were not modifications to that requirement from proposal. This will allow CAT reporting firms adequate time to update systems to facilitate reporting to CAT.426 An 18-month compliance period for the amendment to CAT strikes the appropriate balance between improving the Commission’s administration of short sale regulations and providing CAT reporting firms adequate time to implement changes to their respective systems and processes to accommodate the reporting of BFMM locate exception information to CAT, and is reasonable given that the information to be reported is, or should be, readily available to the market maker at the time they effect a short sale.427 VII. Paperwork Reduction Act Analysis A. Background Certain provisions of Rule 13f–2, Form SHO, and the Amendment to CAT impose ‘‘collection of information’’ requirements within the meaning of the Paperwork Reduction Act of 1995 (‘‘PRA’’).428 The title for the collection of information is: ‘‘Amendments to Enhance Short Sale Data’’ (OMB Control No. 3235–0804). An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a current valid control number. The requirements of this collection of information are mandatory for Managers under Rule 13f–2 and Form SHO, and Plan Participants and CAT reporting firms under the Amendment to CAT. 426 For discussion of the compliance date for the adopted amendment to the CAT NMS Plan to require the reporting to the CAT of reliance on the bona fide market making exception in Regulation SHO, see Notice of the Text of the Amendment to the National Market System Plan Governing the Consolidated Audit Trail for Purposes of Short Sale-Related Data Collection, Exchange Act Release No. 34–98739 (Oct. 13, 2023), published elsewhere in this issue of the Federal Register, which will have an effective date of 60 days after date of publication in the Federal Register and a compliance date of 18 months after the effective date. 427 See supra Part IV.B. See also infra Part VII.C for discussion of costs and burden estimates related to compliance with the amendment to CAT. 428 44 U.S.C. 3501 et seq. E:\FR\FM\01NOR2.SGM 01NOR2 ddrumheller on DSK120RN23PROD with RULES2 75140 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations In accordance with the PRA, the Commission is submitting the final amendments to the rules to the Office of Management and Budget (OMB) for review. The Commission published a request for comments on these collection of information requirements in the Proposing Release,429 and submitted the proposed requirements to the Office of Management and Budget (OMB) for review in accordance with the PRA.430 The Commission received some comments regarding the Commission’s estimates of paperwork burdens and costs associated with anticipated compliance of Rule 13f–2, Form SHO, and the Amendment to CAT, which are addressed in this section. As discussed above, Rule 13f–2 and related Form SHO are designed to provide greater transparency of short sale-related data to regulators, investors, and other market participants by requiring certain Managers to file monthly on Form SHO, through EDGAR in Form SHO-specific XML, certain short position and activity data. Under Rule 13f–2 and Form SHO, only those Managers that meet a specified Reporting Threshold for an equity security will be required to file Form SHO. Such information will provide additional context to the Commission and other regulators regarding the lifecycle of short sales, assist in reconstructing market events, and improve Commission oversight of short selling. The Amendment to CAT is intended to supplement the short sale-related data that will be reported by certain broker-dealers to the Commission pursuant to Rule 13f–2 and Form SHO. The Commission’s amendment to CAT requires, for original receipt or origination of an order for equities, the Participants’ Compliance Rules require their broker-dealer members record and report whether the order is a short sale for which the BFMM locate exception in Rule 203 under Regulation SHO for the reported short sale is being claimed. This information will provide valuable data to both the Commission and other regulators regarding the use of the BFMM locate exception. Given the differences in the information collections applicable to these parties, the burdens applicable to Managers and broker-dealers are separated in the analysis below. 429 See 430 44 Proposing Release, at 14980–81. U.S.C. 3507(d); 5 CFR 1320.11. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 B. Burdens for Managers Under Rule 13f–2 and Form SHO 1. Applicable Respondents As discussed above, Rule 13f–2 and Form SHO require Managers that trigger a Reporting Threshold to file monthly via EDGAR, on Form SHO, certain short position and activity data. Under section 13(f)(6)(A) of the Exchange Act and for purposes of Rule 13f–2, Managers include any person, other than a natural person, investing in or buying and selling securities for its own account, and any person (including a natural person) exercising investment discretion with respect to the account of any other person.431 Thus, the requirements of Rule 13f–2 could apply, for example, to investment advisers that exercise investment discretion over client assets, including investment company assets; broker-dealers; insurance companies; banks and bank trust departments; and pension fund managers or corporations that manage corporate investments or employee retirement assets. In the Proposing Release, the Commission stated that it believed that the burden associated with Proposed Rule 13f–2 and the related Proposed Form SHO reporting in EDGAR would be similar to a Manager’s reporting requirements under former Form SH. In October 2008, the Commission adopted interim final temporary Rule 10a–3T, which required institutional investment managers that exercise investment discretion with respect to accounts holding section 13(f) securities having an aggregate fair market value of at least $100 million to file Form SH with the Commission following a calendar week in which it effected a short sale in a section 13(f) security, with some exceptions. Form SH included information on short sales and positions of section 13(f) securities, other than options.432 The Commission estimated in the Proposing Release, that based on Form SH data, each month, approximately 1,000 Managers would trigger a Reporting Threshold for at least one security, and therefore be required to file a Proposed Form SHO.433 The 431 See also Instructions to Form 13F. of Short Sales and Short Positions by Institutional Investment Managers, 73 FR 61678. The rule extended the reporting requirements established by the Commission’s Emergency Orders dated September 18, 2008, September 21, 2008, and October 2, 2008, with some modifications. See supra n.103. 433 This estimate is similar to the estimate provided in the Disclosure of Short Sales and Short Positions by Institutional Investment Managers, Exchange Act Release No. 58785 (Oct. 15, 2008), 73 FR 61678 (Oct. 17, 2008). However, the number of estimated Form SHO filers represents a monthly, as 432 Disclosure PO 00000 Frm 00042 Fmt 4701 Sfmt 4700 Commission did not receive any comments regarding the estimated number of Managers that would be required to file a Form SHO, or an alternative estimated number of Managers that commenters believed would be more appropriate. As discussed above, the Commission is adopting aspects of the Proposal with certain modifications to Form SHO reporting requirements. For example, the modified reporting threshold for the U.S. dollar value-based prong of Threshold A for reporting company issuer securities is being adopted as a monthly average rather than a daily endof-day calculation, which could result in fewer Managers being subject to Form SHO reporting requirements under Threshold A than under the Proposed Reporting Thresholds. However, the Commission continues to believe that 1,000 Managers is an accurate estimate when considering (1) Managers with discretion over less than $100 million, which were not required to file Form SH; (2) the fact that Form SH was only required to be filed for 13(f) securities that are included on the 13F List as opposed to all equity securities of both reporting and non-reporting company issuers; and (3) the fact that Form SH did not include a second, lower threshold (Threshold B) for short positions in securities of non-reporting company issuers. As such, the Commission continues to estimate that, each month, approximately 1,000 Managers will trigger a Reporting Threshold for at least one security, and therefore be required to file a Form SHO. 2. Burdens and Costs The Commission explained in the Proposing Release that it believed that the burden associated with Proposed Rule 13f–2 and the related Proposed Form SHO reporting in EDGAR would be similar to a Manager’s reporting requirements for former Form SH.434 The Commission continues to believe opposed to weekly, filing, and therefore the Commission estimates fewer overall filings per month. Additionally, the estimate accounts for the estimate by the Commission staff that 252 Form SH filers would have been required to file had a threshold of 2.5% of shares outstanding or $10 million monthly average gross short position in an equity security been imposed during the analyzed time period. The estimate of 1,000 is higher than the 252 estimated Form SH filers to account for: (1) Managers with discretion over less than $100 million, which were not required to file Form SH; (2) the fact that Form SH was only required to be filed for 13(f) securities as opposed to all equity securities of both reporting and non-reporting company issuers; and (3) the fact that Form SH did not include a second, lower threshold (Threshold B) for short positions in securities of non-reporting company issuers. 434 See Proposing Release, at 14972–73. E:\FR\FM\01NOR2.SGM 01NOR2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 that the burden associated with Rule 13f–2 and related Form SHO reporting in EDGAR is similar to a Manager’s reporting requirements for former Form SH. With respect to each applicable section 13(f) security, the Form SH filing identified the issuer and CUSIP number of the relevant security and required the Manager’s start of day short position, the number and value of securities sold short during the day, the end of day short position, the largest intraday short position, and the time of the largest intraday short position.435 In adopting interim temporary Rule 10a– 3T, which required certain Managers to file weekly non-public reports via Form SH, the Commission estimated that Managers would spend approximately 20 hours to prepare and file each Form SH.436 The Commission estimated in the Proposing Release for Form SHO that the burden associated with preparing and filing Form SHO in EDGAR would be approximately 20 hours per filing, consistent with that of former Form SH.437 Some commenters were concerned about the Commission’s reliance on prior Form SH data in estimating Form SHO reporting burdens, as well as the estimated time burden of 20 hours for preparing and filing each required Form SHO.438 One commenter stated that the estimated 20 hours to file Form SHO was ‘‘not realistic’’ and felt that reliance on Form SH for Form SHO burden estimates was not adequately justified in the Proposing Release.439 Specifically, some commenters stated that the Proposing Release underestimated the costs of preparing proposed Information Table 2 in relying on the Form SH and Rule 10a–3T estimates, emphasizing the complexity of Form SHO as compared to Form SH.440 One commenter stated that the Proposing Release’s estimate of 20 hours needed to process and file Form SHO per month may be too low, and even if accurate, will impose a 435 Form SH was adopted in the wake of the 2008 financial crisis and remained in effect until July 2009. 436 See Disclosure of Short Sales and Short Positions by Institutional Investment Managers, 73 FR 61686 (stating that, ‘‘[t]he 20 hour per filing estimate is based on data received from a small sample of actual filers and a random sample of filings conducted by our Office of Economic Analysis.’’). 437 See Proposing Release, at 14973–74. 438 See, e.g., MFA Letter, at 15; Two Sigma Letter, at 5–7. 439 Two Sigma Letter, at 5–7 (citing letters received by the Commission that it had underestimated the burden of Form SH and describing the complexity of Form SHO as compared to Form SH). 440 See, e.g., MFA Letter, at 15; Two Sigma Letter, at 5–7. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 ‘‘substantial ongoing burden.’’ 441 However, these commenters did not provide the Commission with alternative burden estimates for reporting Form SHO, or alternative sources of data for which to base Form SHO burden estimates. In contrast, one commenter believed that Managers were not being genuine about their concerns regarding costs and burdens of complying with Form SHO reporting requirements, stating that they were able to comply with Form SH requirements.442 The commenter also stated that the requirements of Form SHO should be less burdensome than the requirements of Form SH due to the decreased frequency of reporting. Regarding comments of Form SHO’s complexity as compared to Form SH, the adopted Form SHO, as described above, does not include the proposed requirement to report hedging status, which several commenters thought would be particularly burdensome or operationally difficult to implement.443 As adopted, Form SHO also includes a streamlined Information Table 2, which reduces the granularity of the information reported, decreasing the costs and burdens that more detailed reporting of daily activity data as proposed would have imposed, further reducing complexity from the proposed rule and form. As the Commission acknowledged in the Proposing Release, and continues to acknowledge, the information required under former Form SH differs from that required under Form SHO. However, the Commission continues to believe that Form SH is an appropriate basis for Form SHO burden estimates. Form SH involved the same type of entities (Managers) and the same activity (short positions) as Form SHO. While recognizing that the information required under former Form SH differs from that required under Form SHO, the Commission continues to believe that both forms require the reporting of short sale-related data of similar depth and complexity.444 Notably, Rule 13f–2 441 Anonymous Fund Manager Letter, at 8. WTI Letter, at 2 (‘‘The protests of the industry in terms of the effort required to comply with the Proposal ring hollow given the Commission’s experience with interim temporary Rule 10a–3T—firms had no problem complying and the data provided was useful to the Commission. Indeed, the Proposal is easier to comply with, given the monthly rather than weekly reporting of interim temporary Rule 10a–3T.’’). 443 See, e.g., T. Rowe Price Letter, at 3–4; Virtu Letter, at 3; MFA Letter, at 4. 444 Under Form SH, Managers who met the applicable threshold and effected a short sale in a section 13(f) security in the preceding week were required to file a report identifying the open short position, closing short position, largest intraday short position, and the time of the largest intraday 442 See PO 00000 Frm 00043 Fmt 4701 Sfmt 4700 75141 requires monthly reporting if certain conditions are met, as opposed to the weekly reporting required by Form SH for Managers that effected short sales within the preceding week,445 which is anticipated to decrease the overall volume of reports required to be filed by Managers under Form SHO in comparison to Form SH. As such, and since the Commission did not receive comments citing alternative sources of data that commenters believed would result in more accurate Form SHO burden estimates, the Commission continues to believe that Form SH is an appropriate basis for which to estimate Form SHO burdens. The Commission continues to estimate that the burden associated with preparing and filing Form SHO in EDGAR will be approximately 20 hours per filing, consistent with the corresponding burdens for former Form SH, and consistent with estimates in the Proposing Release.446 Accordingly, the Commission estimates that the burden associated with preparing and filing Form SHO across all managers collectively is approximately 240,000 hours per year.447 The Commission received one comment regarding the approximate overall cost of $217.55 per Form SHO filing from the Proposing Release. This commenter stated that this cost was ‘‘not realistic,’’ but, again, did not provide a more accurate cost estimate, or alternative data source for which to base a cost estimate.448 The Commission believes that the hourly cost of internal expertise required for each filing will be $251.36, which includes a blended calculation of the estimated hourly rate for a compliance attorney, senior programmer, and in-house compliance clerk, an increase from the Proposing short position, for that security during each calendar day of the prior week. See Emergency Order Pursuant to Section 12(k)(2) of the Securities Exchange Act of 1934 Taking Temporary Action To Respond to Market Developments, Exchange Act Release No. 58591 (Sept. 18, 2008), 73 FR 55175, 55176 (Sept. 24, 2008). 445 See id. 446 Proposing Release, at 14973. 447 20 hours per filing × 1,000 filings by Managers each month × 12 months = 240,000 hours. In the Proposing Release PRA, the Commission estimated that 346 Form SH filers would have been required to file Form SHO had a threshold of 2.5% of shares outstanding or $10 million position dollar value been imposed during the analyzed time period. Due to the change in the Threshold A calculation of the dollar value prong of the Reporting Threshold for equity securities of reporting company issuers to be based on a monthly average gross short position rather than the proposed daily calculation, the estimated number of Form SH filers that would have been required to file a Form SHO decreased from 346 to 252. However, the Commission continues to estimate that 1,000 Managers will be subject to Form SHO reporting per month. 448 See Two Sigma Letter, at 5–7. E:\FR\FM\01NOR2.SGM 01NOR2 75142 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations Release’s estimated $217.55 to account for inflation.449 Taken together, the estimated burden hours and hourly rate for the filing of Form SHO result in an estimated annual cost to the industry of $60,326,400.450 The Commission, however, recognizes that advances in technology over time could result in Managers spending less time preparing and filing Form SHO than is estimated above.451 Consistent with its estimates in the Proposing Release, the Commission also anticipates that most Managers will file Form SHO directly in the structured XML-based data language for Form SHO,452 rather than using the fillable web form provided by EDGAR, resulting in some limited additional costs for each filing. While the Commission received comments about the use of Form SHO-specific XML generally,453 it did not receive comments regarding the PRA burden estimates of using Form SHO-specific XML. The Commission estimates that Managers that file Form SHO using a structured XML-based data language could incur an additional burden of 2 hours of work by a programmer,454 at an estimated cost of $772.455 The Commission further estimates that Managers will collectively spend up to approximately 24,000 hours and $9,264,000 per year to file Form SHO directly in a structured XML-based data language.456 The Commission also estimates that a similar, additional burden of 2 hours of work by a programmer per filing will apply to Managers filing an amended Form SHO directly in a structured XMLbased data language. Also consistent with the estimates in the Proposing Release, the Commission estimates that approximately 3.5 percent of the Managers that file Form SHO each month will also file an amended Form SHO, resulting in an additional burden and cost for an estimated 35 Managers each month.457 The additional burden could take up to the original 20 hours to process and file, as it will require the filing of an entirely new Form SHO.458 The associated wage rate for filing the amended Form SHO is consistent with the cost of expertise required to file the original Form SHO, estimated to be $251.36 per hour.459 The Commission also estimates that each amended Form SHO will be filed directly using a structured XML-based data language, resulting in a corresponding additional burden of 2 hours of work by a programmer per amended Form SHO filing. The Commission did not receive any comments regarding the estimated percentage of Managers that will file an amended Form SHO each month, or the costs and burden estimates of filing an amended Form SHO. PRA TABLE 1—ESTIMATED MANAGER BURDEN AND COSTS ASSOCIATED WITH FORM SHO REPORTING ddrumheller on DSK120RN23PROD with RULES2 Managers (monthly) Form SHO reports processed and filed (annual) Hours needed to process and file Form SHO (average) Total industry burden hours to process and file Form SHO (annual) Wage rate (average) Total industry cost burden (annual) Form SHO Filings ............................................................................. Use of Structured XML-Based Data Language in Form SHO Filings ................................................................................................ Amended Form SHO Filings ............................................................. Use of Structured XML-Based Data Language in Amended Form SHO Filings ................................................................................... 1,000 12,000 20 240,000 $251.36 $60,326,400 1,000 35 12,000 420 2 20 24,000 8,400 386 251.36 9,264,000 2,111,424 35 420 2 840 386 324,240 Total ........................................................................................... .................... .................... ........................ 273,240 .................... 72,026,064 449 The $251.36 wage rate reflects current estimates of the blended hourly rate for an in-house compliance attorney ($425), a senior programmer ($386) and in-house compliance clerk ($82). $251.36 is based on the following calculation: (($425) + ((($386 + $82) ÷ 2) × 10)) ÷ 11) = $251.36. The estimated proportion of compliance attorney (1/11th) to senior programmer and in-house compliance clerk (10/11th) time burden is based on commenter input and computation of the estimated burden for the filing of Form 13F–HR. See Electronic Submission of Applications for Orders, Exchange Act Release No. 93518 (Nov. 4, 2021), 86 FR 64839 (Nov. 19, 2021) at 64860–61 (‘‘Electronic Submission of Applications for Orders’’). The $425 per hour and $386 per hour figures for a compliance attorney and a senior programmer, respectively, are based on salary information for the securities industry compiled by the Securities Industry and Financial Markets Association’s Office Salaries in the Securities Industry 2013 (‘‘SIFMA Report’’), modified by Commission staff to account for an 1,800-hour work year and inflation, and multiplied by 5.35 to account for bonuses, firm size, employee benefits, and overhead. The $82 per hour figure for a compliance clerk is based on salary information from the SIFMA Report, modified by Commission staff to account for an 1,800-hour work-year and inflation, and multiplied by 2.93 to account for bonuses, firm size, employee benefits, and overhead. See also Form PF; Event Reporting for Large Hedge Fund Advisers and Private Equity VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 Fund Advisers; Requirements for Large Private Equity Fund Adviser Reporting, Release No. IA– 6297, 88 FR 38146, 38195–98 (June 12, 2023). 450 20 hours per filing × 1,000 filings by Managers each month × 12 months × $251.36 per hour = $60,326,400. 451 See Electronic Submission of Applications for Orders, 86 FR 64859 (stating that ‘‘[c]ommenters stated that the advances in technology have made the process of completing and filing Form 13F highly automated, reducing the time and external costs to managers in complying with this requirement.’’). 452 Most Managers will be familiar with other EDGAR Form-specific XML data languages, the use of which is required for the filing (by Managers that exercise investment discretion with respect to accounts holding 13(f) securities having an aggregate fair market value on the last trading day of any month of any calendar year of at least $100 million) of Form 13F. See Frequently Asked Questions About 13F, available at https:// www.sec.gov/divisions/investment/13ffaq.htm. The Commission estimates that all of the 1,000 Managers estimated to file Form SHO each month will do so directly using the structured XML-based data language rather than the fillable web form provided by EDGAR. 453 See XBRL Letter; Comment from An Investor (Apr. 4, 2022), available at https://www.sec.gov/ comments/s7-08-22/s70822-20122297-278355.htm. PO 00000 Frm 00044 Fmt 4701 Sfmt 4700 Comments regarding the use of XML are addressed in Part II.A.4. 454 The 2-hour estimated burden is consistent with similar estimates for the use of structured XML data formats for the filing of Form N–CR and Form 24F–2. See Money Market Fund Reforms; Form PF Reporting Requirements for Large Liquidity Fund Advisers; Technical Amendments to Form N–CSR and Form N–1A, Exchange Act Release No. 34– 97876 (July 12, 2023), 88 FR 51404, 51514 (Aug. 3, 2023); see also Securities Offering Reform for Closed-End Investment Companies, Exchange Act Release No. 88606 (Apr. 8, 2020), 85 FR 33290, 33329 n.439 (June 1, 2020) (stating that ‘‘[w]e assume that the burden of tagging Form 24F–2 in a structured XML format would be 2 hours for each filing.’’). 455 The $386 per hour figure for a senior programmer is based on salary information from the SIFMA Report. 2 hours × $386 = $772. 456 2 hours per filing × $386 per hour × 1,000 filings each month × 12 months = $9,264,000. 457 The estimate of 3.5% of Regulation SHO filers that are anticipated to file an amended Form SHO is based on the frequency of recent filings of amended Form 13F. For the reporting period of Dec. 31, 2022, there were 6,924 holdings reports for Form 13F–HR submitted, 244 of which were amended. (244 ÷ 6,924 = 3.5%). 458 See Form SHO, Special Instructions, at 4. 459 See Proposing Release, at 14974. E:\FR\FM\01NOR2.SGM 01NOR2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations Consistent with estimates in the Proposing Release, in addition to the costs associated with the reporting burden, Managers could incur an initial technology-related burden of 325 hours, at an hourly estimated wage rate of $366,460 for an estimated total cost of $118,950 per Manager,461 to update their current systems to capture the required information and automate and facilitate the completion and filing of Form SHO. The Commission generally believes that the type of Managers that will trigger a Reporting Threshold will likely have sophisticated technologies and be able to implement systems to help automate the reporting requirements of Rule 13f–2. As discussed in the Proposing Release, the estimate of 325 initial technologyrelated burden hours for Managers filing Form SHO was based on the estimated initial filing burden (325 hours) for large hedge fund advisers to fulfill amendments to the reporting requirements for Form PF,462 and is similar to the initial technological infrastructure-related burden (355 hours) for the proposed security-based swap position reporting requirements of proposed Rule 10B–1(a).463 While Managers most likely have other existing reporting obligations, the Commission recognizes that Managers may need to update their systems to ensure timely and accurate filing of the specific information required under Form SHO. One commenter stated that the estimated 325 hours initial technologyrelated burden was ‘‘not realistic’’ but did not provide an alternative estimate.464 One commenter stated that the initial estimated costs for initial technology projects per Manager represented a ‘‘significant portion’’ of a smaller Manager’s information technology budget but did not state that the estimate was inaccurate.465 As a result of not adopting the proposed hedging requirement, which a number of commenters thought would be 75143 operationally difficult to implement,466 the technology-related burden will likely be reduced from that which was estimated in the Proposing Release. The Commission did not receive any comments that provided an alternative hourly estimate for the initial technology related burden for Managers filing Form SHO, or an alternative, more accurate source for which to base the initial technology related burden for Managers filing Form SHO. Additionally, in response to the comment that the Commission generally underestimated the initial technologyrelated burden, and that the technologyrelated burden is likely reduced from the Proposing Release given the Commission’s decision not to adopt the proposed hedging requirement, the Commission continues to believe that an estimate of 325-hours for the initial technology-related burden is appropriate. PRA TABLE 2—ESTIMATED MANAGER BURDEN AND COSTS ASSOCIATED WITH FORM SHO INITIAL TECHNOLOGY PROJECTS ddrumheller on DSK120RN23PROD with RULES2 Form SHO Initial Technology Projects ....................................................... Managers with proposed Form SHO reportable short interest positions Number of hours needed for initial technology projects (average) Industry burden hours for initial technology projects Wage rate (average) Total industry cost burden 1,000 325 325,000 $366 $118,950,000 C. Burdens and Costs Associated With the Amendment to CAT requirement in Rule 203(b)(2)(iii) of Regulation SHO.467 1. Summary of Collections of Information The amendment to the CAT NMS Plan requires Participants to update their Compliance Rules to require reporting by Industry Members of whether an original receipt or origination of an order to sell an equity security is a short sale for which a market maker is claiming the bona fide market making exception to the locate 2. Use of Information As discussed above, reporting of certain short sale information to the CAT provides valuable information for the Commission and other regulators in investigations and reconstruction of market events. Requiring Industry Members to identify short sales for which they are claiming the BFMM locate exception will provide the Commission staff and other regulators an additional tool to determine whether 460 The Commission estimates that, of a total estimated burden of 325 hours, approximately 195 hours will most likely be performed by compliance professionals and 130 hours will most likely be performed by programmers working on system configuration and reporting automation. Of the work performed by compliance professionals, we anticipate that it will be performed equally by a compliance manager at a cost of $360 per hour and a senior risk management specialist at a cost of $416 per hour. Of the work performed by programmers, we anticipate that it will be performed equally by a senior programmer at a cost of $386 per hour and a programmer analyst at a cost of $280 per hour. ((($360 per hour × 0.5) + ($416 per hour × 0.5)) × 195 hours) + ((($386 per hour × 0.5) + ($280 per hour × 0.5)) × 130 hours) ÷ 325 = $366. See Form PF; Event Reporting for Large Hedge Fund Advisers and Private Equity Fund Advisers; Requirements for Large Private Equity Fund Adviser Reporting, Release No. IA–6297 (May 3, 2023), 88 FR 38146, 38195 (June 12, 2023). See also SIFMA Report. 461 325 initial technology-related burden hours × $366 per hour = $118,950. 462 See Form PF; Event Reporting for Large Hedge Fund Advisers and Private Equity Fund Advisers; Requirements for Large Private Equity Fund Adviser Reporting, Release No. IA–6297 (May 3, 2023), 88 FR 38146, 38195 (June 12, 2023). (The Commission recognizes that adopted Rule 13f–2 will cover persons other than large hedge fund advisers, and that large hedge fund advisers may generally be more accustomed to existing Commission reporting requirements than some other persons that will be covered by adopted Rule 13f–2.). 463 See Rule 10B–1 Proposal. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 PO 00000 Frm 00045 Fmt 4701 Sfmt 4700 such activity qualifies for the exception, or instead is indicative of, for example, proprietary trading instead of bona fide market making. 3. Respondents a. National Securities Exchanges and National Securities Associations The respondents for the amendment to CAT include the 25 Plan Participants (the 24 national securities exchanges and one national securities association (FINRA)).468 464 See Two Sigma Letter, at 5. Anonymous Fund Manager Letter, at 6–7. 466 See Virtu Letter, at 3. 467 See supra Part IV. 468 The Participants are: BOX Options Exchange LLC; Cboe BZX Exchange, Inc.; Cboe BYX Exchange, Inc.; Cboe C2 Exchange, Inc.; Cboe EDGA Exchange, Inc.; Cboe EDGX, Inc.; Cboe Exchange, Inc.; Financial Industry Regulatory Authority, Inc.; Investors Exchange Inc.; Long-Term Stock Exchange, Inc.; MEMX, LLC; Miami International Securities Exchange LLC; MIAX PEARL, LLC; MIAX Emerald, LLC; NASDAQ BX, Inc.; NASDAQ GEMX, LLC; NASDAQ ISE, LLC; NASDAQ MRX, LLC; NASDAQ PHLX LLC; The NASDAQ Stock Market LLC; New York Stock Exchange LLC; NYSE MKT LLC; and NYSE Arca, Inc., NYSE Chicago Stock Exchange, Inc., NYSE National, Inc. 465 See E:\FR\FM\01NOR2.SGM 01NOR2 75144 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 b. Members of National Securities Exchanges and National Securities Associations The respondents for the Amendment to CAT also include the Participants’ broker-dealer members, that is, Industry Members. The Commission understands that there are currently 3,501 registered broker-dealers; 469 however, not all broker-dealers are expected to have new CAT reporting obligations under the Amendment to CAT.470 Based on an analysis of CAT data from May 2023, conducted by Commission staff, the Commission estimates that approximately 100 broker-dealers will be required to report for the original receipt or origination of an order to sell an equity security whether the order is a short sale effected by a market maker in connection with bona fide market making activities in the security for which the BFMM locate exception in Rule 203(b)(2)(iii) of Regulation SHO is claimed. This is a decrease from the Commission’s estimate in the Proposing Release of 104 broker-dealers that would be required to report for the original receipt or origination of an order to sell an equity security whether the order is a short sale effected by a market maker in connection with bona-fide market making activities in the security for which the exception in Rule 203(b)(2)(iii) of Regulation SHO is claimed, because there were 104 CAT reporters listed as equity market makers in CAT in November 2021, and 100 CAT reporters listed as equity market makers in CAT in May 2023.471 The Commission also included an estimate of 1,218 broker-dealers that would have been required to report ‘‘buy to cover’’ information on buy orders for equity securities to CAT in the Proposing Release,472 but since the Commission is not adopting the proposed ‘‘buy to cover’’ reporting requirement, such estimate is not included here. The Commission did not receive any comments on the estimated number of respondents under the proposed amendments to CAT. 4. Total Initial and Annual Reporting and Recordkeeping Burdens The Commission received comments regarding the costs and burdens of the proposed amendments to CAT generally 473 but did not receive specific comments regarding the Proposing 469 This is based on FOCUS quarterly filings for 2023 Q1. 470 See supra Part IV.B. 471 See Proposing Release, at 14977. 472 Id. 473 See, e.g., SIFMA Letter, at 25; FIA PTG Letter, at 3; Virtu Letter, at 6. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 Release’s PRA estimates related to the proposed CAT amendments. General comments regarding costs and burdens of the proposed CAT amendments are addressed in Part IV. The Commission’s total burden estimates in this Paperwork Reduction Act section reflect the total burden on all Participants and Industry Members. The burden estimates per Participant or Industry Member are intended to reflect the average paperwork burden for each Participant or Industry Member, but some Participants or Industry Members may experience more burden than the Commission’s estimates, while others may experience less. The burden figures set forth in this section are based on a variety of sources, including Commission staff’s experience with the development of the CAT and estimated burdens for other rulemakings. Because the CAT NMS Plan applies to and obligates the Participants and not the Plan Processor, the Commission believes it is appropriate to estimate the Participants’ external cost burden based on the estimated Plan Processor staff hours required to comply with the proposed obligations.474 Put another way, pursuant to the Amendment to the CAT NMS Plan, the Participants will be obligated to make changes to the CAT, but the CAT is managed by the Plan Processor pursuant to contractual agreement, and so the Participants will be required to engage the Plan Processor to make any required changes. a. Participant Burdens The Amendment to CAT will require the Participants to engage the Plan Processor to modify the Central Repository to accept and process the new BFMM locate exception information on order receipt and origination reports. The Commission estimates that the Participants will incur an initial, one-time burden of 130 hours, or 5.2 hours per Participant, of staff time required to supervise and implement the changes necessary for the Plan Processor to accept and process the new data elements, and an initial, one-time, external cost of $113,800, or a per Participant expense of approximately $4,552 to compensate the Plan Processor for staff time required to make the initial necessary programming and systems changes to accept and process the new data elements, based on an estimate that it will take 300 hours of Plan Processor 474 The Commission derives estimated costs associated with Plan Processor and Industry Member staff time based on per hour figures from the SIFMA Report, modified by Commission staff to account for an 1,800-hour work-year and inflation, and multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead. PO 00000 Frm 00046 Fmt 4701 Sfmt 4700 staff time to implement these changes.475 The Commission did not receive comment on these estimates. The Commission continues to believe that other Paperwork Reduction Act burdens that will apply to the Participants, including ongoing burdens and external expenses for the Plan Processor’s acceptance and processing of the new data elements, are already accounted for in the existing Paperwork Reduction Act estimate that applies for Rule 613 and the CAT NMS Plan Approval Order, submitted under OMB number 3235–0671.476 The prior Paperwork Reduction Act analysis incorporates any other potential Paperwork Reduction Act burdens for the Participants, because the existing Paperwork Reduction Act analysis accounts for initial and ongoing costs for, among other things, operating and maintaining the Central Repository, including the cost of systems and connectivity upgrades or changes necessary to receive and consolidate the reported order and execution information from Participants and their members, the cost to store data and make it available to regulators, the cost of monitoring the required validation parameters, and management of the Central Repository.477 In addition, the Commission anticipates that each exchange and national securities association will file one Form 19b–4 filing to implement updated Compliance Rules. While such filings may impose certain costs on the exchanges, those burdens are already accounted for in the comprehensive Paperwork Reduction Act Information Collection submission for Form 19b– 4.478 The Commission does not expect the baseline number of 19b–4 filings to increase as a result of the Amendment to CAT, nor does it believe that the incremental costs exceed those costs used to arrive at the average costs and/ 475 The estimated 300 hours of Plan Processor staff time include 200 hours by a Senior Programmer, 40 hours by a Senior Database Administrator, 40 hours for a Senior Business Analyst, and 20 hours for an Attorney. The Commission estimates that the initial, one-time external expense for Participants will be $113,800 = (Senior Programmer for 200 hours at $386 an hour = $77,200) + (Senior Database Administrator for 40 hours at $379 an hour = $15,160) + (Senior Business Analyst for 40 hours at $305 an hour = $12,200) + (Attorney for 20 hours at $462 an hour = $9,240). 476 See CAT NMS Plan Approval Order, 81 FR 84911–43; see also OMB Control No. 3235–0671, 85 FR 37721 (June 23, 2020) (notice of submission of request for approval of extension). 477 See CAT NMS Plan Approval Order, 81 FR 84918. 478 See OMB Control No. 3235–0045 (Aug. 19, 2016), 81 FR 57946 (Aug. 24, 2016) (Request to OMB for Extension of Rule 19b–4 and Form 19b– 4 PRA). E:\FR\FM\01NOR2.SGM 01NOR2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations or burdens reflected in the Form 19b– 4 PRA submission. ddrumheller on DSK120RN23PROD with RULES2 b. Broker-Dealer Burdens The Commission anticipates that certain Industry Members will have initial, one-time burdens and costs relating to the Amendment to CAT, to update systems and processes as necessary to capture and report use of the BFMM locate exception to CAT. The Commission has estimated these initial burdens and costs below. The Amendment to CAT will impose an ongoing annual burden relating to, among other things, personnel time to monitor each broker-dealer’s reporting of the required data and the maintenance of the systems to report the required data and implementing changes to trading systems that might result in additional reports to the Central Repository. However, the Commission estimates that the ongoing burden imposed by the Amendment to CAT related to reporting to the CAT is already accounted for in the existing information collections burdens associated with Rule 613 and the CAT NMS Plan Approval Order submitted under OMB number 3235–0671.479 Specifically, the CAT NMS Plan Approval Order takes into account requirements on broker-dealer members to comply with the CAT NMS Plan, including the requirement to maintain the systems necessary to collect and transmit information to the Central Repository,480 provides aggregate burden hour and external cost estimates for the broker-dealer data collection and reporting requirement of Rule 613, and did not quantify the burden hours or external cost estimates for each individual component of the brokerdealer’s data collection and reporting responsibility.481 The Amendment to CAT will not require any Industry Member to submit new reports to the CAT, but to add limited additional information to existing reports in certain circumstances for certain Industry 479 See CAT NMS Plan Approval Order, 81 FR 84911–43. While there is no recordkeeping requirement related to reporting use of the BFMM locate exception, brokers or dealers should be prepared to monitor for compliance with conditions and maintain records documenting such compliance. See Regulation SHO Adopting Release, 48011 n.27 (‘‘As with any rule, broker-dealers relying on [an] exception should be prepared to monitor for compliance with its conditions, and maintain records documenting such compliance.’’). There would be a minimal additional ongoing burden for such brokers or dealers to record that they have determined such eligibility for each transaction reported to CAT. 480 See, e.g., CAT NMS Plan Approval Order, 81 FR 84930. 481 See CAT NMS Plan Approval Order, 81 FR 84930. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 Members. The Commission does not believe that this will alter the estimates of ongoing burden and external costs in the existing Paperwork Reduction Act Analysis and the ongoing burden associated with these new collection requirements are accounted for in the existing Paperwork Reduction Act Analysis. The Amendment to CAT will impose additional burdens on Industry Members that trade equity securities and rely upon or plan to rely upon the BFMM locate exception. Based on an analysis of data reported to the CAT in May 2023, and specifically the identification of all unique CAT Reporters that were identified as equity market makers (including different classes of market makers such as ‘‘designated’’ or ‘‘lead’’ market makers, and secondary liquidity providers), approximately 100 CAT Reporters will be subject to the new reporting obligation. Some broker-dealers that rely upon this exception may retain records regarding their eligibility for this exception for specific orders or for orders originated by specific desks or units of their business. Regarding the obligation to report the BFMM locate exception information to the CAT, the Commission believes that it is appropriate to divide the 100 Industry Members, i.e., the CAT reporters listed as equity market makers in CAT as of May 2023, that will be required to report this information into two categories: (i) Industry Members that report directly to the CAT; and (ii) Industry Members that use third-party reporting agents for CAT reporting. For purposes of this Paperwork Reduction Act analysis, the Commission estimates that of the 100 Industry Members that will be required to report this information, 58 Industry Members will be reporting this information directly to the CAT, and 42 Industry Members will be reporting this information through third-party reporting agents. The Commission believes this is a reasonable estimation because the majority of Industry Members that are identified as market makers in the CAT have developed their own systems and technology to report directly to the CAT. The Commission believes that the majority of market makers handle reporting themselves because they likely submit a sufficient number of reportable events. The Commission did not receive any comments regarding the estimated number of broker-dealers that would be required to report for the original receipt or origination of an order to sell an equity security whether the order is a short sale effected by a market maker in connection with bona-fide market PO 00000 Frm 00047 Fmt 4701 Sfmt 4700 75145 making activities in the security for which the exception in Rule 203(b)(2)(iii) of Regulation SHO is claimed, or about the estimated proportion of insourcing vs. outsourcing Industry Members. As such, the Commission is keeping the proportion of insourcing vs. outsourcing Industry Members the same as in the Proposing Release, but reflective of the estimated 100 broker-dealers rather than 104 broker-dealers from the Proposing Release. The Commission estimates that the 58 insourcing Industry Members that report directly to the CAT will incur an initial, aggregate, one-time burden of 15,080 hours, or that each of these CAT Reporters will incur an initial, average one-time burden of 260 hours, and that each of these 58 insourcing Industry Members will incur an initial, aggregate, one-time external expense of approximately $870,000 for software and hardware to facilitate reporting of the new data elements to CAT, or that each insourcing Industry Member will incur an initial, average one-time external expense of approximately $15,000.482 The Commission did not receive any comments about the cost and burden estimates for insourcing Industry members. The Commission estimates that the 42 outsourcing Industry Members that use third-party reporting agents to report to the CAT will incur an initial, aggregate, one-time burden of 420 hours, or that each of these outsourcing Industry Members will incur an initial, one-time burden of 10 hours on average, and that these 42 outsourcing Industry Members will incur an initial, aggregate, one-time external expense of approximately $42,000 for software and hardware to facilitate reporting use of the BFMM locate exception to CAT, or that each outsourcing Industry Member will incur an initial, average one-time external expense of approximately $1,000.483 482 The Commission is basing this figure on the estimated burden and external costs for a brokerdealer that handles orders subject to customer specific disclosures required by Rule 606(b)(3) to update their systems to capture the data and produce a report to comply with Rule 606. See Disclosure of Order Handling Information, Exchange Act Release No. 84528 (Nov. 2, 2018), 83 FR 58338, 58383 (Nov. 19, 2018). This is a reasonable proxy for estimating the burdens and costs associated with updating data capture systems for reporting purposes here because in both rulemakings broker-dealers were required to update in-house data reported for pre-existing reporting obligations. 483 The Commission believes that the estimated burden and external costs for outsourcing Industry Members is reasonable because the burden on individual Industry Members should be significantly lower than insourcing Industry Members because of the difference in how these E:\FR\FM\01NOR2.SGM Continued 01NOR2 75146 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations The Commission did not receive any comments about the cost and burden estimates for outsourcing Industry Members. As discussed above, the Commission continues to believe that the ongoing burden associated with reporting to the CAT is already accounted for in the existing information collections burdens associated with Rule 613 and the CAT NMS Plan Approval Order submitted under OMB number 3235–0671.484 Because this information is already collected and maintained by market makers that engage in equity trading and claim the exception pursuant to 17 CFR 240.17a–3 (‘‘Rule 17a–3 of the Exchange Act’’), there is no new ongoing burden associated with collecting or recording the information necessary to effectuate CAT reporting of this new element. ddrumheller on DSK120RN23PROD with RULES2 PRA TABLE 3—SUMMARY OF ESTIMATED INITIAL ONE-TIME BURDENS RELATED TO CAT BFMM AMENDMENT Number of entities impacted Initial one-time hourly burden Aggregate one-time hourly burden Initial one-time cost Aggregate one-time cost Name of information collection Type of burden CAT: Central Repository—Short Sale Data ................ CAT: Reporting of Bona Fide Market Making Exception—Insourcers. CAT: Reporting of Bona Fide Market Making Exception—Outsourcers. Recordkeeping .................... Direct Report ...................... 25 58 5.2 260 130 15,080 $4,552 15,000 $113,800 870,000 Third Party Disclosure ........ 42 10 420 1,000 42,000 D. Collection of Information Is Mandatory The information collections are required under Rule 13f–2 and Form SHO for Managers that meet the Reporting Threshold and the Amendment to CAT for Plan Participants to collect and process new CAT reportable information and for CAT Industry Members that engage in certain short sale activity. correspondence, memoranda, papers, books, notices, accounts, and other such records as shall be made or received by it in the course of its business as such and in the conduct of its self-regulatory activity for a period of not less than five years, the first two years in an easily accessible place, subject to the destruction and disposition provisions of 17 CFR 240.17a–6 (‘‘Rule 17a–6’’). E. Retention Period of Recordkeeping Requirement Pursuant to 17 CFR 240.17a–4(b)(7) (‘‘Exchange Act Rule 17a–4(b)(7)’’), a broker-dealer must preserve for a period of not less than three years, the first two years in an easily accessible place, all written agreements (or copies thereof) entered into by such member, broker or dealer relating to its business as such, including agreements with respect to any account. Pursuant to 17 CFR 240.17a–4(e)(7), a broker-dealer must maintain and preserve in an easily accessible place each compliance, supervisory, and procedures manual, including any updates, modifications, and revisions to the manual, describing the policies and practices of the member, broker or dealer with respect to compliance with applicable laws and rules, and supervision of the activities of each natural person associated with the member, broker or dealer until three years after the termination of the use of the manual. Pursuant to 17 CFR 240.17a–1, every national securities exchange and national securities association shall keep and preserve at least one copy of all documents, including all firms report to the CAT. Outsourcing Industry Members will not be required to change internal CAT reporting systems, but instead will be responsible for making any updates necessary for CAT reporting agents to report this information to the CAT. The outsourcing Industry Members will VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 all SROs and their employees, as well as all employees of the Central Repository, shall use appropriate safeguards to ensure the confidentiality of such data. The Commission will receive confidential information pursuant to this collection of information, and such information will be kept confidential, subject to the provisions of applicable law. F. Confidentiality As discussed above, Rule 13f–2 requires certain Managers to file monthly in EDGAR, on Form SHO, certain short sale volume data and short interest position data. However, the Commission will aggregate the information reported by Managers on Form SHO prior to publication to protect the identity of reporting Managers. To the extent that the Commission receives—through its examination and oversight program, through an investigation, or by some other means— records or disclosures from a brokerdealer that relate to or arise from the Rule that are not publicly available, such information will be kept confidential, subject to the provisions of applicable law. With respect to the Amendment to CAT, Rule 613, and the CAT NMS Plan, information collected and electronically provided to the Central Repository will only be available to the national securities exchanges, national securities association, and the Commission. Further, the CAT NMS Plan includes policies and procedures designed to ensure the security and confidentiality of all information submitted to the Central Repository, and to ensure that The Commission is adopting a new rule and related form as well as an amendment that introduce new reporting requirements in connection with short sales. Rule 13f–2, Form SHO, and the amendment to CAT (collectively, the ‘‘adoptions’’) will improve the transparency of short selling activity to regulators, market participants and the investing public. The data provided by these adoptions will close informational gaps in the currently available data, which in turn will benefit market participants and help foster fair and orderly markets. The adoptions will also improve regulatory oversight and enhance regulators’ examination of market behavior and recreation of significant market events. These improvements may, in turn, discourage market manipulation to the extent that it occurs.485 The Commission is mindful of the economic effects that may result from the adoptions of Rule 13f–2, Form SHO, and the amendment to CAT, including the benefits, costs, and the effects on efficiency, competition, and capital have external costs associated with paying CAT reporting agents for any additional fees relating to the change, but because CAT reporting agents can report on behalf of numerous outsourcing Industry Members at the same time, the costs of any updates to their systems can be distributed amongst outsourcing Industry Members. 484 See supra n.476. 485 See infra Part VIII.C.1 for additional discussion on potential market manipulation. PO 00000 Frm 00048 Fmt 4701 Sfmt 4700 VIII. Economic Analysis A. Introduction E:\FR\FM\01NOR2.SGM 01NOR2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 formation.486 The Commission recognizes that the adoptions might impose significant compliance costs on market participants. Requiring Managers 487 to report large positions and short sale activity will likely impose significant initial and ongoing costs on Managers. The amendment to CAT will also impose compliance costs on broker-dealers. The Commission is cognizant of these costs and has modified the Proposals in a way that is intended to reduce the burdens incurred by market participants without sacrificing the transparency that is expected to result from the adoption of the Proposals. Modifications from the proposed rule and form that are likely to reduce reporting costs to Managers relative to the Proposals include: revising a key reporting threshold based on a monthly average calculation instead of a daily calculation, which is expected to reduce the number of reporting entities; streamlining the reporting requirements of Forms SHO; not adopting the ‘‘buy to cover’’ CAT reporting requirement; and not adopting Rule 205. Overall, the Commission has sought to balance the costs of the adoptions against the benefit to transparency that will be provided to regulators and the public. The Commission recognizes that the adoptions may lead to tradeoffs in market quality, with a risk of negative effects on price efficiency. A potential reduction in market manipulation through improved regulatory oversight stemming from the adoptions may have a positive impact on market quality. Furthermore, the adoptions will provide market participants with improved transparency into short selling activity, which might also lead to improved price efficiency. On the other hand, Rule 13f– 2 and the disclosures Form SHO 486 Exchange Act section 3(f) requires the Commission, when it is engaged in rulemaking pursuant to the Exchange Act and is required to consider or determine whether an action is necessary or appropriate in the public interest, to consider, in addition to the protection of investors, whether the action would promote efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). In addition, Exchange Act section 23(a)(2) requires the Commission, when making rules pursuant to the Exchange Act, to consider among other matters the impact that any such rule would have on competition and not to adopt any rule that would impose a burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act. See 15 U.S.C. 78w(a)(2). 487 See infra note 506 and the accompanying discussion in the text on the definition of ‘‘Manager’’. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 requires will increase the costs and risks of implementing large short positions, which might reduce price efficiency by reducing short selling and the positive effects of such short selling. Furthermore, public disclosure of information resulting from Rule 13f–2 and Form SHO might facilitate short squeezes, which in turn might also reduce market quality.488 The Commission has considered the economic effects of the adoptions and wherever possible, has quantified their likely economic effects. The Commission is providing both a qualitative assessment and quantified estimates of the adopted rule and CAT amendment’s economic effects where feasible. The Commission has received comments on the Proposals and has addressed commenters’ concerns with the economic analysis. The Commission has incorporated data and other information to assist it in the analysis of the economic effects of the adoptions. However, as explained in more detail below, because the Commission does not have, and in certain cases does not believe it can reasonably obtain data that may inform the Commission on certain economic effects, the Commission is unable to quantify certain economic effects. Further, even in cases where the Commission has some data, quantification is not practicable due to the number and type of assumptions necessary to quantify certain economic effects, which render any such quantification unreliable. Our inability to quantify certain costs, benefits, and effects does not imply that the Commission believes such costs, benefits, or effects are not significant. The Commission is adopting the Manager reporting and disclosures to implement the statutory mandate of section 929X of the Dodd-Frank Act. Accordingly, many of the costs and benefits of Rule 13f–2 and Form SHO stem from the Commission’s implementation of the statutory mandate. In addition, the Commission is 488 See infra Part VII.C.1. The Commission expects that for many securities, a limited number of Manager positions may surpass the reporting requirement thresholds. Given the eventual public release of the aggregate position sizes, there is a risk that other market participants will be able to potentially identify the Managers with large short positions and orchestrate short squeeze efforts against them (should they seem vulnerable against a short squeeze). Nevertheless, the Commission maintains the ability of identifying such behavior using CAT data, which could mitigate initiation of such behavior. PO 00000 Frm 00049 Fmt 4701 Sfmt 4700 75147 exercising discretion in its design and implementation of Rule 13f–2 and Form SHO and recognizes that this discretion has economic effects. Specifically, the Commission is using this discretion to ensure that the disclosures are additive to currently available data and will be useful to both market participants and regulators, with a focus on addressing data limitations exposed by market events, especially the market volatility in January 2021. Additionally, the Commission is adopting a Proposed CAT amendment in order to address such data limitations outside of the context of the statutory mandate of section 929X. The Commission has access to several sources of data that provide some short selling information, one of which is CAT. CAT data can be used by regulators for regulatory purposes, including analysis and reconstruction of broad-based market events; in market analysis in support of regulatory decisions; in market surveillance, investigations, and other enforcement activities. At times, these regulatory functions can benefit from information on short sale positions of market participants and how these positions change over time. CAT does not include data that can be used to track such positions, and as discussed further above, Commission staff experience in reconstructing the events of January 2021 provided insights into the challenges of using existing CAT data for this purpose. Other existing data sources, including public data sources, are also limited for these purposes as well as for informing members of the public and market participants. Specifically, current data fail to distinguish the type of trader engaged in short selling or identify individual short positions, as well as the fluctuation in those positions, even for regulatory use. Furthermore, current data do not track the use of the bona fide market maker exemption when short selling without the ‘‘locate’’.489 The adopted rule will serve to increase the Commission’s awareness and understanding of short sale activity by Managers with large short sale positions by requiring reporting of their reliance on the bona fide marker maker locate exception. The adopted amendment will serve the Commission in its regulatory capacity. 489 See supra note 10 for description of the locate requirement of Rule 203 of Regulation SHO. E:\FR\FM\01NOR2.SGM 01NOR2 75148 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations Existing data sources fail to accurately represent economic short positions of Managers due to several limitations.490 While FINRA publishes aggregate short interest on a bimonthly basis, these data do not reflect the timing with which short positions expand or shrink in the two-week period between reporting dates.491 Some other data sources report daily short sale volume 492 without distinguishing between short sale transactions that affect economic short positions and short sale transactions meant for purposes such as liquidity provision or hedging of long positions. As such, these existing short volume ddrumheller on DSK120RN23PROD with RULES2 490 One commenter stated that the data reported from Form SHO would only provide very limited additional relevant insight relative to FINRA short interest data. See SBAI Letter at 2. The Commission reiterates that Form SHO data are additive to existing data, including FINRA short interest data. More specifically, publicly released Form SHO data will indicate which equities have large short positions held by institutional investment managers. This is different from seeing large short interest, which may indicate many smaller positions, including those held by retail investors. Large short positions accumulated by Managers are often based on fundamental research, in contrast to smaller positions which more likely stem from hedging or arbitrage strategies. Therefore, information on the magnitude of aggregate large short positions, especially in relation to overall short interest, may highlight the degree to which short sales of a particular security are concentrated among Managers guided by fundamental research relative to hedging or arbitrage strategies. Thus, Form SHO will provide novel information on short sale behavior relative to other short sale data sources. 491 FINRA requires all members to report settled short positions in equities of all customer and proprietary accounts twice per month. According to the schedule it has adopted, FINRA publishes the short sale data about a week after each reporting due date. See, e.g., Short Interest Reporting, available at https://www.finra.org/filing-reporting/ regulatory-filing-systems/short-interest. 492 FINRA reports daily off-exchange short sale volume data that aggregate, for each exchange-listed security, short sale transactions reported to a FINRA TRF or ADF. See Short Sale Volume Data, FINRA, available at https://www.finra.org/finra-data/ browse-catalog/short-sale-volume-data. Registered exchanges also report daily short sale volume aggregated at the security level, often charging a fee. See, e.g., TAQ Group Short Sales & Short Volume, New York Stock Exchange, available at https:// www.nyse.com/market-data/historical/taq-nysegroup-short-sales. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 data may not be combined with the bimonthly short interest data to construct aggregate daily short positions of any particular Manager. Securities lending data, bolstered by the recently adopted 17 CFR 240.10c–1a (‘‘Exchange Act Rule 10c–1a’’), will offer a clearer picture of the relationship between short interest and securities being lent; 493 however, this does not allow the Commission or the public to observe and monitor large short positions of Managers.494 No existing data identify short positions of individual traders. Even though some regulatory data, e.g., CAT data, identify short transactions of individual traders, they may not be utilized to reconstruct short positions because economic short positions may change in the absence of any short sale transactions. Thus, the Commission is adding to the existing data sources to further illuminate the short selling market.495 These data limitations inhibit regulators from performing functions such as market surveillance and market reconstruction. For example, the 493 Specifically, one will be able to look at a particular securities lending data to see if changes in short interest correspond to many smaller lending transactions or a smaller quantity of large securities loans, which may indicate market sentiment towards the particular company. However, it is impossible to discern whether these securities loans are being borrowed by numerous short sellers or instead concentrated among a small number of large short sellers. This information will be covered by Rule 13f–2 if the short seller(s) crosses the Report Thresholds. In addition, unlike FINRA short interest data, Rule 13f–2 data will incorporate Managers that are not FINRA members. Furthermore, while fees are required to access exchanges’ short volume and short transaction data, market participants will not have to pay a fee to view publicly released Form SHO data. 494 Unlike the Commission, however, the public will observe anonymized, aggregated data covering gross short sale positions of Managers that exceed at least one of the Reporting Thresholds. 495 One commenter stated that Form SHO data collected by the Commission would not fully capture the short selling market. See SBAI Letter at 3. The Commission has not stated that Form SHO data provides a complete perspective of the short selling market. However, Form SHO data will reveal large short positions of Managers, which is not readily available from any other data source. PO 00000 Frm 00050 Fmt 4701 Sfmt 4700 Commission does not have regular access to information about Managers who hold large short positions, even if those positions are held for a long period of time. If the positions are sufficiently large and prices move against the positions, the Commission currently cannot efficiently assess the risk that these positions impose on the market more broadly.496 Further, with existing data, the Commission may have difficulty reconstructing significant market events, thereby inhibiting the Commission from quickly understanding market events and providing efficient market oversight. B. Baseline The baseline against which the costs, benefits, and the effects on efficiency, competition, and capital formation of the final rule are measured consists of the current state of the equity market, current practices of Managers and broker-dealers, and the current regulatory framework. The economic analysis considers existing regulatory requirements, including recently adopted rules, as part of its economic baseline against which the costs and benefits of the final rule are measured.497 496 See infra Part VIII.C.1 for discussion of how the Commission might use Form SHO data for understanding market events. 497 See, e.g., Nasdaq v. SEC, 34 F.4th 1105, 1111– 15 (D.C. Cir. 2022). This approach also follows SEC staff guidance on economic analysis for rulemaking. See Staff’s ‘‘Current Guidance on Economic Analysis in SEC Rulemaking’’ (March 16, 2012), available at https://www.sec.gov/divisions/riskfin/ rsfi_guidance_econ_analy_secrulemaking.pdf (‘‘The economic consequences of proposed rules (potential costs and benefits including effects on efficiency, competition, and capital formation) should be measured against a baseline, which is the best assessment of how the world would look in the absence of the proposed action.’’); Id. at 7 (‘‘The baseline includes both the economic attributes of the relevant market and the existing regulatory structure.’’). The best assessment of how the world would look in the absence of the proposed or final action typically does not include recently proposed actions, because doing so would improperly assume the adoption of those proposed actions. E:\FR\FM\01NOR2.SGM 01NOR2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 Several commenters requested the Commission consider interactions between the economic effects of the proposed rule and other recent Commission proposals.498 Commenters indicated there could be interactions between this rulemaking and five proposals 499 that have since been adopted: Rule 10c–1a,500 Beneficial Ownership Reporting,501 Private Fund 498 See, e.g., MFA Letter 2, at 3–4 (‘‘We believe the Commission should take into account the sheer scope of all its recently proposed rules when determining whether to adopt any final rules or in setting compliance dates for any of the new requirements’’); Eric J. Pan, President and CEO, and Susan Olson, General Counsel, Investment Company Institute (Aug. 17, 2023), at 3, available at https://www.sec.gov/comments/s7-04-22/s70422246959-547222.pdf (‘‘ICI Letter 2’’) (‘‘we request that the Commission . . . publish a thorough analysis of the cumulative effects of the Interconnected Rules that accounts for interconnections and dependencies among them’’). 499 Reporting of Securities Loans, Release No. 34– 93613 (Nov. 18, 2021), 86 FR 69802 (Dec. 8, 2021) (see Ji rˇı´ Kro´l,Deputy CEO, Global Head of Government Affairs, Alternative Investment Management Association Ltd (Aug. 11, 2023), at 4, available at https://www.sec.gov/comments/s7-0822/s70822-243880-514482.pdf) (‘‘AIMA Letter 2’’); Modernization of Beneficial Ownership Reporting, Release No. 33–11030 (Feb. 10, 2022), 87 FR 13846 (Mar. 10, 2022) (see MFA Letter 2, at 3; Jennifer Han, Executive Vice President, Chief Counsel and Head of Regulatory Affairs, Managed Funds Association, and National Association of Private Fund Managers (July 21, 2023), at 14–15, available at https://www.sec.gov/comments/s7-08-22/s70822233179-486723.pdf) (‘‘NAPFM Letter’’); ICI Letter 2, at 7 n. 13); Amendments to Form PF to Require Current Reporting and Amend Reporting Requirements for Large Private Equity Advisers and Large Liquidity Fund Advisers, Release No. IA–5950 (Jan. 26, 2022), 87 FR 9106 (Feb. 17, 2022) (see MFA Letter 2, at 3; NAPFM Letter 10–12); Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews, Release No. 1A–5955 (Feb. 9, 2022), 87 FR 16886 (Mar. 24, 2022) (see MFA Letter 2, at 3; NAPFM Letter 10–12); Shortening the Securities Transaction Settlement Cycle, Release No. 34–94196 (Feb. 9, 2022), 87 FR 10436 (Feb. 24, 2022) (see ICI Letter 2 at 7 n. 13). 500 See Reporting of Securities Loans, Release No. 34–98737 (Oct. 13, 2023) (‘‘Rule 10c–1a’’). The securities loan reporting rule requires any person who loans a security on behalf of itself or another person to report information about securities loans to a registered national securities association (namely, FINRA) and requires FINRA to make certain information it receives available to the public. The covered persons will include market intermediaries, securities lenders, broker-dealers, and reporting agents. The final rule’s compliance dates require that FINRA propose its rules within four months of the effective date of final Rule 10c– 1a, or approximately May 2024, and finalize them no later than 12 months after the effective date of final Rule 10c–1a, or approximately January 2025; that FINRA implement data retention and availability requirements for reporting 24 months after the effective date of final Rule 10c–1a, or approximately January 2026; that covered persons report Rule 10c–1a information to FINRA starting on the first business day thereafter; and that FINRA publicly report Rule 10c–1a information within 90 calendar days thereafter, or approximately May 2026. See Rule 10c–1a, Part VIII. 501 See Modernization of Beneficial Ownership Reporting, Release No. 33–11253 (Oct. 10, 2023) (‘‘Beneficial Ownership Reporting’’). Among other VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 Advisers,502 Settlement Cycle,503 and the May 2023 SEC Form PF Amending Release.504 These rules were not included as part of the baseline in the Proposing Release because they were not adopted at that time. In response to commenters, this economic analysis considers potential economic effects arising from any overlap between the compliance period for the final amendments and each of these recently adopted rules.505 things, the amendments generally shorten the filing deadlines for initial and amended beneficial ownership reports filed on Schedules 13D and 13G, and require that Schedule 13D and 13G filings be made using a structured, machine-readable data language. The new disclosure requirements and filing deadlines for Schedule 13D are effective 90 days after publication in the Federal Register. The new filing deadline for Schedule 13G takes effect on September 30, 2024, and the rule’s structured data requirements have a one-year implementation period ending December 18, 2024. See Beneficial Ownership Reporting, Part II.G. 502 See Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews, Release No. IA–6383 (Aug. 23, 2023), 88 FR 63206 (Sept. 14, 2023) (‘‘Private Fund Advisers Adopting Release’’). The Private Fund Advisers Adopting Release includes new rules designed to protect investors who directly or indirectly invest in private funds by increasing visibility into certain practices and restricting other practices, along with amendments to the Advisers Act books and records rule and compliance rule. The amended Advisers Act compliance provision for registered investment advisers has a November 13, 2023 compliance date. The compliance date is March 14, 2025 for the rule’s quarterly statement and audit requirements for registered investment advisers with private fund clients. For the rule’s adviser-led secondaries, restricted activity, and preferential treatment requirements, the compliance date is September 14, 2024 for larger advisers and March 14, 2025 for smaller advisers. See Private Fund Advisers Adopting Release, Parts IV, VI.C.1. 503 See Settlement Cycle Adopting Release. Settlement Cycle Adopting Release shortens the standard settlement cycle for most broker-dealer transactions from two business days after the trade date to one business day after the trade date (‘‘T+1’’). With certain exceptions, the rule has a compliance date of May 28, 2024. See Settlement Cycle Adopting Release, Parts VII, VII.B.3. 504 See Form PF; Event Reporting for Large Hedge Fund Advisers and Private Equity Fund Advisers; Requirements for Large Private Equity Fund Adviser Reporting, Release No. IA–6297 (May 3, 2023), 88 FR 38146 (June 12, 2023) (‘‘May 2023 SEC Form PF Amending Release’’). The Form PF amendments require large hedge fund advisers and all private equity fund advisers to file reports upon the occurrence of certain reporting events. For new sections 5 and 6 of Form PF, the compliance date is December 11, 2023; for the amended, existing sections, it is June 11, 2024. See May 2023 SEC Form PF Amending Release, Part II.E. 505 In addition, commenters indicated there could also be overlapping compliance costs between the final amendments and proposals (or in the case of Release No. 34–93784, a portion of the proposal) that have not been adopted. Cybersecurity Risk Management for Investment Advisers, Registered Investment Companies, and Business Development Companies, Release No. 33–11028 (Feb. 9, 2022), 87 FR 13524 (Mar. 9, 2022) (see MFA Letter 2, at 3; NAPFM Letter 18–19); Outsourcing by Investment Advisers, Release No. IA–6176 (Oct. 26, 2022), 87 FR 68816 (Nov. 16, 2022) (see MFA Letter 2, at 3; NAPFM Letter 17–18); Enhanced Disclosures by PO 00000 Frm 00051 Fmt 4701 Sfmt 4700 75149 1. Institutional Investment Managers The potential universe of persons who meet the definition of Manager is broad and diverse. Exchange Act section 13(f)(6)(A) defines the term ‘‘institutional investment manager’’ as ‘‘includ[ing] any person, other than a natural person, investing in or buying and selling securities for its own account, and any person exercising investment discretion with respect to the account of any other person.’’ 506 Exchange Act section 3(a)(9) states that ‘‘[t]he term ‘person’ means a natural person, company, government, or political subdivision, agency, or instrumentality of a government.’’ ‘‘ ‘Company’ means a corporation, a partnership, an association, a joint-stock company, a trust, a fund, or any organized group of persons whether incorporated or not; or any receiver, trustee in a case under title 11 of the United States Code or similar official or any liquidating agent for any of the foregoing, in his capacity as such.’’ 507 As a result, Managers exercising discretion over the accounts of others include but are not limited to Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices, Release No. 33– 11068 (May 25, 2022), 87 FR 36654 (June 17, 2022) (see MFA Letter 2, at 3; NAPFM Letter 19–20); Safeguarding Advisory Client Assets, Release No. IA–6240 (Feb. 15, 2023), 88 FR 14672 (Mar. 9, 2023) (see MFA Letter 2, at 3; NAPFM Letter 9–10); Prohibition Against Fraud, Manipulation, or Deception in Connection With Security-Based Swaps; Prohibition Against Undue Influence Over Chief Compliance Officers; Position Reporting of Large Security-Based Swap Positions, Release No. 34–93784 (Dec. 15, 2021), 87 FR 6652 (Feb. 4, 2022) (see MFA Letter 2, at 3; NAPFM Letter 13–14; AIMA Letter 2, at 3; ICI Letter 2, at 7 n. 13); Prohibition Against Conflicts of Interest in Certain Securitizations, Release No. 33–11151 (Jan. 25, 2023), 88 FR 9678 (Feb. 14, 2023) (see MFA Letter 2, at 3; NAPFM Letter at 21–22); Further Definition of ‘‘As a Part of a Regular Business’’ in the Definition of Dealer and Government Securities Dealer, Release No. 34–94524 (Mar. 28, 2022), 87 FR 23054 (Apr. 18, 2022) (see NAPFM Letter 12– 13); Standards for Covered Clearing Agencies for U.S. Treasury Securities and Application of the Broker-Dealer Customer Protection Rule With Respect to U.S. Treasury Securities, Release No. 34– 95763 (Sept. 14, 2022), 87 FR 64610 (Oct. 25, 2022) (see NAPFM Letter 16–17); Amendments Regarding the Definition of ‘‘Exchange’’ and Alternative Trading Systems (ATSs) That Trade U.S. Treasury and Agency Securities, National Market System (NMS) Stocks, and Other Securities, Release No. 34–94062 (Jan. 26, 2022), 87 FR 15496 (Mar. 18, 2022) (see NAPFM Letter 22–23). To the extent those proposals are adopted, the baseline in those subsequent rulemakings will reflect the existing regulatory requirements at that time. 506 See also Exchange Act section 3(a)(35) defining when a person exercises ‘‘investment discretion’’ with respect to an account. 507 See section 2(a)(8) of the Investment Company Act. The term ‘‘company’’ in the Exchange Act ‘‘ha[s] the same meaning[ ] as in the Investment Company Act of 1940.’’ Exchange Act section 3(a)(19). E:\FR\FM\01NOR2.SGM 01NOR2 75150 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 investment advisers exercising investment discretion over client assets, including investment company assets such as mutual funds, ETFs, and closedend funds; banks and bank trust corporations offering investment management services; pension fund managers; firms, including brokerdealers and insurance companies, managing corporate or employee investment assets; and individuals exercising investment discretion over the accounts of others. Also, as a result of the definition of Manager, the set of Managers excludes natural persons buying and selling securities only for their own account but does include natural persons exercising discretion over the account of another person.508 Notwithstanding the broad statutory definition of Manager, it is the Commission’s understanding that only a fraction of Managers is believed to engage in short selling and fewer still engage in any substantial short selling. Registered broker-dealers’ market making operations, for example, engage in short selling but, with the exception of option market makers, generally do not hold large positions overnight. The Commission is also aware, for example, that advisers to both hedge funds and registered investment companies engage in short selling to varying degrees. However, with the exception of hedge funds, institutional investors are viewed as ‘‘largely absent’’ from the short selling portion of the financial markets.509 Using actual investment strategies employed by registered investment companies 510 as a proxy for 508 To the extent that a natural person exercising discretion over the account of another person has a short position exceeding the thresholds, that natural person would be subject to the costs associated with Rule 13f–2 and the Form SHO. We expect such a natural person would likely use the fillable web form provided by EDGAR to input Form SHO disclosures. Few Managers that are natural persons would be likely to have short positions large enough to exceed the threshold. See infra Part VIII.C.6 for more information on Managers’ costs. 509 Peter Molk Frank Partnoy, Institutional Investors as Short Sellers?, 99 B.U. L. Rev. 837, 839 (2019). Molk and Partnoy’s paper ‘‘identif[ies] the regulatory and other barriers that keep key categories of institutions, specifically, mutual funds, insurance companies, pension funds, banks, sovereign wealth funds, endowments, and foundations, from acquiring significant short positions.’’ Id. at 844. 510 As of Dec. 20212, there were 9,050 mutual funds (excluding money market funds) with approximately $22,652 billion in total net assets, 2,819 ETFs organized as an open-end fund or as a share-class of an open-end fund with approximately $5,910 billion in total net assets, 680 registered closed-end funds with approximately $363 billion in total net assets, 701 unit investment trusts with approximately $2,184 billion in total net assets, and 15 variable annuity separate accounts registered as management investment companies on Form N–3 with $237 billion in total net assets. Estimates of the VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 the number of Managers in the public fund markets engaged in short selling, the number of such Managers is likely to be relatively small. A Division of Economic and Risk Analysis White Paper survey of all mutual fund Form N–SAR filings in 2014 found that ‘‘[w]hile 64 percent of all funds were allowed to engage in short selling, only 5 percent of all funds actually did so.’’ 511 As of December 2022, there were 7,164 registered investment companies with total equity positions valued at approximately $14.7 trillion. Of those, 138 funds had short positions with a total short position value of approximately $15 billion. Of the funds with short positions, only 15 funds held positions equal to or greater than $10 million.512 Additionally, according to an analysis of publicly available Form PF data, approximately sixteen percent of single-strategy hedge funds employ strategies involving short selling.513 While information about Managers’ investments other than from funds managed by investment advisers is limited, the Commission understands that such other Managers, other than options market makers due to their number of registered investment companies and their total net assets are based on an analysis of Form N–CEN filings as of July 31, 2023. For openend management funds, closed-end funds, and management company separate accounts, total net assets equals the sum of monthly average net assets across all funds in the sample during the reporting period. See Item C.19.a (Form N–CEN). For UITs, we use the total assets as of the end of the reporting period, and for UITs with missing total assets information, we use the aggregated contract value for the reporting period instead. See Item F.11 and F.14.c in Form N–CEN. 511 Daniel Deli et al., Use of Derivatives By Registered Investment Companies at 8, DERA White Paper (2015), available at https://www.sec.gov/files/ derivatives12-2015.pdf. 512 This is based on an analysis of data provided by registered investment companies to the Commission on Form N–PORT filings received through July 31, 2023. 513 As of 2022 Q4, there are 1,107 hedge funds out of 6,553 Equity Single-Strategy hedge funds (excluding fund-of-funds hedge funds) that employ short selling in an Long/Short and Short Bias strategy. Assets under management (AUM) in these types of hedge funds total approximately $1.165 trillion. 2022 Q2 Private Fund Statistics, Division of Investment Management Analytics Office, available at https://www.sec.gov/divisions/ investment/private-funds-statistics.shtml. Data includes both U.S. and non-U.S. domicile hedge funds managed by SEC-registered investment advisers with at least $150 million in private fund assets under management. The data do not include hedge funds that were classified as multi-strategy on Form PF. These hedge funds could employ short selling as part of their multi-strategy. Data for nonU.S. domicile hedge funds with an equity short-bias strategy is not publicly available for 2022 Q2. In this case the last publicly available values were used (7 funds with a total AUM of $1 billion) from 2019 Q3. As of the end of 2021, hedge fund assets totaled approximately $4 trillion. Global Hedge Fund Industry Assets Top $4 Trillion for the First Time, Reuters (Jan. 20, 2022) (retrieved from Factiva database). PO 00000 Frm 00052 Fmt 4701 Sfmt 4700 routine use of hedging transactions, do not frequently establish short positions that would be large enough to be subject to the rule’s reporting requirement.514 One possible proxy for the number of Managers that might potentially have a reporting obligation is a fraction of the number of Managers reporting positions on Form 13F because such persons by definition manage accounts holding section 13(f) securities having an aggregate fair market value of at least $100 million, making such Managers more likely to have the resources to engage in short selling that exceeds Rule 13f–2’s thresholds. As of March 31, 2023, 8,551 Managers 515 with investment discretion over approximately $38.79 trillion reported holdings on Form 13F in Section 13(f) securities.516 The Commission also believes that registered investment advisers, particularly those managing hedge funds, are the primary Managers likely to be affected by Rule 13f–2. Though the Commission lacks data to quantify the exact number affected parties, the Commission estimates that the total number of Managers with reporting obligations will be between 252 and 1,000.517 2. Short Selling Short selling is a widely used market practice, which allows investors to 514 For example, according to Molk and Partnoy ‘‘insurance companies generally are not active short sellers. Short selling by insurance companies is used almost exclusively to hedge positions, and generally is not used with respect to equity positions at all.’’ Supra note 509, at 850. See also Molk and Partnoy discussion about banks and trusts. ‘‘Trust administrators . . . have a history of adopting conservative investment strategies. Although shorting can be used to reduce risk when matched with similar long positions, using short selling as an income generation tool is not consistent with the overall conservative investment tradition.’’ Id. at 854. 515 A portion of these filings are Form 13Fs filed to declare that the filer’s holdings are reported on another filer’s Form 13F. Thus, not all 8,551 Managers’ Form 13Fs represent unique holdings. 516 The statistic is computed by the Commission from data filed on Form 13F. 517 See supra Part VII.B.1 for more information on the estimates of how many Managers would have reporting obligations. The Commission estimated the number of reporting Managers using the short sale activity of Managers that submitted Form SH. Only Managers that exercised investment discretion over accounts with aggregate fair market values of at least $100,000,000 in securities described in Rule 13f–1(c) under the Exchange Act, and effected short sales of those securities, were required to file Form SH. Given that Managers included in the Form SH data may be a subset of Managers with obligations under Rule 13f–2, the estimate of 252 Managers is likely lower than the number who will ultimately report Form SHO. However, the Commission lacks data to better estimate the universe of Managers with obligations under 13f–2. See also infra Part VIII for a discussion of the applicability of Form SH data to estimating the number of Managers affected by Rule 13f–2. E:\FR\FM\01NOR2.SGM 01NOR2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations a. Short Selling Equities A short sale is the sale of a security that the seller does not own or any sale that is consummated by the delivery of a security borrowed by, or for the account of, the seller.518 In general, short selling is used to profit from an expected downward price movement, to provide liquidity in response to unanticipated demand, or to hedge the risk of an economic long position in the same security or in a related security.519 To short sell a stock, the short seller borrows shares of a stock from a lender—typically a long-term investor such as a mutual fund or pension fund—and sells those shares into the market. Later, the short seller purchases the same number of shares and returns them to the lender. The profit on the transaction for the short seller is the difference between the price at which the shares were initially sold and the price at which the investor re-purchased the shares—less any fees such as securities lending fees. If the price of the stock goes down then this difference will be positive and the short seller will make money. Short selling contributes to price efficiency when short sellers trade to incorporate negative information into stock prices. In addition to short selling based on negative sentiment, market participants also short sell to hedge existing positions. Hedging is a particularly potent motive to short sell a stock for options market makers who can hedge the risk of writing a call option by short selling the underlying stock in the stock market. Other investors use short selling to hedge out an unwanted component of a stock’s return. For example, an investor who wants to buy a particular stock to trade on stock specific information but does not want to expose itself to industry risk can hedge industry risk by short selling an industry index ETF while purchasing the underlying security. Market makers also use short selling extensively to maintain two sided quotes in the temporary absence of inventory. Lastly, traders may use short selling as part of algorithmic trading strategies attempting to benefit from temporary pricing anomalies. While short selling to trade on information or to hedge generally results in short positions that are held for some time, registered broker-dealers engaged in market making operations and algorithmic technical traders generally close their positions by the end of the day and thus their short positions generally do not show up in existing measures of short interest.520 Short selling generally entails more risk than holding a long position. At worst, a buyer of a long position can lose its entire investment. This is not true for a short seller. If the stock price increases from the short sale price, the investor loses money and since prices could potentially rise indefinitely, the short seller could lose more than the value of its original investment. Additionally, margin requirements for short selling are typically 150 percent— including the proceeds of the short sale plus an additional 50 percent of the value of the short position.521 If the stock price goes up, the investor may receive a margin call, which would require the investor to commit additional assets to meet margin requirements. To protect itself from losses, if an investor is unable to meet margin requirements, the broker-dealer may close the short position at a significant loss to the short seller. These dynamics can make it difficult for 518 See Rule 200(a) of Regulation SHO, 17 CFR 242.200(a). See also Regulation SHO Adopting Release. 519 One commenter supported this statement, stating that short selling provides liquidity and is an important hedging tool. See SBAI Letter at 2. 520 See infra Part VIII.B.4.i for a discussion of existing short interest data. 521 Regulation T specifies that in most situations margin requirements for equity short sales must be 150%. See 12 CFR 220.12. 522 On Feb. 15, 2023, the Commission adopted a rule to shorten the settlement cycle to one business day; compliance by broker-dealers will be required as of May 28, 2024. See Settlement Cycle Adopting Release. 523 One commenter stated that biotechnology companies, 90% of which have market capitalizations that would qualify as small-cap or micro-cap stocks, face an outsized proportion of short positions. See infra note 593. 524 See DERA 417(a)(2) Study. Figure F.1 in the DERA 417(a)(2) Study (showing that the level of short selling as a percentage of trading volume grew from 2007 to 2013 to about 50%). See also D. Rapach, M.C. Ringgenberg, and G. Zhou, Short Interest and Aggregate Stock Returns, J. of Fin. Econ. 46–65 (2016). 525 The Commission analyzed trading volume for common shares during the year 2019. This analysis revealed that the average common share during this period traded approximately 5% of shares outstanding each week, with approximately half of all trades involving short sellers. Consequently, total short selling volume amounts to approximately 5% of shares outstanding every two weeks for a typical stock. In contrast, from 2015 ddrumheller on DSK120RN23PROD with RULES2 profit if an asset declines in value or to hedge risks. Market participants can build an economic short position using traditional means (i.e., borrowing shares and selling them into the market to buy back later) or they can gain short exposure using derivatives. This section provides an overview of the current state of obtaining short exposure to equities and the different means of short selling—i.e., traditional means and using derivatives. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 PO 00000 Frm 00053 Fmt 4701 Sfmt 4700 75151 investors to maintain short positions in highly volatile stocks. Short selling is facilitated by the securities lending market. Borrowing shares generally occurs two days after the short sale is executed. This is because stock market transactions normally settle two business days after the transaction occurs, while securities lending transactions settle on the same day.522 Consequently, a short seller (or its broker-dealer) will gauge the ability to borrow shares prior to executing the short sale, referred to as obtaining a ‘‘locate,’’ but would actually borrow the share on the day that it is required to deliver the share to settle the stock market transaction. Short selling is prevalent in equity markets in general. A common ratio used to capture the amount of short selling is the short interest ratio, which measures the fraction of shares sold short at a given point in time divided by the total shares outstanding for that security. Figure 1 below presents the time series average for short interest outstanding for equities with different characteristics. This Figure shows that short interest tends to be higher for small-cap stocks than for mid- or largecap stocks.523 Another way to measure the prevalence of short selling in financial markets is by analyzing the fraction of transactions that involve a short seller. Short sellers are involved in nearly 50 percent of trading volume, while only about 2 percent of shares outstanding are held short in the U.S. equity markets.524 This average volume of short selling tends to be much higher than the typical changes in short interest,525 suggesting that a significant fraction of short selling volume is reversed very quickly. Such short selling is indicative of the fact that short selling is a key component of modern market making strategies and technical algorithmic trading.526 BILLING CODE 8011–01–P through 2019, absolute changes in short interest approximately every two weeks have equaled about a half of a percent of shares outstanding. Thus, the total amount of short selling volume occurring is an order of magnitude larger than the changes in short interest over the same time period. These statistics suggest that the majority of short selling transactions likely do not involve long term traders building short positions. Additionally, the correlation coefficient for bimonthly changes in short interest and short selling volume in 2019 is only about 0.018. This low correlation suggests that the economic forces driving total short selling volume and changes in short interest are likely different. 526 See infra Part VIII.C.3 for a more detailed discussion of short selling and liquidity provision. E:\FR\FM\01NOR2.SGM 01NOR2 75152 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations Figure 1: Short Interest Ratio for Non-Financial Common Stocks, Jan. 2005 - Feb. 2023 12.5 2.5 Cl .,. i i - l.lqJe(lllrketCllp>s$1Clbn) .... Mill(Saa<aMllllllltCllp <$1Gba) --· Smal(lllrketCllp<$2bn) 11 ■ SINOO I This figure plots the weighted average short interest ratio for three groups of stocks based on market capitalization on a bi-weekly basis from for January 2005 to April 2023. Large cap stocks are defmed as having a market capitalization of greater than $10 billion, mid cap as $2 billion to less than $10 billion, and small cap as less than $2 billion. We estimate the short interest ratio for each stock as the number of shares in short interest reported by the exchanges on a bi-weekly basis and obtained from the Compustat North America Supplemental Short Interest File (for NYSE- and Nasdaq-listed stocks), divided by shares outstanding obtained from the Center for Research in Security Prices, LLC (CRSP) daily stock files. Since short interest is reported as of the settlement date, we match short interest to the trading date two days prior to the short interest report date. The sample includes non-fmancial (i.e., excluding stocks with SIC code between 6000 and 6999) and common stocks (i.e., CRSP share code of 10 or 11). Following Blocher & Ringgenberg (2019), we discard stocks whose short interest ratio and adjusted short interest ratio (where the adjusted short ratio is adjusted for stock splits, buybacks, etc.) differ by more than 10%, in order to exclude potential asynchronous adjustments for stock splits in the shares outstanding and short interest datasets. Furthermore, stock-date observations for which a stock has multiple gvkey 's (Compustat identifier) or permno's (CRSP identifier) per date are removed. We then take the value-weighted average short interest ratio within a group, using market capitalization as weights. Market capitalization is calculated as shares outstanding multiplied by the closing price (obtained from the CRSP daily stock files) two days prior to the short interest record date. S&P 500 values are obtained from the CRSP Index file. See Jesse Blocher, Matthew C. Ringgenberg, et al., When Do Short Sellers Exit Their Positions?, SSRN (Aug. 27, 2018), available at https://ssm.com/abstract=2634579. b. Taking Short Positions Via Derivatives Trading in derivatives affects short selling in two key ways. First, derivatives offer investors an alternative means to express negative sentiment rather than short selling the stock. For instance, an investor wishing to profit VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 from the decline of a security’s value can also trade in various derivative contracts, including options and security-based swaps. Providing evidence of this alternative means of short selling, academic research shows that investors do indeed use options as an alternative means to obtain short-like PO 00000 Frm 00054 Fmt 4701 Sfmt 4700 economic exposure when standard short selling is restricted.527 527 See Robert Battalio and Paul Schultz, Regulatory Uncertainty and Market Liquidity: The 2008 Short Sale Ban’s Impact on Equity Option Markets, 66 J. of Fin. 2013–2053 (2011); B.D. Grundy, B. Lim, and P. Verwijmeren, Do Option Markets Undo Restrictions on Short Sales? Evidence from the 2008 Short-Sale Ban, 106 J. of Fin. Econ. 331–348 (2012). See also G.J. Jiang, Y. Shimizu, and E:\FR\FM\01NOR2.SGM 01NOR2 ER01NO23.000</GPH> ddrumheller on DSK120RN23PROD with RULES2 BILLING CODE 8011–01–C Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 Among the most popular derivative contracts are options, specifically put and call options. Call options give the owner of the option the right but not the obligation to purchase a stock at a specific price on a future date. Put options are similar but give the owner of the option the right but not the obligation to sell a stock at a specific price at a future date. In a put option the seller of the option is taking a long position in the underlying security while the purchaser of the put is taking a short position. The opposite is true for a call option. In addition to options, convertible securities (in which the security can be converted into an equity security) and security-based swaps can be used to create the same economic exposure as a short position.528 Convertible debt securities offer the owner a stream of payments and the ability to convert the security into equity should the owner’s strategy deem this beneficial.529 Security-based swaps include totalreturn swaps in which two counterparties agree to exchange or ‘‘swap’’ payment with each other as a result of changes in a security characteristic, such as its price.530 As with options, in each of these derivative contracts one party is inherently long and the other party is inherently short. These derivatives, and other more exotic derivatives, tend not to be as standardized as options, and are traded over-the-counter. Security-based swap transactions are reported to and publicly disseminated by security-based swap data repositories.531 C. Strong, Back to the Futures: When Short Selling is Banned (2019), available at https:// papers.ssrn.com/sol3/papers.cfm?abstract_ id=3420275. 528 On Sept. 19, 2019, the Commission approved the ‘‘Recordkeeping and Reporting Requirements for Security-Based Swap Dealers, Major Securitybased Swap Participants, and Broker-Dealers’’ which established a regulatory regime for securitybased swaps under Title VII of the Dodd-Frank Act. See Recordkeeping and Reporting Requirements for Security-Based Swap Dealers, Major Security-Based Swap Participants, and Broker-Dealers, Exchange Act Release No. 87005 (Sept. 19, 2019), 84 FR 68550 (Dec. 16, 2019), available at https://www.sec.gov/ rules/final/2019/34-87005.pdf. 529 Convertible debt securities are also employed in hedging strategies whereby the equity is sold short while the convertible security of that equity is held long. 530 On July 9, 2012, the Commission approved rules and definitions of Security based swaps. See 17 CFR parts 230, 240, and 241; Further Definition of ‘‘Swap,’’ ‘‘Security-Based Swap,’’ and ‘‘SecurityBased Swap Agreement’’; Mixed Swaps; SecurityBased Swap Agreement Recordkeeping, Commodity Futures Trading Commission and Securities and Exchange Commission, 77 FR 48208 (Aug. 13, 2012), available at https://www.sec.gov/rules/final/ 2012/33-9338.pdf. 531 See, e.g., 2015 Regulation SBSR Adopting Release, supra note 97; Security-Based Swap Data Repository Registration, Duties, and Core VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 In addition to providing an alternative means of expressing a bearish sentiment, trading in derivatives frequently leads to related trading in the stock market as derivatives’ counterparties seek to hedge their risk. For example, an options market maker who sells a put has taken on long exposure to the underlying security and may hedge this position by opening a short position in the underlying security. Thus, option market makers who sell large quantities of put options may amass large short positions in the underlying equities to hedge their options exposure. 3. Current Short Selling Regulations The Commission adopted Regulation SHO 532 to update short sale regulation in light of numerous market developments since short sale regulation was first adopted in 1938 and to address concerns regarding persistent failures to deliver and potentially abusive ‘‘naked’’ short selling.533 In adopting Regulation SHO, the Commission recognized that short sales can provide important pricing information 534 and liquidity to the market.535 However, the Commission was also concerned with the negative Principles, Exchange Act Release No. 74246 (Feb. 11, 2015), 80 FR 14437 (Mar. 19, 2015); Regulation SBSR—Reporting and Dissemination of SecurityBased Swap Information, Exchange Act Release No. 78321 (July 14, 2016), 81 FR 53545 (Aug. 12, 2016) (‘‘2016 Regulation SBSR Adopting Release’’). See also Order Approving Application for Registration as a Security-Based Swap Data Repository, 86 FR 8977 (Feb. 10, 2021), available at https:// www.sec.gov/rules/other/2021/34-91798.pdf. 532 See Regulation SHO Adopting Release. 533 In a ‘‘naked’’ short sale, the seller does not borrow or arrange to borrow the securities in time to make delivery to the buyer within the standard two-day settlement cycle. As a result, the seller fails to deliver securities to the buyer when delivery is due (also known as a ‘‘failure to deliver’’). 534 Efficient markets require that prices fully reflect all buy and sell interest. Market participants who believe a stock is overvalued may engage in short sales in an attempt to profit from a perceived divergence of prices from true economic values. Such short sellers add to stock pricing efficiency because their transactions inform the market of their evaluation of future stock price performance. This evaluation is reflected in the resulting market price of the security. See 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#P179_15857. 535 Market liquidity is generally provided through short selling by market professionals, such as market makers, who offset temporary imbalances in the buying and selling interest for securities. Short sales effected in the market add to the selling interest of stock available to purchasers, and reduce the risk that the price paid by investors is artificially high due to a temporary contraction of selling interest. Short sellers covering their sales also may add to the buying interest of stock available to sellers. See 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#P179_15857. PO 00000 Frm 00055 Fmt 4701 Sfmt 4700 75153 effect that failures to deliver may have on shareholders and the markets. For example, large and persistent failures to deliver may deprive shareholders of the benefits of ownership, such as voting and lending, and sellers that fail to deliver securities on settlement date may attempt to use their failures to engage in trading activities to improperly depress the price of a security. Due to continued concerns regarding failures to deliver, and to promote market stability and preserve investor confidence, the Commission has amended Regulation SHO on several occasions. For example, the Commission eliminated certain original exceptions to Regulation SHO’s closeout requirements,536 strengthened those same close-out requirements by adopting Rule 204,537 and reintroduced a short sale price test restriction by adopting Rule 201.538 In addition, the Commission adopted a targeted antifraud rule, Rule 10b–21, to further address failures to deliver in securities 536 As initially adopted, Regulation SHO included two major exceptions to its then existing close out requirements: the ‘‘grandfather’’ provision and the ‘‘options market maker’’ exception. Due to continued concerns regarding failures to deliver, and the fact that the Commission continued to observe certain securities with failures to deliver that were not being closed out consistent with its then existing close out requirements, the Commission eliminated the ‘‘grandfather’’ provision in 2007 and the ‘‘options market maker’’ exception in 2008. See Exchange Act Release No. 56212 (Aug. 7, 2007), 72 FR 45544 (Aug. 14, 2007) (eliminating the ‘‘grandfather’’ provision to Regulation SHO’s close out requirement), available at https:// www.sec.gov/rules/final/2007/34-56212fr.pdf; Exchange Act Release No. 58775 (Oct. 14, 2008), 73 FR 61690 (Oct. 17, 2008) (eliminating the ‘‘options market maker’’ exception to Regulation SHO’s close out requirement), available at https://www.sec.gov/ rules/final/2008/34-58775fr.pdf. 537 In 2008, the Commission adopted 17 CFR 242.204T (‘‘temporary Rule 204T’’), and in 2009 adopted Rule 204. Rule 204 further strengthens Regulation SHO’s close out requirements by making those requirements applicable to failing to deliver results from sales of all equity securities, while reducing the time-frame within which failures to deliver must be closed out. See Exchange Act Release No. 60388 (July 27, 2009), 74 FR 38266 (July 31, 2009), available at https://www.sec.gov/ rules/final/2009/34-60388fr.pdf. 538 In 2004, the Commission initiated a year-long pilot to study the removal of short sale price tests for approximately one-third of the largest stocks. After review of the pilot’s data, the Commission proposed the elimination of all short sale price tests. In June 2007, the Commission adopted a rule that eliminated all short sale price tests, including Rule 10a–1, a predecessor to Regulation SHO. The rule became effective in July 2007. In 2010, the Commission reinstituted a short sale price test restriction by adopting Rule 201. See Exchange Act Release No. 61595 (Feb. 26, 2010), 75 FR 11232 (Mar. 10, 2010), available at https://www.sec.gov/ rules/final/2010/34-61595fr.pdf. E:\FR\FM\01NOR2.SGM 01NOR2 75154 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations that have been associated with ‘‘naked’’ short selling.539 Regulation SHO requires brokerdealers to properly mark sale orders as ‘‘long,’’ ‘‘short,’’ or ‘‘short exempt,’’ to locate a source of shares prior to effecting a short sale (also known as the locate requirement), and to close out failures to deliver that result from long or short sales. In addition, if the price of an equity security has experienced significant downward price pressure, Regulation SHO temporarily restricts the price at which short sales may be effected. Regulation SHO imposes certain recordkeeping obligations on brokerdealers. However, the Commission does not have market-wide information on how often the bona fide market making exception is used. Furthermore, bona fide market making information is not reported on a regular basis, instead the Commission must request bona fide market making records on a brokerdealer by broker-dealer basis.540 In addition, regulations currently do not require market participants to record, report, or track when short sellers ‘‘buy to cover’’ their short sales. This makes it difficult for regulators to assess compliance with Rule 105 and with close out requirements in Rule 204. ddrumheller on DSK120RN23PROD with RULES2 4. Existing Short Selling Data There are several sources of short selling data that are available both publicly and for regulatory purposes. In general, these data sources lack information about levels of and the timing of changes in economic short positions for specific Managers in specific securities. Some sources report aggregate short positions at the security level, but their content is not granular enough to further the understanding of short selling strategies. Other sources provide granular short volume information, but they are unable to distinguish short transactions that impact short positions from those that do not and do not contain all activity 539 Rule 10b–21 is an antifraud provision that supplements existing antifraud rules, including 17 CFR 240.10b–5 (‘‘Rule 10b–5’’), and was adopted to further evidence the liability of short sellers. Specifically, Rule 10b–21 applies to short sellers, including broker-dealers acting for their own accounts, who deceive specified persons about their intention or ability to deliver securities in time for settlement, while failing to deliver securities by settlement date. Among other things, the rule highlights the specific liability of short sellers who deceive their broker-dealers about their source of borrowable shares for purposes of complying with Regulation SHO’s locate requirement, or who misrepresent to their broker-dealers that they own the shares being sold and subsequently fail to deliver shares. See supra note 14, available at https://www.sec.gov/rules/final/2008/34-58774.pdf. 540 See supra Part IV.B for a discussion on the use of the bona fide market making locate exception. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 that can change short positions. Some regulatory data sources report short transactions at the individual investor level, but using these data to estimate short positions would be significantly inaccurate and inefficient. a. Bimonthly Short Interest Data One of the primary data sources for aggregate short selling data is the bimonthly short interest data collected by FINRA.541 FINRA collects aggregate short interest information in individual securities on a bimonthly basis as the total number of shares sold short in a given stock as of the middle and end of each month. Then the exchange that lists the given stock, or FINRA itself in the case of OTC stocks, distributes the collected data.542 FINRA computes short interest using information it receives from its broker-dealer members pursuant to FINRA Rule 4560 reflecting all trades cleared through clearing broker-dealers.543 FINRA Rule 4560 requires generally that broker-dealers that are FINRA members report ‘‘short positions’’ in customer and proprietary firm accounts in all equity securities twice a month through FINRA’s webbased Regulation Filing Applications (RFA) system.544 FINRA defines ‘‘short positions’’ for this purpose simply as those resulting from ‘‘short sales’’ as defined in Rule 200(a) of Regulation SHO under the Exchange Act.545 Member firms must report their short positions to FINRA regardless of position size.546 The process of gathering and validating short interest data takes approximately two weeks.547 Thus the data are available with approximately a two week lag. FINRA short interest data are widely available and are used by academics and other market participants.548 541 See DERA 417(a)(2) Study at 17–18, supra note 6. 542 See Short Interest—What It Is, What It Is Not, FINRA Inv’r Insights (Apr. 12, 2021), available at https://www.finra.org/investors/insights/shortinterest. 543 Id. (Short interest for a listed security at any date reported by FINRA is ‘‘a snapshot of the total open short positions in a security existing on the books and records of brokerage firms on a given date.’’). 544 FINRA Rule 4560 excludes short sales in ‘‘restricted equity securities,’’ as defined in Securities Act Rule 144, from the reporting requirement. 545 See FINRA Rule 4560(b)(1). 546 See FINRA Market Regulation Department, General for Short Interest Reporting Instructions (Dec. 18, 2008) (reporting instructions to FINRA member firms), available at https://www.finra.org/ Industry/Compliance/RegulatoryFilings/ ShortInterestReporting/P037072. 547 See DERA 417(a)(2) Study at 17–18, supra note 6. 548 See supra note 491. FINRA and the listing exchanges make these data publicly available with biweekly updates. PO 00000 Frm 00056 Fmt 4701 Sfmt 4700 Furthermore, these short interest data are found to predict future stock and market returns over the monthly and annual horizons, suggesting that the bimonthly short interest data capture the economic short selling based on fundamental research.549 However, these data face two major limitations. First, the information does not provide insight into the timing with which short positions are established or covered over the two-week reporting period. This precludes the possibility of understanding the behavior of aggregate economic short selling in the two weeks leading up to the reporting date.550 Second, given that short interest is aggregated at the security-level, the aggregation does not provide an understanding of certain aspects of the underlying short selling activity. For example, the data cannot inform on whether short sentiment is broadly or narrowly held or held by persons with larger positions. The data also does not inform on the extent to which short interest has been hedged. b. Short Selling Volume and Transactions From SROs Since 2009, many SROs have been publishing two short selling data sets, including same day publication of daily aggregated short sale volume in individual securities 551 and publication of short sale transaction information on no more than a two-month delay.552 549 See, e.g., Peter N. Dixon and Eric K. Kelley, Business Cycle Variation in Short Selling Strategies: Picking During Expansions and Timing During Recessions, 57(8) J. of Fin. and Quantitative Analysis 3018–3047 (2022); see also Ekkehart Boehmer, Zsuzsa R. Huszar, and Bradford D. Jordan, The Good News in Short Interest, 96 (1) Journal of Financial Economics 80–97 (2010); Stephen Figlewski, The Informational Effects of Restrictions on Short Sales: Some Empirical Evidence, 16 (4) J. of Fin. and Quantitative Analysis 463–476 (1981). 550 For example, the public will not have information on stock-specific volatility in real-time that may relate to short selling of the particular stock. Such volatility may be explained, though only through assumption, once the bimonthly short interest data becomes available. Assumption is necessary because the data are still not at the daily level. 551 See Short Sale Volume and Transaction Data, available at https://www.sec.gov/answers/ shortsalevolume.htm (showing hyperlinks to the websites where SROs publish this data). See also supra note 492. See, e.g., FINRA’s Daily Short Sale Volume Files (which provide aggregated volume by security on all short sale trades executed and reported to a FINRA reporting facility during normal market hours). See FINRA Information Notice, Publication of Daily and Monthly Short Sale Reports (Sept. 29, 2009), available at https:// www.finra.org/sites/default/files/NoticeDocument/ p120044.pdf. 552 See FINRA’s Monthly Short Sale Transaction Files (which provide detailed trade activity of all short sale trades reported to a consolidated tape. See supra note 492. See also Short Sale Volume and Transaction Data, available at https://www.sec.gov/ answers/shortsalevolume.htm. Additional E:\FR\FM\01NOR2.SGM 01NOR2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 Some SROs make the historical daily short volume data available to market participants for a fee.553 The fact that market participants and academic users pay these subscription fees indicate that these data are utilized. In addition to these daily short volume data, several SROs provide intraday short sale transaction information for the orders that execute on their respective venues. As an example, FINRA provides information from FINRA’s Trade Reporting Facility (‘‘TRF’’) and Alternative Display Facility (‘‘ADF’’) 554 (the TRF and ADF are together referred to herein as ‘‘FINRA’s Reporting Facilities’’). Overall, these different sources of daily and intraday short volume data provide greater, though different, levels of granularity relative to the bimonthly short interest observations discussed earlier. Despite offering higher granularity than bimonthly short interest data, these existing short volume data provided by the SROs, including FINRA, have a number of limitations. First, the data do not provide insight into the activities of either individual traders, or different trader types. Consequently, it is not possible with existing short selling data provided by the SROs to separate trading volume associated with market makers, algorithmic traders, investment managers, or other trader types. Form SHO will address this limitation by providing data on the gross short sale positions and activity of investment managers with large short sale positions. transaction data has been available at various times, including transaction data from the Regulation SHO Pilot, which has been discontinued by most exchanges in July 2007 when the uptick rule was removed. See Exchange Act Release No. 55970 (June 28, 2007), 72 FR 36348 (July 3, 2007), available at https://www.sec.gov/rules/final/2007/ 34-55970.pdf. The Pilot data comprised short selling records available from each of nine markets: American Stock Exchange, Archipelago Exchange, Boston Stock Exchange, Chicago Stock Exchange, NASD, Nasdaq Stock Market, New York Stock Exchange, National Stock Exchange, and the Philadelphia Stock Exchange. See SEC Division of Trading and Markets, Regulation SHO Pilot Data FAQ, available at https://www.sec.gov/spotlight/ shopilot.htm#pilotfaq. 553 See, e.g., TAQ Group Short Sale & Short Volume, New York Stock Exchange, available at https://www.nyse.com/market-data/historical/taqnyse-group-short-sales (for short sale data relating to all NYSE owned exchanges). See Short Sale Volume and Transaction Reports from Nasdaq Trader, available at https://nasdaqtrader.com/ Trader.aspx?id=shortsale (for short sale data for Nasdaq exchanges); see also Short Sale Daily Reports, Chicago Board Options Exchange (for Cboe exchanges), available at https://datashop.cboe.com/ us-equity-short-volume-and-trades. 554 Each TRF provides FINRA members with a mechanism for the public reporting of transactions effected otherwise than on an exchange. See FINRA, Market Transparency Trade Reporting Facility, available at https://www.finra.org/Industry/ Compliance/MarketTransparency/TRF/. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 Additionally, the data do not provide insight into activities that may reduce exposure, making the use of these data to estimate investor sentiment fraught with potential bias. Moreover, these data provide information only on short sales, whereas short positions could also change because investors can increase or decrease their positions in ways other than short selling the stock. For example, investors can increase their short positions by exercising put options and delivering borrowed shares or by delivering borrowed shares when they are assigned call options. Investors can reduce their short positions in an equity when they, for example, ‘‘buy to cover’’ their positions, purchase shares in a secondary offering,555 convert bonds to stock, or redeem ETF shares containing the equity. As a result, the short selling volume and transactions data cannot easily explain changes in short interest, exposing a gap between these two types of existing data. Aggregate short selling statistics and short selling transactions data have different lags with which they are available. Aggregate short selling volume statistics are usually made available by the SROs by the end of the following business day. For the transactions data, the lag can be much longer, and in some cases the data are released with a one-month lag— implying that some short selling transactions data are not available for two months.556 There is also a concern that these data may over-represent the total volume of short sales occurring in the market. This is because Regulation SHO provides specific criteria regarding what is a long sale.557 If a market participant is unclear whether its trade will meet all the requirements at settlement to be marked a long sale, then it may choose to mark the trade as short to not run afoul of Regulation SHO requirements, even if the trade is likely an economic long sale.558 555 See supra note 285. example, a short sale transaction that takes place in late June could be released in a dataset in the month of August. 557 See Rule 200(g) of Regulation SHO specifies when an order can be marked as long. See also Part IV.B; Regulation SHO Adopting Release. An economic long sale is a sale of an owned, not borrowed, security. 558 See 2009 letter from Securities Industry and Financial Markets Association (‘‘SIFMA’’) commenting on an alternative short sale price test, expressing concern that compliance with Regulation SHO short selling marking requirements ‘‘will result in a substantial over-marking of orders as ‘‘short’’ in situations where firms are, in fact, ‘‘long’’ the securities being sold.’’ Letter from Securities Industry and Financial Markets Association (‘‘SIFMA Letter’’), available at https:// www.sec.gov/comments/s7-08-09/s70809-4654.pdf. 556 For PO 00000 Frm 00057 Fmt 4701 Sfmt 4700 75155 c. Securities Lending Securities lending data provide information on stock loan volume, lending costs, and the percentage of available stock out on loan. In the equity market, a primary reason for end borrowers to engage in a securities loan is to facilitate a short sale,559 leading to a close correlation between information about certain loan volumes and short interest. Therefore, some market participants use securities lending data as a measure of short sale positions.560 Since the proposing release, the Commission has adopted Rule 10c–1a. Below, we describe the baseline securities lending data—commercial securities lending data as well as forthcoming Rule 10c–1a data.561 i. Commercial Securities Lending Data The securities lending industry appears to use commercial securities lending data widely,562 though these data are generally available only by subscription.563 The use of commercial 559 One reason for this is that the ‘‘permitted purpose requirement’’ of the Board of Governors of the Federal Reserve System’s Regulation T, which broadly governs the lending activities of brokerdealers, specifies that a broker dealer may generally borrow or lend U.S. securities from or to a (nonbroker-dealer) customer solely ‘‘for the purpose of making delivery of the securities in the case of short sales, failure to receive securities required to be delivered, or other similar situations,’’ unless an exemption applies. See 12 CFR 220.10(a). 560 Some research has used stock lending data as a proxy for actual short sales. See, e.g., Oliver Wyman, The Effects of Short Selling Public Disclosure of Individual Positions on Equity Markets, Alternative Investment Management Association (Feb. 2011), available at https:// www.managedfunds.org/industry-resources/ industry-research/the-effects-of-short-selling-publicdisclosure-of-individual-positions-on-equitymarkets/. 561 While the adoption of Rule 10c–1a occurred before the adoption of Rule 13f–2, and Rule 10c–1a has certain intermediate compliance dates related to FINRA rulemaking that precede Rule 13f–2 compliance dates, we expect that the reporting and publication of Rule 13f–2 information will occur before the reporting and publication of Rule 10c–1a information. See supra Part VI and infra note 585. Rule 10c–1a is thus part of the baseline for Rule 13f–2, but significant aspects of Rule 10c–1a will be implemented later. 562 Several commercial entities sell data on securities lending to clients. See, e.g., 2011 Letter from Data Explorers (hereafter ‘‘Data Explorers Letter’’) in response to the request for comment relating to the proposed study of the cost and benefits of short selling required by Dodd Frank Act section 417(a)(2) available at https://www.sec.gov/ comments/4-627/4627-152.pdf. As some commenters have stated, stock lending facilitates short selling. See, e.g., Speech by Chester Spatt, former Chief Economist of the SEC (Apr. 20, 2007), available at https://www.sec.gov/news/speech/ 2007/spch042007css.htm. The information sold by vendors may include volume of loans, lending costs, and the percentage of available stock out on loan. 563 See DERA 417(a)(2) Study at 22–23. See also Rule 10c–a, Part IX.B.5. E:\FR\FM\01NOR2.SGM 01NOR2 75156 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 security lending data as proxy for economic short interest has several limitations. These include the fact that commercial vendors of the securities lending data often impose access restrictions via give-to-get models. In addition, the data are not comprehensive and are based on voluntary contributions, which leads to self-selection bias. In this setting, the entities contributing data are mindful of whether other entities can access the data. As such, participation rates in data sharing reflects strategic considerations that may lower the extent of data shared by each entity, reducing the information content of the pool of data collected by each vendor. The data for securities lending is potentially biased 564—either containing information about the wholesale market or the customer market, but not both, making it difficult for a given market participants to obtain comprehensive security lending information from one source. Furthermore, even the cumulative data provided by vendors is still not be comprehensive, primarily because it is based on voluntary data contributions.565 The reliance on voluntary data contributions increases the likelihood that data are missing in a non-random manner which can introduce biases into the data. To this end, the existing data accessible by an individual market participant may not accurately proxy short selling activity. Existing commercial securities lending data only provide a noisy proxy of short sentiment. This is because current commercial securities lending data originates from either surveys of a subset of asset managers about their securities lending experience, or it comes from give-to-get arrangements where those involved in securities lending must give data to the data providers in order to be able access data from the data providers. Because the survey data are not comprehensive it 564 For example, while the Commission believes that certain currently available securities lending data products may be biased due to missing observations, the extent of the biases cannot be quantified as the data that would be needed to assess the extent of the bias are missing. 565 Voluntary data contributions are provided either through customer market surveys or using a give-to-get model. The Commission believes that both give-to-get and customer market survey data lack comprehensiveness, as it is unlikely that the full universe of lending programs and borrowers contribute all data to any given data vendor. The voluntary nature of submissions to both give-to-get and customer market survey data may mean that some data may be withheld. Market participants that choose not to disclose their data to the commercial data vendors likely make that choice because it is in their strategic interest not to disclose, resulting in nonrandom omissions. These omissions likely insert bias into the commercial databases. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 can only provide a noisy proxy of actual short sentiment. The give-to-get data also provides only a noisy proxy because it too relies on voluntary data submissions. It is also generally limited to information about loans from lending programs to broker dealers (‘‘Wholesale Loans’’), which are made largely to facilitate clearing and settlement on a net basis at a clearing broker, rather than by transaction or position.566 Thus, Wholesale Loans are not traceable to individual short sellers. Further, the Commission understands that brokerdealers will usually source shares to meet their net clearing and settlement requirements from other sources, such as their own inventory or customer margin accounts, before engaging in Wholesale Loans. Thus, current commercial securities lending data serve only as an imperfect measure of short sentiment. ii. Rule 10c–1a Data On October 13, 2023, the Commission adopted Rule 10c–1a.567 Rule 10c–1a requires that the data elements in paragraph (c) of Rule 10c–1a, except for the size of the loan, are required to be made publicly available by an RNSA not later than the morning of the business day immediately after the covered securities loan is effected. Rule 10c–1a requires that the size of the loan be made publicly available by an RNSA on the twentieth day immediately after the covered securities loan is effected. In addition, Rule 10c–1a requires covered persons to report to an RNSA the legal name of each party to the loan (lender, borrower, and intermediary) and that an RNSA keep such information confidential. Next-day summary volume information will indicate the magnitude but not the direction of the activity, such that loan decreases are added to, not subtracted from, loan increases. Therefore, these data will not allow a viewer to discern between increases in aggregate short positions and decreases of aggregate short positions. Because loans to end-borrowers are usually made to facilitate short sales,568 these loans relate very closely to those customers’ short positions. By aggregating the total amount of shares on loan in the ‘‘customer’’ category, market participants could likely estimate outstanding short interest with considerable accuracy, though with an 566 See Rule 10c–1a, Part IX.B.2 for a more detailed discussion. 567 Rule 10c–1a will provide the Commission and market participants with access to comprehensive securities lending data market data. See Rule 10c– 1a; see also supra note 561. 568 See infra Part VIII.C.2. PO 00000 Frm 00058 Fmt 4701 Sfmt 4700 approximately one-month delay.569 Additionally, since each loan likely relates to a unique market participant, the Rule 10c–1a data will provide an indication of the distribution of short sentiment—that is, whether short interest is concentrated on a few short sellers with large positions, or whether it is spread out over many short sellers.570 Examining the change in the size of a loan from the reported data can also indicate when individual market participants increased or decreased their short positions, albeit with an approximate one-month delay. Pursuant to Rule 10c–1a, persons will be required to identify the legal name of all the parties to a securities loan without any delay to the RNSA. Consequently, regulators can use the data to track the size of shares on loan, and thus approximate an individual entity’s short position with little delay, potentially even if that entity uses multiple broker-dealers to source shares. Because loan modifications, such as increases, decreases, or terminations of loans, must be reported, regulators can produce running estimates of changes in individual entity’s estimated short positions. d. CAT Data Regulators can also extract short sale information from CAT data, which provide order lifecycle information for stocks and options.571 The data contain an order mark that is a part of the ‘‘material terms of the trade’’ that indicates whether an order is a short sale. This order mark allows regulators to identify traders who are short selling and to see the order entry and execution times of these short sales. However, CAT was not designed to track traders’ 569 While most loans that facilitate short sales likely come from this category of ‘customer’ loans, not all will. Some large market participants do not use broker dealers as an intermediary when sourcing loans, rather they maintain relationships directly with lending programs to source shares when they wish to short sale. These transactions would show up in the data as loans to ‘‘Other’’ entities. Lastly, to the extent that a broker dealer borrows shares to facilitate their own short selling, the loan would show up in the data as a loan to a broker dealer. However, by summing up all ‘customer’ and ‘other’ loans, market participants could likely estimate aggregate short interest with considerable accuracy. However, only publicly released Form SHO data will isolate large gross short sale positions of Managers. The delay of 21 days is due to the settlement of the loan occurring in T+1 manner plus the publication of the data 20 days after settlement. 570 The ability to identify changes in customer short positions is reduced to the extent that some short sellers, such as large institutions, have relationships with and are able to spread their borrowing across multiple prime brokers, which would make short interest appear less concentrated. 571 It is important to note that only regulators have access to CAT data. E:\FR\FM\01NOR2.SGM 01NOR2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations positions or changes in those positions, but rather collects information to analyze trading and order lifecycles. As such, using CAT data to estimate positions and changes in those positions can be challenging. Theoretically, one could use the order execution information in CAT data to estimate trader positions and track how those positions change over time. However, such estimates could be inaccurate due to several circumstances. First, CAT data do not include information on the long or short positions held in each account at the time that an Industry Member initially begins reporting to CAT. Thus, CAT does not provide an appropriate starting point for building short positions using investor-specific transaction information. Second, some investors may establish or cover short positions via other means that are not CATreportable events, for example: secondary offering transactions; option assignments; option exercises; conversions; or ETF creations and redemptions. Thus, there are activities that affect positions that are not contained in CAT in any capacity. While CAT is not designed to track positions, CAT data can be used in very limited and specific circumstances to offer rough position estimates. When focused on one or few accounts, estimating positions, though potentially inaccurate, can be manageable. However, using transaction information to track positions across a broad set of positions is inefficient. Even in situations in which the above limitations do not apply, the use of CAT data to estimate short positions and changes in those positions for all or a large set of accounts is inefficient and would require a considerable amount of processing power, which would take time and reduce the processing power available for other CAT queries. This hinders the Commission’s estimation of short positions in a timely fashion. Other than the inefficient means of estimating positions described above, CAT does not distinguish buy orders that establish a long position from those that cover, and therefore reduce, a short position. While Commission staff were able to identify some short covering activity during the volatile period in January 2021, due to the difficulties described above, the staff analyzing the volatility associated with meme stocks could not easily identify short covering activity using CAT data alone and was thus hindered in their reconstruction of key events.572 572 See Staff Report on Equity and Options Market Structure Conditions in Early 2021, SEC (Oct. 14, VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 Finally, even though CAT data identify short selling by market makers, the data do not provide information as to whether a broker-dealer is claiming use of the exception for bona fide market making from Regulation SHO’s locate requirement. Rather, the Commission has to make individual document requests to obtain such information currently. The adopted amendment will make this information readily available to regulators in a uniform electronic format and consolidate it with the other material terms of orders required to be reported to CAT. There are 24 national securities exchanges and one national securities association (FINRA) that are CAT Plan Participants. There are also 3,501 broker-dealers who have reporting obligations to CAT as Industry Members.573 These Industry Members often use third-party reporting agents such as service bureaus for CAT reporting. e. Exchange Act Form SH For a ten-month period in 2008 and 2009,574 the Commission required certain Managers to file confidential weekly reports of their short positions in section 13(f) securities, other than options, on Exchange Act Form SH, through temporary Rule 10a–3T.575 De minimis short positions of less than 0.25 percent of the class of shares with a fair market value of less than $10 million were not required to be reported.576 Additionally, only Managers that exercise investment discretion with respect to accounts holding section 13(f) securities having an aggregate fair market value of at least $100 million were required to report. The investment 2021), available at https://www.sec.gov/files/staffreport-equity-options-market-struction-conditionsearly-2021.pdf. 573 See supra Part VII.C.4.b for discussion of PRA costs for broker-dealers due to the CAT amendment. Not all 3,501 broker-dealers will bear the same costs due to the CAT amendment. 574 See DERA 417(a)(2) Study at 18, supra Part II.A.3 at 6. 575 With respect to each applicable section 13(f) security, the Form SH filing was required to identify the issuer and CUSIP number of the relevant security and reflect the manager’s start of day short position, the number and value of securities sold short during the day, the end of day short position, the largest intraday short position, and the time of the largest intraday short position. The reporting requirement was implemented via a series of emergency orders followed by an interim final temporary rule, Rule 10a–3T. Exchange Act Release No. 58591 (Sept.18, 2008), 73 FR 55175 (Sept. 24, 2008); Exchange Act Release No. 58591A (Sept. 21, 2008), 73 FR 58987 (Sept. 25, 2008); Exchange Act Release No. 58724 (Oct. 2, 2008), 73 FR 58987 (Oct. 8, 2008); Exchange Act Release No. 58785 (Oct. 15, 2008), 73 FR 61678 (Oct. 17, 2008). 576 See Exchange Act Release No. 58591 (Sept.18, 2008), 73 FR 55175 (Sept. 24, 2008). PO 00000 Frm 00059 Fmt 4701 Sfmt 4700 75157 manager was required to report short positions to the Commission on Form SH on a nonpublic basis on the last business day of each calendar week immediately following any calendar week in which it effected short sales,577 a more frequent disclosure interval than the quarterly public reporting of long positions required on Exchange Act Form 13F.578 In addition to the limited and temporary time period during which disclosure of short positions was required to be reported on Exchange Act Form SH, even at the regulatory level, the reporting requirements and data had several drawbacks and limitations. One drawback was that only Managers who exercised investment discretion with respect to accounts holding section 13(f) securities having an aggregate fair market value of at least $100 million were required to file Form SH, which excluded short-only funds and other large short sellers who did not file Form 13F. Additionally, the report was costly as Managers filing Form SH had a weekly reporting requirement. Additionally, data fields in Form SH including start of day short position, gross number of securities sold short during the day, and end of day short position were each subject to the de minimis reporting threshold, which resulted in unreported data points when only a subset of the fields exceeded the de minimis threshold. Furthermore, Form SH data were difficult to work with because they were not validated for errors such as duplicate entries, missing fields, or positions that were below the de minimis threshold and therefore did not need to be reported.579 5. Competition Many Managers operate in the investment management industry.580 In broad terms, investment management is a highly competitive industry. Investment managers compete for investors and investor funds. Among the bases on which Managers compete are returns, fees and costs, trading strategies, risk management, and the ability to gather information. It is costly for investment managers to do market research to gain an informational advantage. Investment managers who own a security have an advantage over those who do not in that a security owner can trade more cheaply on 577 See Exchange Act Release No. 58785, 73 FR 61678. 578 Id. 579 See Proposing Release, at 14963 for information on the methodology and caveats of using Form SH data. 580 See supra Part VIII.B.1 for discussion of Institutional Investment Managers. E:\FR\FM\01NOR2.SGM 01NOR2 75158 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 negative information by simply selling whereas investment managers not owning the same security must establish some form of short exposure, such as selling a security short, to capitalize on any negative information that they have uncovered. Academic research suggests that when the cost of short selling increases, a security owner’s advantage in terms of being able to profitably trade on gathered information increases, leading investors not owning a security to engage in less fundamental research.581 The Commission is cognizant of such research and has taken steps to help ensure that the impact of published data will be minimized by delaying publication by approximately one month and anonymizing and aggregating reporting Managers’ short position data. Investment managers, like other investors that could be subject to Rule 13f–2, also compete by using proprietary trading strategies. They typically seek to trade in ways that would not expose their strategies because, if their strategies became known to others, the strategies could lose value and such Managers could also suffer higher trading costs. More specifically, other traders could use copycat trading strategies to try to mimic the Managers’ strategy, potentially competing away the profitability of the strategy or other traders could anticipate when the Manager might trade, which could result in higher trading costs for the Manager. Some Managers also compete for returns by engaging in securities lending whereby assets are lent to other investors, often short sellers, for a fee. These fees in aggregate can be substantial.582 The Commission estimates there are 3,501 broker-dealers. These brokerdealers also compete with each other for order flow. The broker-dealer industry is a competitive industry with reasonably low barriers to entry to many segments of the industry. Most trading activity is concentrated among a small number of large broker-dealers, with thousands of small broker-dealers competing for niche or regional 581 This occurs because if an investor not owning the asset engages in fundamental research and discovers evidence that a stock may be overpriced, then it is costly for that investor to act on that information. This is not true for investors who own the asset as they can simply sell the shares that they own. See, e.g., Peter N. Dixon, Why Do Short Selling Bans Increase Adverse Selection and Decrease Price Efficiency?, 11 (1) The Rev. of Asset Pricing Studies 122–168 (2021). 582 The securities lending market is large and complex. See Parts IX.B.1–IX.B.4 of Rule 10c–1a for a more detailed description of this market and players. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 segments of the market. To limit costs and make business more viable, the small broker-dealers often contract with bigger broker-dealers to handle certain functions, such as clearing and execution, or to update technology. Larger broker-dealers often enjoy economies of scale over smaller brokerdealers and compete with each other to service the smaller broker-dealers who are both their competitors and customers.583 Broker-dealers compete in multiple ways: reputation, convenience, and fees. Broker-dealers typically pass operating costs down to their customers in the form of fees. C. Economic Effects 584 1. Investor Protection and Market Manipulation The adopted Rule 13f–2 and CAT amendment will enhance the Commission’s ability to protect investors and investigate market manipulation by providing a clearer view into the short selling market and improving the Commission’s reconstruction of significant market events. This in turn may lead to improved identification of manipulative short selling strategies which may also serve as a deterrent to would-be manipulators and thus may help prevent manipulation. It will also improve the Commission’s observation of short sale activity that potentially poses a systemic risk. The Commission believes that the adoption of Rule 13f– 2 and the CAT amendment will benefit investors by facilitating the Commission’s observation of short selling and will thus help protect investors and help ensure the sufficiency of information related to short selling in the market. The Commission believes that the Rule 13f–2, Form SHO, and the CAT Amendment will improve regulators’ oversight of markets and enhance the Commission’s and SROs’ reconstruction of significant market events by providing a clearer view into the role that short selling plays in market events of interest. Specifically, the Commission could have used Form SHO data combined with other data to reconstruct market events and better understand the link between trading activity of large short seller and contemporaneous price 583 See Rule 613 Adopting Release. preparing this economic analysis, the Commission accounted for the various types of Managers that could be subject to the reporting requirements. In general, the Commission believes that the economic effects of the rule are more influenced by the Managers’ investment strategy and motivation for short selling rather than by the type of Manager that is reporting. Any exceptions are noted in the analysis. See supra Part VIII.C.1. 584 In PO 00000 Frm 00060 Fmt 4701 Sfmt 4700 volatility during the recent volatility associated with meme stocks. For example, while short sellers as a whole were exiting their positions during the period of heightened volatility, large short sellers may have been engaging in trading behavior that was distinct from other short sellers. The recent adoption of Rule 10c–1a will further enhance the usefulness of adopted Form SHO.585 As another source of data covering the short selling market, the Commission may use Rule 10c–1a data combined with Form SHO data in an attempt to match securities lending with actual short positions taken. While the timing of the data being received may be asynchronous, Form SHO and Rule 10c–1a data sources will have a natural relationship with each other. This combination of data can be useful for market reconstructions, but also useful in detecting activities such as naked short selling or other potential violations. Hypothetically, if Form SHO data had been available to the Commission at the time of the market events of January 2021, the Commission could have used these data to examine the short selling behavior of individual large short sellers. Additionally, because short positions often take some time to create, the Commission could have attempted to identify individual short sellers with large short positions in the various meme stocks in January 2021 based on the most recent reports; the Commission could then have used CAT data to better understand how these short sellers traded during the heightened volatility.586 One commenter stated that the lack of transparency into short positions did not just hamper the SEC’s understanding of these events as they unfolded but, ‘‘. . . may also be interfering with the SEC’s and market 585 Rule 10c–1a, which was adopted prior to Rule 13f–2, includes multiple compliance dates, and certain disclosures required by Rule 13f–2 may be implemented before certain of Rule 10c–1a’s compliance dates. Due to this uncertainty, the Commission describes the effects of Rule 13f–2 and the CAT amendment as coming into existence prior to those associated with Rule 10c–1a but acknowledges that there may be a period in which this is not true. The beneficial combined effects will not materialize until the disclosure requirements of both rules are implemented. See infra note 615. 586 Some academics have critiqued the Commission Staff’s GameStop report, the Report on Equity and Options Market Structure Conditions in Early 2021, available at https://www.sec.gov/files/ staff-report-equity-options-market-structionconditions-early-2021.pdf, and some of its methods, which were driven by data availability. See Joshua Mitts, Robert Battalio, Jonathan Brogaard, Matthew Cain, Lawrence Glosten, and Brent Kochuba, A Report by the Ad Hoc Academic Committee on Equity and Options Market Structure Conditions in Early 2021 (working paper) (2022), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_ id=4030179. E:\FR\FM\01NOR2.SGM 01NOR2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations observers’ ability to say with confidence what happened in retrospect.’’ 587 The Commission agrees that more data, as is being generated by the adoption of this rule, would have aided the Commission in analysis of the events of January 2021. As noted above in Part VIII.B, Form SHO data will provide the Commission with data that are additive rather than duplicative.588 After implementation of Rule 13f–2, the activity data provided in Form SHO will allow the Commission to observe how large short sellers respond to the heightened volatility, albeit with a time lag, due to the filing deadline. Specifically, the Commission will be able to observe more precisely which days reporting short sellers most actively increase or decrease their short positions and correlate this activity to market conditions on those days. Analysis of Form SHO data during periods of high volatility might help the Commission maintain fair and orderly markets by highlighting key economic channels and mechanisms through which short selling could both impact and be impacted by periods of volatility. This information can, in turn, allow the Commission to more specifically tailor responses to similar or related events in the future. While the data provided by the CAT amendment will be visible to the Commission relatively quickly, the Form SHO data will only be available following a lag of at least two weeks.589 Thus, while Form SHO data will be useful in market reconstruction, it will have limitations in its timeliness. The bona fide market making information from the CAT Amendment will facilitate regulatory analysis of the use of the bona fide market making exceptions to Regulation SHO.590 In particular, this information will provide regulators investigating potential Regulation SHO violations with clearer 587 See Better Markets Letter at 7. supra Part VIII.B for discussion. 589 Form SHO is required to be reported 14 days after the end of the month. Thus, trades happening in the first two weeks of the month will not be reported for more than a month. 590 Two Regulation SHO rules include exceptions for bona fide market making. Rule 203(b)(2)(iii) exempts market makers selling short in connection with bona fide market making activities from the requirement that a short seller must either borrow or have reasonable grounds to believe he can borrow a security in time for delivery prior to effecting a short sale. See 17 CFR 242.203(b)(2)(iii). Rule 204(a)(3) provides that a failure to deliver positions attributable to bona fide market making activities by registered market makers, options market makers, or other market makers obligated to quote in the over-the-counter markets, must be closed out by no later than the beginning of regular trading hours on the third consecutive settlement day following the settlement date (T+4), rather than the settlement day following the settlement date (T+1). See 17 CFR 242.204(a)(3). ddrumheller on DSK120RN23PROD with RULES2 588 See VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 evidence regarding whether a market maker was relying on a bona fide market making exception. This might save a significant amount of time during an investigation. Having regular access to these data will provide the Commission with further insight into whether the exceptions for bona fide market making in Regulation SHO Rules 203 and 204 are being used appropriately, which may assist in assessing compliance with Regulation SHO. The bona fide market making information might improve regulators’ ability to interpret certain information in market reconstructions. Market reconstructions can sometimes benefit from regulators knowing when certain activity is either directional or market neutral because the motives and profitability of such trading types are different. The bona fide market making information will help regulators separate short selling that represents market makers’ liquidity provision to facilitate investor demand from other short selling, including other market maker short selling. Since such short selling is more likely to be in response to customer demand, it is less likely to signify that the short seller anticipates a price decline, relative to cases in which the short seller is trading directionally. Additionally, the data provided by adopted Rule 13f–2 and the CAT amendment may improve the Commission’s ability and effectiveness in detecting certain types of fraud. Form SHO data will provide the Commission flags that may signal potential fraud during an examination. Additionally, the enhanced CAT data will provide the Commission with regular access to improved information with which to examine potential instances of fraud without needing to ask broker-dealers for information. Enhanced fraud detection by the Commission may also help deter fraud, resulting in improved price efficiency and market quality. Some market participants and academics have raised concerns that short selling may in some instances offer the potential for stock price manipulation, including ‘‘short and distort’’ campaigns.591 In ‘‘short and 591 See, e.g., comment letters submitted with regards to Short Sale Reporting Study Required by Dodd-Frank Act section 417(a)(2): Naphtali M. Hamlet (May 6, 2011); Jan Sargent (May 6, 2011); Lee R. Donais, President and CEO, L.R. Donais Company (May 8, 2011); Joseph A. Scilla (May 9, 2011); Jane M. Reichold (May 17, 2011); John Gensen (May 18, 2011); Victor Y. Wong (May 20, 2011); Kevin Rentzsch (May 24, 2011); Lynn C. Jasper (May 27, 2011); Donald L. Eddy (May 28, 2011); Al S. (June 10, 2011); Jeffrey D. Morgan, President and CEO, National Investor Relations Institute, at 3 (June 21, 2011) (‘‘NIRI’’); Professor James J. Angel, at 2 (June 24, 2011); and Dennis PO 00000 Frm 00061 Fmt 4701 Sfmt 4700 75159 distort’’ strategies, which are illegal, the goal of manipulators is to first short a stock and then engage in a campaign to spread unverified bad news about the stock with the objective of panicking other investors into selling their stock in order to drive the price down.592 If a ‘‘short and distort’’ campaign is suspected, then detecting this behavior using the position and activity data in Form SHO will be easier than using current data. Short and distort campaigns are more likely to occur in stocks with lower market capitalizations with less public information.593 Consequently, among these stocks, it may not take a very large short position in dollar terms to reach the daily average 2.5 percent of shares outstanding over the preceding calendar month threshold for smaller reporting issuers or the $500,000 or more at the end of a settlement day threshold for non-reporting company issuers.594 As a result, it is likely that an entity engaging in such a practice will be required to report Form SHO data.595 Consequently, Nixon, CEO and Chairman, International Bancshares Corporation, at 1 (July 18, 2011). All letters are available at https://www.sec.gov/ comments/4-627/4-627.shtml. 592 If 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. Short sellers could also engage in price manipulations by systematically taking short positions in one firm while taking long positions in the competitor. See Bodie Zvi, Alex Kane, and Alan J. Marcus, Investments and Portfolio Management, McGraw Hill Education (2011). See also Rafael Matta, Sergio H. Rocha, and Paulo Vaz, Predatory Stock Price Manipulation, available at https:// papers.ssrn.com/sol3/papers.cfm?abstract_ id=3551282. 593 One commenter stated that biotechnology companies, 90% of which have market capitalizations that would qualify as small-cap or micro-cap stocks, face a disproportionately high share of short positions. The commenter believes that biotechnology firms are disproportionately targeted by short sellers for multiple reasons. First, because biotechnology companies cannot disclose interim data until validated, the time gap between milestone announcements makes these stocks targets for ‘‘short-and-distort’’ campaigns. Second, the commenter stated that short sellers of biotechnology firms will challenge patent claims in order to drive their stock prices lower, which makes short positions on these stocks more valuable. The commenter supports the Commission’s inclusion of the 2.5% threshold, which would be reached before the $10 million daily average threshold for the majority of biotechnology firms. See Bio Letter at 5–8. 594 Academic research has found that the average short interest in stocks targeted by activist short sellers is about 10%, while it is only 4% for nontargeted firms. Consistent with high information asymmetries, targeted firms also appear to have wider bid-ask spreads and higher disagreement among analysts. See W. Zhao, Activist Short-Selling and Corporate Opacity (Working Paper) (2020), available at https://papers.ssrn.com/sol3/ papers.cfm?abstract_id=2852041. 595 See, e.g., Y.T.F. Wong and W. Zhao, PostApocalyptic: The Real Consequences of Activist E:\FR\FM\01NOR2.SGM Continued 01NOR2 75160 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 if ‘‘short and distort’’ type behavior is suspected, then the Commission will be more likely to identify Managers with large short positions and thus quickly focus their inquiries on entities that could potentially profit from manipulation. The Commission could then match estimated ‘‘buy to cover’’ trading on individual days to statements or other actions of the investor which may indicate that the investor was engaging in such behavior.596 In addition, the Commission could use CAT data to further investigate the trading activity of the alleged manipulator. CAT data would be used to corroborate Form SHO reporting to CAT reported transactions. Using the identified manager’s data in CAT, the Commission could see all CAT reportable activity, but will not be able to see other activity such as options exercises or participation in secondary offerings from an issuer. Enhanced oversight due to the adopted rule and amendment could also provide increased protection from other sources of harm caused by manipulative short sale activity. First, if firm manager decision-making is influenced by shifts in stock prices, as one theoretical study suggests,597 then short sellers could seek to drive down stock prices when profitable projects are announced, which may cause firm managers to reassess these projects. Doing so may lead to worse managerial decision making and lower stock prices. Second, another theoretical study argues that due to high levels of leverage and interconnectedness in the finance industry, even small declines in stock prices due to manipulative short sellers could ripple through the financial system with large effects.598 While Short-Selling. (Working Paper) (2017), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_ id=2941015. Several commenters agreed that the 2.5% threshold for Rule 13f–2 was important because it protects firms with lower market capitalizations. See, e.g., BIO Letter at 9. 596 ‘‘Buy to cover’’ activity would be inferred from position changes reported on Form SHO. This method is only a proxy for ‘‘buy to cover’’ information. Specifically, the Commission would be assuming that changes in position came from ‘‘buy to cover’’ activity, though there are other mechanisms which could change a Manager’s net position that do not occur from ‘‘buy to cover’’ transactions. Further, Form SHO will not show intraday short sales and buying to cover if the amounts are equal, as the net position will not change. 597 See I. Goldstein and A. Guembel, Manipulation and the Allocational Role of Prices, 75 (1) The Rev. of Econ. Studies 133–164 (2008). 598 See Markus K. Brunnermeier and Martin Oehmke, Predatory Short Selling, 18 (6) Rev. of Fin. 2153–2195 (2014). Similarly, some have also stated that short sellers may have played a role in the stock market crash at the beginning of the Great Depression. See, e.g., Jonathan R. Macey, Mark Mitchell, and Jeffry Netter, Restrictions on Short VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 manipulation is difficult to verify, should it be suspected, such activity might be more easily identified with Form SHO positions and activity data. The positions data will allow the Commission to more quickly identify individuals with large short positions and then use the activity to identify what data to gather, including CAT data to investigate their trading behavior to look for signs of manipulation. Improved detection capacity may also deter manipulative behavior due to increased fear of detection, potentially leading to an overall decline in fraudulent activity.599 Publicly releasing aggregated information about large short positions may, in some instances, increase the risk of trading behavior that is harmful to short sellers, including orchestrated short squeezes. More specifically, to the extent that Managers are still holding their short positions when the data becomes public, the Commission believes that the information disclosed pursuant to Rule 13f–2 and the disclosures Form SHO requires also might, in some cases, potentially facilitate manipulative strategies targeting short sellers, such as short squeezes. However, the Commission has sought to reduce this risk by releasing only aggregated and anonymized data. Several commenters agreed that only aggregated and anonymized data should be published by the Commission in order to reduce the likelihood of short squeezes and chilling short sale activity, the latter of which could harm stock price efficiency and market liquidity.600 In contrast, however, multiple commenters stated that individual Manager’s positions should be publicly disclosed in order to uncover hidden short positions, which one commenter stated pose risks to investors and the markets.601 The Commission has sought to balance the costs and benefits of Rule Sales: An Analysis of the Uptick Rule and its Role in View of the October 1987 Stock Market Crash, 74 Cornell L. Rev 799, 801–802 (1989) (collecting reports of such allegations). 599 See letters from Christine Lambrechts (hereafter ‘‘Lambrechts Letter’’), available at https:// www.sec.gov/comments/4-627/4627-14.htm; see also International Association of Small Broker Dealers and Advisor, available at https:// www.sec.gov/comments/4-627/4627-109.pdf. See NIRI Letter, available at https://www.sec.gov/ comments/4-627/4627-134.pdf. 600 For discussion of data aggregation, see supra Part II.C. See also MFA Letter, at 18; SIFMA Letter, at 22; AIMA Letter, at 5 comment letters of supporters. 601 This commenter stated that reducing or eliminating the reporting thresholds to Form SHO would provide benefits. See Better Markets Letter, at 13. Several retail investor commenters also said that the reporting thresholds to Form SHO should be reduced or eliminated. See supra note 25. PO 00000 Frm 00062 Fmt 4701 Sfmt 4700 13f–2 and Form SHO by collecting Manager-specific data, which should provide the Commission with improved detection of manipulative and potentially destabilizing activity, while publicly releasing only aggregated, anonymized data, which should reduce the likelihood of short squeezes and copycat behavior but still increase the transparency of large short sale activity.602 The Commission recognizes that the position size thresholds that underlie publicly released information may lead to the risk of Managers being identified by the public. The Commission estimates that 39 percent of stocks reported on Form SHO would only have one Manager above the reporting Threshold A.603 By focusing on stocks in which market participants can ascertain that only one Manager exceeded the threshold,604 combined with a Manager’s posts on social media or information discovered by a private investigator, market participants may be able to identify the Manager holding the short position.605 As such, the limited 602 One commenter stated it was confusing that the Commission believes that the public release of Form SHO may give opportunities to orchestrate short squeezes, but at the same time, also help detect short squeezes. See Two Sigma Letter, at 10– 12. While publicly released Form SHO data may, in some cases, increase the opportunity to orchestrate short squeezes, the Commission has reduced this risk by only releasing, aggregated, anonymized data. Moreover, this risk is further reduced by the Commission’s ability to utilize disaggregated, Manager-identified short sale data in order to increase its detection of short squeezes and other manipulative behavior. 603 Based on analysis of Form SH data. See Proposing Release, at 14963. Commenters questioned the use of Form SH data in this and other contexts. See infra Box 1: Use of Form SH Data for responses to comments on the use of these data. 604 In some cases, identifying which equity securities reported to the public via Form SHO data had only one Manager reporting may not be difficult. For example, if the aggregated short positions reported in an equity security were less than $20 million, it could be estimated that one Manager had a short position of at least $10 million average over the month. However, this estimation could be incorrect if Managers’ end of month gross short position differs significantly from their average gross short position over the month. This estimation could be further honed by looking at daily data to see changes in daily short positions to better estimate the size of the position, and thus the number of Managers. 605 For example, one issuer, upon learning that short sellers had taken a large short position in the issuer, reportedly sent a letter to all shareholders urging them to request physical custody of their shares from their broker-dealers in an apparent attempt to disrupt securities lending which supports short selling. This strategy appeared to work initially as the share price increased by nearly 50% in the subsequent three weeks. The issuer also hired private investigators to determine who was behind the short selling and filed suit against a well-known short seller. The issuer, however, entered bankruptcy less than a year later. The bankruptcy courts ruled that the issuer defrauded E:\FR\FM\01NOR2.SGM 01NOR2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 number of reporters potentially risks shining a spotlight on the few Managers with large short positions.606 However, due to the delay before publicly releasing the data, public Form SHO information will not be as up-to-date and thus may not as accurately reflect current short positions.607 Thus, efforts to orchestrate a short squeeze based on the public Form SHO data could result in losses to the initiators of the short squeeze if the short positions they target no longer exist.608 Based on analysis using Form SH data, the Commission expects that most, but not all, of the short positions leading to reporting on Form SHO will be closed by the time that the aggregated Form SHO data are released.609 An additional factor that may help mitigate the risk of a short squeeze due to the public release of Form SHO data is the fact that nonpublic Form SHO data, in coordination with CAT data, will improve the SEC’s ability to detect short squeeze activity, which may deter some market participants from seeking to orchestrate a short squeeze. Having detailed confidential information about which Managers currently hold large positions might also investors. See G. Weiss, The Secret World of ShortSellers, Business Week, 62a (Aug. 5, 1996). See also Owen A. Lamont, Go Down Fighting: Short Sellers vs. Firms, 2 (1) The Rev. of Asset Pricing Studies 1–30 (2012). 606 Though the count of Managers filing Form SHO in any particular equity security may sometimes be able to be estimated with some accuracy, the identities of Managers will not be disclosed by Form SHO data. 607 Analysis of Form SH data found that short positions were held at or above the $10 million or 2.5% thresholds only for an average of 9.85 days after the end of each month. See Proposing Release, at 14963 for information on the methodology and caveats of using Form SH data. Commenters questioned the use of Form SH data in this and other contexts. See infra Box 1: Use of Form SH Data for responses to comments on the use of these data. 608 That is because the short position has already been closed and the organizers of the short squeeze are incorrectly assuming the Manager still has an open short position. Depending on the Manager’s desired length of time of the short position, the public version of Form SHO data may still accurately portray the aggregated short position in a given equity security. However, those basing their decisions on public Form SHO data will not know whether the Managers underlying the aggregated short positions in Form SHO data have closed out their positions within the two weeks publication delay. Other data sources, combined with Form SHO data, can be used in an attempt to discover if the position is closed out, but those are also on a delayed basis. 609 See infra note 622 for a discussion on the Commission’s estimates on how long Managers hold short positions. See also infra note 629 for more information on short sellers that do hold their positions for longer periods of time. Commenters questioned the use of Form SH data in this and other contexts. See infra Box 1: Use of Form SH Data for responses to comments on the use of these data. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 help the Commission observe potential systemic risk concerns regarding short selling. Large and concentrated short positions have the potential to increase systemic risk. As discussed previously, unlike long transactions, short selling places an investor at risk of losing significantly more than the investor’s initial investment, should the value of the underlying asset increase significantly. Even temporary spikes in asset value can lead to significant losses—by triggering margin calls or even position liquidations if capital requirements cannot be met.610 If the value of an underlying asset increases, a short seller may be required to post additional collateral to meet margin requirements. If the investor is unable to do so, then the investor’s broker-dealer may liquidate the investor’s position with existing collateral leading to steep losses for the short seller. Consequently, it may be more difficult for a short seller to ride out periods of turbulence than a long seller. One commenter stated they were unaware of cases of short selling causing systemic harm.611 However, the potential instability that the Commission wishes to detect includes spillovers from events in one asset, such as a particular equity security, to the market for another asset. Manager level short position data of individuals with large short positions might allow the Commission to better observe these positions, study, and more appropriately respond to any market events that arise. For example, if the Commission had Form SHO data during the meme stock events of January 2021 then it would have had a clearer view as to which Managers held large short positions prior to the volatility event and thus which Managers could have been at greatest risk of suffering significant harm from a short squeeze. However, the ability of the Commission to respond to market events is likely impacted by the timeliness of the short sale data that it receives. One commenter stated that due to the delay in reporting of Form SHO, the data would not be useful to the Commission to respond to market events.612 While 610 Due to imperfect information and market frictions, a short seller who ‘‘does not have access to additional capital when security prices diverge . . . may be forced to prematurely unwind the position and incur a loss[.]’’ See, e.g., Mark Mitchell, Todd Pulvino, and Erik Stafford, Limited Arbitrage in Equity Markets, 57 J. of Fin. 551–584 (2002). See also, e.g., Andrei Shleifer and Robert W. Vishny, The Limits of Arbitrage, 52 J. of Fin. 35– 55 (1997) and Denis Gromb and Dimitri Vayanos, Limits of Arbitrage, 2 Annu. Rev. Fin. Econ. 251– 275 (2010) (citations therein). 611 See SBAI Letter at 4. 612 See SBAI Letter at 2. PO 00000 Frm 00063 Fmt 4701 Sfmt 4700 75161 the delay will not aid the Commission in responding in real-time to market events, it does aid the Commission in developing responses to events over a longer time horizon. Regulatory changes rarely happen in real time and involve careful analysis prior to implementation. The Commission has chosen a reporting regime which balances the benefits of more frequent and timely data with the costs incurred by Managers having to report more quickly, including higher explicit reporting costs as well as heightened risks of short squeezes and copycat trading. All the effects, positive and negative, associated with the data collected by Rule 13f–2 discussed in this section will be limited by data accuracy. Upon filing, Form SHO will be checked for technical errors but not for the accuracy of the position and activity data in the Form. If Managers make mistakes in their calculations, such mistakes will reduce the utility of the data. However, the amendment process will require Managers to amend filings when they discover errors, thus promoting the accuracy of the information. 2. Effects on Stock Price Efficiency The Commission believes that Rule 13f–2 and Form SHO may have uncertain effects on stock price efficiency.613 The uncertain effects on price efficiency stems from increased transparency of short sales generally increasing efficiency, whereas increased transparency might also discourage potential short sellers from gathering information—which harms price efficiency. This section discusses both the concept of price efficiency and the positive and negative impacts that adopted Rule13f–2 and the CAT amendment may have on price efficiency. a. Comparisons to Other Public Short Selling Data The publicly released aggregated data from Form SHO will provide information to market participants about the aggregate activities of large short sellers—with a planned lag of approximately fourteen days from the end of the filing deadline, which is fourteen days after the last day of the month.614 Existing short selling data, such as the FINRA short interest data, is timelier than the data that will be 613 See infra Part VIII.D.1 for additional discussion of the effect of adopted Rule 13f–2 and the CAT amendment on efficiency. 614 Thus, it will be a one-month delay after the last day of the month of data being reported. See supra Part II.B.3 for more information on the delay of public dissemination of Form SHO data. E:\FR\FM\01NOR2.SGM 01NOR2 75162 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 filed pursuant to Rule 13f–2 and Form SHO. Forthcoming information from Rule 10c–1a data, which could be used to estimate short interest, is also expected to be timelier than Rule 13f– 2 and Form SHO data.615 Nevertheless, Rule 13f–2 and Form SHO data will provide information on short sale behavior that is not available from other short sale data sources. For example, while FINRA short interest data includes short interest for all short sales known to clearing broker-dealers, it does not provide the Commission or the public with daily information on short sellers’ activities. In contrast, Form SHO data will provide daily information on gross short positions of Managers that exceed Reporting Thresholds.616 Moreover, while Rule 10c–1a data will disseminate to the public anonymized transactions-by-transaction securities lending data by all market participants, it does not allow for an accounting of the timing of aggregate short sales conducted by Managers, nor does it reveal aggregate short positions of Managers with large short positions, as will the data from publicly available Form SHO.617 Thus with the adoption of Rule 13f–2 and Form SHO, market participants, who will only see anonymized data, will have increased awareness into the activity of Managers with large short sale positions.618 These benefits are afforded by the adoption of Rule 13f–2 and the required reporting of Form SHO. There is overlap between the information about stock fundamentals contained in FINRA short interest data, 615 We expect that the reporting and publication of Rule 13f–2 information will occur before the reporting and publication of Rule 10c–1 information. See supra note 531. Reporting and disclosure under Rule 13f–2 will provide more information over current short selling data until reporting and disclosure under Rule 10c–1a are fully implemented. This could temporarily magnify the benefits and costs of many of the effects discussed in this section and elsewhere in the Economic Analysis. 616 The Commission will anonymize these data before they are publicly disseminated. 617 For example, a Manager could accumulate a large short position in a particular security using securities loans from multiple prime brokers. Each of these loans will be reported as a distinct Rule 10c–1a securities loan, and observers may not be able to ascertain whether they are part of a single Manager’s short position. As a result, a large securities loan in Rule 10c–1a data may not represent a single large position reportable under Rule 13f–2. 618 The Commission will have enhanced data regarding Managers and trading activity of stocks in which thresholds are triggered. See supra Part VIII.C.1 for discussion. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 forthcoming Rule 10c–1a data, and the data that will be aggregated from Form SHO filings. However, the information in Form SHO filings provides data on Managers, including their aggregated daily net changes in positions.619 Thus, Form SHO will increase the information available to investors about past bearish sentiment in the market on a specific time frame. For example, Form SHO data could be combined with FINRA short interest data to calculate the proportion of short interest comprised of Managers with substantial positions. Furthermore, the accompanying activity information of Form SHO will provide market participants with an enhanced view of short interest and securities lending as well as increased insight on how the short sale activity measured by these data series change over time. Further, the use of the last day of the month as the reference month for the Form SHO reports will allow for a direct comparison of the Form SHO data to the FINRA short interest data. For example, market participants might search for correlations between significant increases or decreases in short positions found in Form SHO data with corporate events or announcements to gather a more precise view of how the market views corporate actions or events and which events contributed to the FINRA final short interest tally at the end of the month. While Rule 10c–1a data could also be used with FINRA short interest data for such analysis, Form SHO data will more clearly reveal how Managers with large gross short positions view these actions or events. Thus, market participants and regulators will be able to use Form SHO data along with FINRA short interest data to assess the degree to which short interest is concentrated among Managers with large positions. It will also allow regulators to better assess which securities face the greatest risk of short squeezes and other manipulative strategies. Form SHO data could also be combined with forthcoming Rule 10c– 1a data in order to assess the degree to which securities lending is widely dispersed among market participants or concentrated among Managers who filed Form SHO. 619 This is in contrast to other data sources, which only provide data on securities such as the short interest in a particular security (i.e., FINRA short interest) or the volume of securities lent (i.e., Rule 10c–1a data). PO 00000 Frm 00064 Fmt 4701 Sfmt 4700 b. Potential Improvements to Price Efficiency Rule 13f–2 and Form SHO may also improve price efficiency if they mitigate fraud as discussed in Part VIII.C.1. Fraud is inherently non-efficient trading and harms price efficiency because a fraudster’s motive is to create a deviation of a firm’s value from fundamentals and to profit from this deviation. Thus, to the extent that fraudulent trading, such as short and distort campaigns, are limited by regulator’s access to the data provided by Form SHO, Rule 13f–2 will result in improved price efficiency. More generally, the impact of Form SHO on price efficiency will be commensurate with the degree to which aggregated Form SHO data are newer or more timely than other publicly available short selling information and useful for valuing stocks. Price efficiency (also known as market efficiency) refers to how accurately prices reflect available information relevant to the value of the asset.620 This information may allow market participants to more effectively make trading decisions and manage risk— increasing price efficiency. For example, if aggregate Manager short positions provide better info on bearish sentiment, then prices could react to updated Form SHO information on bearish sentiment.621 Although the majority of Managers’ short positions may be closed by the time the aggregated data from Form SHO will be made public due to the lag in reporting and public dissemination, a portion of the short positions may still be open.622 Information on the aggregate size and activity of positions that remain open could be combined with FINRA short interest and forthcoming Rule 10c–1a data to estimate the proportion of short positions held by large short sellers. If this proportion is not yet reflected in prices, prices will adjust upon publication. 620 See, e.g., Eugene Fama, Efficient Capital Markets II, 46(5) J. Fin. 1575–1617 (1991). 621 See, e.g., A. Senchack and L. Starks, ShortSale Restrictions and Market Reaction to ShortInterest Announcements, 28 J. of Fin. and Quantitative Analysis 177–194 (1993). 622 The Commission estimates that the median number of days that the short position is held above the threshold after the end of the month is 0, while the average number of days that a short position is held above the threshold is 9.68. This suggests that the majority of positions will be closed while some are held longer than the delay in reporting. E:\FR\FM\01NOR2.SGM 01NOR2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations Even if many positions are closed by the time the information is disseminated, Tables 1 and 2 will still promote price efficiency if the prices do not yet reflect the historical short position and activity information. Table 2, for example, will provide information on the variability of large short positions in a security and how large short positions changed around corporate events. Such information will improve the precision of signals from Table 1 information and corporate events. c. Potential Harms to Price Efficiency ddrumheller on DSK120RN23PROD with RULES2 Rule 13f–2 may harm price efficiency by increasing the cost of short selling.623 Academic studies, both theoretical and empirical, have shown that when short selling becomes more costly, stock prices are less reflective of fundamental information both because costly short selling makes trading on information more difficult, and because costly short selling dissuades investors from collecting information in the first place.624 Short sellers fill the role of incorporating negative information by making short sales that reflect the short sellers’ beliefs about the true value of the company.625 623 Adopted Rule 13f–2 will have direct impacts on establishing large short positions which may trigger reporting obligations. Additionally, there may be lesser effects which dissuade market participants from short selling in fear of triggering reporting of Form SHO. 624 See supra note 597. See Edward Miller, Risk, Uncertainty, and Divergence of Opinion, 32 J. of Fin. (1977). See Robert F. Stambaugh, Jianfeng Yu, and Yu Yuan, The Short of It: Investor Sentiment and Anomalies, 104 J. of Fin. Econ. 288–302 (2012). 625 Several commenters made statements and cited research on how short selling improves price efficiency. See, e.g, NASDAQ Letter at 1, AIMA Letter at 5, which state that short selling promotes efficient price formation, enhances liquidity, and facilitates risk management. Furthermore, one comment letter, ‘‘. . . urge(d) the Commission to consider the widely-cited academic law and finance literature as part of its analysis of the Proposed Short Reporting Rules,’’ and cited multiple studies that provide evidence that short selling contributes to price efficiency. See also ‘‘Law and Finance Professors letter’’ at 2. Cited studies include Jonathan M. Karpoff and Xiaoxia Lou, Short Sellers and Financial Misconduct, 65 J. of Fin. 1879–1913 (2010) and Ekkehart Boehmer, Charles Jones, and Xiaoyan Zhang, Which Shorts Are Informed? 63 J. of Fin. 491–527 (2008), and Lauren Cohen, Karl Diether, and Christopher Malloy, Supply and Demand Shifts in the Shorting Market, 62 J. of Fin. 62, 2061–2096 (2007). Other cited studies find evidence that constraints on short selling reduce market efficiency, including Joseph E. Engelberg, Adam V. Reed, and Matthew C. Ringgenberg, Short Selling Risk, 73 J. of Fin. 755–786 (2018), Ekkehart Boehmer, Charles Jones, and Xiaoyan Zhang, 2013, Shackling the Short Sellers: The 2008 Shorting Ban, Review of Financial Studies 26, 1363–1400, Pedro Saffi and Kari Sigurdsson, Price Efficiency and Short Selling, Review of Financial Studies 24, 821– 852 (2011). One cited paper favors reduced regulation of short selling in order to avoid undermining the market quality improvements provided by short selling. See Peter Molk and Frank VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 i. Costs That Impact Price Efficiency Rule 13f–2 increases the costs of short selling in at least four ways: (1) Compliance costs, (2) potentially revealing short sellers’ information that may have been acquired through fundamental research, (3) potentially revealing short sellers’ trading strategies, and (4) increasing the threat of retaliation against Managers by other market participants. (a) Compliance Cost Effects The compliance costs associated with reporting large short positions will result in an increase in the cost of short selling.626 As many Managers have underlying investors, these costs will likely be passed on to end consumers in the form of lower returns due to limiting the strategies that Managers could profitably employ and reducing the profitability of strategies still employed. On net, an increase in the cost of short selling will reduce short selling, harming price efficiency.627 (b) Potentially Revealing Information of Short Sellers Publicly releasing aggregated Form SHO data has the potential to reveal some of the information that short sellers may have acquired through fundamental research.628 Revealing this information to the market may cause prices to adjust to the information that the short seller uncovered before the short seller is able to acquire their full desired position—decreasing the profits to acquiring this information and providing less incentive to produce fundamental research. Thus, the publication of Form SHO data represents an additional cost to short selling in the form of potentially lower Partnoy, The Long-Term Effects of Negative Activism, Univ. of Illinois L. Rev., 1–70 (2022). Another cited paper favors less regulation of short selling that enhances price efficiency but increased regulation of short selling that is aimed at disabling the fundamental value of targeted firms. See Barbara Bliss, Peter Molk, and Frank Partnoy, Negative Activism, 97 Wash. Univ. L. Rev. 1333– 1395 (2020)). The comment letter’s suggestion to delay public release of Form SHO data for one year and receive additional input on which Form SHO thresholds to apply stem from a concern that Rule 13f–2 could undermine the market quality benefits of short selling, of which the above cited studies find evidence. However, the Commission is also cognizant of the of the benefits provided by short selling, as noted in supra Part VIII.B.2. Furthermore, the Commission discusses in detail below the potential costs to price efficiency stemming from Rule 13f–2 and Form SHO. See infra Part VIII.C.2.c.ii. 626 See infra Part VIII.D.2 for a discussion of how these direct costs may affect investors in funds that employ short selling. 627 See supra note 624 and accompanying text. 628 Several commenters agreed. See, e.g., SBAI Letter at 2–3, Two Sigma Letter at 1–2, SIFMA Letter at 2. PO 00000 Frm 00065 Fmt 4701 Sfmt 4700 75163 profitability for trading on negative information. Relative to the proposed rule, the Commission has modified the final rule’s requirements for publication of Form SHO data (from the proposed rule) to decrease the risks of revealing this information by requiring much less granular information in Table 2 of Form SHO. In addition, adopted Rule 13f–2 will mitigate revealing information by delaying publication at least 14 days from the last day of a month and only publishing aggregated data. To avoid price impacts, a short seller seeking to build a sizeable position in a firm generally does so by building up small positions over time until the desired position is accumulated.629 Because short positions can take a long time to accumulate, even with a lag, the information motivating the trades being reported may not be stale. While aggregation limits the precision with which markets can estimate an individual short seller’s motivation, it does not eliminate it.630 Additionally, the threshold may protect short sellers with smaller short positions from having the information in their trades revealed. In contrast, Rule 13f–2 may highlight large positions, potentially increasing the likelihood that some of the information contained in the trades of large short sellers will be acted on by other market participants before the short seller could acquire their optimal position. Thus, the Commission expects that publication of aggregated Form 629 See Albert S. Kyle, Continuous Auctions and Insider Trading, Econometrica: J. of the Econometric Society 1315–1335 (1985). See Kirilenko, Andrei, Albert S. Kyle, Mehrdad Samadi, and Tugkan Tuzun, The Flash Crash: High-Frequency Trading in an Electronic Market, 72 (3) The J. of Fin. 967–998 (2017) (for a discussion of this type of trading); Amir E. Khandani and Andrew W. Lo., What Happened to the Quants in August 2007? Evidence from Factors and Transactions Data, 14 (1) J. of Fin. Markets, 1–46 (2011) (for a discussion of what happens when investors build large positions without properly smoothing their trading). Well-known short seller Gabe Plotkin testified that his firm had built and maintained a short position in GameStop for over 5 years prior to the significant volatility experienced in January 2021. See Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide (Hearing), U.S. House of Representatives Committee Repository (‘‘Game Stopped Hearing’’), https://docs.house.gov/ Committee/Calendar/ ByEvent.aspx?EventID=111207; See also Juliet Chung and Melvin Capital Says It Was Short GameStop Since 2014, Wall Street Journal (Feb 17, 2021). In the Form SH data, 17.9% of positions were held above the proposed Threshold A for at least a month. Commenters questioned the use of Form SH data in this and other contexts. See infra Box 1: Use of Form SH Data for responses to comments on the use of these data. 630 See supra Part VIII.C.1 for a discussion of how market participants may attempt to uncover individual identities. E:\FR\FM\01NOR2.SGM 01NOR2 75164 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations SHO data will still represent a cost to short selling.631 Relatedly, Managers who wish to build large short positions may choose to execute their transactions at a pace that is faster than what they would have done otherwise to attempt to profit from their research before information is disclosed and copycat investors are able to trade based on the reported data. Executing transactions at a faster speed than would be optimal imposes increased transaction costs on Managers than they would have incurred otherwise.632 Additionally, trading faster than is optimal may harm price efficiency by leading prices to over-react to the aggressive trading.633 (c) Potentially Revealing Trading Strategies of Short Sellers ddrumheller on DSK120RN23PROD with RULES2 If Form SHO data provides information about the specific trading strategies or identities of certain short sellers, those short sellers could be harmed by actions such as others profiting from predicting their trading or copycat trading.634 This harm could result in less short selling, reducing the price efficiency benefits of short selling. While Rule 13f–2 was designed to minimize the possibility of identifying Managers or their proprietary information, there are conditions that may arise that would be conducive to revealing proprietary trading strategies. For example, in cases where market participants may be able to discern that there is only one Form SHO filer,635 then market participants might attempt to use the activity data to extract information about the specific trading strategies that short sellers use to implement their trades. Market participants might then try to identify similar patterns in the real time market 631 Consistent with this expectation, research on similar regulations in Europe has documented a similar effect there. See Market Impact of Short Sale Position Disclosures, Copenhagen Economics: Office of Global Research and Markets at the MFA, available at https:// www.copenhageneconomics.com/publications/ publication/market-impact-of-short-sale-positiondisclosures. 632 See Kyle (1985) at supra note 630. 633 See e.g., Albert S. Kyle and Anna A. Obizhaeva, Large Bets and Stock Market Crashes (Mar. 22, 2019), available at https://ssrn.com/ abstract=2023776 or https://dx.doi.org/10.2139/ ssrn.2023776. 634 If the identity of the short seller is exposed, then this may also incentivize retaliation against them. See infra Part VIII.C.2.i.(d). 635 This could partially be achieved through the use of Rule 10c–1a data, depending on the timing of the securities loan, among other factors. However, such risk is mitigated by the fact that securities lending transaction sizes in Rule 10c–1a data are not publicly disseminated for 20 business days and counterparties identities are not publicly disseminated. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 trading and quote data and alter their trading strategies to attempt to profit from any predictability in the short seller’s trading strategy. This behavior would further limit the benefit to short selling as it may allow other market participants to game the short seller’s trading behavior—increasing the cost of implementing short selling trading strategies. The Commission received several comment letters that addressed the risk of copycat trading due to public disclosure of Form SHO data.636 While the Commission acknowledges this risk, it believes that the design of the published activity data will significantly limit this risk. In particular, the netting of short selling activity across short sellers will mask much of the trading behavior of individual short sellers while still providing information about changes in bearish sentiment in the market. By netting trading activity in the aggregations across Form SHO filers, market participants viewing the publicly reported Form SHO data will still get a view of changes in bearish sentiment while keeping Manager specific trading strategies hidden. (d) Retaliation Against Short Sellers The public disclosure requirements might also increase short selling costs by exposing Managers to the risk of retaliation by other market participants, but the risk may be low.637 An issuer’s directors or shareholders may have the incentive to retaliate if they believe short sellers are inappropriately reducing the value of the stock.638 Although aggregating the data before releasing it to the public on a delay will provide some protection to Managers 636 See, e.g., SBAI letter at 2, Two Sigma letter at 1, David Kwon letter at 3. Furthermore, supporting commenters’ views, there is empirical evidence that copycat trading in response to media reports may harm price efficiency. See Jiang, George and Strong, Cuyler, Unusual Option Activity: Is it Smart to Follow ‘Smart Money’? (Aug. 29, 2022). available at https://ssrn.com/abstract=3618427. 637 See 2011 MFA Letter; Owen A. Lamont, Go Down Fighting: Short Sellers vs. Firms, 2(1) The Rev. of Asset Pricing Studies 1–30 (2012); Lorien Stice-Lawrence, Yu Ting Wong, Yu Ting Forester Wong, and Wuyang Zhao, Short Squeezes After Short-Selling Attacks (Nov. 2021), available at https://ssrn.com/abstract=3849581 or https:// dx.doi.org/10.2139/ssrn.3849581. 638 The motivation behind such retaliation may be strengthened by the belief that the short seller’s aim is to profit from reducing the value of the stock rather than uncovering mismanagement or other negative information about the firm to shareholders. See generally Barbara Bliss, B., Peter Molk, and Frank Partnoy (2020), Negative Activism, Wash. U. Law Review 97:1333–1395 (2020), which distinguishes between ‘‘informational negative activism,’’ which serves to uncover, ‘‘. . . the truth about companies whose shares the activists believe are overvalued,’’ and ‘‘operational negative activism,’’ which, ‘‘. . . involves dismantling or disabling sources of value at companies.’’ PO 00000 Frm 00066 Fmt 4701 Sfmt 4700 from having their identities uncovered, in certain cases motivated market participants may still be able to identify individual investors. For instance, in the case that the aggregated short position reported to the public is just above the threshold, market participants might reasonably assume that only one Manager has a short position large enough to report, which may facilitate identifying who that manager is. The Commission believes that even if the probability of identifying individual short sellers is low, the threat of this additional exposure to retaliation may disincentivize short selling. In the event that Managers can be identified from Form SHO disclosures, issuers might take retaliatory action against individual short sellers through lawsuits and by forwarding information to regulators in attempts to precipitate regulatory investigations, through claims in the media, or by applying pressure on the shorting firm through business relationships that may exist outside of trading.639 One commenter provided further examples of retaliatory behavior that short sellers may face the threat of, including short squeezes, nuisance lawsuits, intimidation, and physical violence.640 There is also evidence that when short sellers’ positions become public, market participants strive to orchestrate short squeezes and are successful a significant fraction of the time.641 Short sellers often face lawsuits when they take their information public or their identities otherwise become known—regardless of whether the information the short sellers brought forth was legitimate.642 Some issuers have even been known to hire private investigators in an attempt to uncover the identities of individuals short selling their stock.643 Some short sellers have also expressed that they have experienced threats to their personal safety after their short positions were revealed.644 639 See 2011 letter from Security Traders Association of New York on the Short Sale Reporting Study Required by Dodd-Frank Act section 417(a)(2), available at https://www.sec.gov/ comments/4-627/4627-155.pdf. 640 See MFA Letter at 9. 641 See infra note 645. 642 See Owen A. Lamont, Go Down Fighting: Short Sellers vs. Firms, 2 (1) The Rev. of Asset Pricing Studies 1–30 (2012). 643 Id. 644 See Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide: Hearing Before the H. Comm. on Fin. Serv., 117th Cong. (2021) (statement of Gabriel Plotkin, Founder and CEO, Melvin Capital Management), available at https:// www.congress.gov/117/meeting/house/111207/ witnesses/HHRG-117-BA00-Wstate-PlotkinG20210218.pdf (stating that after company’s short positions were made known, Reddit users made E:\FR\FM\01NOR2.SGM 01NOR2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations In addition, publicly disclosing that Managers, in aggregate, have amassed large aggregate short positions may expose the Managers to increased risk of being the target of predatory strategies such as short squeezes. The risk of short squeeze increases if market participants are able to identify the individuals with large short positions, as discussed in Part VIII.C.1.645 In this case, they may be able to better estimate the capital constraints of the short seller to identify the likelihood of a squeeze being successful. ddrumheller on DSK120RN23PROD with RULES2 ii. Impact of the Costs Because reporting information on Form SHO increases the costs of short selling, the adopted rules could have several negative effects on price efficiency. In particular, negative price efficiency effects could derive from a reduction in fundamental research,646 strategic trading to avoid exceeding the thresholds, and reduced liquidity in options markets. Reduced short selling could also take place from the effect of negative price efficiency. Rule 13f–2 and Form SHO have been designed to reduce the likelihood of these risks occurring to the extent possible while still providing market participants and regulators with enhanced transparency of short sale behavior. To the extent that fundamental research decreases, price efficiency might be harmed as prices will not necessarily reflect all available relevant information, only that portion that had been discovered by investors continuing to perform fundamental research. It is possible that short sellers may strategically select average short position just below the threshold in order to avoid reporting. The size of a short position is often related to the expected magnitude of the short seller’s negative information, with revelations of larger negative information being associated with larger short positions.647 Consequently, to the extent that Managers may choose to select otherwise sub-optimal short positions to avoid reaching the reporting threshold, Rule 13f–2 and Form SHO might result in a sub-optimal allocation of capital and may harm price efficiency. To this end, some have argued that stock prices can be viewed as a weighted average of investor sentiment. If short sellers limit posts and others sent personal text messages that were laced with anti-Semitic slurs and threats of physical harm to him and others). 645 As noted in Part VIII.C.1, the Commission will also be better able to detect short squeezes. 646 Several commenters also stated there could be a possible reduction in fundamental research. See, e.g., MFA Letter at 10. 647 See, e.g., supra note 629. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 their positions to avoid disclosure requirements, then stock prices may skew towards being overvalued.648 Additionally, Rule 13f–2 might dissuade options market makers from holding large short positions and providing liquidity in options markets and, thus, might harm price efficiency in equity markets. Research has found that options play an important informational role in stock price discovery, therefore reductions in liquidity in the options market can reduce the price efficiency in the equity market.649 d. Limitations on Price Efficiency Effects As with the discussion in Part VIII.C.1, many of the economic effects articulated in this section relating to the reporting of Form SHO might be limited to the extent that the data reported in Form SHO contains factual errors. The EDGAR system will check the data for technical errors but not the accuracy of the data entry by filers. Thus, the data reported in Form SHO might contain errors. To the extent that these errors exist and meaningfully affect the usability of the data, the value of the data and the economic benefits and costs associated with collecting the data would be limited. Additionally, the benefits and costs are lessened by the delay in the publication of the data. Furthermore, the data will only be available for those securities with Managers who have short positions over 648 See, e.g., supra note 625. In contrast, some argue that short selling itself increases the value of assets as it provides demand for securities lending and allows owners to collect securities lending fees. From this perspective, restricting short selling may decrease stock prices by restricting the demand for securities loans. See Darrell Duffie, Nicolae Garleanu, and Lasse Heje Pedersen, Securities Lending, Shorting, and Pricing, 66 (2–3) J. of Fin. Econ. 307–339 (2002). Consistent with statements in the Proposing Release, the Commission continues to believe that this effect is the not predominate effect of short selling on asset prices, because the average fee earned from securities lending is usually very small relative to the average long term stock returns. Thus, it appears that other economic effects tend to dominate the relationship between short selling and stock prices and that on net short selling restrictions lead to stock overvaluation. Proposing Release at 14996 n. 281. See also letters from OTC Markets, Provable Markets, SIFMA, and Chester Spatt responding to FINRA’s regulatory notice 21–19 (arguing that short selling is vital to price efficiency), available at https://www.finra.org/rules-guidance/notices/2119#. In contrast, others have argued markets adjust to short selling constraints as to not overvalue stocks. See Douglas Diamond and Robert E. Verrecchia, Constraints on Short-Selling and Asset Price Adjustment to Private Information, 18 J. of Fin. Econ. 277–311 (1987). 649 See infra Part VIII.C.3. See also David Easley, Maureen O’Hara, and Pulle Subrahmanya Srinivas, Option Volume and Stock Prices: Evidence on Where Informed Traders Trade, 52 J. of Fin. 431– 465 (1998). PO 00000 Frm 00067 Fmt 4701 Sfmt 4700 75165 the threshold, which may not be representative of all short positions, and the number of reporting Managers may change from month to month. 3. Effect on Market Liquidity The effect of the adopted Rule 13f–2 and CAT amendment on liquidity is uncertain. Part VIII.C.2.c discusses the possibility that Rule 13f–2 and Form SHO may harm price efficiency by dissuading investors from pursuing fundamental research. Alternatively, Rule 13f–2 and Form SHO may help price efficiency by increasing transparency with respect to the actions of large short sellers. To the extent that the adopted rule and amendment improve price efficiency, this might also indirectly improve liquidity because market makers would be subject to less mispricing risk. Mispricing risk leads to lower liquidity because market makers must be compensated in the form of wider bid ask spreads for the potential that there is information relevant to the firm that has not yet been discovered and may affect prices. Thus, to the extent that the Rule 13f–2 enhances price efficiency, it may also enhance liquidity by mitigating mispricing risk. Conversely, if the Rule harms price efficiency, it may also harm liquidity. Equity market makers generally do not carry large gross short positions overnight. However, adopted Rule 13f– 2 and Form SHO may make market makers more concerned that a particularly volatile trading day may cross the Reporting Thresholds requiring the filing of Form SHO. One commenter described the concern for unintentionally crossing the threshold while market making.650 While the Commission believes the adopted Reporting Thresholds will generally be very difficult for market makers to trigger,651 market makers could still choose to reduce market making activities during periods of volatility due to concerns over having to report Form SHO. To the extent market makers believe high volatility may necessitate a large short position, the adopted rule may reduce market liquidity. 650 See HSBC Letter at 15. makers typically use short selling to maintain two sided quotes in the absence of inventory and other high frequency traders. While market makers trade in large volumes, they tend to end trading sessions fairly flat on inventory in larger stocks. Therefore, while it is possible that market makers may end a single trading day holding a gross short position of $10 million, it is highly unlikely that this will occur frequently enough for them to end the month with an average daily position of $10 million. 651 Market E:\FR\FM\01NOR2.SGM 01NOR2 75166 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations Additionally, in the event that an options market maker might have short equity position close to the Reporting Thresholds, Rule 13f–2 might dissuade these option market makers from increasing their short position, which may harm their willingness to provide liquidity in options markets. Alternatively, Rule 13f–2 might not cause option market makers that exceed the Reporting Thresholds to reduce their positions in order to avoid filing Form SHO, in which case the additional associated spending on filing Form SHO (and other compliance costs) might result in wider spreads if the compliance costs are large enough. ddrumheller on DSK120RN23PROD with RULES2 4. Effect on Corporate Decision Making The Commission believes that Rule 13f–2 and Form SHO might have mixed effects on corporate decision making. On one hand, research suggests that corporate managers learn from market reactions to announcements.652 Consequently, Rule 13f–2 and Form SHO may provide corporate managers with additional feedback on their decisions, albeit with a delay. Projects often take some time to design and implement after announcement, and consequently, even with the lag in the reporting time of Form SHO data, a corporate manager might review the data around significant announcements to better understand how some Managers viewed a particular project or announcement. For example, if large short positions were built shortly after a corporate project announcement, then this may help signal to a corporate manager that the market viewed that project announcement negatively, and this information could enhance the corporate manager’s decision-making on the project. In another aspect, short sellers, and particularly large short sellers with the resources to perform fundamental research, serve as valuable external monitors of management. If a corporate manager knows that short sellers are monitoring their actions and financial statements and are willing to expose wrongdoing, then they are less likely to engage in fraud or do other things that may hurt the value of the company. Historically, short sellers have, at times, through doing research, uncovered fraudulent behavior.653 Academic 652 See, e.g., James B Kau, James S. Linck, and Paul H. Rubin, Do Managers Listen to the Market?,14 (4) J. of Corporate Fin. 347–362 (2008). 653 See, e.g., A. Dyck, A. Morse, and L Zingales, Who Blows the Whistle on Corporate Fraud?, 65(6) The J. of Fin. 2213–2253 (2010) (using a large sample of fraud cases between 1996 and 2004, the authors find that short sellers uncovered the fraud in nearly 15% of cases.). See also Cassell Bryan- VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 research has also shown that even the threat of short selling serves to discipline managers.654 As discussed in Parts VI.C.1 and VI.C.2, Rule 13f–2 may discourage Managers from performing fundamental research. If less fundamental research is performed by short sellers,655 then their role as monitors of the firm diminishes. Less monitoring might lead to higher incidences of fraud as managers feel that the likelihood of being caught declines.656 Thus, to the extent that Rule 13f–2 and Form SHO discourage fundamental research it may lead to both an increase in the total amount of corporate fraud in the economy as well as decrease the fraction of fraudulent actors that are discovered by investors. 5. Effect on the Securities Lending Market As discussed in Parts VIII.C.1 and VIII.C.2, the adopted rule and related Form SHO will increase the cost of short selling, particularly large short positions—potentially leading to less overall short selling. As discussed in Part VIII.C.2, short sellers must borrow shares for their short position. When short sellers borrow shares, they pay a borrowing fee to the owner of the share. These fees can represent a significant source of revenue for pension funds, mutual funds, and others who engage in securities lending.657 Consequently, to the extent that the adoptions discourage short selling, they may also lower overall portfolio returns, including for institutional investors that engage in securities lending.658 Low and Suzanne McGee, Enron Short Seller Detected Red Flags in Regulatory Filings, The Wall Street J. (Nov. 5, 2001) (discussing an Enron short seller that detected red flags reviewing, among other things, the company’s SEC filings) (retrieved from Factiva database). Cf. Nessim Mezrahi et al., More Securities Class Actions May Rely on Short-Seller Data, Law360 (Jan. 10, 2022, 7:07 p.m.) available at https://www.law360.com/articles/1453499/ moresecurities-class-actions-may-rely-on-short-sellerdata (authors’ ‘‘analysis of 131 Rule 10b–5 securities class actions indicates that plaintiffs continue to rely on short-seller research to substantiate fraud-on-the-market claims’’). 654 See, e.g., Massimo Massa, Bohui Zhang and Hong Zhang, The Invisible Hand of Short Selling: Does Short Selling Discipline Earnings Management? 28 (6) The Rev. of Fin. Studies 1701– 1736 (2015). 655 See supra Part VIII.C.2 for a discussion of the potential for the final rule to reduce the incentives for short sellers to conduct fundamental research. 656 See, e.g., Paul Povel, Rajdeep Singh, and Andrew Winton, Booms, Busts, and Fraud, 20 (4) The Rev. of Fin. Studies 1219–1254 (2007) (linking variations in monitoring intensity to the incidence rate of financial fraud.). 657 See supra note 563. 658 Commenters on the Short Sale Reporting Study Required by Dodd-Frank Act section 417(a)(2) argue that increased public short selling disclosure may result in reduced short selling, thereby lowering revenues to institutions that PO 00000 Frm 00068 Fmt 4701 Sfmt 4700 6. Compliance Costs The Commission believes that there will be direct costs associated with adopted Rule 13f–2, Form SHO, and the CAT amendment. These costs include Managers reporting position and activity data, broker-dealers updating CAT reporting processes, and the Commission processing and releasing the Manager reports through EDGAR. Rule 13f–2, related Form SHO, and the amendment to CAT in aggregate, will result in an estimated maximum of $119,975,800 in initial costs and $72,026,064 in annual costs.659 The Commission received several comments from industry groups concerned about the cost of implementing Rule 13f–2, Form SHO, and the CAT amendment. One commenter stated that Managers currently do not have systems in place to comply with Rule 13f–2, Form SHO, and the CAT amendment. Multiple commenters stated that there would be high costs associated with tracking positions for the purpose of seeing if they had crossed the Reporting Thresholds.660 Another commenter stated that the Commission’s estimated costs in the proposing release, in general, were ‘‘materially understated’’.661 However, the Commission has attempted to use the applicable resources available to it to estimate the costs of implementing adopted Rule 13f–2, Form SHO, and the CAT amendment. The Commission did not receive any information from commenters that might otherwise have been used to refine or adjust its estimates of the implementation costs of adopted Rule 13f–2, Form SHO, and the CAT amendment. Thus, the Commission believes its estimates to be reasonable given the information it has maintain long positions in equities for extended periods (such as pension funds). See, e.g., 2011 Letter from Alternative Investment Management Association, available at https://www.sec.gov/ comments/4-627/4627-138.pdf. 659 See supra Table 1, Table 2, and Table 3 in Part VII. These costs assume 1,000 Managers would file Form SHO annually and 35 Managers would file amendments each month. The initial costs are calculated by adding the Form SHO Initial Technology Projects cost, the CAT: Central Repository—Short Sale Data cost, CAT: Reporting of Bona Fide Market Making Exception—Insourcers cost, and the CAT: Reporting of Bona Fide Market Making Exception—Outsourcers cost. ($118,950,000 + $113,800 + $870,000 + $42,000 = $119,975,800). The annual costs are calculated by adding the Form SHO Filings cost, the Use of Structured XML-Based Data Language cost, the Amended Form SHO Filings cost, and the amending Use of Structured XML-Based Data Language cost. ($60,326,400 + $9,264,000 + $2,111,424 + $324,240 = $72,026,064). See also infra Part VIII.C.6.a and Part VIII.C.6.c for further explanations of these costs. 660 See infra note 679. 661 See MFA Letter, at 19. E:\FR\FM\01NOR2.SGM 01NOR2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations available. Furthermore, the Commission has adjusted estimates in response to policy choices that differ from the Proposing Release, some of which will lower compliance costs, including the exclusion of the ‘‘buy to cover’’ proposals (proposed Rule 205 and the related CAT amendment) and a change to one of the reporting thresholds that will likely result in fewer Managers having to report Form SHO. As discussed in Part II.B, these policy changes, to the extent possible, address or are in response to statements from commenters regarding costs stemming from the Proposing Release. a. Form SHO Compliance Costs The Commission believes that Managers will incur an initial technology-related burden to update their current systems to capture the required information and automate and facilitate the completion and filing of Form SHO.662 While Managers likely have other existing reporting obligations that are similar to Form SHO filing obligations, Managers will need to update their systems to ensure timely and accurate filing of the specific information required under Form SHO.663 The estimated aggregate cost of Form SHO initial technology projects across all Managers ranges from $29,975,400 to $118,950,000. The Commission estimates that between 252 664 and 1,000 Managers will be required to file Form SHO. The lower estimate is based on the number of Form SH filers above Threshold A. The actual number of reporting Managers will likely be higher than our low estimate, because Managers that exercise 75167 investment discretion with respect to accounts holding section 13(f) securities having an aggregate fair market value of less than $100 million were not required to file Form SH.665 However, the actual number of reporting Managers will likely be lower than the Commission’s high estimate, since this estimate is also based on an initial analysis of Form SH filings, which were filed weekly and therefore more likely to trigger reporting thresholds, as compared to adopted Form SHO, which will involve monthly assessment and therefore require a longer-held large short position to trigger a reporting threshold.666 The Commission discusses the use of Form SH Data, including commenter concerns about the use of the data in this and other contexts, in Box 1: Use of Form SH Data. Box 1: Use of Form SH Data: The Commission’s estimation of the minimum number of Managers likely to report Form SHO draws on an analysis of data collected under Form SH, the only existing data source of individual Manager-level short sale positions. In addition to estimating the minimum number of reporting Managers, the Economic Analysis also uses Form SH data for comparisons of alternative thresholds and to estimate the share and number of potential reported securities with only one reporting Manager, the potential share of gross short sale dollar volume covered by reporting Managers, and statistics on potential holding periods after hitting a threshold. The Commission received several comment letters questioning the applicability of Form SH data to the current time period.a One commenter stated that the period surrounding the filing of Form SH was an abnormal period for financial markets, and also stated that many prominent short sellers have left the industry.b While there are various limitations to be considered when using Form SH data,c Form SH data are the most relevant and applicable source of data available for the purposes of estimating the costs of the design and analysis of Rule 13f–2. There are no other data sources, public or regulatory, which specifically track Managers’ short position activities in the U.S. While the Commission agrees that having more current data would be useful for the purposes of Rule 13f–2’s design and analysis, no commenters provided such data, and the Commission believes Form SH data are sufficiently informative to analyze the predicted impact of the amendments.d Further, in response to these comments, the Commission analyzed FINRA short interest data over the period of 2008 to present with the goal of seeing if short interest was comparable between the current period and the period surrounding Form SH filings.e Specifically, we compared the trend of average short interest to the trend of the number of equities counted from each FINRA short interest files covered 2009 to 2023. The analysis revealed that the average short interest per equity symbol has increased over time by approximately 46 percent, while the number of symbols has increased at a much slower rate of 17 percent. Thus, we observe that the average short interest per equity symbol has increased from 2009 to present. However, the Commission cannot assess whether the size of Manager positions has changed over time.f Without this piece of knowledge, it is indeterminate whether the average amount of short interest generated by a manager has changed over time. If there are currently more Managers relative to 2008, it is possible that the average short position per manager is smaller than during the period Form SH was used. Conversely, if there are fewer Managers, it is likely the average short position per manager has increased relative to 2008. a See, e.g., Law and Finance Professors Letter, at 3; AIMA Letter at 11–12; Two Sigma Letter at 5–6. See Law and Finance Professors Letter, at 3. c See supra Part VIII.B.4.e and note 670 for a discussion of limitations in the use of Form SH data. See also Part VII.B.1 for a discussion of other ways Form SH data differ from Form SHO data. d See supra Part II.A.3 for additional discussion of comments regarding the Reporting Thresholds and note 177 for further discussion of the time period of the data. e FINRA Short Interest data are available at https://www.finra.org/finra-data/browse-catalog/equity-short-interest/data. See also Part VIII.B.4 a for further information about FINRA Short Interest Data. f See supra Part VII.B.1 for a discussion of estimates of the number of affected Managers using Form SH, which most closely mirrors the criteria of Rule 13f–2 and Form SHO and how the number may have changed over time. b ddrumheller on DSK120RN23PROD with RULES2 The Commission estimates that the annual cost to Managers for filing Form SHO ranges from $15,202,252 to $60,326,400.667 The Commission estimates that Managers will 662 See supra Part VII.4. infra Part VIII.C.6.c. 664 In the Proposing Release, the Commission estimated 346 Managers would be required (on the low end of the estimate). The Commission changed the parameters for this estimate to match the scenario of a $10 million daily average over the month or 2.5% daily average over the month of 663 See collectively spend an additional $2,334,528 to $9,264,000 per year to structure Form SHO directly in Form SHO-specific XML.668 The Commission estimates that the Managers that will file amended Form SHOs will collectively spend $542,938 to $2,111,424 per year to file amended Form SHOs.669 Further, shares outstanding thresholds that are being adopted as Threshold A. 665 See Proposing Release, at Table I. See also Proposing Release, at 14963 for more information on the methodology and caveats of using Form SH data. 666 See Disclosure of Short Sales and Short Positions by Institutional Investment Managers, 73 FR 61679. Form SH filers filed weekly reports. As a result, each reporting manager would file fewer reports under Rule 13f–2, because Form SHO would be filed monthly. See also 73 FR 61686 (estimating 1,000 weekly Form SH filings by reporting Managers). 667 See supra PRA Table 2 and note 450. The lower estimate was calculated using 252 Managers. 20 hours per filing × 252 filings by Managers each month × 12 months × $251.36 = $15,202,252. The Continued VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 PO 00000 Frm 00069 Fmt 4701 Sfmt 4700 E:\FR\FM\01NOR2.SGM 01NOR2 75168 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 the Commission estimates that Managers filing amended Form SHO will collectively spend an additional $83,376 to $324,240 per year to structure Form SHO directly in Form SHO-specific XML.670 The Commission thus estimates that the aggregate cost of structuring and filing Form SHO across all Managers ranges from $18,163,094 to $72,026,064.671 Costs might be underestimated to the extent that wages are higher than those used in the estimation. The initial costs are likely higher than the lower bound estimates as Managers who may not file Form SHO on a monthly basis will likely still incur the initial costs. Furthermore, because Manager short positions are fluid, some Managers will not be required to file a report every month when they do not cross the reporting threshold. As a result of this fluidity, ongoing costs could be lower than our estimates. Moreover, to the extent that the number of reportable short positions varies across Managers, the costs to track and report those positions will also vary by Manager. Initial costs might also be higher for some Managers who do not currently have systems built to report to EDGAR.672 By contrast, because we expect Managers will have a financial incentive to automate the reporting process by leveraging Form SHO-specific XML reporting, the aggregate costs associated with Form Commission estimates that 252 Managers would have been required to file Form SH had Form SH been subject to the same $10 million and 2.5% threshold. 668 See infra Part VIII.C.6.c and infra note 686. The lower estimate was calculated as follows: 2 hours per filing × $386 per hour for a programmer × 252 filings by Managers each month × 12 months = $2,334,528. 669 See supra PRA Table 1 and accompanying text discussing amended Form SHO estimates. We maintain the assumption of 3.5% of Managers amending monthly in all of our estimated costs for amending Form SHO. Using the lower estimate of 252 Managers, this would result in 9 Managers filing amendments monthly. 20 hours per filing × 9 filings by Managers each month × 12 months × $251.36 per hour = $542,938. 670 Using the lower estimate of 9 Managers filing amendments monthly would result in $83,376 to structure amended Form SHO filings in Form SHOspecific XML. 2 hours per filing × 9 filings by Managers each month × 12 months × $386 per hour = $83,376. 671 See supra PRA Table 2. These costs are calculated by adding the costs for Form SHO Filings, Use of Structured XML-Based Data Language, Amended Form SHO Filings, and the amending Use of Structured XML-Based Data Language together. For the lower estimate, we calculate using 252 Managers filing each month annually and 9 Managers filing amendments monthly. ($15,202,252 + $2,334,528 + $542,938 + $83,376 = $18,163,094). 672 Most Managers will be familiar with EDGAR filing requirements through other reporting obligations, such as Form 13F. See supra notes 193 and 452. See also infra Part VIII.C.6.c. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 SHO-specific reporting may be meaningfully lower going forward.673 For some Managers, there may be additional considerations, which may increase costs. For example, rules for filing Form SHO require Managers to prevent duplicative reporting.674 The burden to ensure that duplicative reporting doesn’t occur will vary by Manager and will depend on whether two or more Managers exercise investment discretion over the same reportable securities position. Also, Managers managing multiple accounts with short positions requiring aggregation may have additional costs associated with the aggregation when modifying systems to track the Reporting Thresholds and report positions on Form SHO. The Commission believes the need to amend Form SHO may vary by familiarity with filing Form SHO. These costs may be more common for Managers who do not hold short positions often and are likely to decrease with time as Managers become more experienced with filing Form SHO. As part of updating systems to comply with the reporting requirements of Rule 13f–2, Managers must calculate the market value of their position using the official closing price as of the close of regular trading hours for the trade settlement date in question at the end of the month, which may not be the fair market value at the time in which the trade occurred.675 However, the Commission believes that in most cases this will be a small burden on Managers as the data needed for the calculation will be publicly available and that Managers may already track the end of day fair market value of short positions. Even in cases that the reportable equity security is not traded on an exchange, the Commission believes that Managers may be able to calculate the value of their short positions by using publicly available closing prices from the OTC Reporting Facility. In circumstances where closing prices of non-reporting company issuers are not available, the Commission believes the tracking such information will still not impose a large burden as a Manager can use the price at which they last purchased or sold any share of that security, which will be readily available to the Manager. 673 See supra note 451 and infra note 711. Form SHO, General Instructions at Rules to Prevent Duplicative Reporting. 675 See Form SHO, General Instructions at INSTRUCTIONS FOR CALCULATING REPORTING THRESHOLD. See also PRA Table 2 in Part VII for an estimate of these burden hour. 674 See PO 00000 Frm 00070 Fmt 4701 Sfmt 4700 b. Costs of Tracking Threshold Status There will be costs associated with tracking short positions in relation to the threshold.676 Particularly, after the last day of each calendar month, Managers must calculate their average short positions over the month to be aware if their average daily gross short position exceeds $10 million 677 or 2.5 percent of shares outstanding; or in the case of equity securities of nonreporting company issuers, if Managers meet or exceed a gross short position of $500,000 at the close of regular trading hours on any settlement date. However, the Commission believes that the Reporting Thresholds will generally limit the burden on Managers, in aggregate, as fewer Managers will be required to report than if the Commission did not adopt an amended reporting threshold. For example, the Commission believes that certain types of Managers that carry short positions will not meet a Reporting Threshold.678 Additionally, certain types of Managers may be less likely to meet the threshold, resulting in lower overall costs for these Managers.679 Using Form SH data, the Commission estimates that an average of 442 Managers were required to file Form SH each month under the threshold in place during temporary Rule 10a–3T. However, only 252 eligible Managers would have been required to file had Threshold A of adopted Form SHO been in place instead of the threshold in temporary Rule 10a–3T.680 676 As stated in the proposing release, based on the number of registered investment companies reporting short positions and the number of hedge funds engaged in a strategy including short selling, we continue to anticipate that only a small fraction of Managers is likely to have monitoring responsibilities pursuant to the rule and, given the Reporting Thresholds and the modification of Threshold A, an even smaller fraction is likely to have reporting obligations. Proposing Release at 14998 n. 298. 677 Under Proposed Form SHO, the threshold was triggered if a gross short position exceeded $10 million on a single day. Adopted Form SHO requires a daily average gross short position of $10 million over the month. 678 See supra Part VIII.B.1 for a discussion on why certain types of Managers are more likely to have reporting requirements. For example, market makers and algorithmic technical traders are not likely to meet the thresholds because they generally close their positions by the end of the day. 679 However, Managers that trigger a threshold(s) but do not currently report to EDGAR may face additional compliance costs associated with Rule 13f–2. 680 The lower number of estimated reporting Managers in Form SHO compared to Form SH is due to the fact that the Reporting Thresholds are higher for Form SHO than Form SH in Threshold A (average daily gross position of $10 million vs. a single day threshold of $10 million, and 2.5% of shares outstanding vs. 0.25% of shares outstanding). This estimate differs from the Proposing Release due to modification of the part of the threshold from $10 million daily to $10 E:\FR\FM\01NOR2.SGM 01NOR2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 The Commission received several comment letters that described what they believed were the high cost of monitoring with respect to the thresholds to file Form SHO under Rule 13f–2.681 One commenter stated that the cost of daily monitoring would be high, although no specific estimated cost is provided.682 While the costs would likely be higher if firms choose to monitor daily, Rule 13f–2 does not require daily monitoring, either for reporting or non-reporting stocks. For Managers engaged in shorting selling, the rule necessitates that Managers calculate their average daily gross short position in equity securities for which they have conducted short sales during that calendar month in order to know if they are required to file Form SHO within 14 days of the end of that month.683 Managers may choose to do this calculation on a rolling basis, or to do the calculation after the month has ended. While some Managers may choose to incur the higher costs of daily tracking and calculation for purposes of compliance with Rule 13f–2, the final rule’s reporting threshold is not based on a Manager’s gross short position on a single trading date, reducing the need for daily tracking. The Commission understands that the cost of tracking short positions might be higher for certain types of equity securities. For example, tracking the short position in an ETF as a percent of shares outstanding will be more difficult as the number of shares outstanding changes frequently. Additionally, Managers who hold short positions in non-reporting company issuers may have difficulty calculating the value of their position, however Managers may use the last price at which the Manager traded even though the price may be stale.684 million average daily over the month. Commenters questioned the use of Form SH data in this and other contexts. See supra Box 1: Use of Form SH Data for responses to comments on the use of these data. 681 See, e.g., MFA Letter, at 13; AIMA Letter, at 12–14; ICI Letter, at 5; Ropes & Gray Letter, at 2 and 5–7; SBAI Letter, at 4; SIFMA Letter, at 4, 7–8, and 13–19; T. Rowe Price Letter, at 3–4, Two Sigma Letter, at 6–7 and 10. 682 See ICI Letter, at 11. 683 As discussed in supra Part II.A.3, Managers with gross short sale positions that exceed a daily average during the previous month of $10 million or a daily average of 2.5% of a reporting firm’s shares outstanding will have to file Form SHO. With regard to short sale positions of non-reporting firms, Managers will have to file Form SHO if their short sale position exceeded $500,000 on any single day during the previous month. 684 See supra Part II.A.3.b for discussion of comments received related to tracking nonreporting company short positions. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 c. Cost of Reporting Form SHO to EDGAR Requiring Form SHO to be filed on EDGAR in Form SHO-specific XML will not impose significant incremental costs on Managers. The Commission expects most Managers who will be required to file Form SHO will likely have experience filing EDGAR forms that use similar EDGAR Form-specific XML data languages, such as Form 13F. In that regard, the process for filing Form SHO, as well as the XML-based data language used for Form SHO, will be similar to the filing process and data language used for Form 13F.685 We expect that Managers with such experience that choose to file Form SHO directly in Form SHO-specific XML will incur some compliance costs associated with doing so.686 In addition, Managers will be given the alternate option of filing Form SHO using a fillable web form that will render into Form SHO-specific XML in EDGAR, rather than filing directly in Form SHO-specific XML using the technical specifications published on the Commission’s website. We expect Managers who do not have experience filing Form 13F or other EDGAR Formspecific XML filings will likely choose this option. In that regard, Managers are only required to file Form 13F if they exercise investment discretion with respect to accounts holding section 13(f) securities having an aggregate fair market value on the last trading day of 685 See EDGAR Filer Manual (Volume II) version 67 (September 2023), at 9–1 (‘‘EDGAR Filer Manual Volume II’’) (describing process for submitting Form-specific XML filings directly to EDGAR); see also Form 13F XML Technical Specification, available at https://www.sec.gov/edgar/filerinformation/current-edgar-technical-specifications. 686 See supra PRA Table 2 (estimating the ongoing burden for the Form SHO-specific XML requirement at two hours per Manager per filing and two hours per amended filing). These estimates conservatively assume that Managers will structure their filings in Form SHO-specific XML, incurring $772 (2 hours × $386 per hour for a programmer = $772) per filing or amended filing, rather than use a fillable form. Assuming 1,000 Managers filing 12 Form SHO filings per year would equal 12,000 filings per year, resulting in 24,000 total annual industry burden hours (12 filings x 1,000 Managers × 2 hours = 24,000) and $9,264,000 in industry costs for filings per year (24,000 hours * $386 per hour = $9,264,000) attributable to the Form SHO-specific XML requirement. In addition, based on an estimate of 420 amended filings per year, the total industry cost for the Form SHO-specific XML would be $324,240 for amended filings (420 amended filings × 2 hours per amended filing × $386 per hour = $324,240). As such, the total annual industry cost attributable to the Form SHO-specific XML requirement (including amended filings) is $9,588,240 ($9,264,000 for filings + $324,240 for amended filings = $9,588,240). Using a lower estimate of 252 Managers would result in $2,417,904 in total annual industry costs to structure initial and amended filings in Form SHOspecific XML. See supra note 517. PO 00000 Frm 00071 Fmt 4701 Sfmt 4700 75169 any month of any calendar year of at least $100 million.687 Of Managers that do not have experience filing Form 13F, only a subset are subject to other EDGAR Form-specific XML filing requirements.688 For any Managers that choose to file Form SHO using a fillable web form, whether or not they have prior experience with filing forms in EDGAR Form-specific XML, the Form SHO-specific XML requirement (i.e., the requirement to place the collected information in a fillable web form provided by EDGAR, rather than in an HTML or ASCII document to be filed on EDGAR as is required for most other EDGAR forms) will not impose any additional compliance costs.689 d. Costs Associated With Reporting Bona Fide Market Making Locate Exception to CAT The 25 Plan Participants will face costs associated with the CAT amendment, as they will be required to engage the Plan Processor to modify the Central Repository to accept and process new short sale data elements on order receipt and origination reports. Additionally, the Commission estimates an external cost of $4,522 per participant or $113,800 total to compensate the Plan Processor for staff time required to make the initial necessary programming and systems changes.690 However, these initial costs might be higher if the Commission underestimated the time and wages necessary for programming and systems changes for the plan processor to accept and process new data elements. Furthermore, the Commission believes that CAT amendment will not impose additional ongoing cost to Participants beyond those costs already accounted for in existing Paperwork Reduction Act 687 See 17 CFR 240.13f–1(a). example, registered brokers or dealers that are subject to the reporting requirements set forth in 17 CFR 240.17h–2T must file Form 17–H either electronically or in paper. Those that choose to file electronically must file Form 17–H partially in EDGAR Form-specific XML. Insurance companies may offer variable contracts that are registered under the Investment Company Act of 1940, and would thus be required to file annual reports on Form N–CEN in EDGAR Form-specific XML as well as, in some cases, monthly portfolio information on Form N–PORT in EDGAR Form-specific XML. Corporations may make exempt offerings and be required to file Form 1–A, Form C, or Form D in EDGAR Form-specific XML either in part or in full, depending on the nature of the offering. 689 See 17 CFR 232.101(a)(1)(iv); 17 CFR 232.301; EDGAR Filer Manual Volume II at 5–1 (requiring EDGAR filers generally to use ASCII or HTML for their filed documents, subject to certain exceptions). 690 See supra note 475. 688 For E:\FR\FM\01NOR2.SGM 01NOR2 75170 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 estimates that apply for Rule 613 and the CAT NMS Plan approval order.691 The Commission believes that the CAT amendment involving the bona fide market making exception from the locate requirement will impose a onetime cost to Industry Members.692 These costs will involve creating an additional field in the order origination report. Some broker-dealers will incur ongoing costs related to the recording of the use of the BFMM locate exception.693 To the extent that broker-dealers are not already recording the use of the exception, broker-dealers may have costs to inputting the use of the exception into their current systems.694 The Commission recognizes that costs will vary broadly across Industry Members, particularly depending on whether the Industry Member outsources the provision of an order handling system and regulatory data reporting to a service provider. In the CAT NMS Plan Approval Order,695 the Commission identified 126 Industry Members that do not outsource these activities. For these Industry Members, implementation is likely to require changes both to their order handling systems as well as their regulatory data reporting systems that produce their CAT reporting data. Additionally, 58 insourcing Industry Members will incur an aggregate initial cost of $870,000 or $15,000 individually to update systems to facilitate reporting the new bona fide market making exception elements to CAT.696 However, this cost might be lower if the Commission is overestimating the number of insourcing industry members, in particular, the additional cost might drive some insourcing industry members to begin to outsource. The Commission believes that ongoing costs associated with reporting the newly required information to CAT will already be covered by ongoing cost estimates included in its cost estimates for the CAT NMS Plan. The Commission further believes that similar implementation and ongoing costs will 691 See supra Part VII.C.4 for more information on costs for CAT Plan Participants. 692 Id. 693 The Commission believes these costs will be comparable to those estimated in the Proposing Release in connection to the burden of marking an order. The Commission estimates that recording (marking) this information will take between 0.42 and 0.5 seconds per trade, with an annual time burden per Manager equal to 592–7,104 hours. See Table 3 from Proposing Release at 14975, available at https://www.sec.gov/files/rules/proposed/2022/ 34-94313.pdf. 694 See supra Part IV.B for description of Industry Members’ use of BFMM. 695 See CAT NMS Plan Approval Order, 81 FR 84860. 696 See supra Part VII.C.4. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 be borne by each of the service providers that provide order handling systems and regulatory data reporting services to Industry Members that outsource these systems. For Industry Members that outsource, the Commission believes that implementation costs will be far lower because the service bureaus that provide them with order handling systems and regulatory data reporting services will adapt those systems on their customers’ behalf.697 Additionally, 42 outsourcing industry members will incur an aggregate one-time cost of $42,000 or $1,000 individually to update systems to facilitate reporting the new bona fide market making exception elements to CAT.698 However, these costs might be higher if some current insourcing industry members begin to outsource as a result of the increased costs, which will lead to an overall reduced cost for the rule as outsourcing is less costly than insourcing. The Commission believes that the costs of service bureaus adapting those systems will be passed to their Industry Member customers. e. Comparison to Rule 10a–3T Costs The Commission is cognizant of the burdens Managers experienced of filing Form SH in compliance with temporary Rule 10a–3T and has designed Rule 13f– 2 and Form SHO to attempt to reduce those burdens. First, commenters on the temporary Rule 10a–3T stated that the 0.25 percent threshold was too low.699 The two-pronged threshold in Rule 13f– 2 is higher than the threshold in Rule 10a–3T, reducing the number of Managers likely to have a reporting obligation. For example, the Commission estimates that only 28 percent of positions reported under Rule 10a–3T will be required to report given the higher threshold in Rule 13f–2 and Form SHO, while still collecting 78 percent of the dollar value.700 697 One commenter stated that support from thirdparty data service providers could make Form SHO reporting less burdensome. See S3 Letter, at 5. 698 See supra Part VII.C.4. 699 See Temporary Rule 10a–3T Comment letters (including Seward & Kissel LLP Letter), available at https://www.sec.gov/comments/s7-31-08/s7310843.pdf; MFA Letter, available at https:// www.sec.gov/comments/s7-31-08/s73108-41.pdf; IAA Letter, available at https://www.sec.gov/ comments/s7-31-08/s73108-38.pdf; ICI Letter, available at https://www.sec.gov/comments/s7-3108/s73108-47.pdf; SIFMA Letter, available at https://www.sec.gov/comments/s7-31-08/s7310852.pdf. See also supra Part III.D.2. (for more information on Threshold A using Form SH data). 700 See Proposing Release at Economic Analysis Table I: Various Threshold Levels for Monthly Average Positions and Monthly Maximum Dollar Value. However, the Commission recognizes that temporary Rule 10a–3T was in effect in 2008–2009 and the market may be different, particularly the average short position may be larger. Only PO 00000 Frm 00072 Fmt 4701 Sfmt 4700 Additionally the threshold might be less burdensome to assess than the one in Rule 10a–3T because it requires the Manager to assess whether it is above the threshold on a monthly basis rather than on each individual day.701 Second, many commenters believed that weekly reporting was overly burdensome.702 The short selling information required by Rule 13f–2 and Form SHO will be reported less frequently (monthly rather than weekly) and will involve reporting end of month positions rather than daily positions. Third, Managers will have more time to compile and file the Form SHO reports than they had to compile Form SH. Notwithstanding these cost-reducing differences, the Commission does recognize that other differences might offset some or all of these cost reductions. In particular, Rule 13f–2 and Form SHO will require that the information on activity include daily records if the Manager exceeds a position threshold that month rather than include daily records if the Manager exceeds an activity threshold that week.703 Also, unlike the Form SH required under Rule 10a–3T, the Form SHO that will be required by Rule 13f– 2 will feature an XML schema that will incorporate technical validations of certain data fields on the Form, and will flag technical errors and require the filer to correct the technical errors before successful submission on EDGAR. However, because the field validations implemented by Rule 13f–2 and Form SHO will be limited to technical errors (e.g., letters instead of numbers in a field requiring only numbers) that will be straightforward to resolve, such resubmission costs will not be Managers that exercise investment discretion with respect to accounts holding section 13(f) securities having an aggregate fair market value of at least $100 million were required to file Form SH. Additionally, the data lacked data validation according to the needs of the end user when filed, making the data hard to work with. 701 This example assumes the equity is from a reporting company. Thresholds for non-reporting companies are triggered following a single day in which the short sale position exceeds $500,000. See supra Part II.A.3 702 See supra note 697 for the comment letters in note, as well Coalition of Private Investment Companies letter, available at https://www.sec.gov/ comments/s7-31-08/s73108-46.pdf. 703 Rule 10a–3T required institutional investment managers to report beginning and end of day short position, number of securities sold short each day if the particular data item exceeded the threshold. See P 3 final Rule 10a–3T, 73 FR 61678 (Oct. 17, 2008), available at https://www.sec.gov/rules/final/ 2008/34-58785fr.pdf. However, in analysis of Form SH data intraday short selling volume could not be examined for Form SH because the data field for ‘‘Number of Securities Sold Short’’ was populated in only 7% of observations after filters were applied. See Proposing Release note 80 at 14963 for more information on short volume in Form SH data. E:\FR\FM\01NOR2.SGM 01NOR2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations significant. Finally, the rule might impose costs on Managers who were not required to report Form SH because Rule 10a–3T and Form SH did not apply to Managers that exercise investment discretion with respect to accounts holding section 13(f) securities with an aggregate fair market value of less than $100 million. f. Other Compliance Costs One commenter stated that the Commission should consider that ‘‘the sheer number and complexity of the Proposals, when considered in their totality, if adopted, would impose staggering aggregate costs, as well as unprecedented operational and other practical challenges.’’ 704 But, consistent with its long-standing practice, the Commission’s economic analysis in each adopting release considers the incremental benefits and costs for the specific rule—that is the benefits and costs stemming from that rule compared to the baseline. In doing so, the Commission acknowledges that in some cases resource limitations can lead to higher compliance costs when the compliance period of the rule being considered overlaps with the compliance period of other rules. In determining compliance periods, the Commission considers the benefits of the rules as well as the costs of delayed compliance periods and potential overlapping compliance periods. In this regard, some commenters mentioned the proposals which culminated in the recent adoptions of Rule 10c–1a, Beneficial Ownership Reporting, Private Fund Advisers, Settlement Cycle Adopting Release, and May 2023 SEC Form PF Amending Release.705 The Commission acknowledges that there are compliance dates for certain requirements of these rules that overlap in time with the final rule, which may impose costs on resource constrained entities affected by multiple rules.706 However, we do not think these increased costs from overlapping compliance periods will be significant for several reasons. First, the number of Managers who will also be subject to 704 NAPFM Letter 3. supra note 499. As stated above, commenters also specifically suggested the Commission consider potential overlapping compliance costs between the final rule and certain proposing releases. See supra note 505. These proposals have not been adopted and thus have not been considered as part of the baseline here. To the extent those proposals are adopted in the future, the baseline in those subsequent rulemakings will reflect the regulatory landscape that is current at that time. 706 See supra notes 500–504 (summarizing compliance dates). ddrumheller on DSK120RN23PROD with RULES2 705 See VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 one or more of these recently adopted rules could be limited; we estimate that 252 to 1000 Managers may be required under the final rules to report on new Form SHO, and of those, depending on their activities, only a portion may also be required to comply with one or more of the recently adopted rules raised by commenters (and even fewer may need to comply with more than one of those other rules).707 In addition, commenters’ concerns about the costs of overlapping compliance periods were raised in response to the proposal and as discussed above, we have taken steps to reduce costs of the final rule.708 Finally, although the compliance periods for these rules overlap in part, the compliance dates adopted by the Commission are generally spread out over more than a two-year period from 2023 to 2026.709 7. Effect of Certain Electronic Filing and Dissemination Requirements Rule 13f–2 and Form SHO will require the short position and activity disclosures to be filed on the Commission’s EDGAR system using a structured, machine-readable data language. In particular, the rule and Form will require Form SHO to be filed on EDGAR in a custom XML-based data language specific to that Form (‘‘custom XML,’’ here ‘‘Form SHO-specific XML’’). The XML schema for Form SHO-specific XML will incorporate validations of certain data fields on the Form to help ensure consistent formatting and completeness.710 While 707 For example, broker-dealers who need to report on Form SHO under Rule 13f–2 will also need to comply with Settlement Cycle Adopting Release but may not need to comply with the requirements of any of the other recently adopted rules. 708 The final rule mitigates costs relative to the proposal in three ways. First, the reporting threshold for the U.S. dollar value-based prong for reporting company issuer securities is being adopted as a monthly average, rather than the daily end-of-day calculation that was proposed. See supra Part II.A.3.b. Second, Form SHO is being adopted without the proposed requirement to report hedging classifications in Information Table 1, and includes a streamlined Information Table 2, which reduces the form’s complexity and the granularity of the information reported. See supra Parts II.A.4.d.iii, II.A.4.d.iv. Third, proposed Rule 205 and related CAT reporting requirements are not adopted. See supra Part III.B. 709 For example, compliance periods for the May 2023 SEC Form PF Amending Release and the Settlement Cycle conclude by mid-2024 while reporting under the final rule will be required by the end of 2024 at the earliest. Similarly, certain compliance deadlines for Rule 10c–1a extend into early 2026. See supra notes 500–504. 710 See supra Part II.A.4.b. Field validations are restrictions placed on each data element which would not allow a filer to file a form if there are certain technical errors in critical fields. If a Form SHO were to include, for example, letters instead of numbers in a field requiring only numbers, it PO 00000 Frm 00073 Fmt 4701 Sfmt 4700 75171 the field validations will act as an automated form completeness check when a Manager files a Form SHO, the field validations will not be designed to verify the accuracy of the information filed in Form SHO filings. EDGAR will subsequently aggregate the reported information at the equity security level and release the aggregated data to the public on EDGAR. These requirements will incrementally augment the various effects of the short position and activity disclosures discussed herein by enhancing the accessibility, usability, and quality of the Form SHO disclosures (for use by the Commission) and the aggregate security-level disclosures (for use by the public). By requiring a structured machine-readable data language and a centralized filing location (EDGAR) for the disclosures on Form SHO, the Commission will be able to access and download large volumes of Form SHO disclosures in an efficient manner. To the extent that the efficiencies derived from the centralized filing of the Form SHO disclosures facilitate more rapid Commission response to potential market manipulation, investors could indirectly benefit from the fact that such practices are detected, and possibly addressed, earlier than might otherwise be the case. One commenter agreed with the Commission’s proposal to require Managers to provide Form SHO in EDGAR in a Form SHO-specific XML.711 Another commenter stated that ‘‘XML is a widely used language and therefore implementation and maintenance would keep costs low and efficiency high.’’ 712 Similarly, the provision of the aggregated security-level information at a centralized, publicly accessible location in a structured, machinereadable data language, will enable investors and other public data users to download the aggregated information would be flagged as a technical error, at which point the filer would either be unable to file the Form (if completed using the fillable web form provided by EDGAR) or the filing would be rejected (if directly filed in EDGAR in Form SHO-specific XML). To complete the filing, the filer would need to correct the error and re-file. 711 See Comment Letter from Aaron Franz, available at https://www.sec.gov/comments/s7-1821/s71821-20120685-272855.pdf (‘‘This form and forum are ideal for reporting purposes. Further, since the Form SHO is proposed to be published in XML format it should be easy for Managers to automate the process of filling and filing the Form SHO.’’). 712 ‘‘[XML] would also allow for easy parsing and review of the data. The costs shouldn’t vary very much between managers as the SHO form should be uniform for all managers, which means they will all use similar implementations to conform to its usage.’’ Anonymous Comment Letter (Apr. 4, 2022), available at https://www.sec.gov/comments/s7-0822/s70822-20122297-278355.htm. E:\FR\FM\01NOR2.SGM 01NOR2 ddrumheller on DSK120RN23PROD with RULES2 75172 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations directly, and the data might then be analyzed using various tools and applications. Placing the security-level information someplace other than a centralized location in a structured, machine-readable language would mean that data users seeking to analyze the information using tools and applications would need to search for, extract, and structure the security-level short position and activity information or pay a third-party vendor to do so. Requiring the short position and activity disclosures to be filed in Form SHO-specific XML will facilitate more thorough review and analysis of the reported short sale disclosures by the Commission, which will increase the efficiency and effectiveness with which the Commission could identify manipulative short selling strategies— which may also serve as a deterrent to would be manipulators and thus may help prevent manipulation. The requirement for short sale disclosures to be filed on EDGAR in Form SHO-specific XML will result in additional incremental compliance costs on filing Managers. These direct compliance costs are detailed in a subsequent section.713 Moreover, to the extent these incremental compliance costs further chill the incidence of short-selling, the EDGAR and Form SHO-specific XML requirements will increase the likelihood of the indirect costs that are discussed elsewhere in Parts VII.C.2, VII.C.3, VII.C.4, and VII.C.6. Some commenters expressed concerns with regard to the risks of cyber criminals accessing non-public Form SHO data.714 Although the SEC is not exempt from cyberattacks, the Commission is pursuing several actions to protect SEC data and strengthen the EDGAR system as described above. The Commission recently deployed security and modernization enhancements focusing on technology upgrades to the EDGAR system.715 The Commission recognizes that the Rule collects sensitive information and that, while the likelihood of a data breach is low, the costs of a data breach could be substantial. These costs include but are not limited to the following: trading losses that could occur due to the revelation of private trading strategies or economic positions which may enable identifying and trading 713 See 714 See supra Part VIII.C.6. MFA Letter, at 8 and Two Sigma Letter, at 5. 715 See Annual Report on SEC website Modernization Pursuant to Section 3(d) of the 21st Century Integrated Digital Experience Act (Dec. 2022), available at https://www.sec.gov/files/21stcentury-idea-act-report-2022-12.pdf. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 opportunistically around such strategies, such as facilitating a short squeeze; business disruptions that could occur if the data breach results in temporary system down time; data breach response costs as market participants must devote resources to determining how to respond to the data breach; and reputational harm to individual Managers and the brokerdealers that employ them. While the potential costs of a breach, to the extent that one occurs, could be severe, RNSAs, ATSs, and SROs, are currently subject to existing requirements designed to improve the resiliency and oversight of securities market technology infrastructure, such as Regulation Systems Compliance and Integrity (‘‘Regulation SCI’’) (17 CFR 242.1000 through 242.1007). Adherence to such regulations can reduce the probability of a data breach and mitigate the costs associated with a breach, should it occur. As stated previously, one commenter stated that the LEI and the FIGI of issuers is ‘‘not commonly provided’’ in other holding reports and would therefore cause Managers to incur additional costs.716 While LEIs are widely used in the global financial markets (for example, the Commission currently requires funds to identify themselves with LEIs in portfolio holding reports on Form N–PORT),717 we agree that there are costs associated with obtaining and maintaining LEIs. Currently, U.S. entities may obtain an LEI for a one-time fee of $60 and an annual renewal fee of $40.718 FIGIs also are widely used in the financial markets, and the Commission recently added FIGI as an optional securities identifier on Form 13F.719 716 MFA Letter, at 9. A.1.d and Item A.2.c of Form N–PORT. See also Item B.1.d of Form N–CEN (requiring funds to disclose their LEIs on annual reports); 17 CFR 242.903(a) (requiring security-based swap participants to report LEIs to swap data repositories). Additionally, other U.S. and foreign regulators require firms to identify themselves with LEIs. For example, Commodity Futures Trading Commission (CFTC) regulations require counterparties to swaps, including interest-rate swaps, to report their LEIs. See 17 CFR 45.6 (CFTC LEI requirement for parties to swap transactions). 718 A U.S. entity can currently obtain and renew an LEI from one of eleven LEI operating units. See Get an LEI: Find LEI Issuing Organizations, Glob. Legal Entity Identifiner Found., available at https:// www/gleif.org/en/about-lei/get-an-lei-find-leiissuing-organizations (2003). One LEI operating unit currently discloses an initial fee of $60 and a renewal fee of $40. See Frequently Asked Questions, Fees, Payments & Taxes, Bloomberg LEI, available at https://lei.bloomberg.com/docs/ faq#what-fees-are-involved (2023). 719 Special Instruction 11.b.iii of Form 13F. Based on Commission staff analysis of Form 13F filings in EDGAR, at least 500 unique filers have included FIGIs on their Form 13F filings since the 717 Item PO 00000 Frm 00074 Fmt 4701 Sfmt 4700 Further, FIGIs, which are automatically assigned and are retrievable and redistributable without licensing restrictions and at no cost,720 are not expected to result in compliance costs for reporting persons. Lastly, firms can use identifier mapping tables, and thus likely would not need new technology systems to accept LEIs and FIGIs.721 However, the Commission recognizes that Managers who do not currently use those identifiers and who do not already have identifier mapping capabilities in their data systems would incur one-time costs to build such functionality. 8. Potential Increased Use of Derivatives The Commission recognizes the risk that the benefits of Form SHO data could be diminished to the extent that Managers avail themselves of economically similar arrangements. For example, Managers might consider trading derivatives in place of engaging in short selling, particularly for stocks with liquid options.722 Benefits might similarly be diminished if a robust single-stock futures market develops over time.723 Indeed, Rule 13f–2 and its accompanying Form SHO might be a catalyst for growth in derivatives markets if short sellers were to look for avenues to take the economic equivalent of short positions that did not require similar disclosures. The Reporting Thresholds in Rule 13f–2 are based on a Manager’s gross short position in the equity security itself, and do not consider derivative amendments to Form 13F became effective on January 3, 2023. As of the second quarter of 2022, 1 billion FIGIs had been assigned to financial instruments. Financial Instrument Global Identifier Newsletter Q2 2022, OpenFIGI (June 30, 2022), available at https://www.openfigi.com/about/news/ 2022/6/30/financial-instrument-global-identifiernewsletter-q-2-2022. 720 Allocation Rules for the Fin. Instrument Glob. Identifier (FIGI) Standard (Object Mgmt. Grp. & Am. Nat’l Comm. X9, amended 2022) section 1.2.1, available at https://www.openfigi.com/assets/local/ figi-allocation-rules.pdf (‘‘FIGI Allocation Rules’’); Symbology, OpenFIGI, available at https:// www.openfigi.com/about/symbology. FIGI is an open-source, non-proprietary data standard for the identification of financial instruments across asset classes. FIGI Allocation Rules sections 1.1.1, 1.2.1, 1.4.1. The Share Class level FIGI is assigned to equities and funds, and enables users to link multiple FIGIs for the same instrument to obtain an aggregated view for that instrument across all countries globally. Id. section 1.4.3. 721 FIGI allows users to link various identifiers for the same security to each other, which includes mapping the FIGI of a security to its corresponding CUSIP number. See Financial Instrument Global Identifier, OMG Standards Dev. Org. (2023), available at https://www.omg.org/figi/. 722 See supra note 527, R. Battalio, and P. Schultz (2011), Grundy, Lim, and Verwijmeren (2012). One commenter agreed that this is a likely outcome. See Better Markets Letter at 9–10. 723 See supra note 527, Jiang, Shimizu, and Strong (2019). E:\FR\FM\01NOR2.SGM 01NOR2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations positions. Consequently, a Manager seeking to build a large short position without incurring a reporting obligation might hold a short position just below a Reporting Threshold and use derivatives to take positions that effectively rise above that threshold.724 One commenter stated that this may be viewed as regulatory arbitrage.725 Using derivatives to establish an economically equivalent short position that does not include a reporting obligation may be costly. Options tend to be more expensive than equity transactions, particularly for less liquid securities. Additionally, some equities do not have listed options. Consequently, the Managers’ desire to avoid the costs associated with reporting Form SHO information articulated in Parts VIII.C.1 and VII.C.2 is balanced against the increased cost of using derivatives such as options to execute a short position. Thus, for some stocks, i.e., those with illiquid or nonexistent options, the likelihood that Managers will seek to employ alternative arrangements through options may be minimal. However, academic research has shown that investors have used options as an alternative means to obtain short-like economic exposure when short selling is restricted, thus there is a significant risk that there will be some attempt to employ alternative arrangements using derivatives, particularly in stocks with liquid options markets.726 D. Efficiency, Competition and Capital Formation 1. Efficiency ddrumheller on DSK120RN23PROD with RULES2 Markets function best and are most efficient when all relevant information regarding a security is known and is incorporated into prices.727 This includes negative information. When negative information is not tradable, stocks tend to be overpriced, leading to an inefficient allocation of capital across the economy.728 More efficient prices lead to better economic outcomes for the macro economy as capital flows into high value projects and out of low value projects. Short sellers have incentive to uncover negative information and to trade in order to profit from that 724 While combining short positions with derivatives may allow a Manager not to trigger the Reporting Thresholds, using options may trigger a report to FINRA’s LOPR. See supra note 78. 725 See Law and Finance Professors Letter, at 3. 726 See supra note 527. 727 See Eugene F. Fama, Efficient Capital Markets a Review of Theory and Empirical Work, The Fama Portfolio 76–121 (2021). 728 See supra note 624. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 information.729 As discussed in Part VIII.D.2, more transparency in short selling will improve the amount of information that investors have to value a stock—increasing price efficiency. However, it might also disincentivize fundamental research which may harm price efficiency by limiting the amount of total information has been discovered, and thus, limiting the amount of information incorporated into stock prices. Overall, the impact of the adopted rule and CAT amendment on price efficiency is uncertain.730 Additionally, the CAT amendment will improve the efficiency of the Commission’s oversight and enforcement of regulations relating to the bona fide market making exception by providing more efficient access to data on how individual market makers are using the exception. Currently, the Commission must request information about the use of the market maker exception from specific brokerdealers.731 2. Competition Investors compete with one another to gather information that they use to enact trading strategies. Academic research indicates that when short selling is costly, investors owning the asset have an advantage in gathering information due to the reduced cost of acting on whatever information that they gather.732 The final rule may increase this advantage since it will increase the cost of short selling for Managers above the Reporting Thresholds, as discussed in Parts VIII.C.1 and VIII.C.2. Relatedly, fund performance is a key determinate of drawing investor flows. The Commission believes that Rule 13f–2 and Form SHO might harm competition for fund flows between Managers who do and do not use short selling strategies. For instance, Managers that are skilled at uncovering negative information may face additional costs when transacting on this information, potentially leading to lower returns. The Commission believes that the CAT amendment will not alter significantly the competitive landscape for broker-dealer services. Because small 729 See supra Part VIII.C.2 for discussion of short selling motivation. 730 See supra Part VIII.C.2 for discussion of price efficiency effects. 731 See supra Part VIII.B.3 for a further discussion of the inefficiencies of existing data with regards to oversight and enforcement of rules relating to bona fide market making. In examinations and enforcement matters, the Commission has used broker-dealer trade blotters in combination with other regulatory data to consider whether conditions were met for the use of BFMM locate exemptions. 732 See Dixon (2022), supra note 581. PO 00000 Frm 00075 Fmt 4701 Sfmt 4700 75173 broker-dealers are likely to use a service bureau to report their CAT data,733 the Commission believes that implementation costs will be borne by service bureaus and are likely to be recovered across many service bureauclient broker-dealers. Individual small broker-dealers may face expenses in configuring service bureau software packages, but these expenses are likely to be one-time and modest because the bulk of implementation activities will have been performed by the service bureau.734 Because larger broker-dealers that self-report CAT Data enjoy economies of scale, they should be able to absorb the costs associated with compliance more easily, and they may choose to contract with a service bureau if implementation is unusually burdensome due to the operation of multiple legacy order-handling systems. In addition, as stated above, some commenters requested the Commission consider interactions between the economic effects of the proposed rule and other recent Commission rules, as well as practical realities such as implementation timelines.735 As discussed above, the Commission acknowledges that overlapping compliance periods may in some cases increase costs.736 This may be particularly true for smaller entities with more limited compliance resources.737 This effect can negatively impact some competitors because these entities may be less able to absorb or pass on these additional costs, making it more difficult for them to remain in business or compete. However, the final rule mitigates overall costs relative to the proposal,738 and we do not believe these increased compliance costs will be significant for most Managers.739 We therefore do not expect the risk of negative competitive effects from increased compliance costs due to simultaneous compliance periods to be significant. 3. Capital Formation One of the primary roles of the securities markets is to allocate capital 733 See Rule 613 Adopting Release for the Commission discussion of CAT costs to brokerdealers. 734 See supra Part VIII.C.6 for a discussion of compliance costs. 735 See supra Part VIII.C.6. 736 See id. 737 But see supra Part VII.B.2 and infra Part IX (the Commission anticipates that the type of Manager that will trigger a reporting threshold likely already has sophisticated information technology and the ability to automate reporting; and that the reporting thresholds will not apply to a significant number of small Managers). 738 See supra note 706 and accompanying text. 739 See supra Part VIII.C.6.f. E:\FR\FM\01NOR2.SGM 01NOR2 ddrumheller on DSK120RN23PROD with RULES2 75174 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations (money) across the economy. If investors believe that a company is undervalued then, all else being equal, they will buy that stock; if many investors buy the stock, the price for that stock will increase—lowering the cost of equity financing and making funding projects easier for the firm. On the other hand, if investors believe that a company is overvalued then, all else being equal, they will sell or short sell the stock to invest in other more profitable ventures. If enough investors sell or short the stock, then the stock price will decline. A lower stock price implies more expensive equity financing and thus a higher weighted average cost of capital. When stocks are overpriced, they are inherently allocated too much capital, which deprives more productive ventures from receiving optimal capital and hinders economic progress. Consequently, short sellers contribute to capital formation by enhancing price efficiency which helps to ensures an optimal allocation of capital across firms. Thus, to the extent that the adopted rule and CAT amendment discourage short selling, as discussed in Parts VIII.C.1 and VIII.C.2, it may lead to the overpricing of some stocks and the underpricing of others.740 This mispricing distorts optimal capital formation as it implies that some firms may have a cost of capital that is relatively too high or too low with respect to that firm’s fundamentals and risk profile. Additionally, academic research suggests that managers learn from stock price changes, using them as a way to tap into the ‘wisdom of crowds’ phenomena to improve decisions.741 For instance, if a firm announces a capital investment or other project, and the stock price moves up or down, then managers may use this information as a signal about the market’s perception of the value of that project. Thus, stock price reactions may be an input into manager decisions in terms of when and how to invest capital. To the extent that the rule discourages short selling, it may make it more difficult for managers to extract signals from stock prices about the value of capital investments— particularly low value projects as the rule may attenuate the market’s ability to respond to negative information. The costs associated with Managers monitoring their short positions for compliance with reporting Form SHO along with the negative economic effects detailed in Parts VIII.C.1, VIII.C.2, and 740 See supra note 624, Miller (1977). 741 See I. Goldstein and A. Guembel, Manipulation and the Allocational Role of Prices, 75 (1) The Rev. of Econ. Studies 133–164 (2008). VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 VIII.C.7 may harm capital formation, specifically capital formation using convertible debt, if it increases the cost of short selling. Investors may be less inclined to purchase convertible debt if the cost of hedging that purchase by short selling the security becomes more expensive—through both the direct and indirect costs associated with Form SHO.742 Thus, to the extent that the costs associated with Form SHO increase the cost of short selling they may also increase the cost of hedging convertible debt and may make that form of financing more expensive. This effectively increases the weighted cost of capital for firms that use convertible debt and may hinder their ability to fund operations, including new investments. In contrast, adopted Rule 13f–2, Form SHO, and the CAT amendment may have a positive influence on capital formation if they disincentivize short selling that takes place in connection with securities fraud. For example, in one type of fraud, investors holding convertible debt would engage in a manipulation including short sales of a stock in an attempt to drive down the price artificially in order to convert their debt to equity and cover their short positions at a lower price. To the extent that the rule facilitates better oversight and prosecution of this sort of fraud, it may facilitate capital formation by lowering the risk that convertible debt holders will engage in this sort of fraud. More generally, to the extent that enhanced oversight of short sale activity deters manipulative activity such as short squeezes and associated price bubbles stemming from short squeezes, price efficiency may be enhanced, which in turn, could further promote capital formation. Rule 13f–2 may also affect capital formation through investor confidence. Some commenters on FINRA’s short interest proposal suggested that short selling, and in particular a lack of short selling disclosure, leads some investors to have less confidence in financial markets.743 One commenter, however, stated that, ‘‘Rule 13f–2 will not promote greater risk management among market participants, and hence, not bolster confidence in the markets by providing greater transparency,’’ because investors already use aggregate 742 See, e.g., Stephen J. Brown, Bruce D. Grundy, Craig M. Lewis and Patrick Verwijmeren, Convertibles and Hedge Funds as Distributors of Equity Exposure, 25 (10) Rev. Fin. Stud 3077–3112 (Oct. 2012). 743 See letters from NASDAQ, OTC Markets, and CFA Institute in response to FINRA’s short interest proposal) available at https://www.finra.org/rulesguidance/notices/21-19#comments. PO 00000 Frm 00076 Fmt 4701 Sfmt 4700 short interest data from FINRA, the exchanges, and data vendors for risk management purposes.744 As discussed throughout this release, the Commission, however, believes that the data from Form SHO and the amendment to CAT will provide information that is additive to these and other data sources and will therefore improve short selling transparency and strengthen investor confidence, which might increase investment activity and, in turn, promote capital formation. E. Reasonable Alternatives 1. Alternative Approaches a. Releasing Aggregated CAT Data As an alternative to collecting, aggregating, and publishing Form SHO, the Commission considered amending the CAT NMS Plan to collect additional information so that the Commission or the Plan Processor could aggregate and publish CAT Data. This alternative would effectively eliminate the thresholds for reporting.745 CAT data currently contains a short sale mark and, as part of the implementation of the Customer Account Information System (CAIS), will also provide the identities of those transacting. Consequently, the Commission or the Plan Processor could aggregate information on the number of short sales that Managers engage in from CAT, assuming that the Commission or the Plan Processor could determine that a transaction is by or on behalf of a Manager, and disseminate aggregated information to the public at monthly intervals—or more frequently. The Commission or Plan Processor could publish daily statistics on the number of short sales engaged in by Managers each day in the prior month as reported in CAT. Additionally, the reports could include information on options transactions that lead to short exposure, such as purchasing a put option, or writing a call option.746 Furthermore, a longer time series (for example, a rolling year) to estimate a Manager’s position could be aggregated using CAT data. These could be aggregated to create a market-wide short position estimate. However, this estimate would be inaccurate because the alternative does not consider collecting in CAT information on changes in positions that come from activity other than secondary market transactions, such as secondary offering purchases, conversions, creations and redemptions, and option 744 See SBAI Letter, at 3. Proposing Release, at 15003. 746 In this alternative, however, CAT would not contain the information on option expirations or assignments. 745 See E:\FR\FM\01NOR2.SGM 01NOR2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 exercises and assignments. This inaccuracy could also result in the market-wide short position estimate being less accurate than current short interest data.747 The alternative would result in lower benefits than those from Rule 13f–2 and the disclosures Form SHO requires. The data published under this alternative would have significant overlap with the data that would be published under Rule 13f–2 and Form SHO. However, again assuming that the Commission or the Plan Processor could determine that a transaction is by or on behalf of a Manager, the data in this alternative could be more comprehensive in terms of the breadth of Managers whose short selling information could be aggregated and published,748 because the Commission could publish aggregated data on short selling transactions from all Managers instead of just those that meet the threshold. However, the published data would be less accurate in terms of estimating positions and changes in positions as they would not include certain activity, such as options assignments, that are not collected in CAT but that may affect a short position. As a result of these differences, this alternative would result in less clarity about bearish sentiment among Managers. Thus, in terms of price efficiency, this approach would not have many of the same benefits as adopted Rule 13f–2 and Form SHO. The alternative would also reduce the benefits of comparing the published data to short interest because the alternative would focus on transaction dates rather than settlement dates and the alternative would not be restricted to large positions.749 Short interest measures short positions as of two settlement dates per month. A comparison of the data in the alternative to the short interest data would require either publishing the position data as of the transaction dates that correspond to the short interest settlement dates or users would have to use the activity data to offset the dates themselves. Further, the inclusion of more than just Managers with large short positions means that the information conveyed by the alternative relative to short interest data would be less additive than the 747 FINRA’s process of gathering and validating short interest data takes approximately two weeks. See supra note 561. 748 This assumes the Managers that could be identified in CAT could include all those that would be responsible for reporting under Proposed Rule 13f–2 and Proposed Form SHO. 749 Adopted Rule 13f–2 requires reporting based on the settlement date, which is normally two business days after the transaction day. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 data provided that will be provided by adopted Rule 13f–2 and Form SHO. This alternative would mitigate some of the concerns associated with Managers being exposed to increased risk of short squeezes or other retaliation as discussed in Parts VIII.C.1 and VIII.C.2. This reduced risk stems from the fact that it would be more difficult to determine whether the short selling activity reported was due to many Managers short selling small amounts, or just a few Managers short selling large amounts. It would also be more difficult to identify individual short sellers based on the data. A lower risk of retaliation or short squeezes may also mitigate some of the negative effects of Rule 13f–2 and Form SHO with regard to less overall short selling or fundamental research that are described in Part VIII.C.2, depending on the delay in publication under the alternative. Additionally, this approach would have lower compliance costs for Managers than the current proposal, as it would not require Managers to file Proposed Form SHO. One commenter agreed that releasing CAT data with short sale information would be less costly for Managers than Proposed Form SHO.750 While it would result in the same costs for Industry Member reporting as those associated with the CAT amendment, it would increase costs associated with the Plan Processor improving processing power for the aggregation of CAT data if such computations could not be performed with existing resources (without reducing other functionality). Any costs incurred by the Plan Processor would be passed along to Plan Participants and Industry Members. There are several drawbacks to this alternative relative to the existing proposal. First, it would take some time before CAT data could be used to develop an estimate of the size of short positions. Thus, the data would not immediately provide the Commission or market participants with information about the size of individual large short positions. Consequently, to the extent that knowing the total size of short positions held by Managers with large positions conveys fundamental information to the market, then this fundamental information would not be immediately available if the Commission were to adopt a version of this alternative. Additionally, the data provided by this alternative would exclude transactions outside of the purview of CAT that may affect short positions. Thus, the data provided 750 See PO 00000 SBAI Letter, at 2. Frm 00077 Fmt 4701 under this alternative would always be estimates of total short positions, which could be inaccurate for some Managers. Another drawback to this alternative is that releasing CAT data to the public could increase security risks. CAT contains highly sensitive information and creating a process that would release portions of the data, even if aggregated, could present risks. A larger expansion of CAT could achieve at least the same data value as in Rule 13f–2 and Form SHO.751 For example, CAT could expand to require the reporting of all the information that will be collected in adopted Form SHO. Specifically, the Commission could expand CAT to include data on account positions, including short selling positions associated with those positions. In addition, CAT could be expanded to capture information on changes in those positions. Under this approach, regulators would have access to the same data as if Managers filed Form SHO but for all short sellers, not only the subset of Managers reporting on Form SHO. This approach would also result in additional information available to regulators not collected in Form SHO that could improve investor protections. In addition, this alternative would reduce costs for Managers who are not Industry Members because they would not be required to report new information. However, costs would increase for Industry Members, who would have to report a significant amount of new information on CAT report types that do not exist today and for Participants who would have to work out technical specifications and implement changes for new types of CAT reports. Further, more Industry Members would report this information to CAT than Managers who, under the final rule, would be required to report information on Form SHO. It would be a major undertaking for both the Plan Processor and industry participants to build out and adapt systems to collect, process, and publish this information. This implementation would likely be very complex and take a significant amount of time to compile. Overall, the cost of this alternative is likely to exceed the costs of adopted Rule 13f–2 and Form SHO. Further, if the Commission were to expand CAT to collect additional information beyond what would be captured by the amendment to CAT, such as position information, then these additional expansions would impose significant direct costs to CAT-reporting firms. 751 See Sfmt 4700 75175 E:\FR\FM\01NOR2.SGM Proposing Release, at 15004. 01NOR2 ddrumheller on DSK120RN23PROD with RULES2 75176 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations a. FINRA Reporting As discussed in Part VIII.C.4.i, FINRA already collects and, together with the listing exchanges, disseminates aggregate short interest that it collects from member broker-dealers. Consequently, the Commission could codify FINRA’s existing process to ensure that it continues in perpetuity.752 This alternative would have no additional costs to market participants but would substitute a Commission mandate for the publication of the short interest data. Several commenters expressed support for the use of FINRA to satisfy DFA requirements in lieu of Rule 13f–2 and Form SHO.753 The commenters’ support is motivated by familiarity with current FINRA short reporting requirements and costs that would not be incurred to comply with Rule 13f–2 and Form SHO. Similarly, the Commission could require FINRA to publish a version of its short interest information that specifically identifies the aggregate short interest of Managers—separate from other short interest.754 To accomplish this, reporting brokerdealers would separately include in their reports to FINRA the short positions that originate from Managers. FINRA would then compile both total short interest, as it currently does, as well as a Manager specific short interest. Because broker-dealers already have experience reporting short interest data to FINRA and would thus not need to build out new systems to report the data, this alternative might have been less expensive than the existing proposal as it would have only required a modification of an existing process. Since this alternative would not have provided the Commission with the positions of any identified Managers or any Manager-specific activity data, the benefits and risks associated with these data articulated throughout Part VIII.D would decline. In addition, it would not have distinguished Managers with large positions from other Managers. Therefore, neither market participants nor regulators would know what share of short interest was concentrated among Managers with large positions. As discussed above in Part VIII.C.1, Managers often accumulate large short sale positions based on fundamental market research or other factors that differ from investors with smaller positions, the latter of which are more likely shorting for hedging or smallerscale speculative purposes. Therefore, 752 See Proposing Release, at 15004. e.g., AIMA Letter, at 8; ICI Letter, at 51; Ropes & Gray Letter, at 4; Two Sigma Letter, at 9. 754 See Proposing Release, at 15004. 753 See, VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 this alternative would have provided less transparency into the short sale market relative to the Rule 13f–2 and Form SHO because it would not have revealed the degree to which short interest was concentrated among Managers with large positions. The Commission also expects that data on Manager short interest in addition to total short interest would have likely not provided much incremental value over the existing short interest data due to the likely significant overlap of the short positions of Managers and total short interest, and the absence of activity information to better understand changes in short interest.755 Thus, while the alternative that requires FINRA to produce separate short interest data for Managers would have reduced costs to market participants relative to the existing proposal, it also might not have provided the market or regulators a significant incremental benefit relative to existing short selling data. b. Broker-Dealer Reporting to EDGAR on Behalf of Managers The Commission could adopt a modified rule that allows broker-dealers to file Form SHO reports with the Commission on behalf of Managers.756 This alternative might reduce costs as it could concentrate reporting with brokerdealers that have significant experience collecting and providing such information—increasing operational efficiency. On the other hand, Managers may use multiple prime brokers and thus the reporting prime broker may not have easy access to information about all such Manager’s positions and activity in a security. Consequently, the reporting prime broker may not know whether the sum of the manager’s positions exceeds either of the thresholds and thus whether reporting is necessary. Thus, the reporting broker would need to gather additional information from the Manager about activity associated with other prime broker(s).757 In the absence of such information gathering, the reporting broker may mistakenly not report Form SHO for a Manager whose position with 755 Analysis of Form SH data indicates that these data, which would be a subset of the data collected in this alternative, amounted to a high percentage of short interest. Commenters questioned the use of Form SH data in this and other contexts. See supra Box 1: Use of Form SH Data for responses to comments on the use of these data. 756 See Proposing Release, at 15004. 757 The latter could result in the additional complication of double reporting or prime brokers having to coordinate on who reports a position. Likely, the least costly solution could involve Managers being responsible for informing their prime brokers of their threshold status. PO 00000 Frm 00078 Fmt 4701 Sfmt 4700 that particular reporting broker is under the threshold, but over the threshold when positions across brokers are combined. Requiring additional data collection of a Manager’s short positions by the reporting broker might increase complexity and costs as Managers and broker-dealers would need to develop systems by which a Manager provides information to its reporting broker about its activity with other prime brokers. Alternatively, the Commission could permit broker-dealers to report on behalf of Managers only if the broker-dealer could report full information. Thus, Managers using multiple prime brokers would have the option of providing comprehensive information to their reporting prime broker, or they could report Proposed Form SHO data themselves. c. Harmonization With European Disclosure Requirements The Commission could also craft Rule 13f–2 and Form SHO to be consistent with European disclosure requirements.758 In 2012, the European Parliament and the Council of the European Union adopted regulations on short selling (the ‘‘SSR’’) that standardized the reporting threshold for all EU member states.759 Under the SSR, a natural or legal person holding a short position is required to report to the relevant regulator when its short position (‘‘net short position’’), computed by taking into account relevant derivative positions such as options, if any, reaches the initial threshold of 0.2 percent of the issued share capital of the company, and in 0.1 percent up and down increments thereafter.760 The threshold for reporting to a regulator recently was lowered to 0.1 percent.761 If the net short position reaches 0.5 percent of the share capital of the company, then the relevant market regulator reports the net short position to the public with the identity of the short seller revealed. 758 See Proposing Release, at 15005. European Parliament and Council Regulation 236/2012, 2012 O.J. (L 86) 1, available at https://eur-lex.europa.eu/LexUriServ/ LexUriServ.do?uri=OJ:L:2012:086:0001:0024: en:PDF. The SSR was adopted on Mar. 14, 2012 and its provisions had applicability dates of Mar. 25 and Nov. 1, 2012. 760 Id. at Article 5(2). 761 The threshold was temporarily lowered in Mar. 2020 in response to the COVID–19 pandemic. See ESMA Decision of 16 Mar. 2020, ESMA 70– 155–9546, available at https://www.esma. europa.eu/sites/default/files/library/esma70-1559546_esma_decision_-_article_28_ssr_reporting_ threshold.pdf. In September 2021, the change was adopted on a permanent basis. See European Union, Commission Delegated Regulation 2022/27, art. 1, 2022 O.J. (L 6) 9, available at https://eurlex.europa.eu/legal-content/EN/TXT/HTML/ ?uri=CELEX:32022R0027. 759 See E:\FR\FM\01NOR2.SGM 01NOR2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations New filings are required to be made whenever the net short position increases or decreases by 0.1 percent of the share capital of the company. In the EU, trading entities must submit their data to the relevant regulator by 3:30 p.m. on the following trading day.762 Trading entities accomplish public disclosure via a central website operated or supervised by the relevant competent authority.763 Consequently, the Commission could structure the rule to require Manager short selling reports that are consistent with the European regulations in terms of the thresholds for reporting, the computation of the threshold, the items reported, the timing for when short sale information is made public, and the timing for when new reports have to be issued. This alternative would provide directional information about short positions because only net short positions are required to be reported; would likely impose lower compliance costs to Managers; 764 would likely raise the risk of abusive practices towards short sellers; would likely increase Managers’ ability to evade the threshold; and would lower the detail of the data the Commission receives relative to the data from adopted Form SHO. One advantage of this alternative would be likely lower compliance costs for Managers that engage in short selling in both the EU and US.765 By only needing one set of compliance systems in place to satisfy both rules, Managers might enjoy lower costs to comply in both systems. Additionally, Managers might face lower costs to track and report net short positions. Moreover, in connection with Regulation SHO compliance, some Managers already track net positions on an aggregation unit basis.766 Thus, the computation of net positions for such Managers might be less costly than that of gross short positions as required by Rule 13f–2. However, for other Managers who are not currently aggregating positions on a net basis, costs of tracking may be higher under this alternative than under Rule 13f–2. This alternative also could have some negative consequences. The EU data are timelier than data available under adopted Rule 13f–2, since the forms are ddrumheller on DSK120RN23PROD with RULES2 762 Id. at Article 9(2). at Article 9(4). 764 For Managers operating in both the EU and the US, these costs may be lower. 765 Due to uncertainties regarding the EU short selling data regarding the identities of short sellers and the ability to map those IDs to US Managers, the Commission cannot identify the number of US Managers that currently comply with EU regulations. 766 See supra note 263. 763 Id. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 posted publicly immediately after receipt by the regulator, which potentially facilitates greater price discovery. However, this comes at the cost of increasing the possibility of revealing short sellers’ proprietary information and its associated risks, including short squeezes and copycat trading. Additionally, the EU structure, whereby individual short sellers’ names are made public, might raise the risk of retaliation towards short individual sellers, as well as the ability for market participants to engage in copycat strategies that decrease the profitability of gathering information. As a result of these costs to short sellers, investors may not be able to gather as much fundamental information as under the final rule.767 One commenter,768 however, stated that a recent study has found that the EU’s regulation finds no evidence that the disclosure requirements have resulted in increased coordination or have resulted in short sellers being targeted for short squeezes.769 Another potential consequence of this alternative would be adjusting position sizes to evade the Reporting Threshold. Multiple studies found evidence that short sales in the EU are clustered below the threshold, suggesting that investors are trying to conceal their positions to protect their underlying investment strategies.770 Thus, short sellers may adjust their positions to either increase their long exposure or reduce their short exposure, leading to loss of price efficiency. The Commission believes that since there are benefits to short sale activity, including increased price efficiency, then there would likely be increased costs to disclosing manager identities, since this would reduce short sale activity. By reporting net short positions, rather than gross short position, the Commission and the public would not 767 For analyses of how the SSR lead to increased copycat trading, lower price efficiency, and increased volatility, see Stephan Jank, Christoph Roling, and Esad Smajlbegovic, Flying Under the Radar: The Effects of Short-Sale Disclosure Rules on Investor Behavior and Stock Prices, 139 (1) J. of Fin. Econ. 209–233 (2021); Charles M. Jones, Adam V. Reed, and William Waller, Revealing Shorts an Examination of Large Short Position Disclosures, 29 (12) The Rev. of Fin. Studies 3278–3320 (2016). 768 See Better Markets Letter, at 13. 769 See Charles M. Jones, Adam V. Reed, and William Waller, Revealing Shorts an Examination of Large Short. Position Disclosures, 29 Rev. of Fin. Studies 3278, 3282 (2016). 770 See Stephan Jank, Christoph Roling, and Esad Smajlbegovic, Flying Under the Radar: The Effects of Short-Sale Disclosure Rules on Investor Behavior and Stock Prices, 139 (1) J. of Fin. Econ. 209–233 (2021); Mazzacurati, Julien, The Public Disclosure of Net Short Positions, European Securities and Markets Authority (ESMA), Trends, Risks, Vulnerabilities (TRV) Report No. 1, 2018. PO 00000 Frm 00079 Fmt 4701 Sfmt 4700 75177 receive information about large, but hedged, short positions. For instance, the alternative would allow 771 a comparison of total short interest with reported large hedged short positions, which might provide additional information to the market about the activities of large, though perhaps noninformation based, traders. While hedged short positions are less likely to be manipulative in nature, or to pose systemic risk, large short positions are still potential sources of systemic risk. One commenter stated that using thresholds based on net short positions would allow market makers that carry large gross short positions for market making purposes rather than directional trading strategies to avoid having to submit Form SHO and incur its associated costs. According to the commenter, since net positions of market makers tend to be close to zero, including market maker gross positions in the public release of Rule 13f–2 data could be misleading to market participants (assuming that those market participants did not understand what data Rule 13f–2 will and will not provide).772 The Commission believes, however, that market makers will rarely if ever be required to report their short positions because the dollar-value threshold of Rule 13f–2 was increased from the proposal’s $10 million on a single trading day to a $10 million daily average over the course of a month. It is the Commission’s understanding that markets makers are highly unlikely to hold a gross short position averaging $10 million over the course of trading month. A reporting requirement for only net short positions would reduce the value of Rule 13f–2 data for use in reconstructing market events. For instance, during the recent meme stock phenomenon, for certain stocks it became difficult to hedge options transactions using the underlying security due to the significant price changes in the spot market. Consequently, positions that were previously judged to have been hedged, and thus low risk, may no longer have been hedged. In addition, large short positions with hedges that have been significantly weakened or broken due to unforeseen extreme market events, may have become systemically important. In such cases, it would be useful for the Commission to have information on large short positions, regardless of perceived net short position, in order to 771 This comparison, however, would be different than that of comparing Form SHO data to short interest data. 772 See HSBC Letter 2, at 3. E:\FR\FM\01NOR2.SGM 01NOR2 75178 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations aid in the reconstruction of market events. This is a loss of value compared to adopted Rule 13f–2 and Form SHO, which are triggered by large gross short positions. Further, the EU regulations provide activity data if positions change by 0.1 percent or more. Thus, market participants could only learn about measured positions changes, rather than position changes of all sizes. As an example, there may be times where the public may be interested in seeing the reaction to a corporate announcement, but this may be limited if Managers do not adjust short positions above the 0.1 percent threshold to trigger reporting. ddrumheller on DSK120RN23PROD with RULES2 2. Data Modifications a. Release Proposed Form SHO Data in Alternative Formats The Commission could release the information included in Form SHO in a different manner. This alternative could take one of several forms.773 For example, the Commission could release each Form SHO report to the public exactly as it is filed, identifying the Managers. The Commission could also release the Forms as filed, but with the identities of the filers removed. The Commission could also release the aggregated data as in the current proposal, but it could publish the data in different ways in the aggregated Form SHO report, such as publishing the number of entities underlying the aggregated data or publishing increases in short positions separate from decreases. In the first alternative, the Commission could release Form SHO as filed, allowing all market participants to see the identities of short sellers— similar to the EU regulation discussed above. This would increase the information that market participants have to evaluate sentiment on particular equities in the market. In particular, for some market participants, this information would also allow market participants to better manage risk by allowing them to manage their exposure to Managers with large short positions. There are also potential costs to this alternative. One potential result from this alternative is that if a short seller is viewed as sophisticated and informed, then releasing identifying information would likely spur copy-cat trading strategies. This outcome has been documented with respect to the EU regulation and suggests that revealing the identities of the short sellers may diminish the value of becoming informed.774 In addition, the detailed 773 See 774 See Proposing Release, at 15005. supra Part VIII.F.1.iv. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 information on daily short activity could reveal not just market sentiment, but trading strategies of individual Managers. Additionally, releasing the names of large short sellers would further increase the likelihood that the short seller would be the victim of a short squeeze or other retaliatory actions as described in Part VIII.C.1. Similarly, the Commission could publicly release individual Form SHO filings with identification information removed from the released data. This alternative would provide market participants a clearer view into the activities of large short sellers, potentially improving their ability to learn from the actions of large short sellers relative to the current proposal. For instance, the data would allow market participants to know whether short sentiment was broadly held—as would be indicated by many filings—or concentrated—as would be indicated by few filings. This information could potentially improve the market assessment of bearish sentiment relative to Rule 13f–2, improving price efficiency. However, the indirect costs of this alternative would be greater than for Rule 13f–2 and Form SHO. Releasing all the information from Proposed Form SHO could reveal trading strategies that would be costly even if the identities of the short sellers remained anonymous. For example, releasing this information, even without naming the short sellers, might increase the risk of copycat trading which reduces the profits of acquiring information. It might also provide information about how vulnerable short sellers may be to a short squeeze as it could give a signal about whether a short seller has a large and potentially vulnerable short position. In this case, the negative effects of the rule on the value of collecting information and of short selling in general would be greater than under the final rule, leading to less price efficiency and potentially more volatility. Additionally, even though the data could be released anonymously, it is not clear that in all cases the identities of the individual short sellers would remain anonymous.775 If market 775 Issuers have been known to hire private investigators to try and uncover the identities of short sellers when they learn that their stock is being targeted by short sellers. See supra note 622. Additionally, researchers have used algorithms to unmask the identities of individuals from masked data released to the public by the SEC. See Huaizhi Chen, Lauren Cohen, Umit Gurun, Dong Lou, and Christopher Malloy, IQ from IP: Simplifying Search in Portfolio Choice, 138 (1) J. of Fin. Econ. 118–137 (2020). While the Commission could design this alternative to avoid the specific vulnerabilities exploited by Chen et al (2020) it is possible that PO 00000 Frm 00080 Fmt 4701 Sfmt 4700 participants were able to uncover the identities of individual short sellers, then the risk of retaliation or short squeezes would increase relative to Rule 13f–2 and Form SHO. Alternatively, the Commission could release the data as specified in the current proposal but also include the number of entities whose Form SHO reports were collected. This information would provide the market with additional detail about whether short sentiment was broadly held by multiple Managers, or narrowly held by just one or a few. This information could be useful as market participants assess bearish sentiment in the market and adjust their actions accordingly. However, adding this information might also increase the risk of short squeezes or other retaliatory actions in the case where there are very few reporters of Form SHO. In the Form SH data collected under temporary Rule 10a–3T, 32 percent of stocks had only one Manager reporting a position per month.776 Such a situation could signal to market participants that one, or a few, short sellers have large short positions that could potentially be vulnerable to a short squeeze. Similarly, the Commission could collect Form SHO data but publicly release the daily aggregate increases separately from the daily aggregate decreases in short positions as opposed to daily net changes to short positions as adopted in Form SHO. This approach would provide the public more detailed information and understanding on what drives changes to short positions. However, separating daily aggregate increase from decreases in short positions could increase the risk of revealing trading strategies, which could disincentivize short selling and harm market quality. b. Collect Data on Derivatives Positions Investors can use derivatives to take an economically short position in a security. For example, an investor with a bearish view of a stock can purchase a put option in that stock. Consequently, for a more complete view of the total economic short position that a Manager has taken, the Commission could require Managers who report adopted Form SHO to also disclose their derivatives positions on underlying equity securities such as options and motivated researchers and market participants could find some other unforeseen way to link the public data to individual short sellers. 776 See Proposing Release, at 14963 for more information on methodologies and caveats for using Form SH data. See also supra Box 1: Use of Form SH Data for responses to comments on the use of these data. E:\FR\FM\01NOR2.SGM 01NOR2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations total-return swaps as an alternative to Form SHO as adopted, which does not directly collect information on derivatives.777 This alternative refers only to options and other derivative securities for which their transactions do not fit the definition of a short sale under Rule 200(a) of Reg SHO. Requiring this data would provide a more complete view of the economic short position that a Manager engaging in a large short sale has taken.778 Consequently, the information would aid market participants in gauging bearish sentiment in a security relative to Rule 13f–2 and Form SHO, as adopted. This information may also help the Commission to better evaluate potentially risky short positions and respond more quickly in the case of a market event. The Commission could also better reconstruct market events, such as the recent meme stock events in January 2021, with options positions data. Requiring options data to be reported on Form SHO would increase the compliance costs to Managers of reporting on Proposed Form SHO. One commenter stated that the inclusion of derivatives, warrants, convertible debt, and ETFs would be costly.779 Adopted Rule 13f–2 will compel Managers to track their gross short positions in individual equities in a month. Tracking of ETFs for the purposes of adopted Rule 13f–2 is the same as tracking any equity security with the exception of tracking shares outstanding, which might be marginally more costly. Additionally, securities that may be used to change a gross short position, such as options or convertible debt, are unaffected by Rule 13f–2 unless they are used in a manner that changes gross short position in an equity security.780 The alternative discussed here would require explicit tracking and reporting of such securities. While Managers generally track their options exposure carefully, it is frequently different trading desks that execute options trades and equity transactions. Thus, it is possible that Managers use separate systems to track their options and equity positions. For these Managers, collecting options and equity transactions to report the data required for Proposed Form SHO would require building a process to pull data from two separate systems—increasing 777 See Proposing Release, at 15006. 778 One commenter argued including derivatives for Rule 13f–2 would give a more complete picture of Managers’ positions. See NASDAQ Letter, at 3. 779 See MFA Letter, at 12. 780 Such as a Manager exercising a call option to buy equity, and thus decreasing the Manager’s gross short position, if any. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 the cost of complying with the rule. Requiring derivative position information might also be duplicative of other derivatives reporting requirements. 3. Threshold Modifications As an alternative to the adopted Form SHO Thresholds, the Commission could require reporting Form SHO at either higher or lower thresholds—or no threshold.781 Commenters to the Proposal Release expressed a range of opinions on the thresholds, some of whom supported increasing the thresholds and others decreasing the thresholds relative to Proposed Form SHO.782 When selecting thresholds, the fundamental economic tradeoff is the value of the data versus the cost of collecting the data. Alternative thresholds that are lower than Threshold A or Threshold B specified in Rule 13f–2 or an alternative that would not contain a threshold would produce more data as more entities would be required to report. Commission analysis of Form SH data collected under temporary Rule 10a–3T indicates that the gross short position thresholds in adopted Form SHO for Threshold A, equal to daily averages of $10 million or 2.5 percent of shares outstanding, would have collected more than three-quarters (78.5 percent) of the dollar value of short positions.783 Therefore, an alternative that lowers the threshold might lead to only a minor increase in coverage relative to the adopted thresholds in Form SHO. Nevertheless, the Commission recognizes that even a relatively small increase in coverage could increase benefits. For example, such an alternative would provide market participants with a clearer view of Manager bearish sentiment compared to adopted rule and form, as more Managers would be required to report the data, making the data more comprehensive. A lower threshold would also enhance Commission oversight of short selling and allow the Commission to more easily reconstruct significant market events involving short selling— again because the data would be more comprehensive. One commenter stated that reducing or eliminating the 781 See Proposing Release, at 15007. in response to a solicitation of comments on Temporary Rule 10a–3T, commenters suggested thresholds generally ranging from 1% to 5%. See Proposing Release, at 14963 n.79 for links to specific comment letters. 783 Commenters questioned the use of Form SH data in this and other contexts. See supra Box 1: Use of Form SH Data for responses to comments on the use of these data. 782 Furthermore, PO 00000 Frm 00081 Fmt 4701 Sfmt 4700 75179 reporting thresholds to Form SHO would provide additional benefits, since unknown, hidden short positions pose risks to investors and the markets. Reducing or eliminating reporting thresholds would reveal the identity of all holders of short sale positions, thereby reducing these risks.784 However, a lower or no threshold would increase the cost of reporting Form SHO data in terms of compliance costs associated with Managers compiling and filing the required data thorough EDGAR and in the indirect costs associated with revealing short sellers’ information. Evidence of this increase in aggregate reporting costs can be seen through an analysis of Form SH data. For example, if the reporting thresholds of adopted Form SHO were reduced from average daily gross position of 10 million or 2.5 percent of shares outstanding to $5 million or 1 percent of shares outstanding, the number of reporting Managers would rise from 252 to 314. Furthermore, the increase in the share of gross short sale dollar volume covered by reporting Managers would rise from 78.5 percent to 88.6 percent. In addition, Managers would likely be required to file reports for more securities, which would further increase compliance costs. Indirect costs include increased risk of copycat short selling strategies, which can lead to herding and increased volatility, and short sellers engaging in strategic behavior to build short positions just underneath the threshold, which would lead to lower price efficiency.785 In some cases, a lower threshold would decrease the indirect costs associated with adopted rule because it would be harder to identify individual short positions from aggregate reporting if there are many entities reporting.786 This effect may not be universally true, however. In particular, at thresholds just below Threshold A, the number of securities in which only one entity reported Form SH increases.787 This result implies that there are a number of securities for which only one short seller held a short position at a level lower than the current cutoff. In these 784 See Better Markets Letter, at 12. supra Part VIII.F.1.iv for discussion of this behavior in Europe. 786 See supra Part VIII.C.1 and Part VIII.E.1 with accompanying text for more information on risks of identifying individual short sellers. 787 According to Form SH data, 39% of securities would have only one Manager reporting at or above the threshold of $10 million average daily and 2.5% average daily of shares outstanding. If the percent threshold was reduced to 1% average daily of shares outstanding along with the $10 million average daily threshold the number of securities with only one Manager reporting would increase to 41%. 785 See E:\FR\FM\01NOR2.SGM 01NOR2 ddrumheller on DSK120RN23PROD with RULES2 75180 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations cases, lowering the threshold might increase the risk of identifying individual short sellers. In contrast, alternatives that would raise the reporting threshold would lower many of the costs associated with providing Form SHO data, since fewer entities would be required to report. It would also limit somewhat the value of the data—again as the reported data would reflect a smaller portion of overall short positions. One means of increasing the threshold would be to require that both thresholds in Threshold A (i.e., both daily averages of $10 million and 2.5 percent of shares outstanding) be reached before a Manager is required to file, instead of either threshold. Another alternative would be to increase one or both of thresholds in Threshold A but continue to require only one of them be reached before a Manager is required to file Form SHO. This decline in aggregate reporting costs can be seen with an analysis of Form SH data, which show that increasing the Form SHO daily average thresholds from 2.5 percent and $10 million to 5 percent and $25 million would reduce the number of reporting Managers from 252 to 165. In addition, it would reduce the percentage of short sale dollar volume covered by reporting Managers from 78.5 percent to 58.4 percent. Higher thresholds, however, might also come with increased risk of identification and retaliation towards short sellers because at some point the likelihood that more than one investor holds a very large short position diminishes. For example, according to analysis of Form SH data, if the Form SHO thresholds rose from an average daily position of $10 million or 2.5 percent of share outstanding to $25 million or 5 percent of shares outstanding, the share of reported securities with only one Manager would rise from 39.3 percent to 48.4 percent.788 Another alternative would be to raise the percent threshold from 2.5 percent to 5 percent, as suggested by one commenter,789 without altering the $10 million threshold. Commission analysis of Form SH data indicates that this would only reduce the number of reporting Managers from 252 to 247. However, further analysis reveals that there could be a substantial loss of transparency into stocks with less than a $400 million market capitalization. Since stocks with market caps 788 See Proposing Release, at 14963 for more information on methodologies and caveats for using Form SH data. 789 See supra note 120 and associated discussion. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 exceeding $400 million will always trigger the $10 million threshold before the 2.5 percent trigger (2.5 percent of $400 million = $10 million), raising the 2.5 percent to 5 percent will not impact the number of large positions reported in stocks with market caps exceeding $400 million. However, stocks with market caps under $400 million will always trigger the 2.5 percent threshold before the $10 million threshold. Thus, raising the 2.5 percent threshold to 5 percent without altering the $10 million threshold would result in fewer smaller stock positions being reported. Furthermore, analysis of Form SH data indicates that for stocks that are specifically sensitive to the 2.5 percent threshold (i.e., stocks in which all reportable short sale positions are under $10 million and therefore only trigger the 2.5 percent threshold), raising the threshold to 5 percent would reduce the number of reportable stocks from 131 to 30, a decline of about 77 percent. Thus, Form SH data analysis indicates that while raising the threshold from 2.5 percent to 5 percent might only result in a small reduction in the number of reporting Managers, it could nevertheless lead to a significant loss of transparency in small stocks (stocks with market capitalizations under $400 million). For securities subject to Threshold B, the economic impact of either raising or lowering the dollar threshold would be similar. Raising the threshold would lower compliance costs but also the quality of the data, while lowering the threshold would do the opposite. For example, if the Commission raised Threshold B from $500,000 to $10 million, then under the assumption of one manager short selling each Threshold B security, the total number of short positions captured for Threshold B securities would decrease from 23.72 percent to 8.76 percent.790 Similarly, under the same assumptions, lowering the threshold to $50,000 would increase the number of short positions captured to 48.08 percent. As another alternative to the proposed Threshold A, the Commission could establish a threshold based on one rather than both of the thresholds in Rule 13f–2, i.e., either the average daily dollar short position or the percent of shares outstanding.791 The advantage of this alternative is that it might reduce compliance costs by simplifying reporting requirements. One commenter stated that the two-prong threshold for reporting companies was, ‘‘overly and unnecessarily complex.’’ 792 In addition, the commenter said that using a percentage-based threshold was more costly to Managers, in part because it can be burdensome to obtain data on shares outstanding, which serves as the denominator in the calculation of the percentage-based threshold.793 Another commenter, however, stated that, relative to percentage-based threshold, ‘‘compliance with a dollar value threshold typically requires significant manual processes and more difficult system buildouts.’’ 794 The Commission acknowledges that a dollar-value threshold might be somewhat less complicated for some Managers, but nevertheless believes that data tracking the number of shares outstanding are generally readily available, and that it is straightforward to calculate an average daily gross short position as a percentage of outstanding shares. The Commission also acknowledges that using a single threshold for Threshold A would lower compliance costs, primarily because fewer entities would be required to report. However, choosing which of the two thresholds to drop would impact which positions are more likely to trigger the remaining threshold. For example, an alternative that retained only the $10 million daily average threshold would decrease the likelihood of small cap positions being reported, since these firms reach the 2.5 percent threshold before the $10 million threshold.795 Smaller market capitalization stocks tend to be easier to manipulate and less stable. Thus, an alternative that excludes the 2.5 percent threshold would result in less visibility into the actions of short sellers among smaller market capitalization stocks and may undermine the ability of Rule 13f– 2 to reduce manipulative behavior among these stocks, as articulated in Part VIII.C.1. Commission analysis of Form SH data suggest that an alternative that includes only the 2.5 percent threshold would result in a substantial reduction in the number of reporting Managers relative to the two-prong threshold in adopted Rule 13f–2. More specifically, switching from the adopted Form SHO thresholds of $10 million daily average or 2.5 percent of shares outstanding to a single prong threshold of 2.5 percent would cause the number of reporting Managers 792 See MFA Letter, at 13 Proposing Release, at 15008. 794 See ICI Letter, at 9. 795 Short positions in stocks with market capitalizations below $400 million will trigger the 2.5% threshold before they trigger the $10 million threshold. 793 See 790 See Proposing Release, at Table II (analysis within table). 791 See Proposing Release, at 15008 for discussion of this alternative with the $10 million threshold as proposed, not as adopted. PO 00000 Frm 00082 Fmt 4701 Sfmt 4700 E:\FR\FM\01NOR2.SGM 01NOR2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations under Form SH to fall from 252 to 115. Furthermore, it would drastically reduce the share of covered short sale volume of reporting Managers from 78.5 percent to 16 percent. One commenter stated that excluding the dollar-based threshold and solely using a threshold of 5 percent or more, ‘‘. . . would allow the Commission to achieve its objectives without imposing unnecessary complexity on advisers and other reporting Managers.’’ 796 Form SH data, however, indicate that this would reduce the number of reporting Managers from 252 to 55 and the share of covered short sale volume from 78.5 percent to 9 percent. More generally, the alternative of requiring a threshold based only on short positions as a percent of shares outstanding would largely eliminate reporting in larger securities. Note that for stocks with market capitalization above $400 million, short sellers reach the $10 million threshold before the 2.5 percent threshold. Furthermore, for large cap stocks, generally defined as having a market capitalization exceeding $10 billion, short position would have to be more than $250 million in order to trigger the 2.5 percent threshold. Consequently, an alternative in which the Commission required reporting based only on the percent of shares outstanding would result in fewer Form SHO reports for stocks with larger market capitalizations. Less visibility into the actions of short sellers in larger market capitalization stocks would provide less information about bearish sentiment in the economy. This is because larger market capitalization stocks, which are more well-established than small cap stocks, are more likely to be shorted due to general pessimism about the macroeconomy and less likely to be targeted as part of manipulative strategy in comparison to small cap stocks.797 As another alternative, the Commission could structure the Reporting Thresholds to include the nominal economic value of short derivative positions. Specifically, reporting on Form SHO would be required if a Manager’s total short position in the stock and in derivatives such as options and security-based swaps exceeded the relevant Reporting 796 See ICI Letter at 9. e.g., Carole Comerton-Forde & Ta¯lis J. Putnin ¸ sˇ, Stock Price Manipulation: Prevalence and Determinants, 18:1 Rev. of Fin. 23–66 (2014), available at https://doi.org/10.1093/rof/rfs040 (for evidence on small and less liquid stocks higher exposure to manipulative behavior by investors). See also discussion in supra Part VIII.C.1. 797 See, VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 Thresholds.798 This alternative would decrease the likelihood that Managers seek to avoid the Reporting Thresholds by transacting in derivatives and thus, may increase the benefits of the data from Form SHO.799 Making it more difficult to circumvent the reporting requirements using derivatives might also decrease strategic, and sub-optimal, trading around the Reporting Thresholds which leads to lower price efficiency.800 However, increasing the amount of information that was disclosed on publicly released Form SHO may increase copycat activity that leads to herding and increased volatility. Conversely, incorporating derivatives in Form SHO reports may dilute the information filed by Managers relative to the case where only equity gross short positions are included, thereby reducing the amount of herding. This alternative could also result in situations in which Managers would have a reporting obligation despite having large long positions in the equity over the entire month, which would increase costs for the Managers and would provide less relevant information. Additionally, including derivatives in the Reporting Threshold computations would increase the complexity of the rule and the cost of implementing the rule. For instance, Managers may need to pull information from multiple systems to determine the total value of their short position for reporting. Pulling information from multiple systems can be costly. Additionally, while valuing short positions in most equities is fairly straightforward, this is not true for derivatives. There are often multiple methodologies used by different market participants to value derivative contracts such as options. Thus, an alternative including a threshold for a Manager’s short exposure in derivatives would be significantly more complicated than Adopted Rule 13f–2 and Form SHO. An additional alternative could also involve requiring reporting thresholds to be based on activity and not just positions.801 This alternative would increase the amount of information available to the Commission regarding the activities of entities engaging in a high volume of short selling. This alternative might provide additional insight into Managers that sell short but 798 See Proposing Release, at 15008 (discussing this alternative with the $10 million threshold as proposed, not as adopted). 799 See supra Part VIII.C.8. 800 See supra Part VIII.C.1 for further discussion on strategic trading around the threshold and how the rule is designed to reduce it. 801 See Proposing Release, at 15009. PO 00000 Frm 00083 Fmt 4701 Sfmt 4700 75181 do not hold short positions. Specifically, entities with high volumes of short selling are likely to be market makers who use short selling to maintain two sided quotes in the absence of inventory and other high frequency traders. These entities trade in large volumes but tend to end trading sessions fairly flat on inventory in larger stocks. Consequently, requiring reporting based on activity might not significantly improve the market’s ability to assess of bearish sentiment. However, one area where reporting based on activity may be beneficial would be in identifying short selling attacks that are relatively short lived. For example, an investor with a convertible bond may seek to distort the stock price right around the exercise date of their bond as such contracts stipulate that the holder of the convertible bond receives more shares if the stock price is lower. In this case, an attempted manipulator may seek to aggressively short sell right around a convertible bond exercise date. Activity that is concentrated enough in time might not trigger a reporting threshold based on average position over the prior month under the final rule. While this activity information may be helpful in flagging unusual short selling activity, the Commission could conceivably build reports based on existing CAT data 802 that would be more effective at detecting such behavior and Rule 13f– 2 would identify these activities if the market participant exceeds the Reporting Thresholds. As an alternative, the Commission could measure the thresholds as of the last settlement day of the month rather than using the $10 million average daily prong or 2.5 percent average daily prong for Threshold A and the $500,000 threshold over any single day for Threshold B.803 This alternative would have the advantage of simplifying compliance with Rule 13f–2 and Form SHO and thus may reduce compliance costs. Form SH data analysis indicates that using last settlement day of the month instead of average daily thresholds for Threshold A would only result in a marginal increase in the number of reporting Managers, from 252 to 256. However, the Commission is concerned that this alternative might also invite more strategic trading around the end of the month than adopted Form SHO, which is structured to prevent trading around the threshold. For 802 In particular, because such an analysis would not involve estimating a position for the Manager, the limitations of CAT are less important. 803 See Proposing Release, at 15009 (discussing this alternative with the $10 million threshold as proposed, not as adopted). E:\FR\FM\01NOR2.SGM 01NOR2 ddrumheller on DSK120RN23PROD with RULES2 75182 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations instance, Managers with short positions near the threshold may temporarily reduce their positions to below a Reporting Threshold on exactly the days that short positions are measured for compliance with the threshold to avoid reporting. This inefficient trading may reduce price efficiency right around the reporting days as trading to avoid holding a position that would trigger reporting is not trading based on economic considerations but rather trading based on regulatory considerations and thus is inefficient and may harm price efficiency on these days. Instead of Threshold B, the Commission could require the same two prong, $10 million or 2.5 percent daily average gross position reporting threshold for short positions in equity securities of non-reporting company issuers, as well as for equity securities of reporting company issuers.804 This approach might be less complex as all short positions would be subject to the same reporting threshold. Further, it would retain a threshold that relates to the size of the short position and to the size of the issuance to ensure capturing positions that are relatively large whereas the Threshold B imposes a flat threshold that could result in some relatively large positions, in terms of daily average gross position of percentage of shares outstanding, not being filed on Form SHO. However, this alternative would increase the burden for Managers as information for non-reporting company issuers can be hard to find, making threshold calculations difficult. In particular, information on the number of shares outstanding can be difficult to obtain for non-reporting company issuers and when it is available it is often stale and inaccurate. This could lead to problems with the calculations for the 2.5 percent threshold. One commenter stated that a single percentage-based threshold level applied to both reporting and nonreporting company issuers, ‘‘. . . would mitigate unnecessary operational and cost burdens on managers, including complexities from monitoring and reporting with up to three separate thresholds.’’ 805 However, this alternative would require Managers to know the number of shares outstanding in non-reporting companies for each trading day for their short positions, and would therefore effectively impose new recordkeeping costs on Managers. Further, there are multiple sources from which Managers can obtain shares 804 See 805 See Id. ICI Letter, at 9. VerDate Sep<11>2014 23:25 Oct 31, 2023 Jkt 262001 outstanding for securities of nonreporting company issuers. At times these sources may report different numbers for total shares outstanding. Consequently, Managers could also feel the need to track the sources used to identify shares outstanding each day and would incur costs to determine which sources to trust for compliance. One concern is that Managers would try to game different data sources in order to avoid having to report Form SHO. The Commission could enhance record keeping requirements associated with this alternative by requiring Managers to record and report on Form SHO the source of data used to calculate shares outstanding.806 This could improve the quality of the information reported in Form SHO for securities of issuers who do not report with the Commission by improving the quality of the data that Managers use when calculating their positions. It might also help mitigate concerns that Managers may try to game different data sources to avoid complying with the regulation. For securities of reporting issuers, accurate shares outstanding information is readily available, thus concerns about gaming data sources or using low quality information is not as relevant. However enhanced record keeping requirements would increase the costs to Managers. While the Commission believes that most Managers have ready access to this information, requiring that Managers record and report the information would require Managers to further build out systems, in conjunction with the systems already required to report Form SHO, to also capture the source of information used. 4. Other Alternatives a. Alternative Reporting Frequency or Additional Reporting Delay As alternatives, the Commission could require reporting at different frequencies than the monthly reporting mandated by the rule. Specifically, the Commission could require gross short position assessment and reporting (assuming at least one of the thresholds had been crossed) at frequencies that are shorter than a month.807 For example, the Commission could require reporting daily, weekly,808 biweekly, or whenever 806 See Proposing Release, at 15009. 807 See Proposing Release, at 15009. In this alternative, the thresholds would conform to the reporting period, such that the 2.5% and $10 million daily average thresholds would be calculated over the alternative shortened time period. 808 Many commenters on temporary Rule 10a–3T stated that weekly reporting was overly burdensome. See, e.g., Seward Kissel LLP, available at https://www.sec.gov/comments/s7-31-08/s73108- PO 00000 Frm 00084 Fmt 4701 Sfmt 4700 there is a significant change in short position (as is currently the standard in the European Union), but at least monthly. These alternatives could require reporting if the average short position surpasses the threshold for the month prior to the reporting period or if average positions surpass the threshold for the prior period (e.g., one week, or two weeks). This could result in an increase in the number of Managers that report, since it is likely that some Managers hold short positions that cross a Form SHO threshold for the alternative time frequencies (e.g., one week) but not for the entire month. These Managers may be required to report with more frequent disclosures relative to Adopted Form SHO. The fundamental tradeoff with such thresholds compares the simplicity of the rule with the potential to game the threshold by strategic trading. Such alternative frequencies face the fundamental tradeoff of increased cost and increased transparency of the data. Put simply, increasing the reporting frequency increases the number of reports and thus increases the cost associated with reporting by a similar factor. Increased reporting frequency could also result in collecting more information than the current proposal. The difference between the information collected in the current proposal and this alternative would mainly come from the frequency and timeliness of the reports. The improved timeliness could increase the risk of copycat strategies and short squeezes, but also improve price efficiency. One commenter stated that a study of the EU’s short sale disclosure policy, which requires, ‘‘immediate public disclosure of large short positions,’’ finds no evidence of increased manipulation or short squeezes.809 However, multiple studies have found evidence that the EU’s policy has result in short sellers seeking to avoid disclosure by accumulating positions slightly under the threshold, which could result in a loss price efficiency.810 Furthermore, one commenter stated that increasing the disclosure delay to 45 days would help prevent copycat trading and short squeezes.811 The Commission 43.pdf; Investment Adviser Association, available at https://www.sec.gov/comments/s7-31-08/s7310838.pdf; and Securities Industry and Financial Markets Association, available at https:// www.sec.gov/comments/s7-31-08/s73108-52.pdf. 809 See Better Markets Letter, at 13 and Charles M. Jones, Adam V. Reed, and William Waller, Revealing Shorts an Examination of Large Short. Position Disclosures, 29 Rev. of Fin. Studies 3278, 3282 (2016). 810 See supra note 770. 811 See MFA Letter at 4. E:\DRUMHELLER\01NOR2.SGM 01NOR2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations recognizes that there are benefits and costs to more timely disclosure, and believes that the two week delay incorporated in adopted Form SHO effectively balances these costs and benefits. The Commission could also consider different reporting windows for Managers who meet the threshold short positions to report on Form SHO.812 The current proposal requires Managers to report on Form SHO within 14 calendar days of the end of each month. Shorter time horizons may increase the cost of reporting as Managers would have less time to gather and file the data on Form SHO and may need to build costlier procedures to ensure compliance with the reporting requirement.813 A mitigating factor would be that most of this reporting is likely to be done electronically, consequently it may not take the full 14 calendar days for Managers to gather and file the required data to the Commission. Additionally, the Commission could adopt different horizons for releasing the aggregated data after the reporting deadline.814 The fundamental tradeoff in terms of the delay between reporting and when the Commission releases the aggregated data is that a shorter delay increases the relevance of the data, in terms of the bearish sentiment it contains, which may improve managerial decision making, as well as providing more timely information about bearish sentiment in the market.815 At the same time a shorter delay increases the likelihood of copycat behavior, which decreases the incentive that short sellers have to gather information potentially leading to lower price efficiency and greater volatility.816 The converse is true for 812 See Proposing Release, at 15010. Seward & Kissel LLP Letter (discussing Temporary Rule 10a–3T) at 5, available at https:// www.sec.gov/comments/s7-31-08/s73108-43.pdf. 814 See Proposing Release, at 15010. 815 One commenter stated that the ‘‘. . . proposed data framework will not provide timely insight for the SEC to act given that it is monthly data with 14 days delay after month end.’’ See SBAI Letter, at 2. The Commission recognizes that removing the 14-day delay would increase its ability to monitor and respond more rapidly to market events stemming from short sale activity. However, as discussed elsewhere in this release, the delay is in part necessary to review and validate the data, and may also serve to reduce the likelihood of short squeeze and copycat behavior. 816 One commenter stated that the public dissemination of Rule 13f–2 data should be increased from 14 days to 45 days in order to provide additional protection against exposure of trading strategies, which could be used as part of a replication strategy or to facilitate a short squeeze. See MFA Letter, at 4. More generally, the commenter believes that since the amendments would provide only ‘‘limited marginal benefits,’’ reducing the cost of compliance, including the risk of exposing the identities of investment managers ddrumheller on DSK120RN23PROD with RULES2 813 See VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 longer delays. Additionally, a shorter delay provides less time for the Commission to aggregate the data and run checks on the aggregated data to ensure the Commission’s aggregation is error-free, and also provides less time for amendments to be filed, both of which could harm the quality of the data. b. Report Form SHO in Inline XBRL The adopted rule would require Form SHO to be filed in Form SHO-specific XML, a structured, machine-readable data language. As an alternative, the Commission might require Form SHO to be filed in Inline eXtensible Business Reporting Language (‘‘Inline XBRL’’), a separate data language that is designed for business reporting information and is both machine-readable and humanreadable.817 Compared to the adopted Form SHO, the Inline XBRL alternative for Form SHO would provide more sophisticated validation, presentation, and reference features for filers and data users. However, given the fixed and constrained nature of the disclosures to be reported on Form SHO (e.g., the information would be as of a single reporting date rather than multiple reporting dates, and Managers would not be able to customize the content or presentation of their reported data), the benefits of these additional features would be muted. Compared to the adopted Form SHO, this alternative would impose greater initial implementation costs (e.g., licensing Inline XBRL filing preparation software) upon reporting persons that have no prior experience structuring data in Inline XBRL.818 By contrast, because many Managers that would be Form SHO filers would likely have experience structuring filings in a similar EDGAR Form-specific XML data language, such as in the context of filing Form 13F, the Form SHO-specific XML requirement will likely impose lower implementation compliance costs on Form SHO filers than an Inline XBRL requirement would impose. IX. Regulatory Flexibility Act Certification The Regulatory Flexibility Act (‘‘RFA’’) 819 requires Federal agencies, in and their proprietary trading strategies, is warranted. 817 See Proposing Release, at 15010. 818 See Inline XBRL Filing of Tagged Data, Securities Act Release No. 10514 (June 28, 2018), 83 FR 40846 at 40862, available at https:// www.sec.gov/rules/final/2018/33-10514.pdf (discussing costs associated with Inline XBRL filing of operating company financial statements and investment company risk/return summaries, including software licensing costs). 819 5 U.S.C. 601 et seq. PO 00000 Frm 00085 Fmt 4701 Sfmt 4700 75183 promulgating rules, to consider the impact of those rules on small businesses. Section 603(a) of the Administrative Procedure Act, as amended by the RFA, generally requires the Commission to undertake a final regulatory flexibility analysis of rules it is adopting, to determine the impact of such rulemaking on ‘‘small businesses’’ unless the Commission certifies that the rule would not have a significant economic impact on a substantial number of ‘‘small entities.’’ 820 Certification for Rule 13f–2 and Form SHO. Although section 601(b) of the RFA defines the term ‘‘small business,’’ the statute permits agencies to formulate their own definitions. The explanation of the term ‘‘small entities’’ and the definition of the term ‘‘small business’’ in 17 CFR 240.0–10 821 of the Exchange Act do not explicitly reference Managers. Rule 0–10 does provide, however, that the Commission may ‘‘otherwise define’’ small entities for purposes of a particular rulemaking proceeding. For purposes of Rule 13f–2 and related Form SHO, therefore, the Commission has determined that the definition of the term ‘‘small business’’ found in 17 CFR 275.0–7(a) 822 under the Investment Advisers Act of 1940 823 is more appropriate to the functions of institutional managers such as the Managers with reporting obligations under Rule 13f–2. The definition will help ensure that all persons or entities that might be Managers subject to reporting requirements under Rule 13f– 2 will be included within a category addressed by the Rule 0–7(a) definition. Therefore, for purposes of this rule and the RFA, a Manager is a small entity if it: (i) has assets under management having a total value of less than $25 million; (ii) did not have total assets of $5 million or more on the last day of its most recent fiscal year; and (iii) does not control, is not controlled by, and is not under common control with another investment adviser that has assets under management of $25 million or more, or any person (other than a natural person) that had total assets of $5 million or more on the last day of its most recent fiscal year.824 The Commission did not 820 In response to the Commission’s request for comment, commenters provided general predictions without empirical data to support their assessments that Proposed Rule 13f–2, Proposed Form SHO, and the Proposed CAT Amendments would have a significant economic impact on a substantial number of ‘‘small entities.’’ See supra note 324 and accompanying text. 821 Rule 0–10. 822 Rule 0–7(a). 823 15 U.S.C. 80b–1 et seq. 824 Rule 0–7(a), supra note 822. See generally, Reporting Threshold for Institutional Investment E:\FR\FM\01NOR2.SGM Continued 01NOR2 ddrumheller on DSK120RN23PROD with RULES2 75184 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations receive any comments on the certification as it related to entities impacted by Rule 13f–2. Under Rule 13f–2, Managers are not required to report on Form SHO unless they meet or exceed a specified Reporting Threshold. Managers with a gross short interest position in an equity security of a reporting company issuer will be subject to a two-pronged reporting threshold structure: a monthly average gross short position in the equity security with a U.S. dollar value of $10 million or more; or a monthly average gross short position as a percentage of shares outstanding in the equity security of 2.5 percent or more (Threshold A). Managers with a gross short interest position in an equity security of a non-reporting company issuer will be subject to a singlepronged reporting threshold structure: a gross short position in the equity security with a U.S. dollar value of $500,000 or more at the close of regular trading hours on any settlement date during the calendar month (Threshold B). While the parameters of the Reporting Thresholds under Rule 13f–2 relate to the number and dollar value of shares of short positions, rather than assets under management, the Commission nevertheless anticipates that application of the Reporting Thresholds will result in Rule 13f–2 not applying to a significant number of ‘‘small businesses’’ as defined under Rule 0–7(a). With respect to the first prong of Threshold A, a monthly average gross short position in the equity security with a U.S. dollar value of $10 million or more for reporting company issuer securities represents forty percent of the assets of an entity that qualifies as a ‘‘small entity’’ under Rule 0–7(a). The Commission believes it is also unlikely that a significant number of small entities would place 40 percent of their respective assets under management in a short position in a single security. Further, many types of Managers that could be small entities, including bank trustees, endowments, and foundations, are subject to fiduciary standards that prohibit them from investing in large, concentrated short positions. Such restrictions deter small entities (with less than $25M of assets under management) from investing over $10M (greater than 40 percent) of their assets in a single short position, and therefore Managers, Exchange Act Release No. 89290 (July 10, 2020), 85 FR 46016, 46031 n.90 (July 31, 2020) (stating that ‘‘[r]ecognizing the growth in assets under management at investment advisers since Rule 0–7(a) was adopted, the Commission plans to revisit the definition of a small entity in Rule 0– 7(a).’’). VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 prevent them from triggering the first prong of Threshold A.825 With respect to the second prong of Threshold A, smaller Managers (those with under $25M in assets under management) would likely try to leverage their assets through a combination of traditional short sales and derivatives and similar transactions that create economic short exposure to a security. Such entities therefore, would likely engage in strategies that do not lend themselves to a clear determination that the second prong of Threshold A under Rule 13f–2 has been met.826 Further, the Commission estimates, based on an analysis of US common stocks,827 that Managers that qualify as small entities under Rule 0– 7(a) would not meet the 2.5 percent monthly average reporting threshold for securities representing over ninety-eight percent (98 percent) of the overall market value.828 When it comes to meeting the dollar value limits of Threshold B and the first prong of Threshold A, it is important to note that for the subset of Managers that engage in the most short selling activity—hedge funds 829—less than twenty-five percent have less than $50M in assets under management.830 Indeed, research shows that most hedge funds have assets under management above the amount that would qualify them as small entities under Rule 0–7(a), i.e., above $25M.831 Further, the 825 See Molk and Partnoy, supra note 510, describing impediments that have kept different types of institutional investment managers from engaging in short selling. 826 Id. at 839 (positing that ‘‘institutions incorporate short selling into their strategies, not necessarily by taking net-short positions, but instead by combining leveraged long equity index positions with smaller actively managed short portfolios.’’). 827 A small entity, with less than $25M in assets under management, is not able to hold a short position of at least 2.5% in a company with a market capitalization above $1B. Such companies represent over 98.5% of the overall market cap of US equities. See also Stock Market Size Categories (2021), available at https://stockmarketmba.com/ sizecategories.php (calculating approximately three percent (3%) of the US stock market consists of common stocks of companies with less than $2B in market capitalization (i.e., small-cap and micro-cap stocks) and stating that micro-cap companies are generally too small for even most large institutional investment managers to invest in). 828 An analysis by Commission of the daily dataset of the Center for Research in Security Prices (‘‘CRSP’’) showed that for the month of Oct. 2021, on average, the number of companies with less than $1B in market capitalization (2,293) constituted 1.51% of the overall market capitalization. 829 See Molk and Partnoy, supra note 510, at 846. 830 See David Goldin, Elephant in the room? Size and hedge fund performance, Aurum (June 28, 2019), available at https://www.aurum.com/insight/ elephant-in-the-room-size-and-hedge-fundperformance/. 831 See Daniel Barth et al., The Hedge Fund Industry is Bigger (and Has Performed Better) Than PO 00000 Frm 00086 Fmt 4701 Sfmt 4700 Commission certified in the Proposing Release that Proposed Rule 13f–2 would not have a significant economic impact on a substantial number of small entities, as defined under Rule 0–10, for purposes of the RFA. The Commission requested written comments regarding this certification and did not receive any. Additionally, and as described above, the adopted dollar-value based prong of Threshold A for reporting company issuer securities is based on a monthly average rather than a daily calculation, likely capturing fewer Managers than would have been required to report under the proposed daily dollar-value prong of Threshold A, so it is even less likely that small entities will be required to report on Form SHO as adopted. For these reasons, the Commission certifies that Rule 13f–2 will not have a significant economic impact on a substantial number of small entities, as defined under Rule 0–10, for purposes of the RFA. Certification for the Amendment to CAT. The amendment to the CAT NMS Plan will impose requirements on the CAT NMS Plan Participants (the national securities exchanges registered with the Commission under section 6 of the Exchange Act and FINRA), and broker-dealers that effect short sales utilizing the bona fide market making exception pursuant to Rule 203(b)(2)(iii) of Regulation SHO and report use of the exception to CAT. With respect to the national securities exchanges, the Commission’s definition of a small entity is an exchange that has been exempt from the reporting requirements of Rule 601 of Regulation NMS, and is not affiliated with any person (other than a natural person) that is not a small business or small organization.832 None of the national securities exchanges registered under section 6 of the Exchange Act that will be subject to the amendments are ‘‘small entities’’ for purposes of the RFA. In addition, FINRA is not a ‘‘small entity.’’ 833 Based on Commission knowledge and experience with brokerdealers that identify as market makers, the Commission does not believe that any broker-dealer that effects short sales utilizing the bona fide market making You Think (Office of Fin. Research, Working Paper No. 20–01, Feb. 25, 2020, Revised Mar. 8, 2021). 832 See 17 CFR 240.0–10(e) (stating that a brokerdealer is a small entity if it has total net capitalization (net worth plus subordinated liabilities) of less than $500,000 on the date in the prior fiscal year as of which its audited financial statements were prepared pursuant to 17 CFR 240.17a–5(d), and it is not affiliated with any person (other than a natural person) that is not a small business or small organization). 833 See 13 CFR 121.201. E:\FR\FM\01NOR2.SGM 01NOR2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations exception pursuant to Rule 203(b)(2)(iii) of Regulation SHO and reports to the CAT will qualify as a small entity pursuant to Exchange Act Rule 0–10(c), because they either exceed $500,000 in total capital or are affiliated with a person that is not a small entity as defined in Rule 0–10. Given the above estimates it is possible, but unlikely, that in the future a small entity may come within scope of the Amendment to CAT, because such firms are likely to exceed $500,000 in total capital or be affiliated with a person that is not a small entity. For the foregoing reasons, the Commission certifies that the Amendment to CAT will not have a significant economic impact on a substantial number of small entities for purposes of the RFA. X. Other Matters Pursuant to the Congressional Review Act,834 the Office of Information and Regulatory Affairs has designated these rules as a ‘‘major rule,’’ as defined by 5 U.S.C. 804(2). If any of the provisions of these final rules, or the application thereof to any person or circumstance, is held to be invalid, such invalidity shall not affect other provisions or application of such provisions to other persons or circumstances that can be given effect without the invalid provision or application. ddrumheller on DSK120RN23PROD with RULES2 Statutory Authority The Commission is adopting the rule and form contained in this document under the authority set forth in the Exchange Act [15 U.S.C. 78a et seq.], particularly sections 3, 10(b), 12, 13(f), 15, (d), 23(a), 35A, 36 thereof [15 U.S.C. 78c, 78j(b), 78l, 78m(f), 78o(d), 78w(a), 78ll, and 78mm], and Public Law 111– 203, 929X, 124 Stat. 1376 (2010). The Commission is amending the CAT NMS Plan pursuant to the Exchange Act, particularly Sections 2, 3, 5, 6, 11A, 15, 15A, 17(a) and (b), 19, and 23(a) thereof [15 U.S.C. 78b, 78c, 78e, 78f, 78k–1, 78o, 78o–3, 78q(a) and (b), 78s, and 78w(a)], and Rules 608(a)(2) and (b)(2) thereunder. List of Subjects in 17 CFR Parts 240 and 249 Reporting and recordkeeping requirements, Securities. Text of Amendments In accordance with the foregoing, the Commission is amending title 17, chapter II of the Code of the Federal Regulations as follows. 834 5 U.S.C. 801 et seq. VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 75185 U.S. dollar value of $500,000 or more at the close of regular trading hours on any settlement date during the calendar month. ■ 1. The authority citation for part 240 (3) Form SHO and any amendments is amended by removing the sectional thereto must be filed with the authority for § 240.13f–2(T) to read in Commission via the Commission’s part as follows: Electronic Data Gathering, Analysis, and Retrieval system (‘‘EDGAR’’), in Authority: 15 U.S.C. 77c, 77d, 77g, 77j, accordance with 17 CFR part 232 77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c–3, 78c–5, 78d, 78e, 78f, (Regulation S–T). The Commission will 78g, 78i, 78j, 78j–1, 78j–4, 78k, 78k–1, 78l, publish, on an aggregated basis, certain 78m, 78n, 78n–1, 78o, 78o–4, 78o–10, 78p, information regarding each equity 78q, 78q–1, 78s, 78u–5, 78w, 78x, 78dd, 78ll, security reported by institutional 78mm, 80a–20, 80a–23, 80a–29, 80a–37, 80b– investment managers on Form SHO and 3, 80b–4, 80b–11, 7201 et seq., and 8302; 7 filed with the Commission via EDGAR. U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 (b) For the purposes of this section: U.S.C. 1350; and Pub. L. 111–203, 939A, 124 (1) The term institutional investment Stat. 1376 (2010); and Pub. L. 112–106, sec. manager has the same meaning as in 503 and 602, 126 Stat. 326 (2012), unless otherwise noted. section 13(f)(6)(A) of the Exchange Act. (2) The term equity security has the * * * * * same meaning as in section 3(a)(11) of ■ 2. Add § 240.13f–2 to read as follows: the Exchange Act and § 240.3a11–1 § 240.13f–2 Reporting by institutional (Rule 3a11–1). investment managers regarding gross short (3) The term investment discretion has position and activity information. the same meaning as in § 240.13f–1(b) (a) An institutional investment (Rule 13f–1(b)). (4) The term gross short position manager shall file a report on Form SHO means the number of shares of the (referenced in 17 CFR 249.332), in accordance with the form’s instructions, equity security that are held short as a result of short sales as defined in 17 with the Commission within 14 CFR 242.200(a) (Rule 200(a) of calendar days after the end of each Regulation SHO), without inclusion of calendar month with regard to: (1) Each equity security that is of a any offsetting economic positions such class of securities that is registered as shares of the equity security or pursuant to section 12 of the Exchange derivatives of such equity security. (5) The term regular trading hours has Act or for which the issuer of that class the same meaning as in 17 CFR of securities is required to file reports 242.600(b)(77) (Rule 600(b)(77)). pursuant to section 15(d) of the Exchange Act over which the institutional investment manager and all PART 249—FORMS, SECURITIES EXCHANGE ACT OF 1934 accounts over which the institutional investment manager (or any person ■ 3. The general authority citation for under the institutional investment part 249 continues to read as follows: manager’s control) has investment Authority: 15 U.S.C. 78a et seq. and 7201 discretion with respect to either: et seq.; 12 U.S.C. 5461 et seq.; 18 U.S.C. 1350; (i) A monthly average gross short Sec. 953(b) Pub. L. 111–203, 124 Stat. 1904; position at the close of regular trading Sec. 102(a)(3) Pub. L. 112–106, 126 Stat. 309 hours in the equity security with a U.S. (2012), Sec. 107 Pub. L. 112–106, 126 Stat. dollar value of $10 million or more; or 313 (2012), Sec. 72001 Pub. L. 114–94, 129 (ii) A monthly average gross short Stat. 1312 (2015), and secs. 2 and 3 Pub. L. position at the close of regular trading 116–222, 134 Stat. 1063 (2020), unless hours as a percentage of shares otherwise noted. outstanding in the equity security of 2.5 * * * * * percent or more; and ■ 4. Add § 249.332 to read as follows: (2) Each equity security that is of a class of securities that is not registered § 249.332 Form SHO, report of institutional investment managers pursuant to section pursuant to section 12 of the Exchange 13(f)(2) of the Securities Exchange Act of Act or for which the issuer of that class 1934. of securities is not required to file This form shall be used by reports pursuant to section 15(d) of the institutional investment managers that Exchange Act over which the institutional investment manager and all are required to furnish reports pursuant to section 13(f)(2) of the Securities accounts over which the institutional Exchange Act of 1934 (15 U.S.C. investment manager (or any person 78m(f)(2)) and 17 CFR 240.13f–2 (Rule under the institutional investment 13f–2). manager’s control) has investment discretion with respect to a gross short ■ 5. Add Form SHO referenced in position in the equity security with a § 249.332. PART 240—GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934 PO 00000 Frm 00087 Fmt 4701 Sfmt 4700 E:\FR\FM\01NOR2.SGM 01NOR2 75186 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations Note: Form SHO is attached as Appendix A to this document. Form SHO will not appear in the Code of Federal Regulations. By the Commission. Dated: October 13, 2023. J. Matthew DeLesDernier, Deputy Secretary. Note: The following appendix will not appear in the Code of Federal Regulations. Appendix A—Form SHO OMB Number: XXXX–XXXX FORM SHO ddrumheller on DSK120RN23PROD with RULES2 Information Required of Institutional Investment Managers Pursuant to Section 13(f)(2) of the Securities Exchange Act of 1934 and Rules Thereunder General Instructions Rule as to Use of Form SHO. Institutional investment managers (‘‘Managers’’) must use Form SHO for reports to the Commission required by Rule 13f–2 [17 CFR 240.13f–2] promulgated under section 13(f)(2) of the Securities Exchange Act of 1934 [15 U.S.C. 78m(f)(2)] (‘‘Exchange Act’’). A Manager shall file a report on Form SHO in accordance with these instructions with the Commission within 14 calendar days after the end of each calendar month with regard to: (1) each equity security that is of a class of securities that is registered pursuant to section 12 of the Exchange Act or for which the issuer of that class of securities is required to file reports pursuant to section 15(d) of the Exchange Act over which the Manager and all accounts over which the Manager (or any person under the Manager’s control) has investment discretion with respect to either (A) a monthly average gross short position at the close of regular trading hours in the equity security with a value of $10 million or more, or (B) a monthly average gross short position at the close of regular trading hours as a percentage of shares outstanding in the equity security of 2.5 percent or more; and (2) each equity security that is of a class of securities that is not registered pursuant to section 12 of the Exchange Act or for which the issuer is not required to file reports pursuant to section 15(d) of the Exchange Act over which the Manager and all accounts over which the Manager (or any person under the Manager’s control) has investment discretion with respect to a gross short position in the equity security with a U.S. dollar value of $500,000 or more at the close of regular trading hours on any settlement date during the calendar month. For purposes of Rule 13f–2 and Form SHO, ‘‘regular trading hours’’ shall have the meaning ascribed in Rule 600(b)(77) under the Exchange Act [17 CFR 242.600(b)(77)]. A Manager that determines that it has filed a Form SHO with errors that affect the accuracy of the short sale data reported must file an amended and restated Form SHO within ten (10) calendar days of discovering the error. Rules to Prevent Duplicative Reporting. If two or more Managers, each of which is required by Rule 13f–2 to file Form SHO for VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 the reporting period, exercise investment discretion with respect to the same securities, only one such Manager must report the information in its report on Form SHO. If a Manager has information that is required to be reported on Form SHO and such information is reported by another Manager (or Managers), such Manager must identify the Manager(s) reporting on its behalf in the manner described in Special Instruction 5. Filing of Form SHO. A reporting Manager must file Form SHO with the Commission via the Commission’s Electronic Data Gathering, Analysis, and Retrieval system (‘‘EDGAR’’), in accordance with Regulation S–T. The Commission plans to publish certain data from the filings on an aggregated basis. All information included in a Form SHO report is deemed subject to a confidential treatment request under 17 CFR 200.83. The Commission plans to publish only aggregated data derived from information provided in Form SHO reports. Technical filing errors may cause delays in the filing of Form SHO. Technical support for making Form SHO reports is available through EDGAR Filer Support. Instructions for Calculating Reporting Threshold A Manager shall file a report on Form SHO: • with regard to each equity security that is of a class of securities that is registered pursuant to section 12 of the Exchange Act or for which the issuer is required to file reports pursuant to section 15(d) of the Exchange Act (a ‘‘reporting company issuer’’) in either of the following circumstances: (1) the Manager and all accounts over which the Manager or any person under the Manager’s control has investment discretion that are a monthly average gross short position at the close of regular trading hours in the equity security with a U.S. dollar value of $10 million or more, or (2) the Manager and all accounts over which the Manager or any person under the Manager’s control has investment discretion that are a monthly average gross short position at the close of regular trading hours as a percentage of shares outstanding in the equity security of 2.5 percent or more (‘‘Threshold A’’). • with regard to each equity security that is of a class of securities of an issuer that is not a reporting company issuer as described above (a ‘‘non-reporting company issuer’’), when the Manager and all accounts over which the Manager or any person under the Manager’s control has investment discretion that are a gross short position in the equity security with a U.S. dollar value of $500,000 or more at the close of regular trading hours on any settlement date during the calendar month (‘‘Threshold B’’). With respect to each equity security to which the circumstances described in Threshold A or Threshold B applies, the Manager shall report the information, as described in the ‘‘Special Instructions’’ below, aggregated across accounts over which the Manager, or any person under the Manager’s control, has investment discretion. To determine whether the dollar value threshold described in (1) of Threshold A above is met, a Manager shall determine its gross short position at the close of regular PO 00000 Frm 00088 Fmt 4701 Sfmt 4700 trading hours in the equity security (as defined in Rule 13f–2) on each settlement date during the calendar month and multiply that figure by the closing price at the close of regular trading hours on the settlement date (‘‘end of day dollar value’’). The Manager shall then add all end of day dollar values during the calendar month and divide that sum by the number of settlement dates in the month to arrive at a ‘‘monthly average’’ for each equity security the Manager traded during that calendar month reporting period. To determine whether the dollar value threshold described in Threshold B above is met, a Manager shall determine its gross short position at the close of regular trading hours in the equity security (as defined in Rule 13f–2) on each settlement date during the calendar month and multiply that figure by the closing price at the close of regular trading hours on the settlement date. If such closing price is not available, a Manager shall use the price at which it last purchased or sold any share of that security. To determine whether the percentage threshold described in (2) of Threshold A above is met, the Manager shall (a) determine its gross short position at the close of regular trading hours in the equity security (as defined in Rule 13f–2) on each settlement date during the calendar month, and divide that figure by the number of shares outstanding in such security at the close of regular trading hours on the settlement date, and (b) add up the daily percentages during the calendar month as determined in (a) and divide that sum by the number of settlement dates in the month to arrive at a ‘‘monthly average’’ for each equity security the Manager traded during that calendar month reporting period. The number of shares outstanding of the security for which information is being reported shall be determined by reference to an issuer’s most recent annual or quarterly report, and any subsequent update thereto, filed with the Commission. Special Instructions 1. This form consists of two parts: the Cover Page, and the Information Tables. Cover Page 2. The period end date used in the report (and in the EDGAR submission header) is the last settlement day of the calendar month. The date shall name the month, and express the day and year in Arabic numerals, with the year being a four-digit numeral (e.g., 2023). 3. Amendments to Form SHO must restate the Form SHO in its entirety. If the Manager is filing the Form SHO report as an amendment, then the Manager must check the ‘‘Amendment and Restatement’’ box on the Cover Page; and enter the amendment number. Each Amendment and Restatement must include a complete Cover Page and Information Tables. Amendments must be filed sequentially. a. In the space designated on the Cover of Page of each Amendment and Restatement, a Manager shall (1) provide a written description of the revision being made; (2) explain the reason for the revision; and (3) indicate whether data from any additional Form SHO reporting period(s) (up to the past E:\FR\FM\01NOR2.SGM 01NOR2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations 12 calendar months) is/are affected by the Amendment and Restatement. b. If (3) applies, a Manager shall complete and file a separate Amendment and Restatement for each previous calendar month so affected (up to the past 12 months) and provide a description of the revision being made and explain the reason for the revision. 4. Present the Cover Page information in the format and order provided in the form, including the non-lapsed Legal Entity Identifier (‘‘LEI’’), if any, of the Manager filing the Form SHO report. The Cover Page shall include only the required information. Do not include any portions of the Information Tables on the Cover Page. 5. Designate the Report Type for the Form SHO by checking the appropriate box in the Report Type section of the Cover Page, and include, where applicable, the Name and non-lapsed LEI (if available) of each of the Other Managers Reporting for this Manager on the Cover Page, and the Information Tables, as follows: a. If all of the information that a Manager is required by Rule 13f–2 to report on Form SHO is reported by another Manager (or Managers), check the box for Report Type ‘‘FORM SHO NOTICE,’’ include on the Cover Page the Name and non-lapsed LEI (if available) of each of the Other Managers Reporting for this Manager, and omit the Information Tables. b. If all of the information that a Manager is required by Rule 13f–2 to report on Form SHO is reported in this report, check the box for Report Type ‘‘FORM SHO ENTRIES REPORT,’’ omit the ‘‘Name and Non-Lapsed LEI (if available) of each of the Other Managers Reporting for this Manager’’ section of the Cover Page, and include the Information Tables. c. If only a part of the information that a Manager is required by Rule 13f–2 to report on Form SHO is reported in this report, check the box for Report Type ‘‘FORM SHO COMBINATION REPORT,’’ include on the Cover Page the name and non-lapsed LEI (if available) of each of the Other Managers Reporting for this Manager, and include the Information Tables. Information Tables 6. Do not include any additional information in the Information Tables. Do not include any portions of the Information Tables on the Cover Page. 7. In reporting information required on Information Tables 1 and 2, Managers must account for a gross short position in an ETF, and activity that results in the acquisition or sale of shares of the ETF resulting from call options exercises or assignments; put options exercises or assignments; tendered conversions; secondary offering transactions; or other activity, as discussed further below. In determining its gross short position in an equity security, however, a Manager is not required to consider short positions that the ETF holds in individual underlying equity securities that are part of the ETF basket. 8. Instructions for Information Table 1— Manager’s Gross Short Position: a. Column 1. Settlement Date. Enter in Column 1 the last day of the calendar month VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 of the reporting period on which a trade settles (‘‘settlement date’’). b. Column 2. Issuer Name. Enter in Column 2 the name of the issuer of the security for which information is being reported. Reasonable abbreviations are permitted. c. Column 3. Issuer LEI. If the issuer has an LEI, enter the issuer’s LEI in Column 3. d. Column 4. Title of Class. Enter in Column 4 the title of the class of the security for which information is being reported. Reasonable abbreviations are permitted. e. Column 5. CUSIP Number. Enter in Column 5 the nine (9) digit CUSIP number of the security for which information is being reported, if applicable. f. Column 6. FIGI. Enter in Column 6 the twelve (12) character, alphanumeric Financial Instrument Global Identifier (‘‘FIGI’’) of the security for which information is being reported, if a FIGI has been assigned. g. Column 7. End of Month Gross Short Position (Number of Shares). Enter in Column 7 the number of shares that represent the Manager’s gross short position in the security for which information is being reported at the close of regular trading hours on the last settlement date of the calendar month of the reporting period. The term ‘‘gross short position’’ means the number of shares of the security for which information is being reported that are held short, without inclusion of any offsetting economic positions—including shares of the reportable equity security or derivatives of such security. h. Column 8. End of Month Gross Short Position (rounded to nearest USD). Enter in Column 8 the U.S. dollar value of the shares reported in Column 7, rounded to the nearest dollar. A Manager shall report the corresponding dollar value of the reported gross short position by multiplying the number of shares of the security for which information is being reported by the closing price at the close of regular trading hours on the last settlement date of the calendar month. In circumstances where such closing price is not available, the Manager shall use the price at which it last purchased or sold any share of that security. 9. Instructions for Information Table 2— Daily Activity Affecting Manager’s Gross Short Position During the Reporting Period: a. Column 1. Settlement Date. Enter in Column 1 each date during the reporting period on which a trade settles (settlement date). The Manager shall report information for each settlement date during the calendar month reporting period as described in these instructions. b. Column 2. Issuer Name. Enter in Column 2 the name of the issuer of the equity security for which information is being reported. Reasonable abbreviations are permitted. c. Column 3. Issuer LEI. If the issuer has an LEI, enter the issuer’s LEI in Column 3. d. Column 4. Title of Class. Enter in Column 4 the title of the class of the security for which information is being reported. Reasonable abbreviations are permitted. e. Column 5. CUSIP Number. Enter in Column 5 the nine (9) digit CUSIP number PO 00000 Frm 00089 Fmt 4701 Sfmt 4700 75187 of the security for which information is being reported, if applicable. f. Column 6. FIGI. Enter in Column 6 the twelve (12) character, alphanumeric FIGI of the security for which information is being reported, if a FIGI has been assigned. g. Column 7. Net Change in Short Position (Number of Shares). For the settlement date set forth in Column 1, enter the net change in short position (represented as a number of shares) reflecting how the reported gross short position in shares of the security for which information is being reported are being closed out—or increased—as a result of the acquisition or sale of shares of that equity security, by taking into account: (1) Short sales of the security that settled on that date. (2) Shares of the security that were purchased to cover, in whole or in part, an existing short position and settled on that date. (3) Shares of the security that were acquired in a call option exercise that reduces or closes a short position on that security and settled on that date. (4) Shares of the security that were sold in a put option exercise that creates or increases a short position on that security and settled on that date. (5) Shares of the security that were sold in a call option assignment that creates or increases a short position on that security and settled on that date. (6) Shares of the security that were acquired in a put option assignment that reduces or closes a short position on that security and settled on that date. (7) Shares of the security for which information is being reported that were acquired as a result of the tendered conversions that reduces or closes a short position on that security and settled on that date. (8) Shares of the security that were obtained through a secondary offering transaction that reduces or closes a short position on that security and settled on that date. Such secondary offering purchases must be reported whether they occurred outside or within the restricted period of Rule 105 of Regulation M, 17 CFR 242.105, which prohibits purchasing offering shares within the restricted period after selling short. (9) Shares of the security that resulted from other activity not previously reported on this form that creates or increases a short position on that security and settled on that date, or that reduces or closes a short position on that security and settled on that date. (10) Activity other than (1) through (9) above that creates or increases, or reduces or closes, a short position on that security, including, but not limited to, shares resulting from ETF creation or redemption activity. Paperwork Reduction Act Information Persons who are to respond to the collection of information contained in this form are not required to respond to the collection of information unless the form displays a currently valid Office of Management and Budget (‘‘OMB’’) control number. E:\FR\FM\01NOR2.SGM 01NOR2 75188 Federal Register / Vol. 88, No. 210 / Wednesday, November 1, 2023 / Rules and Regulations OMB Number: XXXX–XXXX Institutional Investment Manager (‘‘Manager’’) Filing Report: Name: lllllllllllllllll Mailing Address: llllllllllll Business Telephone Number: lllllll Business Email: lllllllllllll Non-Lapsed Legal Entity Identifier (‘‘LEI’’): llllllllllllllll Contact Employee: llllllllllll Name and Title: lllllllllllll Business Telephone Number: lllllll Business Email: lllllllllllll Date Filed: lllllllllllllll The Manager filing this report hereby represents that all information contained herein is true, correct and complete, and that it is understood that all required items, statements, schedules, lists, and tables, are considered integral parts of this form. Report Type (Check only one): United States Securities and Exchange Commission Washington, DC 20549 FORM SHO Form SHO Cover Page Report for the Period Ended: [Month/Day/ Year] Check here if Amendment and Restatement [ ]; Amendment Number: Description of the Amendment and Restatement, Reason for the Amendment and Restatement, and Which Additional Form SHO Reporting Period(s) (up to the past 12 calendar months), if any, is/are affected by the Amendment and Restatement: [ ] FORM SHO ENTRIES REPORT. (Check here if all entries of this reporting Manager are reported in this report.) [ ] FORM SHO NOTICE. (Check here if no entries reported are in this report, and all entries are reported by other reporting Manager(s).) [ ] FORM SHO COMBINATION REPORT. (Check here if a portion of the entries for this reporting Manager is reported in this report and a portion is reported by other reporting Manager(s).) Name and Non-Lapsed LEI of each of the Other Manager(s) Reporting for this Manager: [If there are no entries in this list, omit this section.] Name: lllllllllllllllll Non-Lapsed LEI: lllllllllllll [Repeat as necessary.] INFORMATION TABLE 1—MANAGER’S MONTHLY GROSS SHORT POSITION Column 1 Column 2 Settlement Date (Month End). Issuer Name. Column 3 Issuer LEI Column 4 Title of Class. Column 5 Column 6 Column 7 Column 8 CUSIP Number. FIGI .......... End of Month Gross Short Position (Number of Shares). End of Month Gross Short Position (rounded to nearest USD). (Repeat as Necessary) INFORMATION TABLE 2—DAILY ACTIVITY AFFECTING MANAGER’S GROSS SHORT POSITION DURING THE REPORTING PERIOD Column 1 Column 2 Column 3 Column 4 Column 5 Settlement Date Issuer Name ..... Issuer LEI ......... Title of Class .... CUSIP Number Column 6 FIGI ................... Column 7 Net Change Shares). (Repeat as Necessary) [FR Doc. 2023–23050 Filed 10–31–23; 8:45 am] ddrumheller on DSK120RN23PROD with RULES2 BILLING CODE 8011–01–P VerDate Sep<11>2014 22:05 Oct 31, 2023 Jkt 262001 PO 00000 Frm 00090 Fmt 4701 Sfmt 9990 E:\FR\FM\01NOR2.SGM 01NOR2 in Short Position (Number of

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 88, Number 210 (Wednesday, November 1, 2023)]
[Rules and Regulations]
[Pages 75100-75188]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-23050]

[[Page 75099]]

Vol. 88

Wednesday,

No. 210

November 1, 2023

Part II

Securities and Exchange Commission

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17 CFR Parts 240 and 249

Short Position and Short Activity Reporting by Institutional Investment
Managers; Final Rule

Federal Register / Vol. 88 , No. 210 / Wednesday, November 1, 2023 /
Rules and Regulations

[[Page 75100]]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 249

[Release No. 34-98738; File No. S7-08-22]
RIN 3235-AM34

Short Position and Short Activity Reporting by Institutional
Investment Managers

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is
adopting a new rule and new Form SHO pursuant to the Securities
Exchange Act of 1934 (``Exchange Act'') and the Dodd-Frank Wall Street
Reform and Consumer Protection Act (``DFA''). The new rule and related
form are designed to provide greater transparency through the
publication of short sale-related data to investors and other market
participants. Under the new rule, institutional investment managers
that meet or exceed certain specified reporting thresholds are required
to report, on a monthly basis using the related form, specified short
position data and short activity data for equity securities. In
addition, the Commission is adopting an amendment to the national
market system (``NMS'') plan governing the consolidated audit trail
(``CAT'') created pursuant to the Exchange Act to require the reporting
of reliance on the bona fide market making exception in the
Commission's short sale rules. The Commission is publishing the text of
the amendments to the NMS plan governing the CAT (``CAT NMS Plan'') in
a separate notice.

DATES:
Effective date: January 2, 2024.
Compliance date: The applicable compliance date is discussed in
Part VI of this release.

FOR FURTHER INFORMATION CONTACT: Timothy M. Riley, Branch Chief;
Patrice M. Pitts, Special Counsel; James R. Curley, Special Counsel;
Jessica Kloss, Attorney Advisor; Brendan McLeod, Attorney Advisor;
Roland Lindmayer, Attorney Advisor; Josephine J. Tao, Assistant
Director, Office of Trading Practices; and Carol McGee, Associate
Director, Office of Derivatives Policy and Trading Practices, Division
of Trading and Markets, Securities and Exchange Commission, 100 F
Street NE, Washington, DC 20549-8010, at (202) 551-5777.

SUPPLEMENTARY INFORMATION: The Commission is adopting new 17 CFR
240.13f-2 (``Rule 13f-2'') and related form 17 CFR 249.332 (``Form
SHO'') under the Exchange Act to require certain institutional
investment managers to report, on a monthly basis on new Form SHO,
certain short position data and short activity data for certain equity
securities as prescribed in Rule 13f-2.
The Commission is also adopting, in a separate notice published
elsewhere in this issue of the Federal Register, an amendment to the
CAT NMS Plan (``CAT Amendment''), pursuant to 17 CFR 242.608(a)(2)
(``Rule 608(a)(2)'') and (b)(2) (``Rule 608(b)(2)''), that enables the
Commission to adopt a rule to amend any effective NMS plan. For the
text of the amendment to the CAT NMS Plan, please see the Notice of the
Text of the Amendment to the National Market System Plan Governing the
Consolidated Audit Trail for Purposes of Short Sale-Related Data
Collection.\1\
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\1\ Notice of the Text of the Amendment to the National Market
System Plan Governing the Consolidated Audit Trail for Purposes of
Short Sale-Related Data Collection, Exchange Act Release No. 34-
98739 (Oct. 13, 2023).
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Table of Contents

I. Overview
A. Background
B. The Proposals
C. Overview of Proposed Rule 13f-2, Proposed Form SHO, Proposed
Rule 205 and Proposed CAT Amendments
1. Overview of Comments Received
2. Final Rule 13f-2, Form SHO and CAT Amendment
II. Discussion of Final Rule 13f-2 and Form SHO
A. Final Rule 13f-2
1. Scope of Persons Covered by Final Rule 13f-2
2. Scope of Reported Securities
3. Reporting Thresholds
4. Form SHO
B. Data Aggregation and Publication of Information by the
Commission
1. Proposal
2. Comments
3. Final Rule
III. Proposed Amendment to Regulation SHO To Aid Short Sale Data
Collection
A. Proposed Rule 205
B. Comments
IV. Amendments to CAT
A. Proposal To Require ``Buy to Cover'' Order Marking
B. Proposal To Require Reporting of Reliance on Bona Fide Market
Maker Exception
V. Other Comments
VI. Compliance Date
VII. Paperwork Reduction Act Analysis
A. Background
B. Burdens for Managers Under Rule 13f-2 and Form SHO
1. Applicable Respondents
2. Burdens and Cost
C. Burdens and Costs Associated With the Amendment to CAT
1. Summary of Collections of Information
2. Use of Information
3. Respondents
4. Total Initial and Annual Reporting and Record Keeping Burdens
D. Collection of Information Is Mandatory
E. Retention Period of Recordkeeping Requirement
F. Confidentiality
VIII. Economic Analysis
A. Introduction
B. Baseline
1. Institutional Investment Managers
2. Short Selling
3. Current Short Selling Regulations
4. Existing Short Selling Data
5. Competition
C. Economic Effects
1. Investor Protection and Market Manipulation
2. Effects on Stock Price Efficiency
3. Effect on Market Liquidity
4. Effect on Corporate Decision Making
5. Effect on the Securities Lending Market
6. Compliance Cost
7. Effect of Certain Electronic Filing and Dissemination
Requirements
8. Potential Increased Use of Derivatives
D. Efficiency, Competition and Capital Formation
1. Efficiency
2. Competition
3. Capital Formation
E. Reasonable Alternatives
1. Alternative Approaches
2. Data Modifications
3. Threshold Modifications
4. Other Alternatives
IX. Regulatory Flexibility Act Certification
X. Other Matters
Statutory Authority

I. Overview

A. Background

Short selling involves a sale of a security that the seller does
not own, or a sale that is consummated by the delivery of a security
borrowed by, or for the account of, the seller.\2\ In order to deliver
the security to the purchaser, the short seller will generally borrow
the security, usually from a broker-dealer or an institutional
investor, and later close out the position by purchasing equivalent
securities on the open market and returning the security to the lender.
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\2\ See 17 CFR 242.200(a).
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Short selling is generally used to profit from an expected downward
price movement, to provide liquidity in response to unanticipated
demand,\3\ or

[[Page 75101]]

to hedge the risk of a long position in the same security or a related
security.\4\ Short selling provides the market with important benefits,
such as providing market liquidity and pricing efficiency.\5\ While
short selling can serve useful market purposes, such as facilitating
price discovery, there are concerns that it could be used to drive down
the price of a security, to accelerate a declining market in a
security, or to manipulate stock prices.\6\
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\3\ Market liquidity is generally provided through short selling
by market professionals, such as market makers, who offset temporary
imbalances in the buying and selling interest for securities. Short
sales effected in the market add to the selling interest of stock
available to purchasers and reduce the risk that the price paid by
investors is artificially high because of a temporary contraction of
selling interest. Short sellers covering their sales also may add to
the buying interest of stock available to sellers. See Amendments to
Regulation SHO, Exchange Act Release No. 61595 (Feb. 26, 2010), 75
FR 11232, 11235 (Mar. 10, 2010) (``Rule 201 Adopting Release'').
\4\ See, Short Sales, Exchange Act Release No. 50103 (July 28,
2004), 69 FR 48008 (Aug. 6, 2004) (``Regulation SHO Adopting
Release'').
\5\ See, e.g., Phil Mackintosh, How Short Selling Makes Markets
More Efficient, NASDAQ (Oct. 1, 2020), available at https://www.nasdaq.com/articles/how-short-selling-makes-markets-more-efficient-2020-10-01. Efficient markets require that prices fully
reflect all buy and sell interest. Market participants who believe a
stock is overvalued may engage in short sales in an attempt to
profit from a perceived divergence of prices from true economic
values. Such short sellers add to stock pricing efficiency in part
because their transactions inform the market of their evaluation of
future stock price performance. This evaluation is reflected in the
resulting market price of the security. See Rule 201 Adopting
Release, 75 FR 11235 nn. 29 & 30. Historically, short sellers have,
at times, through doing research, uncovered fraudulent behavior. See
also generally discussion in infra Parts VIII.C.2 and VIII.C.4.
\6\ See, e.g., Div. Econ. Risk Analysis, Short Sale Position and
Transaction Reporting (June 5, 2014), at 6-7 (``DERA 417(a)(2)
Study''), available at https://www.sec.gov/files/short-sale-position-and-transaction-reporting0.pdf (This is a study of the
Staff of the U.S. Securities and Exchange Commission, which
represents the views of Commission staff, and is not a rule,
regulation, or statement of the Commission. The Commission has
neither approved nor disapproved the content of this study and, like
all staff statements, it has no legal force or effect, does not
alter or amend applicable law, and creates no new or additional
obligations for any person.); Rule 201 Adopting Release, 75 FR 11235
(describing a ``bear raid'' where an equity security is sold short
in an effort to drive down the price of the security by creating an
imbalance of sell-side interest, as an example of unrestricted short
selling that could ``exacerbate a declining market in a security by
increasing pressure from the sell-side, eliminating bids, and
causing a further reduction in the price of a security by creating
an appearance that the security's price is falling for fundamental
reasons, when the decline, or the speed of the decline, is being
driven by other factors''). See generally discussion infra Part
VIII.C.1.
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The Commission has plenary authority under section 10(a) of the
Exchange Act to regulate short sales of securities as necessary or
appropriate in the public interest or for the protection of
investors.\7\ Regulation SHO, which became effective on January 3,
2005,\8\ imposes four general requirements with respect to short sales
of equity securities. Under 17 CFR 242.200 (``Rule 200 of Regulation
SHO''), broker-dealers must properly mark sale orders as ``long,''
``short,'' or ``short exempt.'' \9\ Under 17 CFR 242.203 (``Rule 203 of
Regulation SHO''), a broker-dealer must locate a source of shares that
the broker-dealer reasonably believes can be delivered in time for
settlement (commonly referred to as the ``locate requirement'') before
effecting a short sale.\10\ Under 17 CFR 242.204 (``Rule 204''), if the
broker or dealer that is a member of a registered clearing agency fails
to deliver the security to the registered clearing agency in time for
settlement, the broker or dealer must take action to close out the
failure to deliver if that failure results from a long or short
sale.\11\ Separately, under 17 CFR 242.201 (``Rule 201''), trading
centers \12\ must have policies and procedures in place to restrict
short selling when a covered security has triggered a short sale price
test circuit breaker.\13\ In addition, the Commission adopted an
antifraud provision, 17 CFR 240.10b-21 (``Rule 10b-21''), to address
failures to deliver in securities that have been associated with
``naked'' short selling.\14\
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\7\ 15 U.S.C. 78j(a).
\8\ See Regulation SHO Adopting Release.
\9\ 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 security being 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 dealer no later than the settlement of the transaction. See 17
CFR 242.200(g). A person is deemed to own a security only to the
extent that he 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 In re OZ Mgmt., Exchange Act Release
No. 75445 (July 14, 2015) (settled) (discussing where OZ Management
submitted short sale orders to its executing broker, but identified
such sales as long sales to its prime broker, causing books and
records of the prime broker to be inaccurate), available at https://www.sec.gov/litigation/admin/2015/34-75445.pdf.
\10\ See 17 CFR 242.203(b)(1) and (2). The Regulation SHO locate
requirement provides that broker-dealers may not accept a short sale
order in an equity security from another person, or effect a short
sale in an equity security for its own account, unless the broker-
dealer has (i) borrowed the security, or entered into a bona-fide
arrangement to borrow the security; or (ii) reasonable grounds to
believe that the security can be borrowed so that it can be
delivered on the date delivery is due; and (iii) documented
compliance with this requirement (``locate requirement'').
\11\ See 17 CFR 242.204. ``Failures to deliver,'' or ``fails,''
occur when a broker-dealer fails to deliver securities to the party
on the other side of the transaction on the settlement date.
\12\ Trading center in Regulation SHO means a national
securities exchange or national securities association that operates
an SRO trading facility, an alternative trading system, an exchange
market maker, an OTC market maker, or any other broker or dealer
that executes orders internally by trading as principal or crossing
orders as agent. 17 CFR 242.200.
\13\ See 17 CFR 242.201.
\14\ See ``Naked'' Short Selling Antifraud Rule, Exchange Act
Release No. 58774 (Oct. 14, 2008), 73 FR 61666, 61674 (Oct. 17,
2008) (In a ``naked'' short sale, a seller does not borrow or
arrange to borrow the necessary securities in time to deliver them
to the buyer within the standard settlement period. Although abusive
``naked'' short selling is not defined in the federal securities
laws, it refers generally to selling short without having stock
available for delivery and intentionally failing to deliver stock
within the standard settlement period. In addition, a seller
misrepresenting its short sale locate source or ownership of shares
may intend to fail to deliver securities in time for settlement and,
therefore, engage in abusive ``naked'' short selling.).
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Section 929X of the DFA added section 13(f)(2) of the Exchange Act,
entitled ``Reports by institutional investment managers,'' requiring
the Commission to prescribe rules to make certain short sale data
publicly available no less frequently than monthly.\15\ Specifically,
section 13(f)(2) provides: ``[t]he Commission shall prescribe rules
providing for the public disclosure of the name of the issuer and the
title, class, CUSIP [Committee on Uniform Securities Identification
Procedures] number, aggregate amount of the number of short sales of
each security, and any additional information determined by the
Commission following the end of the reporting period. At a minimum,
such public disclosure shall occur every month.'' \16\ In addition, the
Commission has received multiple petitions to adopt reporting
requirements for short sellers similar to those required for holders of
long positions.\17\
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\15\ Public Law 111-203, sec. 929X, 124 Stat. 1376, 1870 (July
21, 2010).
\16\ 15 U.S.C. 78m(f)(2).
\17\ See, e.g., Letter from Elizabeth King, Corporate Secretary,
NYSE Group, et al. (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 with that currently required for institutional investment
managers under section 13(f) of the Exchange Act for long position
reporting''), available at https://www.sec.gov/rules/petitions/2015/petn4-689.pdf; 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 to require public disclosure
by investors of short positions in parity with the disclosure regime
applicable to long positions''), available at https://www.sec.gov/rules/petitions/2015/petn4-691.pdf (``NASDAQ Petition''); see also
Letter from E. Carter Esham, Executive Vice President, Emerging
Companies, Biotechnology Innovation Organization (BIO) (Mar. 11,
2016) (``BIO Letter'') (applauding reforms to the short disclosure
framework proposed in the NASDAQ Petition and in the NYSE Petition
and advocating for the promulgation of rules to ensure parity
between public disclosures required of investors taking long and
short positions), available at https://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 for short sellers),
available at https://www.sec.gov/comments/4-691/4691-10.pdf.
Developments in the market with regard to ``meme'' stocks in early
2021, some of which were widely reported as involving large short
sellers, also highlighted a need for more consistent and
consolidated short sale information. See, e.g., Robert Smith et al.,
``Short Squeeze'' Spreads as Day Traders Hunt Next GameStop, Fin.
Times (Jan. 27, 2021), available at https://www.ft.com/content/acc1dbfe-80a4-4b63-90dd-05f27f21ceb2; Are ``Meme Stocks'' Harmless
Fun, or A Threat to the Financial Old Guard?, Economist (July 6,
2021) (retrieved from Factiva database). See also Sharon Nunn & Adam
Kulam, Short-Selling Restrictions During Covid-19, Yale Sch. of
Mgmt., Program on Fin. Stability (Jan. 12, 2021), available at
https://som.yale.edu/story/2021/short-selling-restrictions-during-covid-19 (discussing global short selling regulatory responses to
the Covid-19 pandemic).

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[[Page 75102]]

B. The Proposals

In February 2022, in an effort to increase transparency regarding
short position and short activity data to both market participants and
regulators, and to address the requirements of section 13(f)(2), the
Commission proposed new rule 13f-2 (``Proposed Rule 13f-2'') and
related form (``Proposed Form SHO'') under the Exchange Act.\18\
Proposed Rule 13f-2 would require certain institutional investment
managers (``Managers'') with gross short positions that meet certain
quantitative reporting thresholds to report, on a monthly basis on new
Proposed Form SHO, certain short position data and short activity data
for certain equity securities. Proposed Form SHO included two parts:
Information Table 1-reports of information including, but not limited
to, data elements explicitly referenced in section 13(f)(2), gross end-
of-month short positions in equity securities that meet the reporting
thresholds, and whether such positions are fully hedged, partially
hedged, or not hedged; and Information Table 2-reports of information
including, but not limited to, certain daily activity data (including
options assignments and exercises) that affect a Manager's gross short
positions during the calendar month reporting period. Managers would
file Proposed Form SHO with the Commission via the Commission's
Electronic Data Gathering, Analysis, and Retrieval system (``EDGAR'')
within 14 calendar days after the end of the calendar month. The
Commission would then expect to publish on EDGAR aggregated information
derived from the data reported on Proposed Form SHO within one month
after the end of the reporting calendar month.
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\18\ Short Position and Short Activity Reporting by
Institutional Investment Managers, Exchange Act Release No. 34-94313
(Feb. 25, 2022), 87 FR 14950 (Mar. 16, 2022) (``Proposing
Release'').
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In the Proposing Release, the Commission stated that the required
short sale disclosures that would be collected under Proposed Form SHO
and the aggregated data published pursuant to Proposed Rule 13f-2 would
increase transparency and provide several important benefits to market
participants and regulators. Such aggregated information would help
inform market participants regarding the overall short sale activity by
reporting Managers. More information about the short sale activity and
gross short positions of reporting Managers may promote greater risk
management among market participants and may facilitate capital
formation to the extent that greater transparency bolsters confidence
in the markets. As discussed in the Proposing Release, the Commission's
regular access to Proposed Form SHO data would bolster the Commission's
oversight of short selling, as Proposed Rule 13f-2 and Proposed Form
SHO would improve the utility of information available to the
Commission and other regulators.\19\
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\19\ Proposing Release, at 14951.
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Additionally, to supplement the short sale data made available to
the Commission in Proposed Form SHO filings, the Commission proposed a
new rule at 17 CFR 242.205 prescribing a ``buy to cover'' order marking
requirement under Regulation SHO (``Proposed Rule 205'') for certain
purchase orders effected by a broker-dealer for its own account or for
the account of another person at the broker-dealer, if, at the time of
order entry, the purchaser had a gross short position in such security
in the account for which the purchase is being made. The Commission
also proposed amendments to the NMS plan governing the CAT (``Proposed
CAT Amendments'') to require the reporting of ``buy to cover'' order
marking information and of reliance on the bona fide market making
exception in Rule 203(b)(2)(iii) of Regulation SHO (``BFMM locate
exception''). Proposed Rule 205 and the Proposed CAT Amendments were
designed to fill an information gap for the Commission and other
regulators by providing insights into the lifecycle of a short sale
that are not available under existing data sources.\20\
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\20\ Because data obtained through CAT are not made public, the
``buy to cover'' and ``bona fide market making'' data reported
pursuant to the Proposed CAT Amendments would not be made publicly
available as a result of such reporting.
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C. Overview of Proposed Rule 13f-2, Proposed Form SHO, Proposed Rule
205 and Proposed CAT Amendments

1. Overview of Comments Received
The Commission received robust comment on Proposed Rule 13f-2,
Proposed Form SHO, Proposed Rule 205, and the Proposed CAT Amendments
(collectively, the ``Proposals''). Comments were submitted by
individual investors as well as other market participants, such as
trade associations, institutional investment managers, investment
advisers, broker-dealers, non-profit organizations, and academicians.
These comments, which are discussed in context below, included a
variety of different viewpoints on various aspects of the
Proposals.\21\ Many commenters were supportive of the Proposals as a
step toward increasing transparency into short sale activity.\22\ Many
commenters stated that short selling is a particularly opaque area of
the market and that increasing transparency regarding short selling
would be beneficial to market participants.\23\

[[Page 75103]]

Some of these commenters stated that the increased information
regarding short sales would allow investors to be better informed and
make better investment decisions.\24\ A number of these commenters
urged the Commission to strengthen the proposed reporting requirements
further by, for example, lowering or eliminating the thresholds
triggering reporting obligations under Proposed Rule 13f-2.\25\
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\21\ The comment letters on the Proposing Release (File No. S7-
08-22) are available at https://www.sec.gov/comments/s7-08-22/s70822.htm. Over 98% of the over 3,000 comments received were from
individual investors, most of whom (over 1,900) submitted a
variation of a template letter from ``We The Investors,'' an
advocacy group for retail investors. The remaining comments were
from trade associations, financial services firms--including
institutional investment managers and investment management firms,
broker-dealers--and their advisors, non-profit organizations,
academicians, and entities other than individual investors. See
Comment Letter from We the Investors, available at https://www.sec.gov/comments/s7-08-22/s70822-typea.pdf (``WTI Letter'').
\22\ See, e.g., Comment from Samuel Hudock (Mar. 2, 2022),
available at https://www.sec.gov/comments/s7-08-22/s70822-20118373-271244.htm; Comment from Michelle R. Bracke (Mar. 4, 2022) available
at https://www.sec.gov/comments/s7-08-22/s70822-20118531-271417.htm;
Comment from Joshua Barbee (Mar. 4, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20118530-271416.htm; Comment
from Robert Ross (Mar. 14, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20119365-272251.htm; Comment from David
Arkules (Feb. 28, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20118071-270876.htm; Comment from Gina Preziosi
(Mar. 7, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20118726-271589.htm; Comment from Jessica Cooke (Mar. 9,
2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20118963-271791.htm; Comment from Mauricio Gonzalez (Oct. 12, 2022),
available at https://www.sec.gov/comments/s7-08-22/s70822-310835.htm; Comment from Liam Sutton (Oct. 19, 2022), available at
https://www.sec.gov/comments/s7-08-22/s70822-311965.htm; Comment
from Nicholas Graham (Oct. 19, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-312051.htm; Comment from
Steffen Maier (Oct. 19, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-312049.htm; Comment from Zachary D'Elia
(Oct. 19, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-312047.htm; Comment from Stephen Leachman (Oct. 19, 2022),
available at https://www.sec.gov/comments/s7-08-22/s70822-312046.htm; Comment from Sergio Herrera (Oct. 19, 2022), available
at https://www.sec.gov/comments/s7-08-22/s70822-312042.htm; Comment
from David P. Miller Jr. (Oct. 19, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-312038.htm.
\23\ See, e.g., Comment from William Bloxham (Oct. 21, 2022),
available at https://www.sec.gov/comments/s7-08-22/s70822-313372.htm; Comment from Ricardo Gomez (Oct. 29, 2022), available at
https://www.sec.gov/comments/s7-08-22/s70822-316604.htm; Comment
from Victor Arriaza (Oct. 29, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-316625.htm; Comment from Kyle
Byrd (Oct. 29, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-316701.htm; Comment from Tarek Elseweifi (Oct. 29,
2022), available at https://www.sec.gov/comments/s7-08-22/s70822-316706.htm; Comment from Clay Wyant (Oct. 29, 2022), available at
https://www.sec.gov/comments/s7-08-22/s70822-316708.htm; Comment
from Yin Hung Lam (Oct. 29, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-316601.htm; Comment from Evan Anderson
(Oct. 29, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-316580.htm; Comment from Connor Judson (Oct. 29, 2022),
available at https://www.sec.gov/comments/s7-08-22/s70822-316599.htm; Comment from Nicky (Oct. 29, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-316638.htm.
\24\ See, e.g., Comment from Eric Mills (April 27, 2022),
available at https://www.sec.gov/comments/s7-08-22/s70822-20126810-287520.htm (``[T]he proposals will serve the mission of the SEC by
increasing transparency regarding short selling activity. On-going
efforts by the SEC to increase market transparency and relieve
information asymmetries promote efficiency, order, fairness, capital
formation, and public trust. The result is an enhancement of
investor ability to assess the market and make more informed
decisions.''); Comment from Stanley Little (Mar. 8, 2022), available
at https://www.sec.gov/comments/s7-08-22/s70822-20118870-271692.htm
(``The proposed rule is a[n] important missing link for investors.
The ordinary person wishing to make money in the stock market should
have all available information at their disposal to make informed
decisions . . . The transparency rule is such a tool needed to make
well informed decisions.''); Comment from Brendon Withers (Feb, 27,
2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20118078-270936.htm (supported ``immediate implementation [of the
proposals] to improve the US Stock Market and provide a more fair
and free system in which market participants can have accurate
information and make informed decisions based on CURRENT AND
ACCURATE data.'').
\25\ See, e.g., Letter from Stephen W. Hall, Legal Director and
Securities Specialist, Better Markets, et al. (Apr. 26, 2022), at
12, available at https://www.sec.gov/comments/s7-08-22/s70822-20126822-287528.pdf (``[T]the SEC should eliminate the proposed
thresholds so as to reduce or eliminate the risk that unknown,
hidden short positions could pose to investors and the markets.'')
(``Better Markets Letter''); Comment from Matthew Sinex (Oct. 31,
2022), available at https://www.sec.gov/comments/s7-08-22/s70822-317106.htm; Comment from Noah Tewahade (Oct. 30, 2022), available at
https://www.sec.gov/comments/s7-08-22/s70822-317046.htm; Comment
from Luke Dansie (Oct. 31, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-317081.htm; Comment from Mike Flowers (Oct.
30, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-317245.htm; Comment Letter from Katherine Lander (Oct. 30,
2022), available at https://www.sec.gov/comments/s7-08-22/s70822-317266.htm; Comment from Marco Alvarenga (Oct. 31, 2022), available
at https://www.sec.gov/comments/s7-08-22/s70822-316992.htm; Comment
Letter from Erikka Jehle (Oct. 31, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-316930.htm.
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As discussed in further detail below, some commenters recommended
changes to the Proposals in response to their concerns about: the scope
of Proposed Rule 13f-2; the underlying approach and levels of the
proposed thresholds that would trigger a reporting obligation under
Proposed Rule 13f-2; the feasibility of operationalizing Proposed Rule
205 in a manner that would result in the gathering of meaningful short
sale-related data; and the necessity for the Proposed CAT Amendments.
Some commenters stated that the Commission did not sufficiently
articulate the benefits of, or regulatory justification for, the
Proposals and did not accurately estimate or adequately justify the
costs and impacts of the new reporting requirements.\26\ Some of these
commenters expressed concern that the Proposing Release's Economic
Analysis did not adequately estimate the costs and burdens of the
Proposals.\27\
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\26\ E.g., Comment Letter from Robert Toomey, Managing Director
and Associate General Counsel, Securities Industry and Financial
Markets Association, et al. (Apr. 26, 2022), at 3, available at
https://www.sec.gov/comments/s7-08-22/s70822-20126803-287514.pdf
(``SIFMA Letter'') (``SIFMA is concerned that such an expansive
reporting regime would impose burdens and costs on reporting parties
that would materially outweigh the benefit of the information they
might yield, and that the SEC has not provided justification for why
such information is necessary and/or cannot already be obtained
through other means available to the SEC''); see also, Comment
Letter from Thomas M. Merritt, Deputy General Counsel, Virtu
Financial (Apr. 26, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20126856-287588.pdf (``Virtu Letter'');
Comment Letter from Thomas Deinet, Executive Director, Standards
Board for Alternative Investments (Apr. 26, 2022), available at
https://www.sec.gov/comments/s7-08-22/s70822-20126850-287575.pdf
(``SBAI Letter''); Comment Letter from Matthew B. Siano, Managing
Director and General Counsel, Two Sigma (Apr. 26, 2022), available
at https://www.sec.gov/comments/s7-08-22/s70822-20126808-287518.pdf
(``Two Sigma Letter''); Comment Letter from Richard F. Kerr,
Partner, K&L Gates LLP (Apr. 26, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20126848-287571.pdf (``K&L
Gates Letter'').
\27\ See, e.g., SIFMA Letter, at 6 n. 15 (``SIFMA is concerned
that the SEC's economic analysis of the Proposed Rules does not
adequately consider that the sum total of the proposed requirements
may result in a burden that far exceeds the SEC's estimates with
respect to each individual component . . .''); Comment Letter from
Jennifer Han, Executive Vice President, Chief Counsel and Head of
Regulatory Affairs, Managed Funds Association (Apr. 26, 2022), at 7,
19, available at https://www.sec.gov/comments/s7-08-22/s70822-20126815-287523.pdf (``MFA Letter'') (``[T]he SEC's economic
analysis and, specifically, the Proposal's estimated costs are
materially understated.''); Comment Letter from Mark A. Steffensen,
Senior Executive Vice President and General Counsel, HSBC North
American Holdings Inc. and HSBC Bank USA, N.A. (Jan. 24, 2023), at
15 n. 53, available at https://www.sec.gov/comments/s7-08-22/s70822-20155771-324031.pdf (``HSBC Letter'') (``We [ ] do not believe that
the Commission's economic analysis adequately considers the costs of
Proposed Rule 13f-2 to market makers.'').
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2. Final Rule 13f-2, Form SHO and CAT Amendment
For the reasons discussed more fully in Parts II-IV below, and to
balance implementation and compliance costs and burdens with the
Commission's goal of enhancing transparency regarding short selling,
the Commission is adopting Rule 13f-2 and related Form SHO with certain
modifications in response to comments.\28\ The new reporting regime of
Rule 13f-2 provides disclosures that supplement the short sale-related
information that currently is publicly available or accessible for a
fee from existing short sale reporting regimes provided by some
registered national securities exchanges (``exchanges'') and registered
national securities associations (``RNSAs'').\29\
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\28\ Rule 13f-2 and Form SHO, as adopted, are responsive to the
policy recommendations to increase transparency around short selling
activities and improve short sale data of participants in the
Government-Business Forums on Small Business Capital Formation held
by the Commission in recent years. See, e.g., Report on the Report
on the 41st Annual Small Business Forum, at 22, available at 2022
OASB Annual Forum Report (sec.gov); Report on the Report on the 40th
Annual Small Business Forum, at 25, available at https://www.sec.gov/files/2021_OASB_Annual_Forum_Report_FINAL_508.pdf.
\29\ See infra Part II.A.4. See also Proposing Release, at
14964-65.
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Final Rule 13f-2 will require Managers (defined in section
13(f)(6)(A) of the Exchange Act) to report to the Commission, on a
monthly basis on related Form SHO, certain short position data and
short activity data for certain equity securities. In particular:
On the Cover Page of Form SHO, Managers will be required
to report certain basic information including its name, mailing
address, business telephone number and business email, as well as the
name, title, business telephone number and business email of the
Manager's contact employee for the Form SHO report; and the date the
report is filed. The Manager will also provide its non-lapsed Legal
Entity Identifier (``LEI'') if it has one. If other Managers are
required to be listed in the ``Other Manager(s) Reporting for this
Manager'' section of the Cover Page, the Manager will also be required
to include the name and non-lapsed LEI of each such ``Other Manager''
listed, if the LEI of such ``Other Manager(s)'' is available to the
Manager filing the Form SHO report.
With regard to each individual equity security reported on
by Managers

[[Page 75104]]

in the Information Tables of Form SHO, Managers will report: the
issuer's name and LEI if it has one, and the equity security's title of
class, CUSIP, and Financial Instrument Global Identifier (``FIGI'') (if
any has been assigned).\30\
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\30\ See infra nn. 36 & 218.
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With regard to Information Table 1 of Form SHO, the
Manager will also report the number of shares of the reported equity
security that represent the Managers' gross short position at the close
of the last settlement date of the calendar month reporting period, as
well as the corresponding U.S. dollar value of this reported gross
short position.
With regard to Information Table 2 of Form SHO, for each
reported equity security, for each individual settlement date during
the calendar month reporting period, a Manager will report ``net''
activity in the reported equity security. The net activity reported by
a Manager will be expressed by a single identified number of shares of
the reported equity security, and will reflect offsetting purchase and
sale activity by Managers. A positive number of shares identified will
indicate net purchase activity in the equity security on the specified
settlement date, while a negative number of shares identified will
indicate net sale activity in the equity security on the specified
settlement date.
Managers will report such information regarding each equity
security if the following thresholds are met:
With respect to any equity security that is of a class of
securities that is registered pursuant to Exchange Act section 12 \31\
or for which the issuer of that class of securities is required to file
reports pursuant to Exchange Act section 15(d) \32\ (a ``reporting
company issuer'') in which the Manager meets or exceeds either: (1) a
monthly average of daily gross short positions at the close of regular
trading hours in the equity security with a U.S. dollar value of $10
million or more, or (2) a monthly average of daily gross short
positions at the close of regular trading hours as a percentage of
shares outstanding in the equity security of 2.5 percent or more
(``Threshold A'').
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\31\ 15 U.S.C. 78l.
\32\ 15 U.S.C. 78o(d).
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With respect to any equity security that is of a class of
securities of an issuer that is not a reporting company issuer as
described above (a ``non-reporting company issuer'') in which the
Manager meets or exceeds a gross short position in the equity security
with a U.S. dollar value of $500,000 or more at the close of regular
trading hours on any settlement date during the calendar month.
(``Threshold B'').
The Commission will then publish aggregate information as follows:
With regard to Information Table 1 of Form SHO, the
Commission will publish, for each class of equity securities, as an
aggregated number of shares across all reporting Managers, the number
of shares of the reported equity security that represent the Managers'
gross short position at the close of the last settlement date of the
calendar month, as well as the corresponding aggregated U.S. dollar
value of this reported gross short position.
With regard to Information Table 2 of Form SHO, for each
reported equity security, for each individual settlement date during
the calendar month, the Commission will publish the net activity in the
reported equity security, as aggregated across all reporting Managers.
The Commission is also adopting, substantially as proposed, the
amendment to the CAT NMS Plan to require broker-dealers with a
reporting obligation to CAT, to report whether an original receipt or
origination of an order to sell an equity security is a short sale for
which a market maker is claiming the BFMM locate exception. However,
for the reasons discussed below, the Commission is not adopting
Proposed Rule 205 or the CAT ``buy to cover'' reporting requirements.
Changes Made to the Proposals: In response to comments, and as
discussed in more detail below, the Commission is modifying the
proposal generally by:
Streamlining Form SHO reports by not adopting as proposed
the requirement to report hedging classifications on Information Table
1, and by requiring a lower level of granularity of reporting on
Information Table 2; \33\
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\33\ Because the proposed rule and form called for publication
of only ``net'' activity based on the information reported in
Information Table 2, this change in information reported on Form SHO
as adopted does not affect the information published by the
Commission from information derived from the Form SHO reports.
---------------------------------------------------------------------------

Adjusting the calculation of the dollar value prong of the
reporting threshold for equity securities of reporting company issuers
(i.e., Threshold A) to be based on a monthly average of daily gross
short positions rather than the proposed daily calculation;
Requiring in Rule 13f-2 and in the instructions to Form
SHO that, for purposes of determining whether a Manager meets or
exceeds a reporting threshold, a Manager shall determine its gross
short position ``at the close of regular trading hours'' in the equity
security, rather than at the ``end of day'' as was provided for in the
instructions to Proposed Form SHO;
Not adopting Proposed Rule 205 and, consequently, not
adopting the Proposed CAT Amendment requiring a ``buy to cover'' order
mark in order receipts and order origination reports submitted to the
CAT; and
Making modifications to the text of Rule 13f-2 and the
instructions to Form SHO to provide context and enhance
comprehensibility, such as--adding a reference in the definition of
``gross short position'' to ``short sales'' as defined in Rule 200(a)
of Regulation SHO and making minor adjustments to phrasing in the
definition; \34\ adding language to the rule text to more precisely
describe the equity securities for which information is reported in
final Form SHO; \35\ deleting the superfluous word ``collectively''
from the rule text to enhance overall readability; replacing the term
``active LEI'' on Proposed Form SHO with ``non-lapsed LEI'' \36\ on
final Form SHO; updating the contact information to be provided on the
final Form SHO cover page,\37\ and making corresponding modifications
to conform the text of Rule 13f-2 and the instructions to Form SHO.
---------------------------------------------------------------------------

\34\ Specifically, we made a non-substantive revision to change
the word ``including'' to ``such as'' and removed the amphibological
comma.
\35\ To affirm that the Rule 13f-2 requirements apply to each
class of an equity security about which information is being
reported on Form SHO, and to more accurately indicate that classes
of securities, not issuers, are registered pursuant to section 12 of
the Exchange Act, Rules 13(a)(1) and Rule 13(a)(2) have been revised
to refer to ``each equity security that is of a class of
securities'' rather than ``each equity security of an issuer . . .
.'' This distinction by class of security is also consistent with
CUSIP procedures, under which, we understand, different classes of
stock have distinct identifying codes. Rule 13f-2 requires that
Managers provide CUSIP numbers for equity securities for which
information is reported on Form SHO.
\36\ For greater precision in the terminology used in Form SHO
as adopted, an LEI that is currently in effect is referred to as a
``non-lapsed LEI,'' rather than an ``active LEI'' (the terminology
used in Proposed Form SHO), of a Manager. A non-lapsed LEI is an LEI
for which the Manager is current on its periodic renewal fees needed
to maintain the LEI. Further, to avoid any suggestion that a Manager
filing a Form SHO report has an obligation to monitor the status of
an issuer's LEI, Instructions 8.c and 9.c of Form SHO--``Column 3.
Issuer LEI. If the issuer has an LEI, enter the issuer's active
LEI''--have been revised to remove the term ``active.''
\37\ The required Form SHO Cover Page contact information for
the reporting Manager and its ``Contact Employee'' has been updated
to reflect the greater reliance on the communication technology of
email rather than facsimile.
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Making non-substantive, technical changes to correct
inadvertent

[[Page 75105]]

grammatical errors in the text of the adopted amendment to the CAT NMS
Plan that requires a broker-dealer with a reporting obligation to CAT
to indicate whether an order is a short sale effected by a market maker
in connection with bona fide market making activities for which the
BFMM locate exception is claimed.\38\
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\38\ Specifically, the preposition ``for'' was added before ``a
short sale'' to clarify that reporting is required for a short sale
in which the bona fide market maker exception is claimed, the
article ``the'' was added before ``exception,'' and the preposition
``in'' was added before ``Rule 203(b)(2)(iii)'' to clarify that the
BFMM locate exception is found in Rule 203(b)(2)(iii).
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II. Discussion of Final Rule 13f-2 and Form SHO

A. Final Rule 13f-2

1. Scope of Persons Covered by Final Rule 13f-2
a. Proposal
Exchange Act section 13(f) pertains to ``Reports by Institutional
Investment Managers.'' \39\ Proposed Rule 13f-2 would have required
Managers to collect and file with the Commission via EDGAR certain
short sale-related data on proposed Form SHO, within fourteen (14)
calendar days after the end of each calendar month, with regard to each
equity security over which the Manager and all accounts over which the
Manager (or any other person under the Manager's control) has
investment discretion \40\ that meet or exceed a quantitative reporting
threshold (``Reporting Threshold'').
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\39\ 15 U.S.C. 78m(f).
\40\ See Proposed Rule 13f-2(b)(3).
---------------------------------------------------------------------------

As 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 and selling securities for its own account, and any person
exercising investment discretion with respect to the account of any
other person.\41\ As such, the term ``institutional investment
manager'' typically can include brokers and dealers, investment
advisers, banks, insurance companies, pension funds and
corporations.\42\
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\41\ See Proposed Rule 13f-2(b)(1).
\42\ See also Instructions to Form 13F.
---------------------------------------------------------------------------

Proposed Rule 13f-2(b)(3) states that ``investment discretion'' has
the same meaning as in 17 CFR 240.13f-1(b) (``Rule 13f-1(b) under the
Exchange Act''),\43\ and Rule 13f-1(b) states that ``investment
discretion'' has the same meaning as in section 3(a)(35) of the
Exchange Act. Rule 13f-1(b)'s definition is comprehensive in that it
covers all accounts over which the Manager, or any person under the
Manager's control, has investment discretion. This same definition of
investment discretion was used by the Commission in adopting 17 CFR
240.10a-3T (``interim final temporary Rule 10a-3T'') in 2008, which
required certain Managers to file weekly nonpublic reports with the
Commission on Form SH regarding short sales and positions.\44\ In
addition, the Rule 13f-1(b) definition of investment discretion is used
for Form 13F ``long'' position reporting by certain Managers.\45\
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\43\ See 17 CFR 240.13f-1(b).
\44\ See infra discussion in Part II.A.3.a.
\45\ See Form 13F (sec.gov), available at https://www.sec.gov/pdf/form13f.pdf.
---------------------------------------------------------------------------

b. Comments and Final Rule
One commenter encouraged the Commission to expand the scope of
market participants subject to reporting under Proposed Rule 13f-2
``beyond just Managers.'' \46\ This commenter believed the Commission's
determination ``to omit a large group of market participants from
Proposed Rule 13f-2's scope will negatively affect the completeness and
analytical sufficiency of the aggregated and disclosed short sale data,
impeding the Commission's ability to accurately reconstruct significant
or unusual market events.'' \47\ This commenter believed that omitting
a large group of market participants would ``not provide the Commission
with full visibility into the short sale market that it could otherwise
achieve pursuant to Proposed Rule 13f-2'' and believed that an
``artificially narrow scope will not further the Commission's stated
goals of providing greater transparency and filling the information
gaps for market participants and regulators.'' \48\ This commenter,
however, did not identify what market participants were being omitted
under the proposal and that should otherwise be included.
---------------------------------------------------------------------------

\46\ See Comment Letter from the Alternative Investment
Management Association Ltd (Apr. 26, 2022), at 10-11, available at
https://www.sec.gov/comments/s7-08-22/s70822-20126829-287533.pdf
(``AIMA Letter''); see also SBAI Letter, at 3 (stating that the
proposed reporting only includes Managers, which would not provide a
complete perspective of shorting activity). In raising concerns
about reporting and monitoring burdens imposed by the reporting
regime of Proposed Rule 13f-2, other commenters, however, did not
question the application of the proposed rule to institutional
investment managers.
\47\ AIMA Letter, at 11.
\48\ Id.
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As a potential alternative to Proposed Rule 13f-2, however, this
commenter suggested, in part, that the current FINRA short interest
reporting regime could be enhanced, and subsequently codified, to
address potential limitations in the currently available short sale-
related data. However, because FINRA's short interest reporting is
applicable only to broker-dealers that are FINRA member firms, Managers
represent a more diverse group of market participants than is required
under FINRA reporting (as was suggested as a potential alternative by
the commenter). As stated above, Managers typically can include various
market participants, including brokers and dealers, as well as
investment advisers, banks, insurance companies, pension funds and
corporations. Accordingly, the Commission is adopting as proposed Rule
13f-2(b)(1) to define institutional investment managers as having the
same meaning as in Exchange Act section 13(f)(6)(A). Short sale-related
data reported by Managers on Form SHO will provide additional context
to, and otherwise supplement, currently available data by, for example,
distinguishing directional short selling of Managers from short sale
activity effected by market makers and liquidity providers. This
approach should reduce the reporting of non-directional, ``transient''
short sales activity and provide market participants with more focused
information on substantial short positions held by Managers.
Another commenter suggested that the Commission consider an
exemption for certain types of Managers that do not regularly utilize
short positions or that only utilize short positions for passive
investing purposes.\49\ By capturing short sale-related data from
Managers who hold substantial gross short positions--regardless of the
purpose for which they utilize short positions, the reporting regime of
Rule 13f-2 will enhance transparency and provide useful information to
market participants regarding overall short sale activity. Furthermore,
having the reporting obligation under Rule 13f-2 triggered by a
reporting threshold that is calculated based on a monthly average of
daily gross short positions in certain equity securities, rather than
the proposed

[[Page 75106]]

daily calculation,\50\ is designed in part to alleviate concerns for
Managers who only occasionally meet or exceed the prescribed reporting
thresholds.
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\49\ See Comment Letter from Valerie Dahiya, Partner, Perkins
Coie LLP (Apr. 26, 2022), at 3, available at https://www.sec.gov/comments/s7-08-22/s70822-20126839-287549.pdf (``Perkins Coie
Letter'') (stating that ``for institutional investment managers that
only selectively utilize short positions, or who only do so
passively, these additional compliance costs in relation to the
institutional investment manager's usage of short positions could in
turn impose untended risks to the manager's underlying investors if
the institutional investment manager must divert additional time and
resources for compliance and oversight'').
\50\ See infra Part II.A.3 for more discussion of the reporting
thresholds in Proposed Rule 13f-2 and Rule 13f-2 as adopted.
---------------------------------------------------------------------------

In addition, the Commission did not receive any comments regarding
the definition of ``investment discretion'' as proposed. The Commission
is adopting Rule 13f-2(b)(3) as proposed to define the term
``investment discretion'' as having the same meaning as in Rule 13f-
1(b) (which, among other things, incorporates the definition in section
3(a)(35) of the Exchange Act). In addition, Managers that will file
reports on adopted Form SHO likely have experience reporting on Form
13F, for which this same definition is used.\51\
---------------------------------------------------------------------------

\51\ See infra Part VIII.B.1. Registered investment advisers,
particularly those managing hedge funds, are the primary Managers
likely to be affected by Rule 13f-2.
---------------------------------------------------------------------------

2. Scope of Reported Securities
a. Proposal
Under the proposed rule, a Manager would have had to file a Form
SHO report with regard to:
Any equity security of an issuer that is registered
pursuant to section 12 of the Exchange Act \52\ or for which the issuer
is required to file reports pursuant to section 15(d) of the Exchange
Act \53\ in which the Manager meets or exceeds either (1) a gross short
position in the equity security with a U.S. dollar value of $10 million
or more at the close of regular trading hours on any settlement date
during the calendar month; or (2) a monthly average gross short
position as a percentage of shares outstanding in the equity security
of 2.5 percent or more (Threshold A); and
---------------------------------------------------------------------------

\52\ 15 U.S.C. 78l.
\53\ 15 U.S.C. 78o(d).
---------------------------------------------------------------------------

Any equity security of an issuer that is not a reporting
company issuer as described above in which the Manager meets or exceeds
a gross short position in the equity security with a U.S. dollar value
of $500,000 or more at the close of regular trading hours on any
settlement date during the calendar month (Threshold B).
As proposed, the reporting thresholds in Rule 13f-2(a)(1) and (2)
(each a ``Proposed Reporting Threshold'') applied to equity securities,
as the term ``equity security'' is defined in section 3(a)(11) of the
Exchange Act \54\ and 17 CFR 240.3a11-1 (``Rule 3a11-1'').\55\ This
scope, which included both exchange-listed and over-the-counter
securities, is consistent with the securities to which Rules 200, 203,
and 204 of Regulation SHO apply.\56\ The proposed scope would have
included exchange-traded fund (``ETF'') securities, but would not have
required Managers, in calculating a Proposed Reporting Threshold or
Form SHO data, to consider short positions the ETF held in individual
underlying equity securities.\57\ And because the Proposed Reporting
Thresholds were based on a Manager's gross short position in the
underlying equity security itself, the proposed rule would not have
required the Manager to account for derivative exposure as part of the
threshold calculation for the underlying equity security, but would
have required Managers to report certain changes in their gross equity
short positions derived from acquiring or selling the equity in
connection with derivative activity, such as exercising an option.\58\
---------------------------------------------------------------------------

\54\ Section 3(a)(11) of the Exchange Act defines ``equity
security'' as any stock or similar security or any security future
on any such security; or any security convertible, with or without
consideration, into such a security, or carrying any warrant or
right to subscribe to or purchase such a security; or any such
warrant or right; or any other security which the Commission shall
deem to be of similar nature and consider necessary or appropriate,
by such rules and regulations as it may prescribe in the public
interest or for the protection of investors, to treat as an equity
security. 15 U.S.C. 78c(a)(11).
\55\ See Proposing Release, at 14956 n.59.
\56\ See Regulation SHO Adopting Release, at 48012.
\57\ Proposing Release, at 14958.
\58\ As stated in the Proposing Release, the Commission believed
this proposed approach balances Managers' reporting costs with the
utility such data provides to regulators. See Proposing Release, at
14962.
---------------------------------------------------------------------------

b. Comments and Final Rule
The Commission received several comments on Proposed Rule 13f-2's
and Proposed Form SHO's proposed scope of securities, with commenters
expressing a variety of views. Most commenters took an expansive view,
exemplified by one such commenter's statement that ``all different
securities and ETFs should be required to report all short sale data.
The more information that is available to every investor and the
Commission the better.'' \59\ As discussed below, other commenters, by
contrast, recommended narrowing the universe of ``in scope'' securities
by, for example, aligning with similar Commission reporting and public
dissemination regimes, limiting the scope to securities of U.S.
reporting companies, or excluding ETFs, options and warrants and other
convertibles, and derivatives. Some commenters focused on the impact on
implementation and compliance costs related to Proposed Rule 13f-2
reporting requirements and recommended that derivatives, options,
warrants and other convertibles, and ETFs be excluded from the scope of
equity securities subject to Proposed Rule 13f-2 reporting
requirements.\60\
---------------------------------------------------------------------------

\59\ Comment from Samuel Meadows (Mar. 26, 2022), at 1,
available at https://www.sec.gov/comments/s7-08-22/s70822-273456.htm
(``Samuel Meadows Comment'').
\60\ See, e.g., MFA Letter, at 11-12 (recommending that, to
simplify compliance, provide clarity, and reduce costs, Commission
should limit the reporting requirements to stocks of U.S. reporting
company issuers, and exclude derivatives and ETFs); SIFMA Letter, at
20 (recommending reduction of compliance costs by creating a list of
equity securities that would be subject to Proposed Rule 13f-2
reporting requirements that would exclude ``extraneous securities,
such as options, warrants, convertibles, and ETFs''); Comment Letter
from Frank Vivirito, Compliance Officer, XR Securities LLC (Apr. 25,
2022), at 2 (``XR Securities Letter'') (stating ``I feel strongly
that highly liquid, higher priced, active and efficient ETFs (and
perhaps even some single name equities) with limited or no
settlement issues'' should be excluded from Proposed Rule 13f-2
reporting requirements).
---------------------------------------------------------------------------

Comments on the Scope of Covered Securities
Most commenters supported the applicability of Proposed Rule 13f-2
to short positions in ETFs, some expressing specific concerns about
``improper'' use of ETFs to leverage short positions.\61\ However, one
commenter advocating for the exclusion of ETFs from the universe of
``in-scope'' securities stated that, in most circumstances, Managers
short ETFs largely for hedging purposes and not for the same reasons
that Managers short stocks of reporting company issuers; this commenter
stated that such information ``will provide the public, and the SEC,
very little in terms of useful information.'' \62\
---------------------------------------------------------------------------

\61\ See, e.g., Comment Letter from Nick Dougherty (Mar. 27,
2022), at 2, available at https://www.sec.gov/comments/s7-08-22/s70822-20121466-273451.pdf (``Nick Dougherty Letter''); Anonymously
Submitted Comment (Mar. 21, 2022), at 1, available at https://www.sec.gov/comments/s7-08-22/s70822-20120739-272894.pdf. See
generally, Anonymously Submitted Comment (Mar. 21, 2022), at 2,
available at https://www.sec.gov/comments/s7-08-22/s70822-20122297-278355.htm (recommending that ``[a]ll securities, including ETFs,
OTC stocks, swaps etc. should have their positions data recorded and
submitted to the SEC daily''); Samuel Meadows Comment, at 1 (``I
strongly believe that all different securities and ETFs should be
required to report all short sale data.'').
\62\ MFA Letter, at 12.
---------------------------------------------------------------------------

The Commission disagrees with the commenter that reporting about
gross short positions in ETFs will not provide useful information to
the public and the Commission. Establishing short positions in an ETF
can provide short exposure to a diverse set of equity securities or
create a directional short strategy such as leveraged shorting. Because
of their multipurpose nature, ETFs are a substantial piece of the
short-

[[Page 75107]]

side market.\63\ ETFs are subject to the requirements of Regulation
SHO, and there is a benefit to applying the Rule 13f-2 reporting
requirements to the same universe of securities subject to the
Commission's short sale rules. Further, short sale-related data
regarding ETFs will provide important transparency to a significant
segment of market activity to both the marketplace and regulators
alike.\64\
---------------------------------------------------------------------------

\63\ ETFs are a popular trading tool that can be used in various
ways, including, for example, to hedge a long position, or to
establish a directional short position. See Exchange-Traded Funds,
Investment Company Act Release No. 33646 (Sept. 25, 2019), 84 FR
57162 (Oct. 24, 2019) (``[ETFs] have become a popular trading tool,
making up a significant portion of secondary market equities
trading.''). See also Giovanny Moriano & Brian Baker, Best inverse
and short ETFs--here's what to know before buying them, Bankrate
(Feb. 16, 2023), available at https://www.bankrate.com/investing/best-inverse-etfs/ (describing traders' use of short ETFs to hedge
against falling prices in other positions, to make directional bets
on securities or indexes, or to magnify returns through leveraged
short ETFs); The Renaissance of ETFs, Oliver Wyman (2023), available
at https://www.oliverwyman.com/our-expertise/insights/2023/may/exchange-traded-funds-are-fueling-market-opportunities.html (stating
``As of the end of December 2022, total ETF assets under management
(AUM) have reached $6.7 trillion across the US and Europe, growing
at approximately 15% compound annual growth rate (CAGR) since 2010.
. . . We expect a significant part of this growth to come from
active ETFs.''). Active ETFs can include inverse and short ETFs that
seek to use short strategies or leverage.
\64\ See Experiences of US Exchange-Traded Funds During the
COVID-19 Crisis, Inv. Co. Inst. (Oct. 2020), available at https://www.sec.gov/comments/credit-market-interconnectedness/cll10-2.pdf
(``Early in 2020, . . . ETF trading volume accounted for between 20
and 30 percent of total stock market trading on a daily basis . . .
.''); see also Richard B. Evans et al., ETF Short Interest and
Failures-to-Deliver: Naked Short-Selling or Operational Shorting?,
U. Pa. Wharton Sch. (Jan. 2018), available at https://jacobslevycenter.wharton.upenn.edu/wp-content/uploads/2018/08/ETF-Short-Interest-and-Failures-to-Deliver.pdf (stating that ETFs
constitute roughly 10% of U.S. equity market capitalization but over
20% of short interest, and that short interest for the ETF market
has increased steadily over several years).
---------------------------------------------------------------------------

Some commenters recommended that fixed-income securities be added
to the proposed scope of securities.\65\ These commenters believed that
all investment vehicles, including fixed income securities, should be
included within the scope of securities subject to potential reporting.
These commenters generally believed that short positions in fixed
income securities would provide additional transparency to the
marketplace. One of these commenters believed that fixed income
securities should be included under the rule because ``bonds play a
large role in market activities, along with the repo market'' and that
``corporate bond borrowing data provides an unparalleled insight into
short positioning at a security and issuer level.'' \66\
---------------------------------------------------------------------------

\65\ See, e.g., Nick Dougherty Letter (Mar. 27, 2022), at 3
(stating that ``fixed income securities should be included under
Proposed rule 13f-2''); Anonymously submitted Comment (Mar. 21,
2022), at 1, available at https://www.sec.gov/comments/s7-08-22/s70822-20120739-272894.pdf.
\66\ Anonymously submitted Comment (Mar. 21, 2022), at 1,
available at https://www.sec.gov/comments/s7-08-22/s70822-20120739-272894.pdf.
---------------------------------------------------------------------------

Fixed income securities are not subject to the Commission's short
sale rules. Market participants, including Managers, are currently
accustomed to complying with the short sale rules with regard to equity
securities that meet the definition of short sales in Rule 200(a) of
Regulation SHO.\67\ Further, the self-regulatory organizations
(``SROs'') currently collect and provide data on short sales of equity
securities as defined by Rule 200(a) of Regulation SHO. Consistent with
the discussion in the Proposing Release, the aggregated short sale-
related data that will be published by the Commission under Rule 13f-2
will provide additional context to market participants regarding equity
securities that are subject to the requirements of Regulation SHO.\68\
For these reasons, the Commission is not including fixed income
securities.
---------------------------------------------------------------------------

\67\ See Proposing Release, at 14956 n.59.
\68\ See id. at 14956.
---------------------------------------------------------------------------

Some commenters also recommended excluding options, warrants, and
other convertibles from the rule.\69\ Other commenters recommended that
derivatives be included within the scope of Proposed Rule 13f-2 \70\-
including those not within the definition of equity security in section
3(a)(11) of the Exchange Act and Rule 3a11-1 thereunder.\71\
---------------------------------------------------------------------------

\69\ SIFMA Letter, at 20.
\70\ See, e.g., Better Markets Letter, at 9 (stating that ``[i]n
order for the final rule to actually serve its purpose, it must
require that institutional investment managers include their short
interest that arises from derivatives positions''); WTI Letter, at 4
(stating that not including derivatives contracts such as options
and security-based swaps is a ``huge hole that must be remedied''
and ``will inevitably result in firms exploiting the loophole . .
.''); Samuel Meadows Comment, at 1 (stating that ``[a]ny and all
Short positions resulting from derivatives should be included in
whether they meet a Reporting Threshold'').
\71\ See supra nn. 54 & 55 and accompanying text; see generally
Part II.A.2.a.
---------------------------------------------------------------------------

Certain derivatives, options, warrants, and convertibles are
themselves equity securities for purposes of section 3(a)(11) of the
Exchange Act and Rule 3a11-1 thereunder, and therefore for purposes of
final Rule 13f-1.\72\ Derivatives and other securities that are not
equity securities within the definitions of section 3(a)(11) of the
Exchange Act and Rule 3a11-1 thereunder, are not within the scope of
the rule. Managers are currently accustomed to complying with
requirements for equity securities under Rule 200(a) of Regulation SHO.
The Commission is not including derivatives and other securities that
are not equity securities under the definitions of section 3(a)(11) of
the Exchange Act and Rule 3a11-1 thereunder. Many commenters who
requested that derivatives be included expressed concern that
derivatives could be used to create substantial economic short
positions, while avoiding Proposed Rule 13f-2's reporting
requirements.\73\ The Commission recognizes, as it did in the Proposing
Release, that there is a risk that Rule 13f-2 could be a catalyst for
growth in markets of economic equivalents of underlying equity
securities as short sellers look for new avenues to take the economic
equivalent of short positions while avoiding these proposed reporting
requirements.\74\ Managers do not have to account for economic exposure
to an underlying equity security created through the use of equity
derivatives when calculating the reporting thresholds for reporting
short sales of that underlying equity security. However, once a Manager
meets or exceeds a reporting threshold for an underlying equity
security, the Manager will then be required to report certain short
activity for each settlement date during the reporting calendar month,
and that disclosure will take into account activity in options,
tendered conversions, secondary offering transactions,\75\ and other
equity derivatives or activity that might affect the reported short
positions on Form SHO, as discussed further below.\76\ Managers must
also report gross short positions of each equity security resulting
from short sales as defined in Rule 200(a) of Regulation SHO to the
extent the Manager's positions meet the relevant thresholds.\77\
Finally, large

[[Page 75108]]

positions in options are currently reportable under a separate
requirement.\78\ In addition, there is a separate reporting regime for
security-based swaps,\79\ which may also lessen the likelihood of
Managers attempting to avoid the requirements of Rule 13f-2 by using
these instruments.
---------------------------------------------------------------------------

\72\ Id.
\73\ See, e.g., Comment Letter from Oliver Davies, Apr. 20,
2022, available at https://www.sec.gov/comments/s7-08-22/s70822-20124155-280554.htm (expressing concern that ``funds are using
complex derivative positions like options and swaps to hide their
true short positions''); Anonymously submitted Comment, Mar. 14,
2022, available at https://www.sec.gov/comments/s7-08-22/s70822-20119368-272254.htm (positing that excluding derivative positions
can create opportunities to avoid triggering the reporting
thresholds through other economically equivalent instruments).
\74\ See infra Part VIII.C.8; see also Proposing Release, at
15001.
\75\ See infra n. 285.
\76\ See infra Part II.A.4.
\77\ Option exercises or assignments can result in a short sale.
See, e.g., Rule 201 Adopting Release, at 11263 n. 433 (explaining
that short sales that result from option exercises or assignments
are short sales but are not covered by the Rule 201 of Reg. SHO's
price test because there is no national best bid).
\78\ FINRA Rule 2360 requires FINRA member firms to report large
options positions to the Large Options Positions Report (``LOPR''),
which FINRA uses to surveil for potentially manipulative behavior,
including attempts to corner the market in the underlying equity,
leverage an option position to affect the price, or move the
underlying equity to change the value of a large option position.
\79\ See Regulation SBSR, 17 CFR 242.900 through 242.909.
---------------------------------------------------------------------------

Comments on Creating a List
Some commenters recommended narrowing the universe of ``in-scope''
securities to lessen the burden on Managers and to help to ensure
compliance with Proposed Rule 13f-2. Certain commenters recommended
that the Commission create and publish a list of securities subject to
Form SHO reporting, much like the Commission's Official List of Section
13(f) Securities (``13F List'') required by statute to be made
available to the public pursuant to section 13(f)(4) of the Exchange
Act \80\ for use in the preparation of quarterly reports filed with the
Commission for purposes of long position reporting under Rule 13f-1.
One such commenter suggested that providing such a list would ``promote
greater efficiency in validating reported short positions and
consistency in reporting of those positions among managers.'' \81\
Another commenter recommended aligning Proposed Rule 13f-2 with the
scope of other similar reporting and public dissemination regimes
(e.g., Rule 13f-1, and prior Rule 10a-3T \82\) that are focused on a
narrower set of securities, namely certain section 13(f) securities
that are included on the 13F List.\83\
---------------------------------------------------------------------------

\80\ 15 U.S.C. 78m(f)(4).
\81\ Comment Letter from Sarah A. Bessin, Associate General
Counsel & Nhan Nguyen, Assistant General Counsel, Investment Company
Institute (Apr. 26, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20126820-287527.pdf (``ICI Letter'') at 9
n.28; see also MFA Letter, at 13 (positing that having an ``official
list'' of securities subject to Form SHO reporting would reduce the
burden on Managers to make judgments about whether a particular
security is in-scope for Form SHO reporting and would reduce
inconsistencies among reporting Managers in making such judgments in
the absence of such a list); see also SIFMA Letter, at 20
(suggesting that the ``Form SHO List'' include securities that are
included on the 13F List while excluding securities that should not
be covered by Form SHO, as well as the total shares outstanding for
each security).
\82\ Rule 10a-3T and Form SH focused on certain section 13(f)
securities and excluded options that are reportable on Form 13F.
\83\ HSBC Letter, at 13-14 (recommending that Commission align
the reporting requirements of Proposed Rule 13f-2 to a narrower set
of securities--e.g., the securities prescribed in Rule 13f-1--rather
than with securities that are ``in-scope'' with Regulation SHO).
---------------------------------------------------------------------------

Narrowing the scope of securities to the 13F List would effectively
exclude certain equity securities that are subject to the requirements
of Regulation SHO, which the Commission continues to believe would be
inconsistent with the Commission's objective to publish short sale-
related data under Rule 13f-2 that will provide additional context to
market participants regarding securities that are subject to the
Commission's current short sale rules.\84\ As stated above, market
participants, including Managers, are currently accustomed to complying
with the short sale rules with regard to equity securities generally,
so narrowing the scope to the 13F List that periodically changes, or to
a list created for purposes of Rule 13f-2 that is similar in concept to
the 13F List, could result in reduced Rule 13f-2 reporting and,
consequently, less transparency of short sale-related data. Narrowing
the scope to securities that are included on the 13F List could also
result in additional administrative costs and burdens to Managers to
the extent that Managers have to perform additional monitoring to
ensure that their Form SHO reports cover, and the calculations required
to determine whether a reporting obligation under Rule 13f-2 has been
triggered because a Reporting Threshold has been met, apply to, only
the narrower scope of securities (a subset of the equity securities
currently subject to the Commission's short sale rules). Such an
outcome is inconsistent with the Commission's objective of enhancing
transparency, while balancing the interests of gathering and disclosing
data that provides additional context to market participants regarding
securities that are subject to the requirements of Regulation SHO
against the potential costs to reporting Managers.
---------------------------------------------------------------------------

\84\ See Proposing Release, at 14956.
---------------------------------------------------------------------------

Additionally, with respect to long position reporting, section
13(f)(1) expressly provides that the Commission shall make available to
the public a list of all equity securities that are subject to such
reporting.\85\ However, section 13(f)(2) does not require publication
of such a list. Further, existing short sale-related reporting to
exchanges and RNSAs does not rely on a published list of securities.
For these reasons, it is not necessary to compile and periodically
provide a list of securities covered by Rule 13f-2.
---------------------------------------------------------------------------

\85\ Section 13(f)(1) of the Exchange Act (15 U.S.C. 78m(f)(1))
requires any institutional investment manager exercising investment
discretion over accounts holding at least $100 million in fair
market value of certain equity securities to file reports on Form
13F with the Commission at the times set forth in 17 CFR 240.13f-1
(``Rule 13f-1''). The statute directs the Commission to make
available to the public, for a reasonable fee, a list of all equity
securities described in section 13(d)(1) of the Exchange Act and to
disseminate to the public the information contained in the reports.
---------------------------------------------------------------------------

Comments To Limit Scope to Equity Securities of U.S. Reporting Company
Issuers
Some commenters recommended tailoring the scope of securities
subject to Rule 13f-2 reporting to the equity securities of U.S.
reporting company issuers.\86\ Many of these commenters raised concerns
about the costs to Managers of developing new systems to capture
trading of equity securities of non-reporting company issuers. Certain
commenters focused on how a requirement to report short sales of equity
securities of non-reporting company issuers would represent an
expansion of reporting requirements beyond what is currently required
under existing reporting regimes under Exchange Act sections 13(d),
13(f)(1), 13(g), and 16.\87\ Other commenters believed that requiring
Managers to report short position information in equity securities of
non-reporting company issuers would be extremely costly and provide
little public benefit.\88\ Another such commenter stated that because
securities of non-reporting company issuers can be held

[[Page 75109]]

by only a small number of U.S. investors, cannot be traded on U.S.
securities exchanges, and can often be subject to contractual
restrictions on transfer, short sales in such securities are rare due
to the limitations on the number of shares available to borrow.\89\
Another commenter stated that trading (including short selling) in
securities of non-reporting company issuers is limited, which
potentially makes Managers that file Form SHO reports with respect to
such securities more susceptible to retaliatory and manipulative
trading strategies.\90\ As stated above, the Commission is adopting
Rule 13f-2 and Form SHO to help enhance transparency regarding short
selling in equity securities--including both exchange-listed and over-
the-counter securities, and ETFs--that are already subject to
Regulation SHO. Consistent with the discussion in the Proposing
Release, through the publication of short sale-related data to
investors and other market participants, the information published
under Rule 13f-2 will provide additional context to market participants
regarding equity securities that are subject to the requirements of
Regulation SHO.\91\ To that end, the Commission continues to believe
that transparency regarding short selling in over-the-counter (``OTC'')
equity securities, many of which are non-reporting company issuers,\92\
is important to investors generally, including many retail investors.
The Commission has previously stated that securities ``that trade in
the OTC market are primarily owned by retail investors.'' \93\
Consistent with this view, it is important from a transparency
perspective to include, as proposed, non-reporting issuers for purposes
of reporting under Rule 13f-2. While the Commission is cognizant that
information on non-reporting company issuers will be more difficult to
obtain and more costly to report than information on reporting company
issuers, the Commission disagrees there would be little benefit to the
public from such information, particularly given the extent of trading
in OTC market securities by retail investors.\94\ Furthermore, OTC
securities typically have lower prices, lower trading volume, and are
by definition not traded on exchanges, making them potentially more
prone to fraud.\95\ In addition, as discussed further below,
publication of aggregated data approximately one month following the
reporting calendar month will alleviate concerns regarding potential
retaliation against reporting Managers.
---------------------------------------------------------------------------

\86\ See, e.g., MFA Letter, at 11-12; Letter from Leigh R.
Fraser, Partner, Ropes & Gray LLP (Apr. 26, 2022), at 9, available
at https://www.sec.gov/comments/s7-08-22/s70822-20126853-287579.pdf
(``Ropes & Gray Letter''). Cf. SIFMA Letter, at 5 (recommending,
rather than separate reporting thresholds for reporting company
issuers and non-reporting company issuers, a single threshold apply
to U.S. equity securities included in a ``Form SHO List'' akin to
the 13F List that ``would include securities that are included on
the 13F List, while also excluding certain extraneous securities,
such as options, warrants, convertibles, and ETFs that should not be
covered by Proposed Form SHO reporting'').
\87\ See, e.g., Ropes & Gray Letter, at 9 (stating that a
requirement to report short sale-related data regarding equity
securities of U.S. private companies would represent a ``significant
expansion'' of reporting requirements imposed in investors beyond
what currently is required under existing reporting regimes under
Exchange Act sections 13(d), 13(f)(1), 13(g), 13(h), and 16).
\88\ See, e.g., MFA Letter, at 11-12 (stating that because non-
reporting company issuer securities are not publicly traded,
information about transactions in such securities would not likely
have an effect on price efficiency or market liquidity, but could
have negative consequences for Managers--e.g., increasing the risk
of exposing Managers, their short positions, and trading strategies,
which could facilitate retaliatory and manipulative trading
strategies).
\89\ Ropes & Gray Letter, at 8-9.
\90\ MFA Letter, at 11-12.
\91\ See Proposing Release, at 14956.
\92\ See, e.g., Publication or Submission of Quotations Without
Specified Information, Exchange Act Release No. 89891 (Sept. 16,
2020) (``Adopting Release for Amendments to Rule 15c2-11''), 85 FR
68124, 68125 (Oct. 27, 2020) (``However, in other cases, there is no
or limited current public information available about certain
issuers of quoted OTC securities to allow investors or other market
participants to make informed investment decisions.'').
\93\ See, e.g., Publication or Submission of Quotations Without
Specified Information, Exchange Act Release No. 89891 (Sept. 16,
2020), 85 FR 68124, 68125 (Oct. 27, 2020) (citing to Andrew Ang, et
al., Asset Pricing in the Dark: The Cross-Section of OTC Stocks, 26
Rev. Fin. Studs. 2985-3028 (2013) (``Securities that trade in the
OTC market are primarily owned by retail investors[,]''); see also
Unraveling the Mystery of Over-the-Counter Trading, FINRA Inv'r
Insights (Jan. 4, 2016), available at https://www.finra.org/investors/insights/unraveling-mystery-over-counter-trading (``OTC
equities are largely owned by retail investors, according to a 2013
study from Columbia University, who may be attracted to the low
price of many OTC equities, including so-called ``penny stocks''
that trade at under $5 a share. That activity is typically very
speculative.'').
\94\ See id. See also infra Part VIII.C.6 for a discussion of
costs related to tracking non-reporting companies, and infra Part
II.A.3 for discussion of possible benefit.
\95\ See, e.g., Adopting Release for Amendments to Rule 15c2-11,
85 FR 68124, at 68185.
---------------------------------------------------------------------------

Other commenters raised questions as to whether the Commission's
jurisdiction extended to equity securities not traded in the U.S. One
such commenter, highlighting the disparity between Proposed Rule 13f-2
reporting and reporting of long positions in the same securities,
questioned why it would be in the public interest to require more
expansive disclosure with respect to short positions than long
positions, and stated that the ``proposed scope of the rule would
provide U.S. investors with information that is of limited value,
particularly with respect to non-U.S. securities.'' \96\
---------------------------------------------------------------------------

\96\ HSBC Letter, at 13-14 (recommending that the reporting
requirements of Proposed Rule 13f-2 be limited to equity securities
of reporting company issuers that are traded on a Commission-
registered trading platform).
---------------------------------------------------------------------------

Exchange Act section 13(f)(2)'s cross-border reach is based on the
territorial approach that the Commission has applied when crafting
rules to implement other provisions of the Exchange Act.\97\ Consistent
with that territorial approach (which is based on Supreme Court
precedent, including Morrison v. National Australia Bank, Ltd. and its
progeny) the Commission examines the relevant statutory provision to
determine the domestic conduct that is covered by the provision.\98\
The Commission understands section 13(f)(2), by its terms, to apply to
any institutional investment manager already subject to U.S. reporting
requirements. This indicates that the relevant domestic conduct under
section 13(f)(2) is being an institutional investment manager operating
in the U.S. securities markets such that the investment manager is
subject to filing reports with the Commission. Thus, when that relevant
domestic conduct is present here in the United States, section
13(f)(2)'s regulatory reporting obligation will generally apply.
---------------------------------------------------------------------------

\97\ See, e.g., Regulation SBSR--Reporting and Dissemination of
Security-Based Swap Information, Exchange Act Release No. 74244
(Feb. 11, 2015), 80 FR 14563, 14649 (Mar. 19, 2015) (``2015
Regulation SBSR Adopting Release'') (discussing the territorial
approach to the cross-border application of Title VII requirements
for regulatory reporting and public dissemination of security-based
swap transactions).
\98\ 561 U.S. 247. See, e.g., Abitron Austria GmbH v. Hetronix
Int'l, Inc, 600 U.S. **, **, 2023 WL 4239255, at *4 (June 29, 2023)
(stating that ``[the Supreme Court has] repeatedly and explicitly
held that courts must ``identif[y] `the statute's ``focus'' ' and
as[k] whether the conduct relevant to that focus occurred in United
States territory'').
---------------------------------------------------------------------------

The Commission is adopting Rule 13f-2 and Form SHO to help enhance
transparency regarding short selling in equity securities--including
both exchange-listed and over-the-counter securities, and ETFs. The
Commission continues to believe that, through the publication of short
sale-related data to investors and other market participants, the
information reported by Managers will provide important additional
context to market participants regarding short sale activity in these
equity securities by Managers. The Commission disagrees that the
reported information would be of ``limited value'' as was suggested by
a commenter. Transparency regarding short selling by Managers of
securities of U.S. and non-U.S. issuers is important regardless of
where those sales occur.
Final Rule
For the reasons discussed above, the Commission is adopting the
scope of securities as originally proposed. Specifically, the final
rule will cover equity securities as defined in section 3(a)(11) of the
Exchange Act and Rule 3a11-1 thereunder. This scope of securities
includes both exchange-listed and OTC equity securities, including,
inter alia, ETFs, certain derivatives, and options, warrants and other
convertibles, which is consistent with the equity securities to which
Rules 200, 203, and 204 of Regulation SHO apply.\99\
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\99\ See Regulation SHO Adopting Release, at 48012.

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[[Page 75110]]

3. Reporting Thresholds
a. Proposal
To balance the interests of gathering and disclosing data and the
potential costs to reporting Managers, the Commission proposed separate
thresholds for short positions in reporting company issuers, or
Threshold A, and non-reporting company issuers, or Threshold B.\100\
Threshold A, in Proposed Rule 13f-2(a)(1), involved a two-pronged
approach that would have required reporting by Managers that have, with
regard to each equity security of a reporting company issuer, either
(i) a gross short position with a U.S. dollar value of $10 million or
more at the close of regular trading hours on any settlement date
during the calendar month, or (ii) a 2.5 percent or higher monthly
average gross short position as a percentage of shares
outstanding.\101\ Threshold B, in Proposed Rule 13f-2(a)(2), involved a
single-pronged approach that would have required reporting by Managers
that have, with regard to each equity security of a non-reporting
company issuer, a U.S. dollar value of $500,000 or more at the close of
regular trading hours on any settlement date during the calendar
month.\102\ The Proposed Reporting Thresholds were based on comment
letters and analysis of Form SH data collected under Rule 10a-3T, an
interim temporary rule adopted by the Commission in October 2008, which
required certain institutional investment managers to file weekly
nonpublic reports with the Commission on Form SH regarding their short
sales and short positions in certain section 13(f) securities, other
than options.\103\ Rule 10a-3T required reporting of short positions
that were either greater than 0.25 percent of shares outstanding or $10
million in fair market value.\104\ This temporary rule was adopted in
the wake of the 2008 financial crisis in response to concerns about
high levels of volatility associated with short selling.\105\ Proposed
Threshold B was developed based on an analysis of OTC Markets
data.\106\ The Proposed Reporting Thresholds were structured to make it
more difficult for Managers with substantial gross short positions to
avoid disclosure by trading below a Proposed Reporting Threshold,
particularly with lower market capitalization securities.
---------------------------------------------------------------------------

\100\ As discussed above, an issuer of a class of securities
that is registered pursuant to Exchange Act section 12 or for which
the issuer is required to file reports pursuant to Exchange Act
section 15(d) is referred to herein as a reporting company issuer;
issuers not meeting those criteria are referred to herein as non-
reporting company issuers.
\101\ Proposed Rule 13f-2(a)(1). See Proposing Release, at 14962
(describing in detail the design of Threshold A).
\102\ Proposed Rule 13f-2(a)(2). See Proposing Release, at 14962
(describing in detail the design of Threshold B).
\103\ Disclosure of Short Sales and Short Positions by
Institutional Investment Managers, Exchange Act Release No. 58785
(Oct. 15, 2008), 73 FR 61678 (Oct. 17, 2008). The rule extended the
reporting requirements established by the Commission's Emergency
Orders dated Sept. 18, 2008, Sept. 21, 2008, and Oct. 2, 2008, with
some modifications. See Emergency Order Pursuant to Section 12(k)(2)
of the Securities and Exchange Act of 1934 Taking Temporary Action
to Respond to Market Developments, Exchange Act Release No. 58591
(Sept. 18, 2008), 73 FR 55175 (Sept. 24, 2008); Amendment to
Emergency Order Pursuant to Section 12(k)(2) of the Securities
Exchange Act of 1934 Taking Temporary Action to Respond to Market
Developments, Exchange Act Release No. 58591A (Sept. 21, 2008), 73
FR 55557 (Sept. 25, 2008) (amending the Sept. 18, 2008 Emergency
Order (``Order'') to clarify certain technical issues and when the
information filed by the institutional investment managers on a
nonpublic basis would be made public by the Commission on a delayed
basis); Amendment to Order and Order Extending Emergency Order
Pursuant to Section 12(k)(2) of the Securities Exchange Act of 1934
Taking Temporary Action to Respond to Market Developments, Exchange
Act Release No. 58724 (Oct. 2, 2008), 73 FR 58987 (Oct. 8, 2008)
(extending effectiveness of the Order through Oct. 17, 2008, and
stating that the Forms SH filed under the Order would remain
nonpublic to the extent permitted by law).
\104\ See Proposing Release, at 14963-65 (discussing the
analysis of Form SH data).
\105\ Rule 10a-3T remained in effect through July 2009, at which
time the Commission stated that it and its staff would be working
with several SROs to make certain short sale volume and transaction
data publicly available through SRO websites. See Proposing Release,
at 14954 (providing background on Rule 10a-3T and related Form SH).
\106\ See Proposing Release, at 14964 n.82 (``This analysis was
performed using data from OTC Markets Group Inc. available through
Wharton Research Data Services, https://wrds-www.wharton.upenn.edu/pages/about/data-vendors/otc-markets-group/. The data were filtered
to only include equities that had a closing price and short interest
on September 30, 2020. Approximately 13% of the data did not have
total shares outstanding available, representing approximately 14%
of the dollar value of short interest. We use these data without
shares outstanding as a proxy for non-reporting issuers. The
Commission used September 2020 because that is the most recent date
in which a dataset containing total shares outstanding for a broad
set of OTC equities was available.'').
---------------------------------------------------------------------------

The approach to Threshold A, as described in the Proposing Release,
was designed to ensure that a substantial short position in either a
small capitalization security or a large capitalization security could
potentially trigger a reporting obligation under Threshold A.\107\ For
example, it would be difficult for a Manager to trigger only a dollar
threshold in a given security if the market capitalization of the
reporting company issuer is small; likewise, it would be difficult for
a Manager to trigger only a percentage threshold in a given security if
the market capitalization of the reporting company issuer is large. The
Commission believed that this would help to ensure transparency into
short sale-related activity that would be beneficial to both market
participants and regulators. As stated above, the Proposed Reporting
Thresholds were structured to make it more difficult for Managers with
substantial gross short positions to avoid disclosure by trading below
a Reporting Threshold, particularly with lower market capitalization
securities. The proposed U.S. dollar value-based prong was designed to
capture Managers with a substantial short position, even if the
position was relatively small compared to the market capitalization of
the issuer.\108\ The prong based on percentage of shares outstanding
was designed to capture Managers with gross short positions that are
large relative to the size of the issuer and, therefore, could have a
significant impact on the issuer.\109\
---------------------------------------------------------------------------

\107\ Id. at 14962.
\108\ Id.
\109\ Id.
---------------------------------------------------------------------------

Regarding Threshold B, as discussed in the Proposing Release, a
$500,000 or more threshold for non-reporting company issuer securities
is similar to the median dollar value of a position of 2.5 percent of
the market capitalization of OTC stocks for which the Commission was
able to obtain information on total shares outstanding.\110\ The
Commission believed that this approach with regard to non-reporting
company issuers would help to ensure added transparency into short
sale-related activity that would be beneficial to both market
participants and regulators, because, as discussed in the Proposing
Release, it would capture Managers with substantial short positions in
an equity security of a non-reporting company issuer, even if such
positions are relatively small compared to the market capitalization of
the issuer.\111\ Rather than a two-pronged reporting threshold for
equity securities of non-reporting company issuers, however, the
Commission proposed a single-pronged, dollar value-based, reporting
threshold for non-reporting company issuer securities given its
understanding that the number of total shares outstanding for non-
reporting company issuers may not be readily and consistently
accessible to Managers.\112\
---------------------------------------------------------------------------

\110\ Id. at 14962-63.
\111\ Proposing Release, at 14962-63.
\112\ Id. at 14962.
---------------------------------------------------------------------------

As discussed in the Proposing Release, to determine whether the
proposed dollar value prong of Threshold A (Proposed Rule 13f-
2(a)(1)(i)) or Threshold B (Proposed

[[Page 75111]]

Rule 13f-2(a)(2)) is met, a Manager would be required to determine its
end of day gross short position on each settlement date during the
calendar month and multiply that figure by the closing price at the
close of regular trading hours on the relevant settlement date.\113\ In
circumstances where such closing price was not available in calculating
Threshold B, a Manager would be required to use the price at which it
last purchased or sold any share of that security, which would be
readily available to the Manager.\114\
---------------------------------------------------------------------------

\113\ Id. at 14957.
\114\ Id.
---------------------------------------------------------------------------

As discussed in the Proposing Release, to determine whether the
second prong of Threshold A (Proposed Rule 13f-2(a)(1)(ii))--2.5
percent or higher monthly average gross short position as a percentage
of shares outstanding in the equity security--is met, the Manager would
be required to (a) identify its gross short position in the equity
security at the close of each settlement date during the calendar month
of the reporting period, and divide that figure by the number of shares
outstanding in such security at the close of that settlement date, then
(b) add together the daily percentages during the calendar month as
determined in (a) and divide the resulting total by the number of
settlement dates during the calendar month reporting period. The number
of shares outstanding of the security for which information was being
reported would have been determined by reference to an issuer's most
recent annual or quarterly report, and any subsequent update thereto,
filed with the Commission.\115\
---------------------------------------------------------------------------

\115\ Id.
---------------------------------------------------------------------------

b. Comments and Final Rule
As discussed below, the Commission received numerous comments
regarding various aspects related to the Proposed Reporting Thresholds.
Generally, these comments varied, with some commenters recommending,
for example, that the Commission raise the thresholds (which would
trigger less gross short position reporting) and others recommending
the Commission lower or eliminate the thresholds (which would trigger
additional gross short position reporting).\116\ Some commenters
expressed general support for the Proposed Reporting Thresholds, or
expressed support for certain aspects of those thresholds.\117\
---------------------------------------------------------------------------

\116\ See, e.g., ICI Letter, at 9-10 (supporting a higher
threshold, stating that ``a higher threshold would still provide the
Commission with information on such large positions, while reducing
the burdens on managers of reporting smaller positions that likely
would have a lesser market impact''); K&L Gates Letter, at 4-5
(supporting a higher threshold, and stating that ``[u]nless the
Reporting Thresholds are modified, we anticipate that the Commission
will be inundated with reports providing significant detail about
positions that, in many cases, are not sufficiently sizable to
impact the larger markets or raise the type of concerns that the
Proposal was intended to address''); but see WTI Letter (stating
that ``it is important to set the threshold as low as possible to
mitigate any effects and impacts from firms attempting to game the
threshold'').
\117\ See, e.g., SIFMA Letter, at 20 (stating that ``while
certain SIFMA members believe that the threshold should be higher,
other SIFMA members did not object to the proposed threshold of 2.5
percent of the issuer's TSO or $10 million fair market value'');
Schulte Roth & Zabel LLP Letter (Apr. 26, 2022), at 3, available at
https://www.sec.gov/comments/s7-08-22/s70822-20126845-287561.pdf
(``Schulte Roth & Zabel Letter'') (stating that ``[w]e believe that
the 2.5 percent threshold identifies those situations where a short
position could lead to market manipulation'').
---------------------------------------------------------------------------

Comments To Raise Threshold A
Some commenters recommended increasing the proposed Reporting
Threshold A by, for example, doubling the percent of shares outstanding
threshold from 2.5 percent to 5 percent so as to be consistent with the
existing reporting requirements of 17 CFR 240.13d-1 (``Exchange Act
Rule 13d-1'') \118\ and the proposed reporting requirements of 17 CFR
240.10B-1 (``Exchange Act Rule 10B-1'') \119\ related to large
positions in security-based swaps.\120\ Other commenters also
recommended doubling that same percentage of shares outstanding
threshold from 2.5 percent to 5 percent, because the commenters
believed that the proposed 2.5 percent threshold was not sufficiently
sizable to have a market impact.\121\ Additionally, one commenter
believed that the lack of any reported instances of ``short-side''
manipulation did not justify a lower percentage threshold compared to
Rule 13d-1 and proposed Rule 10B-1.\122\
---------------------------------------------------------------------------

\118\ Rule 13d-1 (requiring long-side equity securities holders
to file a Schedule 13D or Schedule 13G if the security holder owns
over 5% of an issuer's equity securities).
\119\ See Prohibition Against Fraud, Manipulation, or Deception
in Connection With Security-Based Swaps; Prohibition Against Undue
Influence Over Chief Compliance Officers; Position Reporting of
Large Security-Based Swap Positions, Exchange Act Release No. 93784
(Dec. 15, 2021), 87 FR 6652, 6678 (Feb. 4, 2022) (``Rule 10B-1
Proposal''). See also Reopening of Comment Period for Position
Reporting of Large Security-Based Swap Positions, Exchange Act
Release No. 97762 (June 20, 2023), 88 FR 41338 (June 26, 2023)
(proposing to require any person holding security-based swap
positions to file a proposed Schedule 10B if they hold in excess of
$300 million in equity security-based swap positions or if the
notional value of those security-based swap positions is 5% of the
outstanding number of shares of a class of equity securities,
whichever is less).
\120\ See, e.g., Ropes & Gray Letter, at 6 (recommending
increasing the threshold to 5% in order to ``mitigate costs to
investors and provide consistency with other reporting regimes'');
K&L Gates Letter, at 5 (stating that 2.5% does not ``represent a
significant portion of an issuer's outstanding equity securities,''
and recommending increasing the threshold to more than 5% of an
issuer's voting equity securities in order to be consistent with the
existing reporting requirements of Rule 13d-1); Perkins Coie Letter,
at 6 (recommending alignment with requirements of Rule 13d-1(a) that
require filing of Schedule 13D or 13G upon crossing a 5% threshold
of ownership of any class of an equity security); ICI Letter, at 10
(stating that Commission identified 5% as a threshold over which a
position could have a meaningful market impact in ``recent'' Rule
10B-1 proposal).
\121\ K&L Gates Letter, at 5; see also ICI Letter, at 9-10
(``However, we believe that a higher threshold would still provide
the Commission with information on such large positions, while
reducing the burdens on managers of reporting smaller positions that
likely would have a lesser market impact.'').
\122\ One commenter believed that the proposed Rule 13f-2
reporting regime was overly expansive and ``asymmetric'' to existing
or other proposed reporting regimes in multiples ways, such as the
proposed percentage reporting threshold of 2.5% being lower than the
5% threshold in Rules 13d-1 and 10B-1. See SIFMA Letter, at 3-4
(stating that there is ``no empirical evidence'' that short selling
requires an ``asymmetric'' reporting regime and that ``[t]his
conclusion is consistent with the SEC's own reported enforcement
actions, i.e., any reported instances of `short-side' manipulation
(e.g., `short and distort' campaigns) are dwarfed by the instances
of `long-side' manipulation (e.g., `pump and dumps'). There thus is
simply no basis for such asymmetric regulation.'').
---------------------------------------------------------------------------

Other commenters proposed that the U.S. dollar value-based
threshold of Threshold A be raised.\123\ One commenter suggested that
it be increased from the proposed $10 million to $100 million because a
$100 million threshold would capture more substantial short positions
and be consistent with the adjustment to the proposed percentage of
shares outstanding threshold as compared to former Form SH (i.e., a
tenfold increase from 0.25 percent under Form SH to 2.5 percent under
Proposed Form SHO).\124\
---------------------------------------------------------------------------

\123\ See, e.g., Virtu Letter, at 2 (positing that dollar value
thresholds ``are significantly lower than is necessary''); Perkins
Coie Letter, at 2 (finding the $10 million (USD) gross short
position threshold of Threshold A too low); XR Securities Letter, at
2 (citing circumstance illustrating that $10M prong of Threshold A
may be too low).
\124\ Schulte Roth & Zabel Letter, at 3.
---------------------------------------------------------------------------

For reasons set forth below and discussed more fully in Part VIII,
increasing the proposed Threshold A percentage-based threshold from 2.5
percent or more of total shares outstanding to 5 percent (e.g., to be
consistent with the existing 5 percent reporting threshold of Exchange
Act Rule 13d-1 and the proposed reporting requirements of Exchange Act
Rule 10B-1), as suggested by some commenters,\125\ is not warranted or
appropriate. In this regard, because the rules are designed for
different purposes and utilize different reporting thresholds to meet
their respective

[[Page 75112]]

objectives, the Commission does not believe, as one commenter states,
that comparing Rule 13f-2 with long-side Rule 13d-1, as well as
comparing perceived instances of ``short-side'' and ``long-side''
manipulation, is an accurate assessment by which to determine Rule 13f-
2's Reporting Thresholds. Reporting under Exchange Act section 13(d) is
intended to provide information to the public and the affected issuer
about rapid accumulations of its equity securities in the hands of
persons who have the potential to change or influence control of the
issuer.\126\ Reporting under Rule 13f-2, in contrast, is intended to
capture Managers with gross short positions that are large relative to
the size of the issuer and could therefore have a significant impact on
the issuer, especially for issuers with a small market capitalization
where the dollar-based threshold is less likely to be breached.\127\ An
increase in the percentage-based prong of Threshold A, from 2.5 percent
to 5 percent, would reduce transparency into short positions in smaller
stocks. Specifically, increasing the percentage from 2.5 percent to 5
percent would reduce transparency into stocks with less than a $400
million market capitalization. This reduction could be meaningful given
that, short and distort campaigns and other market manipulations are
more likely to occur in stocks with lower market capitalizations and
less public information.\128\ As a result, the appropriate threshold
for Rule 13d-1 is not necessarily the appropriate threshold for Rule
13f-2. Instead, the Commission continues to believe that a broader
coverage of short position reporting (i.e., using a 2.5 percent
reporting threshold) is more appropriate for Rule 13f-2, especially
given that the reported data are aggregated and anonymized before
public dissemination with a delay. Here, the Commission is designing a
reporting threshold that is appropriate for the purposes of section
13(f)(2). Based on analysis of Form SH, a 2.5 percent or higher monthly
average gross short position is an appropriate threshold.\129\ For
example, one exchange estimates that median short interest for small-
cap issuers is only about 3 percent,\130\ indicating that a single
Manager breaching the 2.5 percent threshold would be significant for
many issuers. Thus, a percentage-based Threshold A is appropriate to
adopt as proposed.
---------------------------------------------------------------------------

\125\ See supra nn. 121 & 122.
\126\ See, e.g., Filing and Disclosure Requirements Relating to
Beneficial Ownership, Release No. 34-14693 (Apr. 21, 1978), 43 FR
18501, 18484 (Apr. 28, 1978) (stating that the ``legislative history
[of Exchange Act section 13(d)] reveals that it was intended to
provide information to the public and the affected issuer about
rapid accumulations of its equity securities in the hands of persons
who would then have the potential to change or influence control of
the issuer'').
\127\ See Proposing Release, at 14961-64.
\128\ See infra Part VIII.C.1 (discussing market manipulations)
and Part VIII.E.3 (discussing how thresholds are triggered at
various dollar amounts).
\129\ See infra Part VIII.E for discussion of different
threshold options.
\130\ See Short Interest in Decline, Nasdaq (Mar. 3, 2022),
available at https://www.nasdaq.com/articles/short-interest-in-decline.
---------------------------------------------------------------------------

Nor does the Commission believe that raising the dollar-based
threshold of Threshold A from $10 million to $100 million to be
consistent with the tenfold increase in percentage threshold is
warranted or appropriate. Based on its analysis of Form SH data as
discussed in the Proposing Release,\131\ as well as the need to balance
costs with the rule's ultimate goal of transparency, $10 million
strikes an appropriate balance of limiting costs of reporting to
Managers, while increasing transparency into short positions,
especially for equity securities of issuers with mid or large market
capitalizations that may not be captured under the percentage
threshold. While issuers with small market capitalizations may have
only one or a few large short sellers, issuers with mid or large market
capitalizations may have tens or even hundreds of large short sellers,
which diffuses the percentage of short interest for each short seller.
The Commission considered this when setting a dollar-based threshold of
Threshold A such that large short sellers are captured for all equity
issuers.
---------------------------------------------------------------------------

\131\ As discussed in the Proposing Release, the Proposed
Reporting Thresholds were based on comment letters and analysis of
Form SH data collected under Rule 10a-3T. Proposing Release, at
14963-64. Rule 10a-3T required reporting of short positions that
were either greater than 0.25% of shares outstanding or $10 million
in fair market value. Comment letters to Rule 10a-3T itself
generally concurred with the dollar reporting obligation but
expressed concerns that the percentage obligation was too low.
Suggestions for a percentage reporting obligation ranged from 1% to
5% of shares outstanding. See, e.g., Seward Kissel LLP, available at
https://www.sec.gov/comments/s7-31-08/s73108-43.pdf; Investment
Adviser Association, available at https://www.sec.gov/comments/s7-31-08/s73108-38.pdf; and Securities Industry and Financial Markets
Association, available at https://www.sec.gov/comments/s7-31-08/s73108-52.pdf.
---------------------------------------------------------------------------

Comments To Lower or Eliminate Reporting Thresholds
Other commenters recommended that the Proposed Reporting Thresholds
be reduced or eliminated. Some of these commenters were concerned that
the Proposed Reporting Thresholds could be too lenient and under-
inclusive,\132\ and some of those commenters supported removing the
thresholds entirely because of the possibility of Managers
intentionally maintaining short positions just below the thresholds to
avoid reporting.\133\ One commenter stated that the final rule should
``eliminate the proposed thresholds so as to reduce or eliminate the
risk that unknown, hidden short positions could pose to investors and
the markets.'' \134\ However, eliminating thresholds to capture all
short sale data may result in the inclusion of ``transient'' short
sales,\135\ such as short sales due to market making or customer
facilitation activity rather than directional short sales. By providing
a properly calibrated threshold this type of ``noise'' should be
reduced and allow market participants to instead focus on substantial
short sales that are more likely to be directional. The reduction of
``noisy'' short position information also sets Rule 13f-2 apart from
existing short sale data regimes, such as those provided by FINRA and
the exchanges, which do not have thresholds. On the other hand, the
threshold cannot be set so high that substantial short sales by
Managers are out of scope. The Reporting Thresholds, as adopted, will
help ensure added transparency into short sale-related activity that
would be beneficial to both market participants and regulators, and
will result in reporting by Managers with a substantial gross short
position in both reporting and non-reporting company issuers.
---------------------------------------------------------------------------

\132\ See, e.g., Comment from Peter Stauduhar (Mar. 6, 2022),
available at https://www.sec.gov/comments/s7-08-22/s70822-20118728-271591.htm (stating that ``[t]he thresholds are a critical part of
the success of this rule, and I urge the Commission to worry less
about the burden the reporting will have on short sellers'').
\133\ See, e.g., Comment from Travis Donovan (Mar. 14, 2022),
available at https://www.sec.gov/comments/s7-08-22/s70822-272287.htm; Comment from Steve B. (Mar. 14, 2022), available at
https://www.sec.gov/comments/s7-08-22/s70822-20119335-272221.htm
(``SteveB.Comment''); Anonymously Submitted Letter (Apr. 2, 2022),
available at https://www.sec.gov/comments/s7-08-22/s70822-20122297-278355.htm (``I believe that all short sales should be recorded and
reported. The minimum threshold should be a single short sale.'').
\134\ Better Markets Letter, at 12.
\135\ See Virtu Letter, at 2-3.
---------------------------------------------------------------------------

Recommendations to Base Reporting Thresholds on a Single Metric
Some commenters, often in conjunction with recommendations to
increase the Proposed Reporting Thresholds, suggested applying a single
threshold metric. One commenter proposed the Commission adopt a single
U.S. dollar value-based threshold for all issuers in order to limit the
impact of

[[Page 75113]]

any potential ambiguity around identifying the number of shares
outstanding for non-reporting company issuers.\136\ Another commenter,
however, recommended that the Commission adopt a single threshold based
on percentage of shares outstanding, stating that it would ``mitigate
unnecessary operational and cost burdens on Managers,'' as the
commenter believed that a U.S. dollar value-based threshold would
require more difficult system buildouts.\137\
---------------------------------------------------------------------------

\136\ See MFA Letter, at 4 (stating that ``[a] dollar-based
approach would be more simple and less costly for managers to
employ'').
\137\ See, e.g., ICI Letter, at 8-9 (stating ``we recommend that
the Commission adopt a single reporting threshold level that is an
average short position in an equity security based on a percentage
of shares outstanding rather than on a dollar value''); see also K&L
Gates Letter, at 5 (recommending a threshold triggered only by ``a
position representing more than 5 percent of an issuer's voting
equity'').
---------------------------------------------------------------------------

The Reporting Thresholds are designed to require the filing of Form
SHO by Managers with substantial gross short positions. The two-pronged
approach of Threshold A measures the size of a Manager's short position
relative to both dollar amount and number of shares. The dollar value-
based prong (Rule 13f-2(a)(1)(i)) captures Managers with substantial
short positions, even if such positions are relatively small compared
to the market cap of the issuer. The percentage of total shares
outstanding-based prong (Rule 13f-2(a)(1)(ii)) captures Managers with
gross short positions that are large relative to the size of the issuer
and, therefore, could have a significant impact on the issuer. With
respect to securities of non-reporting company issuers, however, the
Commission understands that the number of total shares outstanding may
not be readily and consistently accessible.\138\ For this reason, a
single-pronged, dollar value-based Reporting Threshold is an efficient
way for Managers to determine whether they trigger Threshold B (Rule
13f-2(a)(2)) that avoids the additional cost and complexity of locating
the number of total shares outstanding for the securities of a non-
reporting company issuer that may be difficult or impossible to
locate.\139\
---------------------------------------------------------------------------

\138\ Proposing Release, at 14962.
\139\ Id.
---------------------------------------------------------------------------

Comments Recommending the Use of the Same Threshold for Reporting
Company and Non-Reporting Company Issuers
Another commenter recommended not having differing thresholds for
reporting company issuers and non-reporting company issuers.\140\ This
commenter believed having two different reporting thresholds ``would be
unnecessarily complicated and burdensome.'' \141\ Furthermore, the
commenter stated as an alternative the creation of a ``Form SHO List''
akin to the 13F List that would include total shares outstanding of
each security to assist in threshold calculations.\142\ As a result of
the potential difficulties in accessing the total shares outstanding
for non-reporting company issuers discussed above, using a percent of
total shares outstanding-based approach would not be appropriate for
non-reporting company issuers. Requiring total shares outstanding for
both thresholds would be operationally difficult, potentially
inaccurate and therefore costly for Managers to determine for some non-
reporting companies. Requiring a dollar-based metric for both
thresholds could be both under-inclusive and over-inclusive, as the
markets for reporting and non-reporting companies differ. For example,
a high dollar threshold (e.g., $10 million) for both thresholds would
under-include many non-reporting companies while a low dollar threshold
(e.g., $500,000) would over-include reporting companies. For these
reasons, the Commission is adopting Threshold B as proposed.
---------------------------------------------------------------------------

\140\ See SIFMA Letter, at 19-20 (stating that ``the proposed
distinction between the thresholds that would apply to Reporting
Company securities and Non-Reporting Company securities would be
unnecessarily complicated and burdensome'').
\141\ Id.
\142\ SIFMA suggested that the ``Form SHO List'' include
securities that are included on the 13F List, while excluding
securities that should not be covered by Form SHO. Id. at 20. SIFMA
further suggested that the ``Form SHO List'' include, for each
security, the total shares outstanding.
---------------------------------------------------------------------------

For similar reasons, and as discussed in the ``Scope of Reported
Securities'' section above, the Commission will not be publishing a
``Form SHO List'' with total shares outstanding to assist in Manager
calculations, as one commenter suggested. The thresholds as adopted are
designed to reduce operational burdens while capturing substantial
short positions in both reporting and non-reporting company issuers.
Adopting a much lower dollar threshold for non-reporting company
issuers than that for reporting company issuers results in Managers not
being required to determine percentages of total shares outstanding
and, due to sparse data in non-reporting company issuer markets,
Managers would avoid the difficulty of having to do so. A ``Form SHO
List'' with total shares outstanding would not be necessary for
Managers reporting positions in reporting company issuers because,
unlike Rule 13f-1 securities, Rule 13f-2 covers equity securities as
discussed above,\143\ rendering additional guidance on what securities
qualify unnecessary. Additionally, as discussed above in the Scope of
Reported Securities section, section 13(f)(1) expressly provides that
the Commission shall make available to the public a list of all equity
securities that are subject to such reporting,\144\ while section
13(f)(2) does not require publication of such a list.
---------------------------------------------------------------------------

\143\ See supra Part II.A.2.
\144\ Section 13(f)(1) of the Exchange Act (15 U.S.C. 78m(f)(1))
requires any institutional investment manager exercising investment
discretion over accounts holding at least $100 million in fair
market value of certain equity securities to file reports on Form
13F with the Commission at the times set forth in Rule 13f-1. The
statute directs the Commission to make available to the public, for
a reasonable fee, a list of all equity securities described in
section 13(d)(1) of the Exchange Act and to disseminate to the
public the information contained in the reports.
---------------------------------------------------------------------------

Comments Regarding Other Concerns Related to Thresholds
Implementation and Compliance Costs
Some commenters stated that the Proposing Release did not
adequately account for the burdens associated with monitoring for
whether a Reporting Threshold is met, i.e., whether a Manager has a
Form SHO reporting obligation.\145\ Specifically, these commenters
stated that the Proposing Release did not address the costs of those
Managers who would need to develop and implement reporting systems to
monitor for whether a Reporting Threshold is met or exceeded, that may
or may not ultimately result in a reportable gross short position.\146\
The

[[Page 75114]]

comments are addressed in the Economic Analysis, in Part VIII below.
---------------------------------------------------------------------------

\145\ See, e.g., Virtu Letter, at 2 (``the dollar value
thresholds referenced in the Proposal are significantly lower than
is necessary''); MFA Letter, at 4 (recommending a single, dollar-
based threshold only); SIFMA Letter, at 5 (recommending elimination
of different thresholds for reporting and non-reporting companies in
favor of one uniform threshold for U.S. equity securities); ICI
Letter, at 9 (recommending a single, percentage-based threshold for
both reporting and non-reporting company issuers); Ropes & Gray
Letter, at 2 (recommending that all thresholds ``be determined using
average positions over a month rather than daily positions.'').
\146\ See, e.g., MFA Letter, at 10-11; see also ICI Letter, at 5
(stating that Proposed Rule 13f-2 would require a Manager to
continuously monitor and record any activity that could potentially
be subject to future reporting on Form SHO). While the costs would
likely be higher if Managers choose to monitor daily, Rule 13f-2
does not require daily monitoring, either for reporting or non-
reporting company issuers. Managers may choose to do this threshold
calculation on a rolling basis, or to do the calculation after the
month has ended. While some Managers may choose to incur the higher
costs of daily tracking and calculation for purposes of compliance
with Rule 13f-2, the final rule's Reporting Threshold for reporting
company issuers is not based on a Manager's gross short position on
a single trading date, reducing the need for daily tracking. See
infra Part VIII.C.6.b.
---------------------------------------------------------------------------

``Gross'' Short Position versus ``Net'' Short Position
Some commenters requested that the Reporting Thresholds be
calculated based on ``net'' short position rather than ``gross'' short
position as proposed. Multiple commenters expressed concern that using
a gross short position calculation would not accurately reflect risk in
the markets.\147\ However, other commenters supported the use of the
proposed gross short position data either instead of or in conjunction
with net short position data.\148\ One commenter proposed requiring net
short position reporting by Managers that are solely reporting on Form
SHO with regard to one issuer while requiring gross short position
reporting for Managers with short positions in more than one
issuer.\149\ One commenter proposed that, if a gross short position
calculation is used, market makers should not be subject to adopted
Rule 13f-2's reporting requirements.\150\ However, another commenter
supported applying the rule's requirements to market makers.\151\ One
commenter stated that, even though market makers do not typically carry
overnight positions and would likely not trigger the Proposed Reporting
Thresholds, market makers would still incur the costs of end-of-day
calculations to determine whether they meet or exceed the Proposed
Reporting Thresholds.\152\
---------------------------------------------------------------------------

\147\ See, e.g., Virtu Letter, at 3 (stating that ``the
requirement to report such positions on a gross rather than net
basis would likely distort the actual degree of short positions as
it will capture circumstances where a firm is net long but may have
short positions among its accounts.''); Perkins Coie Letter, at 3-4,
6. (recommending that ``[r]ather than set a low threshold and over
capture short position information, the SEC should revise the
requirement to $10 million net short position as opposed to
gross.''); Schulte Roth & Zabel Letter, at 2 (stating that ``net
short position data would more accurately reflect actual positions
taken by institutional investment managers and provide useful
transparency to the Commission and to the marketplace.''); ICI
Letter, at 10 (recommending that ``the Commission streamline and
simplify how managers account reflect hedging positions by adopting
a net short position threshold and eliminating the required
indication of whether a position is hedged or not in Form SHO.'');
Comment Letter from Anonymous Fund Manager at 1-2, available at
https://www.sec.gov/comments/s7-08-22/s70822-20126773-287490.pdf
(``Anonymous Fund Manager Letter'') (recommending that the
Commission ``modify the proposed threshold requirements to reference
short positions on a net `delta-adjusted' basis as opposed to a
gross basis or, in the alternative, exclude from the reporting
obligations under the Proposed Rules `bona fide hedging activity' as
such term would be defined in the final rules.'').
\148\ See, e.g., Comment from Josh Allen (Mar. 14, 2022),
available at https://www.sec.gov/comments/s7-08-22/s70822-272295.htm; Comment from An Investor (Apr. 4., 2022), available at
https://www.sec.gov/comments/s7-08-22/s70822-20122297-278355.htm
(supported including both net and gross short positions in
reporting).
\149\ Perkins Coie Letter, at 4 (stating that ``the SEC should
consider amending its proposal to require net position reporting by
certain types of managers that do not regularly utilize short
positions. For instance, the SEC could require net short position
reporting by filers that are solely reporting on Form SHO with
regards to one issuer. For any filer reporting more than one issuer,
the SEC could require gross short position reporting.'').
\150\ HSBC Letter, at 16 (stating that ``[b]ecause Proposed Rule
13f-2 requires disclosure of gross positions, market makers could be
required to report large positions, even if a market makers' [sic]
net position is close to zero (i.e., because such short positions
are typically hedged via options or swaps). Subjecting market makers
to Proposed Rule 13f-2 may, therefore, result in market participants
receiving unhelpful and misleading information about the short sale
market.'').
\151\ See Samuel Meadows Comment, at 2 (stating that ``Market
Makers should NOT be except [sic] from reporting for any reason.
Market Makers should report short sales the same as everyone else
should they pass the Reporting Threshold.'').
\152\ See SIFMA Letter, at 11-12 (stating that ``[h]owever, as
the Proposing Release notes, requiring Institutional Investment
Managers to consider intraday short sale activity, which would not
be captured in the `gross short position' as reflected on their
trade date stock records, in determining whether the threshold has
been exceeded, would be incredibly onerous--particularly, for
example, for market makers that generally may not carry large
overnight short positions.'').
---------------------------------------------------------------------------

As discussed in the Proposing Release, under the proposal, a
Manager would report its ``gross'' short position in an equity security
without offsetting such gross short position with ``long'' shares of
the equity security or economically equivalent long positions obtained
through derivatives of the equity security.\153\ For example, if a
Manager has investment discretion over multiple accounts, some of which
have long positions in an equity security and some have short positions
in the same equity security, only the total gross short position in the
``short accounts'' is reported, without being offset by the long
positions in the ``long accounts.'' Requiring a Manager to report its
daily gross short position in a security will provide a more complete
view of short positions held by Managers in a security, particularly
once the data is aggregated for publication.\154\ Permitting Managers
to ``net'' positions would dilute the usefulness of the data in
providing market participants with a sense of substantial short
positions. For example, requiring net short position reporting by
Managers that are solely reporting on Form SHO with regard to one
issuer, or for other types of Managers infrequently using short
positions, as one commenter suggested, would provide minimal cost
savings and create misleading data that could be difficult to aggregate
and confusing to market participants. Further, the data collected and
provided by FINRA \155\ and the exchanges is not netted.\156\ By
providing aggregate gross positions reported by Manager in a security,
the final rule will supplement such existing short sale information
with additional context on substantial gross short sale positions.
---------------------------------------------------------------------------

\153\ Proposing Release, at 14956.
\154\ In addition, commenters stated they would be uncertain how
to ``offset'' positions when discussing the hedging indicator. See
infra Part II.A.4.d.iii.(B). Netting would raise similar concerns.
\155\ See, e.g., Short Interest--What It Is, What It Is Not,
FINRA Inv'r Insights (Jan. 25, 2023), available at https://www.finra.org/investors/insights/short-interest (``The short
interest data is just a snapshot that reflects short positions held
by brokerage firms at a specific moment in time on two discrete days
each month. The Short Sale Volume Daily File reflects the aggregate
volume of trades within certain parameters executed as short sales
on individual trade dates.'').
\156\ See, e.g., Frequently Asked Questions (FAQ) about Short
Interest Reporting, FINRA, available at https://www.finra.org/filing-reporting/regulatory-filing-systems/short-interest/faq (``Q1:
Rule 4560 applies to short interest positions resulting from: (1) a
``short sale,'' as defined by Regulation SHO Rule 200(a); or (2)
where the transaction that caused the short position was marked
``long,'' consistent with Regulation SHO Rule 200(g), due to the
firm's or the customer's net long position at the time of the
transaction. For example, a sale may be marked as ``long'' because
the overall net position in the security within an aggregation unit
is long at the time of the sale. If the execution results in a short
position in a specific account (or subaccount) held within the
aggregation unit, this position is reportable pursuant to Rule
4560.''; Q11: ``Where, as part of a strategy, an account holds both
a short and long position in the same security simultaneously, the
short position is reportable as short interest pursuant to Rule 4560
and must be reported in full, i.e., not netted against the long
position.'').
---------------------------------------------------------------------------

In addition, the Commission is making additional modifications,
discussed further below, that should alleviate burdens on market makers
that may otherwise need to undertake the obligation of calculating
reporting thresholds despite generally holding positions below such
thresholds. Specifically, the Commission is modifying the threshold
calculations to a monthly average of daily gross short positions rather
than a single daily position, as discussed under the subheading ``When
the Reporting Obligation is Triggered'' below. Further, as discussed in
Part III below, the Commission is not adopting the proposed requirement
to report ``buy to cover'' activity, which a commenter \157\ stated
would be more difficult if gross positions are required to be reported.
The Commission, in adopting Rule 13f-2, will require a Manager to
report its ``gross'' monthly short position as

[[Page 75115]]

proposed under Proposed Rule 13f-2(b)(4).
---------------------------------------------------------------------------

\157\ SIFMA Letter, at 24.
---------------------------------------------------------------------------

When the Reporting Obligation Is Triggered
To ease reporting burdens and reduce costs, some commenters
proposed decreasing the frequency of certain aspects of the U.S. dollar
value-based aspects of the Reporting Thresholds by instead using
monthly average positions, instead of the proposed ``close of regular
trading hours on any settlement date'' frequency.\158\ Alternatively,
one commenter suggested that the proposed monthly reporting requirement
should only be triggered if a Manager holds a short position in excess
of the Proposed Reporting Thresholds as of the last settlement day of
the month.\159\ Commenters stated that by using average monthly
positions rather than the proposed rule's use of any settlement date
within the reporting period, the reporting burden required of Managers
would be substantially lessened, since Managers may transiently cross
the reporting thresholds through activities such as market making,
hedging, and customer facilitation activity.\160\ Requiring reporting
for Managers who temporarily cross these thresholds on an intraday
basis through such activity, one commenter stated, would not adhere to
the legislative intent of DFA section 929X.\161\ Commenters stated that
transiently crossing these thresholds would not produce reported data
that would be valuable to the Commission; for example, short-term
market disruptions may trigger reporting under the proposed frequency
for Managers that do not hold substantial short positions.\162\ For
reasons discussed below, the Commission is modifying Proposed Rule 13f-
2(a)(1)(i) (the U.S. dollar value-based prong of Threshold A) to
trigger reporting requirements when a Manager has a monthly average of
daily gross short positions (``monthly average'') with a U.S. dollar
value of $10 million or more at the end of the calendar month, rather
than, as proposed, a $10 million or more gross short position at the
close of regular trading hours on any settlement date during the
calendar month.\163\
---------------------------------------------------------------------------

\158\ See, e.g., Virtu Letter, at 3 (stating that ``[w]e also
object to the reporting requirement being triggered by the existence
of a short position on any settlement date within a reporting
period.''); Ropes & Gray Letter, at 2 (stating that ``[a]ll filing
thresholds should be determined using average positions over a month
rather than daily positions.'').
\159\ SIFMA Letter, at 15 (advocating ``that the proposed
monthly reporting under Information Table 1 of Proposed Form SHO
should be triggered only if the Institutional Investment Manager
holds a gross short position in an equity security, as of the last
day of such month, in excess of the threshold(s) for reporting.'').
\160\ See Virtu Letter, at 2.
\161\ See SIFMA Letter, at 4.
\162\ See Ropes & Gray Letter, at 6-7.
\163\ This change to ``monthly average'' is responsive, in part,
to commenters' concerns about certain aspects of the U.S. dollar
value-based Reporting Thresholds. For reasons discussed below,
however, the Commission is adopting Threshold B as proposed
(Proposed Rule 13f-2(a)(2)), which employs an ``at the close of
regular trading hours on any settlement during the calendar month''
approach. The Form SHO ``Instructions For Calculating Reporting
Threshold,'' discussed below, explain in detail the method for
determining whether the modified threshold is met.
---------------------------------------------------------------------------

Threshold A, as adopted, will require reporting by Managers that
have, for each equity security of a reporting company issuer, either
(1) a monthly average gross short position at the close of regular
trading hours in the equity security with a U.S. dollar value of $10
million or more,\164\ or (2) a monthly average gross short position at
the close of regular trading hours as a percentage of shares
outstanding in the equity security of 2.5 percent or more.\165\ Using a
``monthly average'' dollar value for reporting company issuers will
result in Form SHO reporting by Managers that consistently carry large
gross short positions during the reporting month. This approach should
reduce the reporting of non-directional, ``transient'' short sales
activity \166\ and provide market participants with more focused
information on substantial short positions held by Managers. The
modification should also reduce the burdens of certain Managers,
specifically those Managers, including market makers, that periodically
meet or exceed the $10 million or more threshold on a given settlement
date during a calendar month, but that do not typically carry a large
gross short position throughout the month that will meet or exceed the
monthly average reporting threshold, by eliminating the need to
calculate (and potentially trigger) the threshold on a daily basis.
This will help the Commission to distinguish directional short selling
of Managers from short sale activity effected by market makers and
liquidity providers.\167\
---------------------------------------------------------------------------

\164\ To determine whether this Reporting Threshold has been
met, a Manager shall determine its gross short position at the close
of regular trading hours in the equity security (as defined in Rule
13f-2) on each settlement date during the calendar month and
multiply that figure by the closing price at the close of regular
trading hours on the settlement date (``end of day dollar value'').
The Manager shall then add all end of day dollar values during the
calendar month and divide that sum by the number of settlement dates
in the month to arrive at a ``monthly average'' for each equity
security the Manager traded during that calendar month reporting
period.
\165\ The methods of calculation of the Reporting Thresholds are
prescribed in ``Instructions for Calculating Reporting Threshold''
in Form SHO. Rule 13f-2 and the instructions in Form SHO, require
that for purposes of determining whether a Manager meets or exceeds
a Reporting Threshold, a Manager shall determine its gross short
position ``at the close of regular trading hours'' in the equity
security, rather than at the ``end of day'' as was provided for in
the instructions to Proposed Form SHO. Accordingly, the Commission
is making a modification to the instructions for calculating
Threshold A and replacing ``end of day gross short position'' with
``gross short position at the close of regular trading hours.''
Addressing any potential ambiguity in terminology should facilitate
more consistency in reporting by Managers and more comparability of
the data reported on Form SHO. With this change, the calculation
instructions for Threshold A provide that to determine whether the
percentage threshold of Threshold A has been met, a Manager shall
(a) determine its gross short position at the close of regular
trading hours in the equity security (as defined in Rule 13f-2) on
each settlement date during the calendar month, and divide that
figure by the number of shares outstanding in such security at the
close of regular trading hours on the settlement date, and (b) add
up the daily percentages during the calendar month as determined in
(a) and divide that sum by the number of settlement dates in the
month to arrive at a ``monthly average'' for each equity security
the Manager traded during that calendar month reporting period. The
number of shares outstanding of the security for which information
is being reported shall be determined by reference to an issuer's
most recent annual or quarterly report, and any subsequent update
thereto, filed with the Commission.
\166\ See supra n. 135 and accompanying text.
\167\ See Proposing Release, at 14953.
---------------------------------------------------------------------------

In addition, similar to the discussion in the Proposing Release
regarding the use of a monthly average gross short position of 2.5
percent or more of total shares outstanding,\168\ the Commission
continues to believe that using a monthly average gross short position
at the close of regular trading hours of $10 million or more, rather
than an end of each settlement date calculation as was originally
proposed, will reduce the risk that a Manager may time its short sales
to avoid triggering the adopted reporting threshold.\169\
---------------------------------------------------------------------------

\168\ Proposing Release, at 14962 (``In addition, the Commission
believes that requiring the reporting of short positions with a 2.5%
or higher monthly average gross short position would capture
Managers with gross short positions that are large relative to the
size of the issuer, and could therefore have a significant impact on
the issuer. Using a monthly average gross short position, rather
than an end of month gross short position, is also designed to
prevent the scenario where a Manager engages in trading activity on
the last day of the month in order to avoid reporting.'').
\169\ In addition, the Commission is making a modification to
specify in Rule 13f-2 and in the instructions in Form SHO that, for
purposes of determining whether a Manager meets or exceeds Threshold
A, a Manager shall determine its gross short position ``at the close
of regular trading hours'' in the equity security, rather than at
the ``end of day'' as was provided for in the instructions to
Proposed Form SHO. Reducing any potential ambiguity in terminology
should facilitate more consistency in reporting by Managers and more
comparability of the data reported on Form SHO.

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[[Page 75116]]

Threshold B, as proposed, and as adopted, will require reporting by
Managers that have, for each equity security of a non-reporting company
issuer, a gross short position in the equity security with a U.S.
dollar value of $500,000 or more at the close of regular trading hours
on any settlement date during the calendar month.\170\ A single,
dollar-based prong approach (using the $500,000 or more on any
settlement date metric) for securities of non-reporting company issuers
(Rule 13f-2(a)(2)) will capture Managers with large gross short
positions, even if such positions are relatively small compared to the
market capitalization of the issuer. As discussed above, the markets
for non-reporting company issuers are more opaque and could benefit
more from transparency. Additionally, due to their lower liquidity,
equity securities of non-reporting companies can be more sensitive to
strategic trading than those of reporting companies.\171\ As a result,
for those securities, a single dollar threshold that can be triggered
on any day of a month is more appropriate than the two-prong threshold
calculated as monthly averages for equity securities issued by
reporting companies.
---------------------------------------------------------------------------

\170\ The methods of calculation of the Reporting Thresholds are
prescribed in ``Instructions for Calculating Reporting Threshold''
in Form SHO. To determine the dollar value-based Reporting Threshold
described in Threshold B has been met, a Manager shall determine its
gross short position at the close of regular trading hours in the
equity security (as defined in Rule 13f-2) on each settlement date
during the calendar month and multiply that figure by the closing
price at the close of regular trading hours on the settlement date.
If such closing price is not available, a Manager shall use the
price at which it last purchased or sold any share of that security.
\171\ See infra Part VIII.E.3 (discussing difficulty in
obtaining information on non-reporting company issuers, and that
data is often stale and inaccurate).
---------------------------------------------------------------------------

Basing Reporting Thresholds on Form SH Data
Some commenters maintained that the Commission should not have
based the Proposed Reporting Thresholds on Form SH data, as the Form SH
data was collected during ``a period of abnormal market conditions that
does not reflect recent changes in the markets,'' and urged the
Commission to more robustly support its rationale for selecting the
Reporting Thresholds.\172\ These commenters essentially suggested that
the use of Form SH data was unrealistic, and suggested that the
Commission consider whether the Reporting Thresholds are appropriate
based on more recent data and analysis.\173\ In the Proposing Release,
the Commission stated that to perform the underlying Reporting
Thresholds analysis, Form SH data on daily short positions for November
2008 through February 2009 were filtered and matched to Center for
Research in Security Prices, LLC for daily closing prices and Compustat
for daily shares outstanding. The Commission recognized that the
results of an analysis of Form SH data may not fully reflect the status
quo but that the analysis used appropriate data because it involved the
same type of entities (Managers) and the same activity (short
positions).\174\ As discussed in the Proposing Release, the Commission
believed that it struck a reasonable balance in proposing the Reporting
Thresholds with regard to the fundamental economic tradeoff of the
value of the data versus the cost of collecting the data.\175\
---------------------------------------------------------------------------

\172\ Comment Letter from Barbara Bliss, Associate Professor of
Finance, et al. (Apr. 25, 2022), at 3, available at https://www.sec.gov/comments/s7-08-22/s70822-20126591-287247.pdf (``Law and
Finance Professors Letter'') (``we believe the Commission could and
should more robustly support its rationale for these thresholds
before adopting any final rule.''); see also AIMA Letter, at 11-12
(commenter was critical of Reporting Thresholds based on ``stale and
limited'' data). For a discussion of Form SH applicability to the
current period, see infra Part VIII.C.6.a.
\173\ See, e.g., AIMA Letter, at 12 (stating that the Commission
should ``review and analyze current short interest market data for
reporting issuers to ensure that any final threshold based on a
gross position's dollar value accounts for the latest and most
complete data''); Law and Finance Professors Letter, at 3 (stating
that the Commission should ``consider more carefully whether the
stated disclosure thresholds are appropriate, based on more recent
data and analysis, and whether there should be a mechanism that
would permit these thresholds to change over time''); Two Sigma
Letter, at 7 (stating that Form SH burden estimates are an
``unrealistic benchmark'').
\174\ Proposing Release, at 14963 n.80.
\175\ Proposing Release, at 14963-64, 15007.
---------------------------------------------------------------------------

The Commission disagrees with one commenter that stated that Form
SH data was ``stale and limited.'' \176\ The Commission continues to
believe that Form SH data is highly relevant for determining the
Reporting Thresholds. Form SH is the only existing data source of
individual Manager-level short sale positions.\177\ Form SH data was
collected from October 17, 2008, until August 1, 2009, and the
Commission analyzed daily data submitted from November 2008 until
February 2009 as representative of short positions held by Managers. By
the time Form SH was in effect, the global financial crisis was winding
down, and is considered by some to have calmed by approximately June
2009.\178\ Thus, data was analyzed for several months during which the
economy was returning to normalcy. Although the commenter suggested
such data does not address ``recent changes in the financial markets,''
the commenter did not elaborate on what ``recent changes'' would have
impacted an analysis of the Form SH data or the time period in which
the data was analyzed. Markets undergo periods of volatility and
stability and are constantly evolving over time. The data from Form SH
involves the same type of entities (Managers) and the same activity
(short positions) as Form SHO. The time period for which the Form SH
data was studied is sufficiently informative to provide a reasonable
assessment of appropriate reporting thresholds for purposes of Form
SHO.\179\
---------------------------------------------------------------------------

\176\ See AIMA Letter, at 11-12.
\177\ While there are various limitations to be considered when
using Form SH data, Form SH data are the most relevant and
applicable source of data available for the purposes of estimating
the costs of the design and analysis of Rule 13f-2. There are no
other data sources, public or regulatory, which specifically track
Managers' short position activities in the U.S. See infra Part
VIII.C.6.a.
\178\ The National Bureau of Economic Research considers the
global financial crisis as having officially started Dec. 2007 and
ended June 2009. See, e.g., Nat'l Bureau of Econ. Research, Business
Cycle Dating, available at https://www.nber.org/research/business-cycle-dating.
\179\ See discussion of Form SH in Part VIII.C.6.a.
---------------------------------------------------------------------------

4. Form SHO
a. Reporting via EDGAR
i. Proposal
To enhance transparency of short sale-related data reported and
published pursuant to Proposed Rule 13f-2, Proposed Rule 13f-2(a)(3)
provided that Managers would file Form SHO (and any amendments thereto)
with the Commission on EDGAR.\180\ The Commission believed that most
Managers should be familiar with filing forms on EDGAR--for example,
Form 13F \181\--and relying on EDGAR to access registration statements,
periodic reports, and other filings with the Commission that are made
publicly available.\182\ The Commission believed

[[Page 75117]]

that requiring Proposed Form SHO to be reported via EDGAR would enhance
the accessibility, usability, and quality of the Proposed Form SHO
disclosures for the Commission, and would allow the Commission to
download disclosures from Form SHO directly, facilitating efficient
access, organization, and evaluation of the reported information.\183\
The Commission further believed that the improved quality and scope of
information available for the Commission's use in examining market
behavior and recreating market events would bolster the Commission's
oversight of short selling activity and enhance investor
protections.\184\
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\180\ See Proposed Rule 13f-2(a)(3) (providing that ``Form SHO
and any amendments thereto must be filed with the Commission via the
Commission's Electronic Data Gathering, Analysis, and Retrieval
System (``EDGAR''), in accordance with Regulation S-T. Certain
information regarding each such equity security reported by
institutional investment managers on Form SHO and filed with the
Commission via EDGAR will be published by the Commission on an
aggregated basis.'').
\181\ EDGAR filing is mandatory for all public Form 13F
submissions. See Rulemaking for EDGAR System, Exchange Act Release
No. 34-40934 (Jan. 12, 1999), 64 FR 2843 (Jan. 19, 1999); see also
Electronic Submission of Applications for Orders under the Advisers
Act and the Investment Company Act, Confidential Treatment Requests
for Filings on Form 13F, and Form ADV-NR; Amendments to Form 13F,
Exchange Act Release No. 34-95148 (June 23, 2022), 87 FR 38943 (June
30, 2022).
\182\ See, e.g., About EDGAR, available at https://www.sec.gov/edgar/about; see also Important Information about EDGAR, available
at https://www.sec.gov/edgar/searchedgar/
aboutedgar.htm#:~:text=EDGAR%2C%20the%20Electronic%20Data%20Gathering
,and%20Exchange%20Commission%20(SEC) (``The [EDGAR] system processes
about 3,000 filings per day, serves up 3,000 terabytes of data to
the public annually, and accommodates 40,000 new filers per year on
average.'').
\183\ Proposing Release, at 14957.
\184\ Id.
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ii. Comments and Final Rule
Several commenters raised concerns about how the confidentiality of
the data reported on Form SHO via EDGAR would be preserved.\185\ Most
of these commenters spoke of a need to establish robust data security
protocols for the ``valuable and proprietary'' information that would
be reported on Proposed Form SHO via EDGAR. Several such commenters
expressed concerns about cyberattacks or other breaches of account
information.\186\
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\185\ See, e.g., K&L Gates Letter, at 5-6 (any final rule or
final Form SHO should ensure ``indefinitely'' the confidentiality of
information that could reveal the identity of the reporting
Manager).
\186\ See, e.g., AIMA Letter, at 14 (stating that the Commission
has not explained how it will protect the commercially sensitive
data that will be reported on Proposed Form SHO or acknowledged that
its systems are susceptible to data breaches); MFA Letter, at 8
(positing that ``the risk of increased cyberattacks or other
breaches of confidential account information far outweigh any
incremental benefit associated with requiring [Managers] to
individually report short position information''); Two Sigma Letter,
at 3-5 (cautioning that information on Proposed Form SHO reports
``will be private only so long as the Commission does not have its
systems breached, its personnel do not misappropriate the
information, the information is not unintentionally released, or
policies do not change retroactively''); SIFMA Letter, at 22 n.60
(citing cyber security, theft, and inadvertent data breach concerns
as chief among the risks of providing sensitive and confidential
information regarding short positions and short activity).
---------------------------------------------------------------------------

While no technology system or infrastructure is impervious to
cyberattack, the Commission employs an array of actions to safeguard
and protect the confidentiality and security of all information
reported to EDGAR, which will include data reported on Form SHO.\187\
The Commission has stated that it has ``engaged in a multi-year, multi-
phase effort to modernize the EDGAR system, including both internal and
public-facing components. Security and modernization enhancements were
deployed in June 2020, focusing on technology upgrades internal to the
system.'' \188\ Moreover, as discussed in Part I.A.4.f.ii below, the
Commission is adopting an approach to the confidential treatment of
information provided on Form SHO reports that all such information will
be deemed subject to a confidential treatment request under 17 CFR
200.83 (``Rule 83''). Accordingly, the Commission is adopting Rule 13f-
2(a)(3) as proposed.
---------------------------------------------------------------------------

\187\ See Annual Report on SEC website Modernization Pursuant to
Section 3(d) of the 21st Century Integrated Digital Experience Act
(Dec. 2022), available at https://www.sec.gov/files/21st-century-idea-act-report-2022-12.pdf.
\188\ Id.
---------------------------------------------------------------------------

b. Filing Form SHO Reports
i. Proposal
As described in the Proposing Release, Managers would use Proposed
Form SHO for reports to the Commission required by Proposed Rule 13f-2.
The Commission proposed that Managers would file a report on Proposed
Form SHO with the Commission within 14 calendar days after the end of
each calendar month with regard to each equity security in which the
Manager meets or exceeds a Reporting Threshold.\189\ The Commission
proposed that Managers would file the Form SHO with the Commission via
the Commission's EDGAR system in an eXtensible Markup Language
(``XML'') specific to Form SHO (``custom XML'' or ``Form SHO-specific
XML''),\190\ a structured machine-readable data language. The
Commission also proposed that Managers would either be able to file
Form SHO using a fillable web form the Commission would provide on
EDGAR to input Form SHO disclosures, or a Manager could use its own
software tool to file Form SHO to EDGAR directly in Form SHO-specific
XML.\191\ Reporting via EDGAR, as described in the Proposing Release,
would facilitate efficient access, organization, and evaluation of
reported information by the Commission.
---------------------------------------------------------------------------

\189\ Proposing Release, at 14956.
\190\ Id. at 14955.
\191\ See id. at 14955. The filing options described for
Proposed Form SHO are consistent with other EDGAR filings that are
filed in form-specific XML-based languages. See, e.g., Regulation of
NMS Stock Alternative Trading Systems, Exchange Act Release No.
83663 (July 18, 2018), 83 FR 38768 (Dec. 9, 2021) (requiring new
EDGAR Form ATS-N to be filed in an XML-based language specific to
that Form).
---------------------------------------------------------------------------

The Commission stated in the Proposing Release that requiring Form
SHO to be filed in custom XML format, since it is a structured,
machine-readable data language, would facilitate more thorough review
and analysis of the reported short sale disclosures by the Commission,
which would increase the efficiency and effectiveness with which the
Commission could identify manipulative short selling strategies.\192\
Furthermore, the Commission stated most Managers have experience filing
EDGAR forms that use similar EDGAR Form-specific XML-based data
languages, such as Form 13F and Form ATS-N.\193\
---------------------------------------------------------------------------

\192\ See Proposing Release, at 14997 (``By requiring a
structured machine-readable data language and a centralized filing
location (EDGAR) for the disclosures on Proposed Form SHO, the
Commission would be able to access and download large volumes of
Proposed Form SHO disclosures in an efficient manner.'').
\193\ See, e.g., Proposing Release at 14960, 14999 (first citing
Form 13F, available at https://www.sec.gov/pdf/form13f.pdf) (then
citing Regulation of NMS Stock Alternative Trading Systems, Exchange
Act Release No. 83663 (July 18, 2018), 83 FR 38768 (Aug. 7, 2018))
(requiring new EDGAR Form ATS-N to be filed in an XML-based language
specific to that Form); see also Money Market Fund Reforms,
Investment Company Act Release No. 34441 (Dec. 15, 2021), 87 FR 7248
(Feb. 8, 2022) (Form N-CR); Securities Offering Reform for Closed-
End Investment Companies, Exchange Act Release No. 88606 (Apr. 8,
2020), 85 FR 33290 (June 1, 2020) (Form 24F-2).
---------------------------------------------------------------------------

As proposed, if a Manager uses the web-fillable Proposed Form SHO
on EDGAR and encounters a technical error when filling out the form,
such Manager would be required to correct the identified technical
error before being permitted to file the Proposed Form SHO through
EDGAR. If a Manager uses its own software tool to file a Proposed Form
SHO filing to EDGAR directly in Proposed Form SHO-specific XML, and a
technical error is identified by EDGAR after the filing is sent, such
Manager would receive an error message that the filing has been
suspended, and would be required to correct the identified technical
error and re-file the Proposed Form SHO through EDGAR.\194\
---------------------------------------------------------------------------

\194\ The Commission stated in the proposing release that the
XML schema (i.e., the set of technical rules associated with
Proposed Form SHO-specific XML) for Proposed Form SHO would
incorporate validations of each data field on Proposed Form SHO to
help ensure consistent formatting and completeness. For example,
letters instead of numbers in a field requiring only numbers, would
be flagged by EDGAR as a ``technical'' error that would require
correction by the reporting Manager in order to complete its
Proposed Form SHO filing. Field validations act as an automated form
completeness check when a Manager files Proposed Form SHO through
EDGAR; they do not verify the accuracy of the information filed in
Proposed Form SHO filings. Proposing Release, at 14960 n.72.

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[[Page 75118]]

As an alternative, the Commission also discussed whether Proposed
Form SHO should be required to be filed in Inline eXtensible Business
Reporting Language (``Inline XBRL'').\195\ The Commission stated that,
compared to the proposal, the Inline XBRL alternative, which is both
machine-readable and human-readable, would provide more sophisticated
validation, presentation, and reference features for filers and data
users.\196\ However, the Commission stated that given the fixed and
constrained nature of the disclosures to be reported on Proposed Form
SHO, the benefits of the Inline XBRL alternative would be muted, and
therefore Managers would not be able to take advantage of customization
and presentation features.\197\ Furthermore, the Commission stated in
the Proposing Release that the alternative Inline XBRL approach would
create greater initial implementation costs, such as licensing XBRL
filing preparation software, because many Managers may not have prior
experience structuring data in Inline XBRL.\198\
---------------------------------------------------------------------------

\195\ See Proposing Release, at 15010-11.
\196\ See id.
\197\ See id.
\198\ See id.
---------------------------------------------------------------------------

ii. Comments and Final Rule
The Commission received some comments about the use of Form SHO-
specific XML in filing Form SHO. In response to Q39 in the Proposing
Release,\199\ which asked whether the use of Form SHO-specific XML
would make the reported data more useful to users, one commenter stated
that data prepared in consistent, structured format would be
``significantly more functional and useful.'' \200\ Regarding the costs
and benefits of an Inline XBRL requirement as compared to Proposed Form
SHO-specific XML, this commenter supported using XBRL in a comma-
separated value (``CSV'') format, which is a text file that uses
delimiters such as commas to separate data fields.\201\ The commenter
stated that this would be the most appropriate standard ``for capturing
high volume, granular data in a compact format,'' and urged the
Commission to adopt XBRL rather than custom XML.\202\ The commenter
stated that XBRL-CSV has several advantages over the Commission's
proposed use of a custom XML format, such as reducing preparation costs
and processing costs, as well as improving validation.\203\ In
addition, the commenter disagreed with the Commission's view in the
Proposing Release that the benefits of the additional features of XBRL
would be muted if used for Form SHO due to the fixed and constrained
nature of the disclosures to be reported. The commenter stated that
several other agencies, such as the FDIC and FERC, have recently
adopted XBRL format over custom XML format. However, the commenter
acknowledges that initial implementation costs will be higher and
familiarization with the format will take longer for reporting
entities. Alternatively, another commenter supported the use of Form
SHO-specific XML, stating that ``XML is a widely used language and
therefore implementation and maintenance would keep costs low and
efficiency high,'' and thought it would allow for efficient review of
the reported data.\204\
---------------------------------------------------------------------------

\199\ Proposing Release, at 15012.
\200\ Comment Letter from Campbell Pryde, President and CEO,
XBRL US (Apr. 26, 2022), at 1 (``XBRL Letter''), available at
https://www.sec.gov/comments/s7-08-22/s70822-20126860-287597.pdf.
\201\ See id. at 2.
\202\ See id. at 2-5.
\203\ See id.
\204\ Comment from An Investor (Apr. 4, 2022), available at
https://www.sec.gov/comments/s7-08-22/s70822-20122297-278355.htm.
---------------------------------------------------------------------------

The Commission is adopting the custom XML data reporting
requirement as proposed. As explained in the Proposing Release, the
filing options for Form SHO are consistent with other EDGAR filings
that are filed in Form-specific XML-based languages.\205\ The
Commission also continues to believe that because many Managers have
been using custom XML-based languages through other releases, they are
more familiar with this language than other languages, such as XBRL, so
the use of XML will promote efficiency in filing and review of Form SHO
reports. Familiarity with custom XML formats will reduce implementation
and ongoing compliance costs when compared to introducing XBRL-based
formats that may be unfamiliar to Managers. Managers' greater
familiarity with custom XML formats should also reduce the possibility
of data input errors when compared to XBRL formats. The above noted
commenter likewise stated that XBRL formats would entail higher initial
implementation costs and that familiarization with the XBRL formats
would take longer for reporting entities. The costs of using XBRL
formats in implementation and user retraining, along with the
inconsistencies relative to other filings that use Form-specific XML-
based languages, do not justify the potential data formatting benefits
of XBRL. Further, the commenter stated a preference for using XBRL
specifically in CSV format. In addition to the above concerns about
XBRL-based languages generally, the Commission believes that custom XML
format is more appropriate than an XBRL-CSV format for the purposes of
Form SHO because XML format is more human-readable than CSV format, and
XML is more flexible when using more complex data.
---------------------------------------------------------------------------

\205\ See, e.g., Regulation of NMS Stock Alternative Trading
Systems, Exchange Act Release No. 83663 (July 18, 2018), 83 FR 38768
(Dec. 9, 2021) (requiring EDGAR Form ATS-N to be filed in an XML-
based language specific to that Form).
---------------------------------------------------------------------------

Finally, the Commission's XML schema is designed to include
validations for each data field on Form SHO to help ensure consistent
formatting and completeness. The Commission continues to believe that
requiring Form SHO to be filed via Form-SHO specific XML, a structured
machine-readable data language, will facilitate more thorough review
and analysis of the reported short sale disclosures by the Commission,
increasing the efficiency and effectiveness of the Commission's
understanding of short selling and systemic risk. Additionally, most
Managers have experience filing EDGAR forms that use similar EDGAR
Form-specific XML-based data languages, such as Form 13F.\206\
---------------------------------------------------------------------------

\206\ See Form 13F, available at https://www.sec.gov/pdf/form13f.pdf.
---------------------------------------------------------------------------

c. Timing of Reporting by Managers and Publication by Commission
i. Proposal
Under Proposed Rule 13f-2(a), a Manager would have been required to
file the required information on Form SHO with the Commission within 14
calendar days after the end of each calendar month. Proposed Rule 13f-
2(a)(3) provides that certain information reported on Proposed Form SHO
would be published by the Commission on an aggregated basis. No time
frame for publication by the Commission was provided in Proposed Rule
13f-2. In the Proposing Release, however, the Commission estimated that
it would publish the aggregated information within one month after the
end of the calendar month.
ii. Comments and Final Rule
Comments on the frequency of reporting and publication varied. Some
commenters called for more frequent reporting by Managers and, by
implication, more frequent publishing by the Commission of information
from Form SHO reports. Several of these commenters suggested that
technology permits more frequent--i.e., daily, if not

[[Page 75119]]

monthly--reporting.\207\ Several of these comments also expressed
concern that the Commission's estimated month-long delay in publishing
the aggregated information would produce stale data that would
undermine the goal of greater transparency in the markets.\208\ The
Commission acknowledges that the technology exists for frequent
reporting of transactions and faster data processing. The Commission is
concerned, however, about the accuracy of the data reported by Managers
and the aggregated data published by the Commission pursuant to Rule
13f-2 reporting requirements. The Commission believes that the data
reported by Managers on Form SHO is more likely to be complete and
accurate if Managers are afforded sufficient time to gather, assemble,
and review the reported data.\209\ The Commission continues to believe
that 14 calendar days after the end of each month provides a reasonable
period of time for Managers to meet their Rule 13f-2 reporting
requirements. The Commission is also concerned that increasing the
frequency of Commission publication of aggregated data may increase the
risk of short squeezes or other manipulative activities that could
interfere with the price discovery function of equity markets. The
timeframes as proposed and as adopted balance such concerns with some
commenters' desire for faster transparency.
---------------------------------------------------------------------------

\207\ See, e.g., Comment from Regina Murrell (Mar. 25, 2023)
available at https://www.sec.gov/comments/s7-08-22/s70822-20121170-273336.htm (suggesting that technology be used to report short
positions daily); Anonymously Submitted Comment (Mar. 14, 2022)
(calling for reporting to regulators within twenty-four hours);
Anonymously Submitted Comment (Apr. 26, 2022) (calling for daily, if
not intraday, Form SHO reporting rather than monthly reporting, as
proposed); Anonymously Submitted Comment (Mar. 17, 2022) (stating
that technology permits more frequent reporting and release of short
sale-related data to the public in shorter timeframes); see also
Better Markets Letter, at 13 (predicting that the Commission's
``fairly significant delay'' in publishing the aggregated
information derived from Form SHO reports will lead to published
information that is ``less timely and less informative'').
\208\ See, e.g., Comment of Estaban Oliveras (Mar. 14, 2022)
available at https://www.sec.gov/comments/s7-08-22/s70822-20119372-272258.htm (commenting ``If data is neither accurate nor timely,
then what is the point of collecting data?'').
\209\ See Proposing Release, at 14956.
---------------------------------------------------------------------------

Commenters taking the opposite view recommended that additional
time be given for Manager reporting and Commission publication. One
such commenter recommended that the Commission align the proposed
timelines for preparing and filing Form SHO reports with existing
filing requirements for other Commission reports and forms, to allow
for better coordination of the process of including short sale-related
data in multiple reporting frameworks.\210\ Another such commenter
suggested an initial filing period be extended to within 28 calendar
days upon crossing the threshold and then 14 calendar days for any
subsequent filing.\211\ Another commenter suggested that a minimum of
45 days before publication of aggregated data by the Commission was
necessary to protect Managers from the risk that their positions and
strategies would be used in a ``short squeeze or other market-driven
reaction'' or as part of a copycat strategy.\212\
---------------------------------------------------------------------------

\210\ ICI Letter, at 12 (stating that aligning Form SHO
reporting requirements with those of Form N-Port, for example, would
give Managers 30 days, rather than the proposed 14 days, after the
end of a calendar to file a Form SHO).
\211\ See Perkins Coie Letter, at 3 (stating a request to extend
the initial filing period to within 28 calendar days upon crossing
the threshold in order ``to reduce the monitoring and compliance
burdens for infrequent short position users'').
\212\ MFA Letter, at 18.
---------------------------------------------------------------------------

While adopting the proposed timeframes will delay the public
dissemination of aggregate short positions by about a month, the
Commission believes a longer delay such as 28 days for initial filings
or 45 days for all filings is unnecessary. FINRA's current short
interest reporting, for example, is published twice a month, resulting
in a delay of about two weeks.\213\ The final rule here requires
slightly more time than FINRA's current reporting regimes because
Managers need additional time following determination of whether they
meet a Reporting Threshold at the end of each calendar month to prepare
and file the data on Form SHO through EDGAR. Additionally, the
Commission believes that providing Managers with a reasonable period of
time to file complete and accurate short sale-related information in
the first instance will reduce the need for Managers to file amendments
to Form SHO. However, having an asymmetric filing deadline of 28 days
for initial filing and 14 days thereafter, as one commenter suggested,
would create negligible cost savings for Managers. Meanwhile, it may
have detrimental effects on the timing of data aggregation and
publication, which could unnecessarily affect the timing and quality of
aggregated published data.
---------------------------------------------------------------------------

\213\ See, e.g., FINRA, Short Interest Reporting, available at
https://www.finra.org/filing-reporting/regulatory-filing-systems/short-interest (presenting ``due dates'' for reporting short
interest to FINRA and publication of short interest data by FINRA).
FINRA Rule 4560 requires FINRA member firms to report their short
positions in exchange-listed and over-the-counter equity securities
to FINRA twice each month. FINRA publishes the short interest
reports it collects from member firms for all such equity
securities.
---------------------------------------------------------------------------

Final Rule
After considering comments, the Commission is adopting Rule 13f-
2(a) as proposed, and continues to estimate that it will publish
aggregated data derived from Form SHO reports within one calendar month
after the end of the reporting calendar month.\214\ For example, for
data reported by Managers on Form SHO for the month of October, the
Commission expects to publish aggregated information derived from such
data no later than the last day of November. The Commission continues
to believe that 14 calendar days after the end of each calendar month
provides Managers with sufficient time for Managers that meet the
Reporting Threshold to prepare and file Form SHO data.
---------------------------------------------------------------------------

\214\ Publication of the aggregated information may be delayed
for an initial period following effectiveness of Rule 13f-2 and Form
SHO.
---------------------------------------------------------------------------

d. Contents of Form SHO
Form SHO, as proposed, consists of two parts: Cover Page and
Information Tables. As discussed more fully below:
The Cover Page presents certain identifying information
about the Manager(s) filing the Form SHO report, the calendar month for
which the Manager is reporting, the type of Form SHO report being made,
and whether the Manager is filing the Form SHO report as an amendment;
\215\
---------------------------------------------------------------------------

\215\ See infra Part II.A.4.d.ii.
---------------------------------------------------------------------------

Information Table 1 presents a Manager's monthly gross
short position in the equity security on which information is being
reported, as well as certain identifying information about that
security and about the issuer of that security; \216\ and
---------------------------------------------------------------------------

\216\ See infra Part II.A.4.d.iii.
---------------------------------------------------------------------------

Information Table 2 presents daily activity affecting a
Manager's gross short position during a calendar month reporting
period, as well as certain identifying information about that security
and about the issuer of that security.\217\
---------------------------------------------------------------------------

\217\ See infra Part II.A.4.d.iv.
---------------------------------------------------------------------------

i. Financial Identifiers
(A) Proposal
The Commission proposed that a Manager provide the active LEI, if
any, of each Manager listed on the Cover Page. The Commission also
proposed that a Manager report on each of the Proposed Form SHO
Information Tables the FIGI and CUSIP number of each security on which
information is being reported, and the active LEI, if any, of

[[Page 75120]]

the issuer of those securities. These items are discussed in Special
Instructions 8.c, 8.e, and 8.f regarding Columns 3, 5, and 6 of
Information Table 1, and in Special Instructions 9.c, 9.e, and 9.f
regarding Columns 3, 5, and 6 of Information Table 2.
(B) Comments and Final Rule
The Commission received only a few comments regarding the proposed
requirement to report certain financial identifiers, including CUSIP
and FIGI (which identify specific securities), and LEI (which
identifies specific entities) on Form SHO.\218\ Two commenters stated
that the Commission should only require that CUSIP be reported on Form
SHO, and that the inclusion of additional financial identifiers could
cause confusion.\219\ Another commenter stated that the LEI and the
FIGI of issuers is ``not commonly provided'' in other holding reports
and would therefore cause Managers to incur additional costs.\220\
Another commenter, citing ``substantial CUSIP licensing costs,''
expressed concern that requiring the reporting of CUSIP could create an
``unnecessary financial burden'' on Managers.\221\ However, another
commenter stated that the inclusion of multiple financial identifiers
in addition to CUSIP, such as FIGI and LEI, could help foster
competition that ultimately reduces costs and improves data
quality.\222\
---------------------------------------------------------------------------

\218\ FIGI and LEI each serve different functions. FIGIs
identify securities, whereas LEIs identify entities. Thus, a single
issuer's LEI could be associated with multiple FIGIs. Conversely,
multiple FIGIs could be associated with the same issuer's LEI.
Furthermore, identifying reporting Managers on Form SHO would
require an entity identifier (LEI) rather than a security identifier
(FIGI).
\219\ See, e.g., Comment Letter from CUSIP Global Services (Apr.
25, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20126577-287237.pdf (``CUSIP Letter''); Comment Letter from
American Bankers Association (Apr. 26, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20126641-287311.pdf (``ABA
Letter'').
\220\ Jennifer Han, Executive Vice President, Chief Counsel and
Head of Regulatory Affairs, Managed Funds Association (June 15,
2023), at 9, available at https://www.sec.gov/comments/s7-08-22/s70822-206120-414822.pdf (``MFA Letter 2'').
\221\ See Letter from Anonymous Fund Manager, at 9.
\222\ See Comment Letter from Gregory Babyak, Glob. Head Regul.
Affs., Bloomberg L.P., at 5 (May 2, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20127745-288932.pdf.
---------------------------------------------------------------------------

In DFA section 929X, Congress specifically directed the Commission
to include CUSIP in short sale disclosure rules.\223\ CUSIP is a
universally recognized identifier that has been used for a wide array
of financial instruments since 1964, allowing securities transactions
to be easily identified, cleared, and settled, including short sales.
Furthermore, market participants and investors are familiar with
CUSIPs, which are widely and publicly available and used to identify
most U.S. stocks.\224\ Many companies display their CUSIPs on their
websites, and brokers and dealers often provide investors with search
engines to look up stocks by CUSIPs.\225\ Accordingly, while the
Commission recognizes that there are licensing costs associated with
the CUSIP, the Commission is adopting, as proposed, the requirement
that Managers report in Column 5 of each of the Form SHO Information
Tables the CUSIP for the equity security for which information is
reported to help facilitate market participants' understanding of the
reported data.
---------------------------------------------------------------------------

\223\ Public Law 111-203, sec. 929X, 124 Stat. 1376, 1870 (July
21, 2010).
\224\ See, e.g., Fast Answers: CUSIP Number, available at
https://www.sec.gov/answers/cusip (referencing CUSIP Global
Services).
\225\ See, e.g., Chad Langager, How to Locate the CUSIP Number
for a Stock, Investopedia (Apr. 6, 2022), available at https://www.investopedia.com/ask/answers/06/cusipforspecificstock.asp.
---------------------------------------------------------------------------

The Commission will also adopt, as proposed, the requirement that
Managers report in Column 6 of each of the Form SHO Information Tables
the FIGI of the equity security for which information is being
reported, if a FIGI has been assigned. Like CUSIP, FIGI provides a
methodology for identifying securities, and reporting a FIGI, if
assigned, will provide additional identifying information that will
provide additional clarity, not confusion, to market participants and
the public. Unlike CUSIPs,\226\ however, FIGIs are provided for
free.\227\
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\226\ See, e.g., Fees for CUSIP Assignment, CUSIP Glob. Servs.,
available at https://www.cusip.com/pdf/FeesforCUSIPAssignment.pdf
(``For an offering requiring a single CUSIP identifier, the
assignment fee is $200.'').
\227\ See, e.g., Unlock the Power of Efficiency with Open
Symbology, OpenFIGI, available at https://www.openfigi.com/.
---------------------------------------------------------------------------

To aid in the identification of the issuers referenced in Form SHO
reports, the Commission is also adopting a requirement that Managers
report in Column 3 of each Form SHO Information Table, the LEI, if any,
of the issuer of the security about which information is reported on
Form SHO.\228\
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\228\ This practice is in keeping with current requirements of
other Commission forms. For example, the registrant filing Form N-
PORT need not report LEIs for counterparties that do not have one.
In addition, as noted above, to avoid any suggestion that a Manager
filing a Form SHO report has an obligation to monitor the status of
an issuer's LEI, Instructions 8.c and 9.c of Form SHO--``Column 3.
Issuer LEI. If the issuer has an LEI, enter the issuer's active
LEI--have been revised to remove the term ``active.'' See supra n.
36.
---------------------------------------------------------------------------

With respect to the proposed requirement that a Manager provide its
own LEI, if it had one, and, if available to the Manager making the
Proposed Form SHO filing, the active LEI of each Manager listed on the
Form SHO Cover Page as an ``Other Manager Reporting for'' the Manager
making the Proposed Form SHO filing, the Commission sought comment on
whether it should require every Manager filing a Proposed Form SHO to
obtain an LEI.\229\ One commenter supporting the requirement to report
financial identifiers on Form SHO stated that all Managers should be
required to obtain and maintain a non-lapsed LEI, as opposed to the
proposal, which stated that Managers would be required to report their
LEI, if any.\230\ Another commenter, however, expressed uncertainty
regarding such a requirement, stating that registration or renewal of
an LEI is ``not monetarily costless.'' \231\
---------------------------------------------------------------------------

\229\ See Proposing Release, at 14965. Because the Cover Page,
as proposed, would also present the name and, if available to the
Manager making the Proposed Form SHO filing, the active LEI of each
Manager listed on the Form SHO Cover Page as an ``Other Manager
Reporting for'' the Manager making the Proposed Form SHO filing, the
query covered those Managers as well.
\230\ Anonymously Submitted Comment (Apr. 4, 2022), available at
https://www.sec.gov/comments/s7-08-22/s70822-20122297-278355.htm
(``Every manager that has a part of trading any form of security or
derivative on any market should be forced to have a Legal Entity
Identifier (LEI). That way, specific bad actors can be easily
identified.'').
\231\ See Comment Letter from Aaron Franz, available at https://www.sec.gov/comments/s7-18-21/s71821-20120685-272855.pdf (``I'm
uncertain that Managers should be required to obtain an LEI.
Registration or renewal of an LEI is not monetarily costless. The
same information can be submitted by Managers without a tracking
number with a cost.'').
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The Commission acknowledges that LEIs do provide a precise and
consistent means of identification of legal entities. However, after
considering the comments received, and because LEIs would supplement
existing identifying information provided for Managers and issuers
listed in Form SHO filings, the Commission is not requiring Managers
subject to Rule 13f-2 to obtain (and maintain non-lapsed) LEIs to
provide on the Cover Page of Form SHO reports and, when appropriate for
the ``Other Manager(s) Reporting for this Manager'' section of the Form
SHO Cover Page to be completed, to provide a non-lapsed LEI for each
Manager listed in the ``Other Manager(s) Reporting for this Manager''
of the Form SHO Cover Page. However, the Commission may consider this
issue in the future.
ii. Cover Page
(A) Proposal
As proposed, and pursuant to Special Instructions 2-5 of Proposed
Form SHO, a Manager would report on the Cover

[[Page 75121]]

Page: (i) certain basic information, including its name, mailing
address, business telephone and facsimile numbers, and active LEI, if
any, as well as the name, title, business telephone and facsimile
numbers of the Manager's contact employee for the Form SHO report, and
the date the report is filed; (ii) the period end date--i.e., the last
settlement date of the calendar month for which the Manager is
reporting; (iii) the type of Form SHO report being filed; \232\ and
(iv) whether the Form SHO is being filed as an amendment.\233\ The
Manager filing the report will include the representation that ``all
information contained herein is true, correct and complete, and that it
is understood that all required items, statements, schedules, lists,
and tables, are considered integral parts of this form.'' \234\
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\232\ The Commission proposed that the reporting Manager
designate the report type for the Form SHO by checking the
appropriate box in the ``Report Type'' section of the Cover Page and
include, where applicable, the name and active LEI of each other
Manager reporting for this Manager. If all of the information that a
Manager is required by proposed Rule 13f-2 to report on related Form
SHO is reported by another Manager (or Managers), the Manager shall
check the box for Report Type ``FORM SHO NOTICE,'' include on the
Cover Page the name and active LEI (if available) of each of the
other Managers reporting for this Manager, and omit the Information
Tables. If all of the information that a Manager is required by
proposed Rule 13f-2 to file on Form SHO is included in the report,
the Manager shall check the box for Report Type ``FORM SHO ENTRIES
REPORT,'' omit from the Cover Page the name and active LEI of each
other Manager reporting for this Manager, and include the
Information Tables. If only a part of the information that a Manager
is required by proposed Rule 13f-2 to file on Form SHO is included
in the report filed by the Manager, the Manager shall check the box
for Report Type ``FORM SHO COMBINATION REPORT,'' include on the
Cover Page the name and active LEI of each of the other Managers
reporting for this Manager, if available, and include the
Information Tables. See Proposing Release, at 14958.
\233\ If the Manager is filing the Form SHO report as an
amendment, then the Manager must check the ``Amendment and
Restatement'' box on the Cover Page and enter the Amendment and
Restatement number. Each amendment must include a complete Cover
Page and Information Tables. Amendments must be filed sequentially.
See Proposing Release, at 14960-61.
\234\ See Proposing Release, at 14958.
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(B) Comments and Final Rule
Other than with respect to financial identifiers as discussed
above, the Commission did not receive any comments on the contents of
the Cover Page. As a result, the Commission is adopting Special
Instructions 2-5 of Form SHO as proposed, with minor technical
modifications. For greater precision (but no change in the meaning) in
the terminology used in Form SHO as adopted, an LEI that is currently
in effect is referred to as a ``non-lapsed LEI'' rather than an
``active LEI'' (the terminology used in Proposed Form SHO). Also, the
Cover Page contact information for the reporting Manager and its
``Contact Employee'' has been updated to require the use of email
rather than facsimile.\235\
---------------------------------------------------------------------------

\235\ See supra n. 37 and accompanying text.
---------------------------------------------------------------------------

iii. Information Table 1: ``Manager's Monthly Gross Short Position''
(A) Proposal
Under Proposed Rule 13f-2, Managers meeting a Reporting Threshold
would report certain information, including end of month gross short
position information regarding transactions that have settled during
the calendar month being reported, and certain hedging information that
would help to indicate whether the reported gross short position is
directional or non-directional in nature.\236\
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\236\ Id. at 14959.
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Specifically, as proposed, the Manager would report the following
information on Information Table 1:
In Column 1, a Manager would enter the last day of the
calendar month being reported by the Manager on which a trade settles.
This information would identify the month being reported by the
Manager.
In Column 2, a Manager would enter the name of the issuer
to identify the issuer of the equity security for which information is
being reported.
In Column 3, a Manager would enter the issuer's active
LEI, if any. The LEI provides standardized information that would
enable the Commission and market participants to more precisely
identify the issuer of each equity security for which information is
being reported.
In Column 4, consistent with section 13(f)(2), a Manager
would enter the title of the class of the equity security for which
information is being reported.
In Column 5, consistent with section 13(f)(2), a Manager
would enter the nine (9) digit CUSIP number of the equity security for
which information is being reported, if applicable.
In Column 6, a Manager would enter the twelve (12)
character, alphanumeric FIGI of the equity security for which
information is being reported, if a FIGI has been assigned. Like CUSIP,
FIGI provides a methodology for identifying securities.
In Column 7, a Manager would enter the number of shares
that represent the Manager's gross short position in the equity
security for which information is being reported at the close of
regular trading hours on the last settlement date of the calendar month
of the reporting period. The term ``gross short position'' means the
number of shares of the security for which information is being
reported that are held short, without inclusion of any offsetting
economic positions (including shares of the equity security for which
information is being reported or derivatives of such security).
In Column 8, a Manager would enter the U.S. dollar value
of the shares reported in Column 7, rounded to the nearest dollar. A
Manager would report the corresponding dollar value of the reported
gross short position by multiplying the number of shares of the
security for which information is being reported by the closing price
at the close of regular trading hours on the last settlement date of
the calendar month. In circumstances where such closing price is not
available, the Manager would use the price at which it last purchased
or sold any share of that security. This additional information
regarding the dollar value of the reported short position would provide
additional transparency and context to market participants and
regulators.
In Column 9, a Manager would indicate whether the
identified gross short position in Column 7 is fully hedged (``F''),
partially hedged (``P''), or not hedged (``0'') at the close of the
last settlement date of the calendar month of the reporting
period.\237\
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\237\ As stated in the proposal, a Manager would indicate that a
reported gross short position in an equity security is ``fully
hedged'' if the Manager also holds an offsetting position that
reduces the risk of price fluctuations for its entire position in
that equity security, for example, through ``delta'' hedging (in
which the Manager's reported gross short position is offset 1-for-
1), or similar hedging strategies used by market participants. A
Manager would report that it is ``partially hedged'' if the Manager
holds an offsetting position that is less than the identified price
risk associated with the reported gross short position in that
equity security. This additional hedging information would help to
indicate whether the reported gross short position is directional or
non-directional in nature. More specifically, a short position that
is not hedged could be an indicator that the short seller has a
negative view of the security, believes that the price of the equity
security will decrease, and accepts the market risk related to its
short position. A short position that is fully hedged could be an
indicator that the short seller has a neutral or positive view of
the security and is engaged in hedging activity to protect against
potential market risk. A short position that is partially hedged
could be an indicator that the short seller has a negative, neutral,
or positive view of the security. Whether the hedge itself is full,
partial, or non-existent might provide further context to market
participants regarding the short seller's view of the equity
security. Hedging information also can assist with distinguishing
position trading, which typically has corresponding hedging
activity, from other strategies such as arbitrage.

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[[Page 75122]]

(B) Comments and Final Rule
Comments regarding the contents of Information Table 1 raised
concerns about the proposal to require hedging information in Column 9.
As discussed below, the Commission is adopting Information Table 1, as
proposed, except that the Commission will not require Managers to
report hedging information as originally proposed in Column 9 of the
table.
Comments Regarding Hedging Indicators
Implementation Challenges
The proposal would have required Managers to report on Information
Table 1 whether they were ``fully hedged'' or ``partially hedged''
based on whether a Manager held an offsetting position that completely
or partially reduced the risk of price fluctuations for its position in
that equity security, respectively.\238\ Further, the proposal required
Managers to report on Information Table 1 that their short position was
``not hedged'' if the Manager did not hold any offsetting
positions.\239\ A number of commenters raised concerns about the costs
to implement this proposed requirement.\240\ One such commenter
expressed concerns that the requirement to report hedging status would
be ``operationally difficult to implement,'' as the reporting would be
produced by back-office systems that ``generally do not have any
linkage information to allow them to match a hedge to a short
position,'' necessitating the development of costly new systems.\241\
One industry group commenter expressed a concern about ``complications
that can arise from the hedging classification,'' particularly for
large portfolios for which it will not always be clear when a position
is intended to be a hedge for another position, or clear or obvious
whether a position acts as ``one-to-one offset'' of price risk for
another position.\242\
---------------------------------------------------------------------------

\238\ Proposing Release, at 14959.
\239\ Id.
\240\ See, e.g., MFA Letter, at 4 (stating that inclusion of
hedging classification on Form SHO would be costly and time
consuming for reporting Managers to produce); Virtu Letter, at 3
(advocating that requirement to report short positions as fully,
partially, or not hedged would be ``operationally difficult to
implement'' and should be eliminated).
\241\ Virtu Letter, at 3.
\242\ AIMA Letter, at 13.
---------------------------------------------------------------------------

Non-Universal Terminology
Some commenters expressed concerns about the meaning of ``fully
hedged'' and ``partially hedged'' under the proposed rule. These
commenters expressed the view that because there is no universal
definition of hedging in the marketplace, or clear guidance on this
matter from the Commission, Managers can reasonably come to different
conclusions regarding the extent to which similar positions are
hedged.\243\ Because the meanings of ``fully'' and ``partially'' hedged
are subject to interpretation, these commenters believed that the
reporting of hedging data would be inconsistent, imprecise, potentially
misleading, and subject to misinterpretation. Several such commenters
posited that due to what they described as the ambiguity of the hedging
definitions, the proposed hedging reporting could result in inaccurate
or misleading data--such as misleading market signals of Managers'
sentiments--as Managers may interpret the hedging indicators
differently.\244\ Similarly, a commenter stated that due to the lack of
detail surrounding the ``partially hedged'' designation in particular,
the data may be misleading as to the level of price risk associated
with certain positions.\245\ A commenter stated that there is no
universal definition of what constitutes a ``hedge'' and that the
Commission's guidance in the Proposing Release and the instructions in
Proposed Form SHO as to how a Manager determines whether or when a
position is fully or partially hedged, or not hedged, are insufficient
to create a universal understanding and consistent reporting.\246\ That
commenter further stated that the Commission provided only one example
(the use of delta hedging in a one-to-one offset between short and long
positions), even though Managers use a variety of other hedging
techniques, such as portfolio hedging, ETFs, baskets of securities, and
securities that have historic trading correlations, among others.\247\
Under these circumstances, several commenters predicted, Managers would
likely default to a ``partially hedged'' designation,\248\ resulting in
data of limited utility.\249\ These commenters stated that due to what
they viewed as the ambiguous and non-universal nature of the terms,
many Managers may simply default to marking transactions as ``partially
hedged'' when it is unclear to what extent the positions are hedged,
due to the wide range of positions encompassed by the proposed
partially hedged indicator.\250\ To mitigate this concern and to
improve transparency, some commenters critical of the hedging
indicators suggested reducing the qualitative nature of the proposed
terms by dividing the ``partially hedged'' term into smaller, well-
defined units or even percentage increments.\251\ More specifically,
these commenters expressed concern that the proposed hedging
classifications could prove challenging to apply consistently across
Managers and could result in significant

[[Page 75123]]

costs for data of limited value.\252\ One commenter stated that the act
of market participants reporting the proposed hedging classification
would create a chilling effect.\253\
---------------------------------------------------------------------------

\243\ See, e.g., ICI Letter, at 10; see also Comment Letter from
Mehmet Kinak, Head of Equity Trading, T. Rowe Price, et al. (Apr.
26, 2022), at 4, available at https://www.sec.gov/comments/s7-08-22/s70822-20126777-287493.pdf (``T. Rowe Price Letter'') (stating that
hedging data may be ``especially vulnerable to lack of consistency
in terms of how various managers apply the classification.''); AIMA
Letter, at 13 (predicting that hedging classification will involve
``level of subjectivity that is unlikely to be applied uniformly
across Managers'' and that determining such classification will
``prove even more complicated for a large quantitative portfolio'').
\244\ See, e.g., AIMA Letter, at 13; MFA Letter, at 16.
\245\ See ICI Letter, at 10.
\246\ See MFA Letter, at 16-17.
\247\ See id.
\248\ See, e.g., MFA Letter, at 17. The MFA Letter suggested
that ``almost all short positions held by a large manager will be
partially hedged--for example, if a manager has discretion over one
fund with a short position, and another unrelated fund with a long
position, the manager would be required to report the short position
as ``partially hedged'' when in fact, the short position is not
hedged at all.'' Depending on the facts and circumstances, the
commenter is correct that the positions in the two funds managed by
the same Manager may have to be aggregated under Rule 200(c) of
Regulation SHO for marking purposes.
\249\ See, e.g., Ropes & Gray Letter, at 5 (stating that
difficulty in defining ``fully,'' ``partially,'' or ``not,'' hedged
would likely lead to inconsistent reporting that, in turn would
limit the ``meaningfulness'' of the reported information to
investors and the Commission); T. Rowe Price Letter, at 4 (raising
concern that lack of consistency in how reporting Managers would
apply the hedging classification could lead to ``weaknesses'' in the
hedging data reported that would make the Commission's publication
of aggregated hedging classifications across reporting Managers of
little value to, and potentially misinterpreted by, the public); MFA
Letter, at 4 (stating ``[b]ecause (i) there is no universal
definition of ``hedging'' in the industry, and (ii) the reported
gross short position must encompass short positions aggregated
across funds, clients and affiliated managers, any hedging-related
designation would be meaningless. Inclusion of this data would
result in inconsistent reporting and would be costly and time
consuming for managers to produce.''); SIFMA Letter at 21 (stating
information reported in Column 9 of Proposed Form SHO would be
``inherently inconsistent and precise and, therefore, of very little
value to regulators in that it could be highly misleading''); see
also AIMA Letter, at 13 (stating hedging classification will involve
``level of subjectivity that is unlikely to be applied uniformly
across Managers'').
\250\ See, e.g., Ropes & Gray Letter (arguing that the possible
exaggerated use of the partially hedged indicator is ``unlikely to
elicit comparable reporting across managers'').
\251\ See Comment from Peyton Bailey (Mar. 14, 2022) (``Peyton
Bailey Comment''), available at https://www.sec.gov/comments/s7-08-22/s70822-272291.htm (proposing to use percentage points or
``majority'' (<=50%) and ``minority'' (<=50%) hedging indicators
instead of partially hedged); Nick Dougherty Letter (proposing to
use percentage points); WTI Letter (proposing to use percentage
points); Comment from Alex Fleming (Oct. 31, 2022), available at
https://www.sec.gov/comments/s7-08-22/s70822-317348.htm (proposing
to use numerical or percentage scale).
\252\ See MFA Letter, at 4, 16-17.
\253\ See Comment Letter from Joshua Russell (Oct. 26, 2022),
available at https://www.sec.gov/comments/s7-08-22/s70822-20147825-314190.pdf.
---------------------------------------------------------------------------

Another commenter stated that although a change in hedging status
may correspond with a change in manager sentiment, it is also possible
that such a change may simply be the result of other unrelated
objectives, such as rebalancing a portfolio.\254\ Similarly, another
commenter agreed that the purpose of defensive tactics that hedging
strategies often entail, such as hedging a long position, contrasts
with the purpose of unhedged short strategies.\255\ That commenter
expressed the view that such ``defensive'' hedging should not be
included in the reporting as it would provide limited utility to the
public. Some commenters took the position that reporting on ``bona
fide'' hedging activity would not align with the goals in the Proposing
Release and that such activity is unlikely to be abusive or
manipulative.\256\
---------------------------------------------------------------------------

\254\ See T. Rowe Price Letter, at 4.
\255\ See K&L Gates Letter, at 2.
\256\ See K&L Gates Letter, at 2-3, T. Rowe Price Letter, at 2-
4, Anonymous Fund Manager Letter, at 1.
---------------------------------------------------------------------------

Some commenters that supported requiring hedging indicators
generally rejected complaints about the costs and burdens related to
the proposed reporting of hedging status as part of Information Table
1, stating that with modern technology, the requirements are ``easily
automated and with minimal cost incurrence.'' \257\ Support for the
collection of hedging information generally came from commenters
favoring steps to enhance the transparency of short sale-related data
to facilitate a better understanding of short selling dynamics.\258\
One commenter stated that the hedging classification, if made public,
would illustrate market sentiment, and that it would help to uncover
``short and distort'' campaigns, particularly in sectors that have
higher than normal rates of short selling.\259\ The commenter further
explained that under the status quo, it is unclear whether short
positions are used for hedging long positions or whether they are being
used to speculate on perceived overvaluation in the market in recent
years.\260\ Another commenter stated that publishing hedging
information regarding the actions of hedge funds and other large market
participants would inform the decision making of retail investors.\261\
Other commenters posited that the proposed ``not hedged'' indicator
would provide the most useful information to the market because
unhedged short positions may be the most likely to be riskier or
manipulated.\262\
---------------------------------------------------------------------------

\257\ Letter from Andrew Patrick White, CEO & Founder, FundApps
(Mar. 2, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20118368-271239.pdf.
\258\ See, e.g., Comment Letter from Anonymous (March 14, 2022)
(positing that managers should report whether, and to what extent,
they are hedged, along with an explanation of what that means; such
information is valuable in determining a manager's position with
regard to the associated risks); see also Comment Letter from
Biotechnology Innovation Organization (Apr. 25, 2022) at 3,
available at https://www.sec.gov/comments/s7-08-22/s70822-20126539-287214.pdf (``BIO Letter'') (positing that transparency into hedging
data would facilitate understanding of price and behavior dynamics).
\259\ BIO Letter, at 7.
\260\ Id. at 2.
\261\ Peyton Bailey Comment.
\262\ See Comment from Max Knaus (Oct. 30, 2022), available at
https://www.sec.gov/comments/s7-08-22/s70822-316957.htm; Comment
Letter from Brendan Casey (Oct. 30, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20149998-319181.pdf.
---------------------------------------------------------------------------

Final Rule
After considering the comments received,\263\ the Commission is not
adopting the hedging reporting requirement as proposed. Specifically,
when filing Form SHO Information Table 1, a Manager will not be
required to indicate whether the identified gross short position in
Column 9 of Information Table 1 is fully hedged (``F''), partially
hedged (``P''), or not hedged (``0'') at the close of the last
settlement date of the calendar month of the reporting period; Column 9
will be removed from Information Table 1 of Form SHO as adopted.
---------------------------------------------------------------------------

\263\ One commenter stated that the proposed hedging requirement
``fails to appreciate the difficulty--particularly for multi-service
broker-dealers that use aggregation units and investment funds with
multiple strategies--of calculating and determining such information
for reporting purposes.'' SIFMA Letter, at 20. Under Regulation SHO,
a person shall be deemed to own a security only to the extent it has
a net long position in that security. See Rule 200(c). See also Rule
200(g)(1) (an order shall be marked long only if the seller is
deemed to own the security and the security is in the physical
possession or control of the broker or dealer or it is reasonably
expected that the security will be in the physical possession or
control of the broker or dealer by settlement date). Under Rule
200(f), a broker must aggregate all of its positions in a security
to determine its net position, unless it qualifies for independent
trading unit aggregation. If the broker or dealer qualifies for
independent aggregation units, each independent trading unit shall
aggregate all of its positions in a security to determine its net
position. See Rule 200(f). Qualification requires that the
independent aggregation unit meet four conditions. See Rule
200(f)(1) through (4). For instance, all traders in an aggregation
unit must pursue only the particular trading objective(s) or
strategy(s) of that aggregation unit and may not coordinate that
strategy with any other aggregation unit. See Rule 200(f)(3). In
adopting Rule 200(f), the Commission stated that ``conditions are
necessary to prevent potential abuses associated with establishing
aggregation units within multi-service broker-dealers.'' Regulation
SHO Adopting Release, at 48011. Thus, to be eligible for the
aggregation unit exception, the broker or dealer's units must
operate independently, with defined trading strategies, and one
unit's trades or positions cannot be used to offset or hedge another
unit's trades or positions. See, e.g., Rule 200(f)(3); see also
Regulation SHO Adopting Release, at 48011 (each unit must be engaged
in separate trading strategies). While information barriers between
aggregation units may be useful, as the commenter suggests, such
barriers alone are not sufficient for eligibility for Rule 200(f).
See e.g., Rule 200(f)(3); see also Regulation SHO Adopting Release
at 48011 (conditions are intended to limit potential for abuse
associated with coordination among units and to maintain the
independence of the units). Thus, a broker or dealer that has
created multiple units with fungible trading strategies as a means
of affecting order marking may not be eligible for aggregation unit
treatment under Rule 200(f) of Regulation SHO. See e.g., In re
Morgan Stanley & Co., LLC, 34-90046 (Sept. 30, 2020) (settled case),
available at https://www.sec.gov/litigation/admin/2020/34-90046.pdf
(long-only and short-only aggregation units were not independent and
separate trading strategies, but were instead operated by the same
employees, managed by the same manager, and consisted of the same
trading strategies).
---------------------------------------------------------------------------

While the Commission laid out the rationale behind the hedging
reporting requirement in the Proposing Release, comments received, as
discussed above, persuaded the Commission that such reported data may
not result in as consistent and accurate data as it originally
envisioned. In addition to the definitional challenges discussed above,
the Commission recognizes the challenges of applying the Rule 13f-2
reporting requirements in the scenario when a Manager has investment
discretion over multiple accounts. For example, purchases and sales in
different accounts may not be intended to hedge one another, but the
proposal would have required that the Manager indicate that it was
``partially-hedged'' nonetheless. Such information would not be an
accurate reflection of the Manager's hedging status, and thus would not
be useful. As another example, a Manager that has purchased a few
shares of a security (for example, 100 shares) for which it holds a
substantial short position (for example, 1 million shares) would have
had to report that it was ``partially hedged'' without regard for the
scale of such purchases in relation to the position for which it would
have had to report it was hedging. That said, the Commission continues
to believe, as did some commenters favoring the proposed requirement,
that if accurate data on hedging could be collected, such information
would be useful to regulators.

[[Page 75124]]

The Commission considered whether, as suggested by a commenter, the
hedging indicator could be simplified so that Managers would be
required only to report whether a position is not hedged.\264\ While
short positions that are unhedged may involve greater risk, this
alternative could be too easily circumvented by, for example, simply
purchasing a nominal number of shares of the security and stating the
position is therefore hedged (or partially hedged under the rule as
proposed). The Commission also considered another commenter's
suggestion that hedged short positions should be exempted from
reporting.\265\ This alternative would create a similar circumvention
scenario to the one mentioned above (i.e., using a nominal long
position to create an exempt hedged position).
---------------------------------------------------------------------------

\264\ See Comment from Max Knaus (Oct. 30, 2022), available at
https://www.sec.gov/comments/s7-08-22/s70822-316957.htm; Comment
Letter from Brendan Casey (Oct. 30, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20149998-319181.pdf.
\265\ Perkins Coie Letter, at 6 (stating that ``[o]r,
alternatively, the SEC should consider exempting hedged short
positions from reporting on Form SHO'').
---------------------------------------------------------------------------

Accordingly, the Commission is not adopting the hedging reporting
requirement as proposed.
iv. Information Table 2: ``Daily Activity Affecting Manager's Gross
Short Position During the Reporting Period''
(A) Proposal
As proposed, Information Table 2 of Form SHO captures daily
activity that increases or decreases a Manager's short position for
each settlement date during the calendar month reporting period. More
specifically, on proposed Form SHO, a Manager would report the number
of shares of the equity security that: (i) were sold short; (ii) were
purchased to cover, in whole or in part, an existing short position in
the security; (iii) were acquired through the exercise or assignment of
an option, through a tendered conversion, or through a secondary
offering transaction,\266\ that reduces or closes a short position on
the (underlying) security; (iv) were sold through the exercise or
assignment of an option that creates or increases a short position on
the (underlying) security; (v) resulted from other activity not
previously reported in the Information Table that reduces or closes, or
creates or increases a Manager's short position on the security,
including, but not limited to, ETF creation or redemption activity.
Pursuant to Proposed Rule 13f-2, Managers would assemble, review, and
file the required information with the Commission on new Form SHO
within fourteen (14) calendar days after the end of the calendar month.
As noted above, the Commission would then publish aggregated
information derived from the data reported on new Form SHO, aggregated
across all reporting Managers, within one month after the end of the
reporting calendar month.
---------------------------------------------------------------------------

\266\ The term ``sale'' under the Securities Act includes
contract of sale. See Securities Offering Reform, Exchange Act
Release No. 52056 (July 19, 2005), 70 FR 44722, 44765 (Aug. 3,
2005); Short Selling in Connection With a Public Offering, Exchange
Act Release No. 56206 (Aug. 6, 2007), 72 FR 45094, 45102 (Aug. 10,
2007). The Commission has previously stated that, in a short sale,
the sale of securities occurs at the time the short position is
established, rather than when shares are delivered to close out that
short position, for purposes of section 5 of the Securities Act of
1933 (``Securities Act''). See, e.g., Commission Guidance on the
Application of Certain Provisions of the Securities Act of 1933, the
Securities Exchange Act of 1934, and Rules Thereunder to Trading in
Security Futures Products, Exchange Act Release No. 46101 (June 21,
2022), 67 FR 43234, 43236 (June 27, 2002) (see Questions 3 and 5);
Short Selling in Connection With a Public Offering, 72 FR 45094.
---------------------------------------------------------------------------

Specifically, as proposed, the Manager would report the following
information on Information Table 2 for each date during the reporting
period on which a trade settled (settlement date) during the calendar
month.
In Column 1, a Manager would enter the date during the
reporting period on which a trade settled for the activity reported.
This would identify the settlement date activity being reported.
In Column 2, consistent with section 13(f)(2), a Manager
would enter the name of the issuer, to identify the issuer of the
security for which information is being reported.
In Column 3, a Manager would enter the issuer's active
LEI, if the issuer had an active LEI. The LEI provides standardized
information that would enable the Commission and market participants to
more precisely identify the issuer of each equity security for which
information is being reported.
In Column 4, consistent with section 13(f)(2), a Manager
would enter the title of the class of the security for which
information is being reported.
In Column 5, consistent with section 13(f)(2), a Manager
would enter the nine (9) digit CUSIP number of the equity security for
which information is being reported, if applicable.
In Column 6, a Manager would enter the twelve (12)
character, alphanumeric FIGI of the equity security for which
information is being reported, if a FIGI has been assigned. Like CUSIP,
FIGI provides a methodology for identifying securities.
In Column 7, for the settlement date set forth in Column
1, a Manager would enter the number of shares of the equity security
for which information is being reported that resulted from short sales
and settled on that date.
In Column 8, for the settlement date set forth in Column
1, a Manager would enter the number of shares of the security for which
information is being reported that were purchased to cover, in whole or
in part, an existing short position in that security and settled on
that date. This activity information would allow the Commission and
other regulators to more quickly identify a potential ``short
squeeze,'' which could be evidenced by short sellers closing out short
positions by purchasing shares in the open market. If it appeared that
a short squeeze may have occurred through potential manipulative
behavior involving short selling, the Commission could perform further
analysis regarding the squeeze. Increased risk of detection could deter
some market participants seeking to orchestrate a short squeeze.
In Column 9, for the settlement date set forth in Column
1, a Manager would enter the number of shares of the security for which
information is being reported that are acquired in a call option
exercise that reduces or closes a short position on that security and
settled on that date. The exercise or assignment of an option position
can reduce or close a short position in the underlying equity security.
In Column 10, for the settlement date set forth in Column
1, a Manager would enter the number of shares of the security for which
information is being reported that were sold in a put option exercise
that created or increased a short position on that security and settled
on that date. Options can be used to create economic short exposure
such that an exercise or assignment of an option could create or
increase a short position in the underlying equity security.
In Column 11, for the settlement date set forth in Column
1, a Manager would enter the number of shares of the security for which
information is being reported that were sold in a call option
assignment that created or increased a short position on that security
and settled on that date. Options can be used to create economic short
exposure such that an exercise or assignment of an option could create
or increase a short position in the underlying equity security.
In Column 12, for the settlement date set forth in Column
1, a Manager would enter the number of shares of the security for which
information is being reported that were acquired in a put option
assignment that reduced or

[[Page 75125]]

closed a short position on that security and settled on that date. The
exercise or assignment of an option position can reduce or close a
short position in the underlying equity security.
In Column 13, for the settlement date set forth in Column
1, a Manager would enter the number of shares of the security for which
information is being reported that are acquired as a result of tendered
conversions that reduced or closed a short position on that security
and settled on that date. Holders of convertible debt often hold short
positions to hedge their convertible position. When the shares of the
convertible debt are converted, they can reduce or close a short
position in the equity security.
In Column 14, for the settlement date set forth in Column
1, a Manager would enter the number of shares of the security for which
information is being reported that were obtained through a secondary
offering transaction that reduces or closes a short position on that
security and settled on that date. Purchasing securities in a secondary
offering \267\ can reduce or close a short position in the equity
security.
---------------------------------------------------------------------------

\267\ Such offering purchases must be reported whether they
occurred outside or within the restricted period of 17 CFR 242.105,
Rule 105 of Regulation M, which makes it unlawful for a person who
sells short a security that is the subject of an offering to
purchase in the offering if the short sale occurred during the
restricted period. Rule 105 originally prohibited persons from
covering short sales with offering purchases but was amended to
prohibit any purchases of offering shares if the person sold short
during the restricted period (with limited exceptions) ``to end the
progression of schemes and structures engineered to camouflage
prohibited covering.'' Short Selling in Connection with a Public
Offering, Exchange Act Release No. 34-54888 (Dec. 6, 2006), 71 FR
75002 at 75005 (Dec. 13, 2006). The amendment was designed to
address a proliferation of trading strategies and structures
attempting to accomplish the economic equivalent of the activity
that the rule seeks to prevent, specifically, attempts to obfuscate
the prohibited ``covering'' of the short sale. See, e.g., Short
Selling in Connection with a Public Offering, Exchange Act Release
No. 34-56206 (Aug. 6, 2007), 72 FR 45094 (Aug. 10, 2007).
---------------------------------------------------------------------------

In Column 15, for the settlement date set forth in Column
1, a Manager would enter the number of shares of the security for which
information is being reported that resulted from other activity not
previously reported in Information Table 2 that creates or increases a
short position on that security and settled on that date. Other
activity to be reported includes, but is not limited to, shares
resulting from ETF creation or redemption activity.
In Column 16, for the settlement date set forth in Column
1, a Manager would enter the number of shares of the security for which
information is being reported that resulted from other activity not
previously reported on Information Table 2 that reduces or closes a
short position on that security and settled on that date. Other
activity to be reported includes, but is not limited to, shares
resulting from ETF creation or redemption activity.
The Commission stated in the Proposing Release that it believes
that the information in Columns 9, 12, 13, 14, and 16 of proposed
Information Table 2 would be useful in providing the Commission
additional context and transparency into how and when short positions
in the reported equity security are being closed out or reduced.\268\
The Commission also stated that the information in Columns 10, 11, and
15 would be useful in providing the Commission additional context and
transparency into how and when short positions in the reported equity
security are being created or increased.\269\
---------------------------------------------------------------------------

\268\ Proposing Release, at 14960.
\269\ Id.
---------------------------------------------------------------------------

Such daily activity information would provide market participants
and regulators with additional context and transparency into whether,
how, and when reported gross short positions in the reported equity
security are being closed out (or alternatively, increased) as a result
of the acquisition or sale of shares of the equity security resulting
from call options exercises or assignments; put options exercises or
assignments; tendered conversions; secondary offering transactions;
\270\ and other activity. The Commission stated that it believed that
such activity data would also assist the Commission in assessing
systemic risk and in reconstructing unusual market events, including
instances of extreme volatility.
---------------------------------------------------------------------------

\270\ See supra n. 263.
---------------------------------------------------------------------------

(B) Comments and Final Rule
The Commission solicited and received comment on the categories of
short sale activity data that a Manager would be required to report on
new Form SHO Information Table 2. Commenters differed on the
appropriate level of transparency of the short sale-related data
presented. Some commenters called for robust--if not complete--
transparency of short sale-related data, while other commenters
expressed concerns about the breadth of the activity information to be
reported, the related cost burdens to report such information, and data
security.
Individual investor commenters, generally, were critical of the
opacity of current short position and short activity data disclosure. A
group consisting of retail investors stated there was a ``lack of
transparency around short positions, the inability to adequately
quantify short interest, and the ability for firms to skirt regulation
through derivative positions such as options and security-based
swaps.'' \271\ Some individual investor commenters viewed Proposed Rule
13f-2 and related Form SHO as a first step toward achieving the full
transparency in disclosure they perceived as necessary for a fair and
efficient market.\272\ To these commenters, greater transparency is a
means to level the playing field for retail investors.\273\
---------------------------------------------------------------------------

\271\ WTI Letter.
\272\ Id. See also Anonymously Submitted Comment (Mar. 11,
2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20119226-272030.htm (``any and all information'' should be
accessible by any investors); Anonymously Submitted Comments (Apr.
26, 2022, May 10, 2022, Oct. 9, 2022, Oct. 26, 2022); Comment from
Erin Ashford (Oct 9, 22), available at https://www.sec.gov/comments/s7-08-22/s70822-309605.htm (calling for ``robust and complete
transparency''); cf. Anonymously Submitted Comment (Mar. 17, 2022)
(raising concerns about data integrity when the reporting system is
based on reporting).
\273\ See, e.g., Comment from Richards (Oct. 31, 2022),
available at https://www.sec.gov/comments/s7-08-22/s70822-317124.htm
(``Market fairness and transparency is an important part of this
democracy. It helps to level the playing field.''); Anonymously
Submitted Comment (Oct. 19, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20146713-312005.pdf (``In summary, I, like
many others, support the above proposal to increase transparency in
the markets, and to somewhat level the playing field for smaller,
independent investors and retail alike.''); Comment from Jonathan
Patterson (Mar. 14, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-272193.htm (``Shedding some light into the
transactions of short sellers would be very supportive for retail
investors and would help to level the playing field.'').
---------------------------------------------------------------------------

Other commenters acknowledged the Commission's authority to
promulgate rules to capture short sale-related data but took the
position that Form SHO reporting should be limited to the bare minimum
necessary to satisfy the statutory mandate of DFA section 929X (i.e.,
Exchange Act section 13(f)(2)).\274\ These commenters expressed
concerns about requiring the reporting of anything beyond the data
elements expressly specified in section 13(f)(2) of

[[Page 75126]]

the Exchange Act.\275\ Expressing concerns that the data required in
Information Table 2 of Proposed Form SHO is too granular and contains
an excessive amount of commercially sensitive information that, if
misappropriated, would lead to commercial harm, these commenters
recommended that, at a minimum, the scope of information required to be
reported on Information Table 2 of Proposed Form SHO be substantially
limited, or that Information Table 2 be eliminated altogether.\276\
Some of these commenters suggested that the Commission rely instead on
existing sources of short-sale related data, such as CAT or short sale-
related data provided to FINRA and the exchanges.\277\ Other commenters
questioned the utility of the reported information proposed to be
required.\278\
---------------------------------------------------------------------------

\274\ See T. Rowe Price Letter, at 2 (urging a measured approach
to meeting the 929X reporting obligation so that ``the public
reporting of short sale information only satisfies the specific data
elements and minimum frequency of dissemination referenced in
section 929X and goes no further.''); Comment Letter from Robert
Sloan, Managing Partner, S3 Partners, LLC (May 20, 2022), available
at https://www.sec.gov/comments/s7-08-22/s70822-20129426-295541.pdf
(recommending reporting be limited to public disclosure of ``only
those data elements required by Section 13(f)(2)'') (``S3 Letter'');
see also AIMA Letter (positing that Information Table 1 of Form SHO,
without the requirement to report hedging information, would alone
be sufficient for the Commission to carry out its statutory mandate
and achieve its goals).
\275\ See, e.g., SIFMA Letter, at 2 (positing that ``expansive
reporting regime contemplated under the Proposed Rules would extend
significantly beyond what Congress intended in passing Section 929X
. . . .''); Comment Letter from James Toes, President & CEO, et al.,
Security Traders Association (Apr. 26, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20126796-287509.pdf (``STA
Letter'') (criticizing rulemaking proposal as going far beyond
mandate of 929X of Dodd-Frank Act to prescribe rules providing for
public disclosure of short sales and recommending more alignment of
Proposed Rule 13f-2 reporting requirements with those of Form 13F);
T. Rowe Price Letter, at 2.
\276\ See, e.g., Two Sigma Letter, at 3-4 (raising concerns
about potential data breaches and unintended public dissemination of
daily short position data); see also AIMA Letter, at 14 (citing
negative ramifications for Managers, markets and the Commission if
commercially sensitive and valuable data reported in Information
Table 2 were to be compromised). See also discussion in supra Part
II.A.4.a.ii.
\277\ See, e.g., AIMA Letter, at 2 (calling for elimination of
Information Table 2 because it is ``too granular''); MFA Letter, at
4 (calling for elimination of Information Table 2 in favor of ``less
burdensome alternative''); see also Ropes & Gray Letter, at 2
(stating that much of the information to be reported under Proposed
Rule 13f-2 ``is, or soon should be'' available from existing
reporting regimes--e.g., CAT, and information reported by broker-
dealers to FINRA and the exchanges); SIFMA Letter, at 15-19
(recommending elimination of Information Table 2 altogether or
alternatively that reporting of short activity data be limited to
reporting only gross short positions at the end of each settlement
day when a reporting threshold is breached (excluding detailed
purchase and sale activity); cf. T. Rowe Price Letter, at 3
(recommending that Commission not use the permissive authority
granted in section 13(f)(2) of the Exchange Act to gather additional
information that would not be beneficial to the market and would be
challenging for Managers to compile). See also discussion in supra
Part II.A.4.a.i.
\278\ See, e.g., Ropes & Gray Letter, at 3, 6 (stating that it
would be difficult to ``to discern market sentiment or levels of
activity from the net number published by the Commission, and the
utility of publishing daily net transactions data to market
participants will also likely be limited''); see also K&L Gates
Letter, at 2 (questioning the ``value and impact'' of the
information called for under Proposed Rule 13f-2, that would
supplement information currently available from other sources).
---------------------------------------------------------------------------

Several commenters expressly or effectively questioning the need
for Information Table 2, also raised the concern that the short
activity monitoring necessary to comply with the reporting requirements
of Proposed Form SHO would require any Manager that engages in short
selling to expend significant time and resources to enhance or revamp
its systems to monitor activity continuously, without certainty as to
if or when its short selling activity would meet or exceed the
reporting thresholds.\279\ These commenters concluded that the costs to
operationalize Rule 13f-2 had not been adequately weighed against any
benefits to regulators or the public.\280\
---------------------------------------------------------------------------

\279\ See, e.g., Two Sigma Letter, at 7 (commenting that the
``commercial risk and operational burdens created by daily reporting
of individual short positions'' was not adequately justified in the
Proposing Release); MFA Letter, at 9-10 (raising concern that costs
and consequences of Proposals would have a chilling effect on
institutional investment managers' pursuit of short strategies);
Perkins Coie Letter, at 2-3 (stating that the benefits of the
reported information would be outweighed by compliance costs for
Managers that do not regularly utilize short positions ``[F]or
institutional investment managers that only selectively utilize
short positions, or who only do so passively, these additional
compliance costs in relation to the institutional investment
manager's usage of short positions could in turn impose untended
risks to the manager's underlying investors if the institutional
investment manager must divert additional time and resources for
compliance and oversight. This appears to be yet another affirmative
reporting requirement that will increase compliance and overhead
cost, without a [commensurate] benefit.'').
\280\ See, e.g., MFA Letter, at 14 (describing categories of
information required in Information Table 2 as ``unclear,
requir[ing] complicated judgments on the part of [M]anagers, and . .
. likely to yield inconsistencies in reporting and results that are
not accurate.''); Ropes & Gray Letter, at 3 (positing that reporting
under Proposed Rule 13f-2 would impose ``significant costs'' on
Managers, would not result in disclosure of ``actionable information
to market participants,'' and is not necessary to allow the
Commission to perform ``effective market surveillance''); see also
S3 Letter, at 2 (predicting that short activity monitoring required
by Information Table 2 of Form SHO will be a ``substantial lift''
for Managers' administrative systems); SBAI Letter, at 2 (positing
that proposed Form SHO data collection framework not justified from
a cost benefit perspective and provides ``very limited'' additional
insight in an untimely manner).
---------------------------------------------------------------------------

Final Rule
The Commission continues to believe that publication of aggregated
short position data, on a delayed basis, is a reasonable means of
minimizing the potential negative impacts of short position and short
activity disclosures on short selling and allaying data security
concerns raised by commenters while at the same time increasing
transparency.\281\ This rationale applies to Information Table 2, which
is about daily activities. Eliminating Information Table 2 would not
further the goal of enhancing the transparency of short sale-related
data.\282\ And for reasons stated below, the data available from
existing sources of short sale-related information have limitations, so
they do not extinguish the need for additional transparency in the
short sale market.\283\
---------------------------------------------------------------------------

\281\ Proposing Release, at 14955.
\282\ See Proposing Release, at 14987-14988, 14991 (discussing
how existing sources of short sale-related data are not sufficiently
granular, for example, to provide sufficient insights to further
understanding of short selling strategies, to distinguish short sale
transactions that impact short positions and those that do not, or
into the timing with which short positions are established or
covered).
\283\ See infra Part VIII.B.4.
---------------------------------------------------------------------------

The data to be reported in the following columns of Information
Table 2 in Proposed Form SHO will provide regulators with additional
context and transparency into how and when reported gross short
positions were closed out or increased, which will help the Commission
assess systemic risk.\284\ These columns are as follows:
---------------------------------------------------------------------------

\284\ Proposing Release, at 14959.

Column 7: Number of Shares Sold Short
Column 8: Number of Shares Purchased to Cover an Existing
Short Position
Column 9: Number of Shares Purchased in Exercised Call Option
Contracts
Column 10: Number of Shares Sold in Exercised Put Option
Contracts
Column 11: Number of Shares Sold Short in Assigned Call Option
Contracts
Column 12: Number of Shares Purchased in Assigned Put Option
Contracts
Column 13: Number of Shares Resulting from Tendered
Conversions
Column 14: Number of Shares Obtained Through Secondary
Offering Transaction \285\
---------------------------------------------------------------------------

\285\ A secondary offering transaction for purposes of this
requirement means an offering, other than an initial public
offering, or ``IPO,'' for the same class of security that is the
subject of the short sale. Such an offering could be made by the
issuer and include newly created and or treasury shares and could
also include or be made exclusively by selling shareholders.
---------------------------------------------------------------------------

Column 15: Other Activity that Creates or Increases Manager's
Short Position
Column 16: Other Activity that Reduces or Closes Manager's
Short Position

However, the Commission is modifying the design of Information
Table 2 of Proposed Form SHO to help reduce the costs and burdens of
complying with the reporting requirements of Proposed Rule 13f-2
without sacrificing the level of

[[Page 75127]]

transparency of short sale activity data made available to market
participants as prescribed in Proposed Rule 13f-2(a)(3).
Under the reporting regime of Proposed Rule 13f-2, Managers would
have been required to report each category of short activity
information included in Columns 7-16 (above) of Information Table 2 of
Proposed Form SHO.\286\ The Commission, for each individual column,
would then tabulate the information reported to determine and publish
the net activity in each reported equity security, as aggregated across
all reporting Managers. That net activity would be expressed by a
single identified number of shares of the reported equity security and
be determined by offsetting the purchase and sale activity reported by
Managers in Columns 7-16 of Information Table 2 of Proposed Form SHO.
---------------------------------------------------------------------------

\286\ See Special Instructions 9.g of Proposed Form SHO.
---------------------------------------------------------------------------

Under the adopted version of Information Table 2, Columns 7-16 of
Information Table 2 of Proposed Form SHO are replaced by a single, new
Column 7, in which Managers will report net activity in the security
for which information is being reported (represented as a number of
shares). More specifically, Special Instruction 9.g of Form SHO, as
adopted, requires Managers to report net change in short position
reflecting how the gross short position in shares of the security for
which information is being reported are being closed out--or
alternatively, increased--as a result of the acquisition or sale of
share activity determined by offsetting prescribed types of purchase
and sale activity. Those prescribed types of purchase and sale
activities correspond to the purchase and sale activities identified in
Columns 7-16 of Proposed Form SHO. The net activity will be determined
by Managers--rather than by the Commission--and reported to the
Commission. The Commission will then aggregate the reported daily net
change numbers across Managers for public dissemination. Under the
adopted version of Information Table 2, the Commission will receive
less granular information from reporting Managers than was proposed.
The Commission, however, will receive net activity information from
reporting Managers for each settlement date during the calendar month
which will provide additional context and transparency into whether the
reported gross short positions in the reported equity security are
being closed out (or alternatively, increased) as a result of the
acquisition or sale of shares of the equity security resulting from
call options exercises or assignments; put options exercises or
assignments; tendered conversions; secondary offering transactions; and
other activity. The Commission believes that this is a reasonable
approach that considers both those comments that supported additional
transparency with regard to short sale-related information that would
result from Information Table 2 reporting, and also comments about cost
and data security concerns with regard to such reporting. This reported
net activity information will assist the Commission in assessing
systemic risk and in reconstructing unusual market events, including
instances of extreme volatility.\287\
---------------------------------------------------------------------------

\287\ See infra Part VIII.C.1 for a discussion of how the Rule
13f-2 (and the adopted CAT amendment) will enhance the Commission's
ability to protect investors and investigate market manipulation by
providing a clearer view into the short selling market and improving
the Commission's and other regulators' reconstruction of significant
market events.
---------------------------------------------------------------------------

These modifications in the final rule for Information Table 2 of
Form SHO result in no change to the net activity information that will
be made publicly available by the Commission. Under Proposed Rule 13f-2
and Proposed Form SHO, the Commission would publish net activity
information for each reported equity security, aggregated across all
categories of activity in Columns 7-16 of Information Table 2 of
Proposed Form SHO, and aggregated across all reporting Managers. Under
Rule 13f-2 and Form SHO, the Commission will publish this same net
activity information for each reported equity security as originally
proposed by the Commission.\288\ And for this reason, Information Table
2 as adopted will not sacrifice transparency to market participants.
---------------------------------------------------------------------------

\288\ Proposing Release, at 14961.
---------------------------------------------------------------------------

e. Filing Amendments
i. Proposal
To facilitate the Commission's process of aggregating the short
sale-related information reported on Form SHO for publication, the
Commission proposed that amendments to Form SHO must restate the Form
SHO in its entirety. To inform the Commission that the filing is an
amendment of a previously filed Form SHO, the Commission proposed that
a Manager must check the box on the Form SHO Cover Page to indicate
that the filing is an ``Amendment and Restatement.'' On the Cover Page
of each Amendment and Restatement filed, the Commission proposed that a
Manager must provide a written description of the revision being made,
explain the reason for the revision, and indicate whether data from any
additional Form SHO reporting period(s) (up to the past 12 calendar
months) is/are affected by the amendment. If other reporting periods
have been affected, the Commission proposed that a Manager shall
complete and file a separate Amendment and Restatement for each
previous calendar month so affected and provide a description of the
revision being made and explain the reason for the revision.
In cases where a revision is reported in an Amendment and
Restatement that changes a data point reported in the Form SHO by
twenty-five (25) percent or more, the Commission proposed that the
Manager must notify the Commission staff via the Office of
Interpretation and Guidance of the Division of Trading and Markets
(``TM OIG'') at sec.gov">TradingAndMarkets@sec.gov within two (2) business days
after filing the Amendment and Restatement.
ii. Comments and Final Rule
The Commission received some comments on the issue of amendments
and restatements. One comment stated that the notification requirement
for an amendment of 25 percent or more is too large, and that lower
percentage revisions can be considered significant.\289\ The commenter
further recommended that the notification requirement for amendments be
reduced to revisions of 15 percent or more and that the number of
revisions allowed for individual Managers be limited.\290\ Another
commenter stated that if a non-material error has been made, a Manager
should not have to restate Form SHO in its entirety, and that a simple
note or addendum should suffice.\291\ This commenter also encouraged
the Commission to adopt a materiality threshold for other errors or
omissions, i.e., if the error does not ``materially impact the data the
Commission intends to publish, then the Manager should not be required
to restate Proposed Form SHO in its entirety,'' stating that this would
``eliminate the need for the Commission to collect even more
commercially sensitive and valuable data and, in turn, relieve Managers
of the time and costs that would be required to calculate, populate,
and re-file an entirely new Proposed Form SHO.'' \292\
---------------------------------------------------------------------------

\289\ Comment Letter from Anonymous (Mar. 21, 2022), available
at https://www.sec.gov/comments/s7-08-22/s70822-20120739-272894.pdf.
\290\ See id.
\291\ AIMA Letter, at 15.
\292\ Id.

---------------------------------------------------------------------------

[[Page 75128]]

The Commission is adopting procedures for filing and amending Form
SHO consistent with the Proposing Release but modified to no longer
require Managers to separately notify the Commission that the reporting
discrepancies presented in an Amendment and Restatement have occurred.
A Manager that determines or is made aware that it has filed a Form SHO
with errors that affect the accuracy of the information reported must
file an amended Form SHO within ten (10) calendar days of discovery of
the error. The Commission continues to believe that filing an amended
Form SHO within 10 calendar days of discovery of the error will provide
Managers with a reasonable period of time to prepare the Form SHO
amendment, while helping to ensure that accurate information is
received by the Commission in a timely manner.
The Commission is adopting the requirement, as proposed, that
amendments to a previously filed Form SHO restate the Form SHO in its
entirety, as described in Special Instruction 3 to Form SHO. Form SHO
Special Instruction 3.a provides that on the Cover Page of each amended
and restated Form SHO filing, a Manager must: check the box to indicate
that the filing is an ``Amendment and Restatement,'' provide a written
description of the revision being made, explain the reason for the
revision, and indicate whether data from any additional calendar month
reporting period(s) (up to the past 12 calendar months) is/are affected
by the amendment. Consistent with the proposed procedures for filing an
amended Form SHO, if other reporting periods have been affected, a
Manager must complete and file a separate Amendment and Restatement for
each previous calendar month so affected, and provide a description of
the revision being made and explain the reason for the revision. As
proposed and discussed further below, the Commission will provide
aggregated data on a rolling twelve-month basis, with prior months'
data updated as necessary to reflect data from Amendments and
Restatements. The Commission continues to believe that limiting the
requirement to file an amended Form SHO to twelve months will reduce
the burden and cost on Managers.\293\ In response to comments
requesting a materiality threshold, requiring a Form SHO to be restated
in its entirety should add little if any additional burden, as the
Manager will have already compiled such data, and thus no additional
data collection will be required other than to correct the data point
that is being amended. A materiality threshold could create additional
complexity in determining how and when to file an amendment to Form
SHO, and as such, the Commission is adopting the straightforward
approach that any revision requires the Manager to restate Form SHO in
its entirety when filing an amendment.
---------------------------------------------------------------------------

\293\ Proposing Release, at 14960.
---------------------------------------------------------------------------

The Commission is not adopting, however, the requirements that a
Manager provide the Commission notice of the revision(s) reported in an
Amendment and Restatement and an explanation of the reason(s) for the
revision(s), as prescribed in Proposed Form SHO Special Instruction 3.b
and 3.c; \294\ and each of those Special Instructions in Proposed Form
SHO is deleted from Form SHO as adopted. This change will reduce
compliance costs for Managers filing Amendments and Restatements by not
requiring them to provide a separate notice regarding information that
has been reported, and therefore is available, to the Commission via
EDGAR, without sacrificing transparency.
---------------------------------------------------------------------------

\294\ Special Instruction 3.b of Proposed Form SHO provided that
if a data being reported in an Amendment and Restatement affects the
data reported on the Form SHO reports filed in at least three of the
immediately preceding Form SHO reporting periods, the Manager,
within two (2) business days after filing the Amendment and
Restatement, must provide the Commission staff, via TM OIG at
sec.gov">TradingAndMarkets@sec.gov, with notice of (1) this circumstance; and
(2) an explanation of the reason for the revision. Special
Instruction 3.c of Proposed Form SHO provided that if a revision
reported in an Amendment and Restatement changes a data point
reported in the Form SHO that is being amended by 25% or more, the
Manager must notify the Commission staff via TM OIG at
sec.gov">TradingAndMarkets@sec.gov within two business days after filing the
Amendment and Restatement.
---------------------------------------------------------------------------

Consistent with the proposed procedures for publishing data
reported on or derived from Form SHO reports--including any Amendments
and Restatements, the Commission plans to update prior months'
aggregated Form SHO data on EDGAR to reflect information reported in
Amendments and Restatements and will add an asterisk (i.e., *) or other
mark for any updated data for which a Manager notified Commission staff
that it filed an Amendment and Restatement that changes a data point
reported in the Form SHO by 25 percent or more to highlight for market
participants that the published aggregated data includes significantly
revised data. The Commission will publish the aggregated Form SHO data
for the latest reporting period along with aggregated Proposed Form SHO
data for the prior twelve months on a rolling basis. The published
aggregated Form SHO data will include a disclaimer that the Commission
does not ensure the accuracy of the data being published.\295\
Maintaining these requirements will help preserve the integrity of the
reported short sale data and alert market participants to any potential
issues with published data.\296\
---------------------------------------------------------------------------

\295\ See Proposing Release, at 14961.
\296\ See id.
---------------------------------------------------------------------------

f. Confidential Treatment
i. Proposal
The instructions to Proposed Form SHO provided that all information
that would reveal the identity of a Manager filing a Proposed Form SHO
report with the Commission would be deemed subject to a confidential
treatment request under 17 CFR 240.24b-2 (``Rule 24b-2'').\297\ As
discussed in the Proposing Release, the Commission proposed to publish
only aggregated data derived from information provided in Proposed Form
SHO reports. Proposed Form SHO, by its terms, ensured that information
reported on the form that could reveal the identity of the reporting
Manager would be deemed subject to a confidential treatment request.
Pursuant to section 13(f) of the Exchange Act, the Commission may
prevent or delay public disclosure of all other information reported on
Proposed Form SHO in accordance with the Freedom of Information Act
(``FOIA''), section 13(f)(4) and (5), Rule 24b-2(b) under the Exchange
Act, and any other applicable law.
---------------------------------------------------------------------------

\297\ Id. at 14957.
---------------------------------------------------------------------------

ii. Comments and Final Rule
The Commission received a single comment regarding confidential
treatment. Stating that there are a variety of valid reasons beyond the
example provided in the Proposing Release that a Manager might seek
confidential treatment of information reported on Proposed Form SHO,
the commenter urged the Commission to adopt a more flexible process for
seeking confidentiality that would enable Managers and the Commission
staff to determine whether confidential treatment is appropriate.\298\
The Commission is adopting an approach consistent with the Proposing
Release but modified to refer to Rule 83 (17 CFR 200.83), and to
provide that all

[[Page 75129]]

information will be deemed subject to a confidential treatment request
under Rule 83.
---------------------------------------------------------------------------

\298\ Schulte Roth & Zabel Letter, at 5 (urging the Commission
to permit confidential treatment requests with respect to the data
to be included in the aggregated data to be published by the
Commission on a case-by-case basis).
---------------------------------------------------------------------------

As proposed, the instructions to Form SHO expressly provided that
all information that would reveal the identity of a Manager filing a
Proposed Form SHO report with the Commission would be deemed subject to
a confidential treatment request under Rule 24b-2, as described in the
``Filing of Form SHO'' section of the General Instructions to Form SHO.
Because the Commission does not intend those filings to be public, Rule
83 includes appropriate and less burdensome procedures and,
accordingly, is revising the General Instructions to provide that data
will also be deemed subject to a confidential treatment request under
Rule 83.
As with the Proposed Rule, the Commission currently plans to
publish only aggregated data derived from information provided in
Proposed Form SHO reports. While it is possible a person may be able to
determine the identity of a Manager (or reverse engineer a Manager's
trading strategies) in a situation where only one person was selling
short, especially where the short seller has publicly disclosed that it
has a short position in a specific security, the Commission continues
to believe that excluding such data from the aggregated data published
by the Commission could affect the integrity of the data. The
Commission anticipates that the risk of exposing a single short seller
will be mitigated by the delay in publication of the aggregated data.
The Commission does not anticipate disclosing information in Form
SHO, other than to the extent the data is included in the Commission's
aggregated disclosures, and the Commission will deem the information
included in Form SHO as being subject to a confidential treatment
request under Rule 83. Accordingly, the Commission is further revising
the General Instructions to provide that all information included in
the Form SHO is deemed subject to a confidential treatment request
under Rule 83. Pursuant to section 13(f) of the Exchange Act, the
Commission may prevent or delay public disclosure of all other
information reported on Form SHO in accordance with FOIA, section
13(f)(4) through (5), Rule 83, and any other applicable law.\299\
---------------------------------------------------------------------------

\299\ The Commission will follow Rule 83 procedures in
addressing any requests for information reported on Form SHO deemed
subject to a confidential treatment request.
---------------------------------------------------------------------------

g. Preventing Duplicative Reporting
i. Proposal
The rules to prevent duplicative reporting of information regarding
short positions and short activities of an equity security in Proposed
Form SHO were partially modeled after those in Form 13F.\300\ More
specifically, as described in the General Instructions to Proposed Form
SHO, if two or more Managers, each of which would be required by
Proposed Rule 13f-2 to file Proposed Form SHO for the reporting period,
exercise investment discretion with respect to the same security, only
one such Manager would be required to report information regarding that
security in its Proposed Form SHO report. The Commission proposed that
if a Manager were required to file a Proposed Form SHO report with
respect to a security and chose to rely on the duplicative reporting
provisions of the General Instructions to Proposed Form SHO, then such
Manager would be required to identify on the cover page of its Proposed
Form SHO report any other Managers filing a Proposed Form SHO report
with respect to such security on behalf of the Manager, in the manner
described in Special Instruction 5 of Proposed Form SHO. Duplicative
reporting could result in unnecessary costs to Managers and could make
the aggregated data published by the Commission less accurate.
---------------------------------------------------------------------------

\300\ See ``Rules to Prevent Duplicative Reporting'' in the
``General Instructions'' of Form 13F, available at https://www.sec.gov/pdf/form13f.pdf.
---------------------------------------------------------------------------

ii. Comments and Final Rule
The Commission did not receive any comments regarding duplicative
reporting, and for the reasons stated in the Proposing Release, is
adopting Special Instruction 5 to Form SHO as proposed.
h. Verification of Short Sale Data
i. Proposal
The Commission stated in the Proposing Release that it does not
intend to verify the accuracy of the data reported by Managers, but may
consider doing so in the future after assessing whether such
verification would be useful or necessary to enhance the integrity of
the data.\301\ The Commission further stated that field validations act
as an automated form completeness check when a Manager files Proposed
Form SHO through EDGAR, and that the validations do not verify the
accuracy of the information filed in the Proposed Form SHO
filings.\302\
---------------------------------------------------------------------------

\301\ Proposing Release, at 14955.
\302\ Proposing Release, at 14960 n.72.
---------------------------------------------------------------------------

ii. Comments and Final Rule
The Commission received many comments on the issue of Manager
reporting and data verification. The comments supported implementing a
Commission verification system for reported data, stating that
reporting as proposed would lead to inconsistencies. Commenters
expressed concerns regarding the self-reporting of data, citing the
potential for errors or intentional manipulation of data.\303\ One
commenter stated that Managers have incentives to report inaccurately,
especially if there is concern over unveiling short selling
strategies.\304\ Other commenters cited examples of instances of
potential issues with data resulting from under-reporting, over-
reporting, and misreporting.\305\ One commenter stated, without further
detail, that orders were being mismarked as short exempt in order to
circumvent the short sale circuit breaker of Rule 201 of Regulation
SHO.\306\ Other commenters suggested that the Commission verify the
accuracy of reported data via a random audit, such as auditing
reporting at a rate applicable to five percent of reported data per
quarter.\307\ Several commenters also suggested that short sale
transactions be placed on a publicly available,

[[Page 75130]]

immutable log, perhaps using blockchain technology, as a solution to
the issue of verification.\308\ Finally, one commenter suggested that
it should be the duty of exchanges and broker-dealers to report
eligible short positions.\309\
---------------------------------------------------------------------------

\303\ See, e.g., Comment from Dale Eaglen (Feb. 25, 2022),
available at https://www.sec.gov/comments/s7-08-22/s70822-20117894-270815.htm; Comment from Michael Behrens (Feb. 25, 2022), available
at https://www.sec.gov/comments/s7-08-22/s70822-270806.htm
(``Michael Behrens Comment''); Comment from Stephen (Mar. 4, 2022),
available at https://www.sec.gov/comments/s7-08-22/s70822-20118671-271537.pdf; Comment from Kevin B. (Mar. 14, 2022), available at
https://www.sec.gov/comments/s7-08-22/s70822-20119357-272243.htm;
see also Steve B. Comment (expressing concern that ``[s]hort
positions are currently `self regulated' ''), Comment Letter from
Mike Monisky (Mar. 4, 2022) available at https://www.sec.gov/comments/s7-08-22/s70822-20118657-271529.pdf (expressing concerns
about misreporting of securities transactions to FINRA) (``Mike
Monisky Letter''), Comment from Jonathan Dumaine (Mar. 14, 2022),
available at https://www.sec.gov/comments/s7-08-22/s70822-20119364-272250.htm (expressing general concern for potential for abuse
whenever self-reporting on forms is involved) (``Jonathan Dumaine
Comment'').
\304\ Comment from J. T. (Oct. 2, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-309405.htm.
\305\ See, e.g., Michael Behrens Comment; Mike Monisky Letter;
Jonathan Dumaine Comment.
\306\ See Michael Behrens Comment.
\307\ See, e.g., Michael Behrens Comment; Comment from Jana
Caperton (Mar. 12, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20119201-272007.htm; Comment from Jim Lee (May 26,
2022), available at https://www.sec.gov/comments/s7-08-22/s70822-295810.htm (``Jim Lee Comment''); Comment from Gerry T. (Oct. 31,
2022), available at https://www.sec.gov/comments/s7-08-22/s70822-317082.htm; Comment Letter from Wayne C. Smith (Dec. 3, 2022),
available at https://www.sec.gov/comments/s7-08-22/s70822-20152504-320238.pdf.
\308\ See, e.g., Comment from Joseph M. Grato (Mar. 21, 2022),
available at https://www.sec.gov/comments/s7-08-22/s70822-20120589-272777.htm (``Joseph Grato Comment''); Jim Lee Comment.
\309\ Jonathan Dumaine Comment.
---------------------------------------------------------------------------

The Commission is adopting the reporting requirement as proposed.
Consistent with the Commission's statement in the Proposing Release,
the Commission does not intend to verify the accuracy of the data
received from the Managers but may consider doing so after assessing
whether such verification would be useful or necessary to enhance the
integrity of the data. The reporting Managers are responsible for the
completeness, timeliness, and accuracy of information included in their
mandatory filings to the Commission. The Commission has the ability to
conduct examinations to help evaluate whether reporting Managers are in
compliance and, where necessary, the Commission may bring enforcement
actions where potential violations are believed to have occurred.
i. New Reporting Regime--Comments and Final Rule
Rather than create a new reporting regime by adopting the
Proposals, several industry commenters urged the Commission to leverage
the existing data frameworks of FINRA, CAT, and other data filed with
the Commission (e.g., Form N-PORT).\310\ These commenters stated that
leveraging existing reporting frameworks would alleviate compliance
burdens and associated costs,\311\ and that existing reporting
frameworks were already sufficient for short interest reporting.\312\
These commenters stated, and the Commission acknowledges,\313\ that
there are multiple sources of existing public and non-public data
related to short sales. FINRA and most exchanges collect and publish
daily aggregate short sale volume data, and on a one month delayed
basis publish aggregated information regarding short sale transactions.
FINRA collects and aggregates short interest data from broker-dealer
member firms, by security, twice each month.
---------------------------------------------------------------------------

\310\ See, e.g., Ropes & Gray Letter, at 2; Two Sigma Letter, at
9-10; ICI Letter, at 5; see also K&L Gates Letter, at 2 (stating
that the Proposal ``is unnecessary and, on balance, overly
burdensome given the sufficiency of existing data availability'');
Virtu Letter, at 2 (stating that the Commission ``has not proffered
a regulatory need or justification for why the current reporting
regime is inadequate''); SIFMA Letter, at 13 (``respectfully
disagree[ing] with the Commission's assertions that the data
available to it through the existing reporting regimes is not
sufficient to allow the SEC to meet its obligations under Section
929X''); Perkins Coie Letter, at 2; AIMA Letter, at 8-10 (stating
that ``[w]ith tailored refinements to FINRA reporting and the
combination of the proposed CAT amendments . . . the Commission can
still fulfill the statutory mandate and achieve the goals outlined
in the Proposal but without creating additional reporting
requirements, burdens and costs for many market participants'');
SBAI Letter, at 2 (stating that instead of implementing a new
reporting regime, the Commission should ``[f]ocus should instead lie
on making enhancements to FINRA's existing collection and activity
fit for purpose.''); T. Rowe Price Letter, at 3 (stating that
``[g]iven the extensive data already available to the SEC through
FINRA's existing short interest reporting, stock exchanges'
reporting of short sale activity, and the [CAT], the SEC should
extract the short data it desires from these sources, rather than
create new reporting obligations for managers whose activity is
already captured by these existing frameworks.'').
\311\ See, e.g., Ropes & Gray Letter, at 2; SIFMA Letter, at 19.
\312\ See, e.g., SIFMA Letter, at 9-10; K&L Gates Letter, at 2;
Virtu Letter, at 2.
\313\ See Proposing Release, at 14953-4.
---------------------------------------------------------------------------

In assessing how the Commission might leverage existing data to
satisfy the mandate of section 929X, it is important to note
differences in reporting entities, timing, and the specific data being
collected in existing public and non-public sources of short sale-
related data. The letters submitted by industry commenters critical of
the Proposed Rule 13f-2 reporting regime did not explain with any
specificity how the Commission could leverage existing sources of short
data so that the Commission would receive equal or comparable data to
that which will be reported on Form SHO, nor did Commenters articulate
how short data that is currently available to market participants is
comparable to data which would be reported on Form SHO and published by
the Commission, rather the comments referenced leveraging of existing
sources generally.\314\
---------------------------------------------------------------------------

\314\ See, e.g., Virtu Letter, at 2 (stating that the
Commissions should ``explore ways to utilize the existing sources of
data that already are available to the SEC rather than establishing
yet another pool of short sale data.'').
---------------------------------------------------------------------------

After considering the viewpoints of commenters, the Commission
believes that a new reporting regime will increase transparency into
short positions consistent with the goals of DFA 929X, and that market
participants and regulators alike will benefit from the required Form
SHO disclosures, as they are distinct from existing short sale
reporting regimes. Further, the short sale-related information that
will be collected under Rule 13f-2 and Form SHO will fill an
information gap for market participants and regulators by providing
insights into increases and decreases in reported short positions. As
stated in the Proposing Release, the Commission believes that the short
position data reported pursuant to Rule 13f-2 on Form SHO will
supplement the short sale information that is currently publicly
available from FINRA and the exchanges.\315\ In the Proposing Release,
the Commission elaborated on the limitations of using existing data,
such as the CAT or FINRA data, to reconstruct market events like the
``meme'' stock events of January 2021.\316\ The Commission stated that
while some existing sources report daily short sale volume, there are
several limitations with regard to using existing data sources to
accurately represent the short exposure of Managers. The short sale
data reported on Form SHO will include the daily ``net'' activity by
reporting Managers on each settlement date during the calendar month in
the security for which information is being reported, and such
information is not currently available from FINRA or the exchanges.
Moreover, because FINRA's existing short interest data reports
aggregate short positions on a bimonthly basis,\317\ those reports do
not reflect the timing with which short positions increase or decrease
in the two-week period between the two reporting dates. The short sale
data reported on Form SHO will help to fill that information gap. The
Commission continues to believe that publication of this additional
aggregated information can help to further inform market participants
regarding overall short sale activity by Managers with substantial
short positions and will provide regulators as well as market
participants with important information regarding the timing of
increases and decreases in the reported short positions.\318\ Finally,
compared to other existing reporting regimes, the Reporting Thresholds
in Rule 13f-2 are designed to require the reporting of only
substantial, hence more informative, short positions.\319\
---------------------------------------------------------------------------

\315\ See Proposing Release, at 14981-82. See also infra Part
VIII.B.4.
\316\ See Proposing Release, at 14981-82.
\317\ The short interest data reported reflects aggregate short
positions as of the specified reporting dates.
\318\ Proposing Release, at 14995.
\319\ With regard to Threshold B, as discussed in the Proposing
Release, a $500,000 or more threshold for non-reporting company
issuer securities is similar to the median dollar value of a
position of 2.5 percent of the market capitalization of OTC stocks
for which the Commission was able to obtain information on total
shares outstanding. Hence, it is proportional to Threshold A in
capturing substantial short positions. See supra Part II.A.3.a for
additional discussion of Reporting Thresholds.
---------------------------------------------------------------------------

Further, the Commission understands that while FINRA makes publicly

[[Page 75131]]

available short sale-related data pertaining to both exchange-traded
equity securities and OTC equity securities that is reported to it by
its member firms,\320\ some of the exchanges require payment of a fee
to access short sale-related data, which may make it difficult for some
investors to access the data. The reporting regime under Rule 13f-2, by
contrast, will provide aggregated short sale-related data in a readily
accessible location (i.e., EDGAR or the Commission website), free and
accessible to all investors and other market participants. The
Commission continues to believe that providing free, accessible, and
more complete information to market participants regarding short sale-
related data will aid market participants in their understanding of the
level of negative sentiment about a particular equity security and the
actions of short sellers collectively and aid the Commission's
oversight of short selling.\321\
---------------------------------------------------------------------------

\320\ In mid-to-late Dec. 2022, FINRA began publishing short
sale information for exchange-traded as well as OTC equity
securities. See Equity Short Interest Files, FINRA, available at
https://www.finra.org/finra-data/browse-catalog/equity-short-interest/files.
\321\ Proposing Release, at 14952.
---------------------------------------------------------------------------

Other industry commenters were concerned about reporting burdens
for smaller Managers, and one such commenter predicted that the
increased reporting costs resulting from the Proposals and other
related Commission proposed rulemakings could lead to industry
consolidation and decrease competition and investor choice.\322\ The
Commission continues to believe that application of the Reporting
Thresholds will not result in Rule 13f-2 applying to a significant
number of small entities, especially considering the modification to
Threshold A to be based on a monthly average gross short position
rather than the proposed daily calculation.\323\
---------------------------------------------------------------------------

\322\ See, e.g., MFA Letter, at 2 (positing that combined costs
of compliance with the Proposals and other related Commission
proposed rulemakings would be ``insurmountable for small and newly-
formed advisers''); Anonymous Fund Manager Letter, at 7-8. See infra
Parts VIII.B, VIII.C.6.f, VIII.D.2 for a discussion of interactions
between the economic effects of the adopted rule and other
Commission rulemakings.
\323\ See infra Part IX.
---------------------------------------------------------------------------

In response to comments about reporting burdens, the Commission is
not adopting the proposed hedging requirement, not adopting Proposed
Rule 205 and ``buy to cover'' reporting to CAT, and is streamlining
Information Table 2, thus reducing the costs of reporting from the
proposed rule and form as compared to Rule 13f-2 and Form SHO as
adopted.\324\
---------------------------------------------------------------------------

\324\ See generally infra Part VIII.
---------------------------------------------------------------------------

B. Data Aggregation and Publication of Information by the Commission

1. Proposal
The Commission proposed to require Managers exercising investment
discretion over short positions meeting specified thresholds to report
information relating to end-of-the-month short positions on Information
Table 1, and certain daily activity affecting such short positions on
Information Table 2, of a new Form SHO. The Commission would aggregate
the reported data by security, including daily short sale activity
data, and then, on a delayed basis, make such aggregated data available
to the public. As proposed, data would be aggregated across all
reporting Managers for each reported equity security prior to
publication. The Commission stated its belief that publicly disclosing
the identity of individual reporting Managers may not be necessary to
advance the policy goal of increasing public transparency into short
selling activity, and that aggregating across reporting Managers would
help safeguard against the concerns noted above related to retaliation
against short sellers, including short squeezes, and the potential
chilling effect that such public disclosure may have on short
selling.\325\
---------------------------------------------------------------------------

\325\ See Proposing Release, at 14955.
---------------------------------------------------------------------------

As proposed, the Commission would publish aggregated information
derived from data reported on Proposed Form SHO. The Commission
estimated that it will publish such aggregated information within one
month after the end of the reporting calendar month--e.g., for data
reported by Managers on Proposed Form SHO for the month of January, the
Commission would expect to publish aggregated information derived from
such data no later than the last day of February. This additional time
prior to publication of data by the Commission following receipt of the
monthly Proposed Form SHO reports would be used to aggregate the data
received from the reporting Managers, and would also help to reduce the
risk of imitative trading activity by market participants and help to
protect report Managers' proprietary trading strategies.\326\ In
proposing an approach for reporting the short sale-related information
gathered, the Commission sought to balance calls to level the playing
field for retail investors by, for example, taking steps to enhance the
transparency of short sale-related data, with, among other things,
concerns raised--primarily by institutional investors--regarding
potential ``chilling effect[s]'' on short selling and potential issuer
and investor retaliation against an identified short seller.\327\
---------------------------------------------------------------------------

\326\ See id., at 14955.
\327\ See id., at 14955.
---------------------------------------------------------------------------

The Commission also presented, and sought comment on, an
alternative approach for its publishing of information reported on
proposed Form SHO that would offer greater transparency and less
anonymization of the published short sale-related data.\328\
Specifically, under this alternative, the Commission would publish the
information reported to it at the individual Manager level rather than
aggregate that information across all reporting Managers.\329\ Before
publication, a reporting Manager's identifying information would be
removed to anonymize the information published.
---------------------------------------------------------------------------

\328\ See id., at 14967.
\329\ Id.
---------------------------------------------------------------------------

2. Comments
Several commenters raised concerns about potential negative
consequences of more detailed short position disclosures--particularly,
negative effects on liquidity and price discovery, the facilitation of
copycat trading, and the greater susceptibility of holders of short
positions to short squeezes.\330\ These commenters also preferred an
``aggregation'' approach to the alternative of publishing data at the
individual Manager level, due to the commercially sensitive investment
and trading information that Managers are required to report under Rule
13f-2.\331\
---------------------------------------------------------------------------

\330\ E.g., SBAI Letter, at 2 (concluding that ``only aggregate,
anonymized, and delayed public reporting of short positions''
mitigates concerns about the potential risks of short position
disclosures); Two Sigma Letter, at 1-3 (expressing concerns that
disclosure of individual short positions could lead to revelation of
commercially sensitive systematic investment strategies and to
front-running and other actions that undermine those strategies, and
that such disclosures would provide incomplete information, and
potentially misleading signals, to investors); see also T. Rowe
Price Letter, at 2 (raising concerns about the effects the
rulemaking proposal would have on liquidity and price discovery);
Law and Finance Professors Letter, at 2-3 (stating potential
chilling effect on short selling if identities of short sellers are
publicly disclosed).
\331\ E.g., Schulte Roth & Zabel Letter, at 4 (alternative
proposal to publish anonymized short sale-related data reported on
an individual Manager would risk eviscerating potential
confidentiality protections of reporting Managers and jeopardize the
confidentiality of a Manager's positions, strategies or proprietary
business information); MFA Letter, at 3 (stating the need for
``robust data security protocols'' to protect information reported
pursuant to Proposed Rule 13f-2).
---------------------------------------------------------------------------

These commenters stated, however, that aggregation would not go far
enough to lower the risk that the trading and investment behavior
reported

[[Page 75132]]

would be attributable to a single Manager or set of Managers.\332\
Commenters stated that the risk of Manager attribution would be
heightened when only one Manager or a small set of Managers report a
short position in the relevant security. Under these circumstances,
market participants could use the information reported on Form SHO to
extrapolate an individual Manager's overall position, and potentially
the Manager's strategies or portfolio management methods across
different clients.\333\ One commenter expressed concern that Manager
attribution/identification could result in retaliation against Managers
by market participants.\334\
---------------------------------------------------------------------------

\332\ E.g., MFA Letter, at 3 (stating that publishing aggregated
short position data can help mitigate the risk of identification of
Manager(s), but is not ``foolproof, . . . the effectiveness will
depend on what data is published and with what frequency''); AIMA
Letter, at 4 (stating that ``even if the data is anonymized, market
participants could still identify certain reporting Managers.'');
see also SIFMA Letter, at 5 (positing that reporting anonymized
short sale data at the Manager level without first aggregating such
information is inconsistent with the directive in 929X of DFA and
could expose investment strategies of institutional investment
managers and their clients to their detriment); T. Rowe Price
Letter, at 2 (positing that ``attribution or anonymized manager-
level data in public reports would be inappropriate and . . . create
unacceptable risks to . . . [market] participants and discourage a
useful source of liquidity provision.'').
\333\ See, e.g., ICI Letter, at 7-8 (further stating that risk
of Manager identification ``may be especially high'' for [regulated
investment] funds that currently disclose their identities as well
as their individual short positions on Form N-PORT filings with the
Commission).
\334\ MFA Letter, at 9 (citing potential for retaliation against
short sellers if Manager's confidential information reported on
Proposed Form SHO is leaked).
---------------------------------------------------------------------------

By contrast, other commenters favored the alternative approach of
publishing reported information at the individual Manager level after
removing all identifying information of the reporting Manager that the
Commission sought comment on in the Proposing Release.\335\ While
expressing general support for rulemaking that increases transparency
of short sale-related data, proponents of this alternative approach
also criticized Proposed Rule 13f-2 for not going far enough.\336\
These commenters pointed to a need for complementary reporting of long
and short positions, and downplayed industry concerns about potential
risks of greater transparency of short sale data, including, the costs
and challenges of operationalizing Rule 13f-2 and the threat of
``copycat trading'' if short positions are disclosed pursuant to Rule
13f-2.\337\ These commenters supported publishing short sale-related
data that is ``current.'' \338\ Two such commenters suggested that the
Commission publish, or at least share on a confidential basis with
issuers of the securities for which information is reported on Form
SHO, the names of the firms shorting securities.\339\ Other commenters
further recommended that the Commission glean more from and build upon
the experience of the European Union (``EU'') with publishing short
sale-related data in developing an approach for gathering and reporting
such data.\340\ A few commenters also pointed out ways that, by
monitoring the published information from Form SHO reports, the public
and reporting companies could serve as watchdogs for the SEC, a ``first
line of defense against abusive practices.'' \341\
---------------------------------------------------------------------------

\335\ See, e.g., Better Markets, at 13; Comment from An Investor
(Apr. 4, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20122297-278355.htm; Comment from Rick Sweeney (Oct. 10,
2022), available at https://www.sec.gov/comments/s7-08-22/s70822-309597.htm (Rick Sweeney Comment). But see Samuel Meadows Comment
(``It would be strongly against retails best interests to have the
reports published at the managers level. This would make finding and
understanding the scope of shorting very difficult. I believe it is
best to have the report aggregated with other reporting Managers
reports. Ease of access to this information is critical in creating
fairer markets.''); Comment Letter from Matthew D. Brusch, Interim
President and CEO, National Investor Relations (Apr. 28, 3033), at
4, available at https://www.sec.gov/comments/s7-08-22/s70822-20127576-288806.pdf (``NIRI Letter''); K&L Gates Letter, at 5-6. See
Proposing Release, at 14967.
\336\ In addition to underscoring the need for transparency in
the reporting of short sale-related data, commenters recommended
ways to enhance the transparency of U.S. stock market transactions
with the creation of a ``transparent and publicly viewable
platform'' through which U.S. stock market securities would be
traded, and the use of block chain technology to allow verification
of transactions in real time. See, e.g., Joseph Grato Comment;
Anonymously Submitted Comment (Mar. 7, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-271636.htm; Comment from Jason
Payne (Mar. 7, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20118798-271634.htm; Comment from Lex Stultz (Mar. 13,
2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20119199-272005.htm; Comment from Devon Turcotte (Mar. 15, 2022),
available at https://www.sec.gov/comments/s7-08-22/s70822-20119399-272285.htm.
\337\ See WTI Letter. These and other commenters expressed
concern for the danger to ``fair and free'' U.S. markets posed by
``the lack of transparency, the inability to adequately quantify
short interest, and the ability of firms to skirt regulations
through derivative positions such as options and security-based
swaps.'' These commenters also called for symmetry in the level of
disclosures and transparency for short positions as is currently the
case for long positions, to allow retail and institutional investors
to conduct the same type of analysis regarding short positions as is
currently possible for long positions using data from Form 13F.
\338\ See, e.g., NIRI Letter, at 4 (stating that the alternative
approach to publishing Form SHO reports would bring short position
information to the marketplace faster, closer in real time to when
the Form SHO is filed).
\339\ See id. (recommending confidential disclosures of short
position and identifying Manager information reported on Form SHO to
an issuer whenever a ``large short position'' is reported for a
security of that issuer, or alternatively, only to those issuers
that request such confidential information); Letter from Tim Quast,
President and Founder, Modern Networks IR LLC (Apr. 4, 2022),
available at https://www.sec.gov/comments/s7-08-22/s70822-20122528-278558.pdf (urging Commission to publish the names of reporting
Managers) (``Modern IR Letter'').
\340\ Better Markets Letter, at 13 (suggesting reliance on
``EU's experience with publishing much more comprehensive, specific,
and current information'' in developing an approach for gathering
and reporting short sale data that enhances the usability of short
position information to be published pursuant to Proposed Rule 13f-2
without ``inviting some of the more damaging consequences'' of doing
so). More generally, a few commenters recommended harmonizing
Proposed Rule 13f-2 requirements with potentially overlapping EU and
UK regulations. See, e.g., WTI Letter, at 2-3; HSBC Letter, at 14-
15.
\341\ E.g., Anonymously Submitted Comments (Oct. 14, 2022, Oct.
24, 2022, Oct. 29, 2022, Oct. 31, 2022, Nov. 1, 2022); Rick Sweeney
Comment.
---------------------------------------------------------------------------

3. Final Rule
The approach taken for publishing short sale-related data reported
on Form SHO must balance competing interests of public transparency
against the potential negative impacts on price discovery, and of short
position and short activity disclosures on short selling as well as
data security concerns. After considering the comments received, the
Commission continues to believe that the indirect costs of publishing
information reported at the individual Manager level would likely
exceed those of publishing information aggregated across all reporting
Managers.\342\ More specifically, the Commission continues to believe
that if the Commission were to release the information reported on Form
SHO as filed, there would be a greater potential to reveal a reporting
Manager's trading strategies and to signal whether a Manager has a
large and potentially vulnerable short position. It would also make it
easier for a market participant to deduce the identity of a reporting
Manager, even if that Manager's identity remains anonymous.\343\ The
easier it is for a market participant to deduce the identities of
individual short sellers, the greater the risk of retaliation, copycat
trading and other market activity that might have an undesired chilling
effect on price discovery.\344\ For these reasons, and in response to
commenters that raised concerns about potential negative consequences
of more detailed short position disclosures, the Commission believes
that the anticipated benefit of enhanced transparency by publishing
reported information at the individual Manager level after removing all

[[Page 75133]]

identifying information of the reporting Manager does not justify the
costs were the Commission to take that approach in publishing
information reported to it on Form SHO.
---------------------------------------------------------------------------

\342\ See infra Part VIII.E.2.a.
\343\ Id.
\344\ Id.
---------------------------------------------------------------------------

Some commenters suggested the Commission adopt an approach similar
to that of the EU structure whereby individual short sellers' names are
made public.\345\ The final rule, as modified, addresses the potential
risk of retaliation towards individual short sellers, and the potential
chilling of the incentive of gathering information and price
discovery.\346\ For more discussion of the EU's approach and the
Commission's decision to aggregate and publish anonymized data instead,
see Part VIII.E.1.c.
---------------------------------------------------------------------------

\345\ See WTI Letter at 2-3; Better Markets Letter at 13 and 16.
See also Proposing Release, at 15005.
\346\ See supra Part II.A.2.b.
---------------------------------------------------------------------------

Further, aggregating across reporting Managers will address certain
non-financial costs and burdens identified by commenters by helping to
safeguard against the concerns raised about potential chilling effects
on short selling and data security regarding the information reported
by Managers on Form SHO.\347\ Additionally, the Commission anticipates
that many potential negative effects on the market will be mitigated by
the delay in publication of the aggregated data. Accordingly, the
Commission is adopting as proposed the approach of publishing, on a
delayed basis, aggregated short sale-related data reported on Form SHO
and treating each filed Form SHO confidentially.
---------------------------------------------------------------------------

\347\ Id.
---------------------------------------------------------------------------

III. Proposed Amendment to Regulation SHO To Aid Short Sale Data
Collection

A. Proposed Rule 205

Under Proposed Rule 205, a broker-dealer would be required to mark
a purchase order as ``buy to cover'' if, at the time of order entry,
the purchaser (i.e., either the broker-dealer or another person) has a
gross short position in such security in the specific account for which
the purchase is being made at such broker-dealer. A broker-dealer would
be required to mark a purchase order as ``buy to cover,'' regardless of
the size of such purchase order in relation to the size of the
purchaser's gross short position in such security in the account, and
regardless of whether the gross short position is offset by a long
position held in the purchaser's account at the broker-dealer at the
time of order entry. Unlike the netting requirements under Rule 200 of
Regulation SHO, the ``buy to cover'' order marking determination under
Proposed Rule 205 would be made on a ``gross'' basis. Under the
proposed rule, short positions held by the purchaser in any account(s)
other than the purchasing account, as well as offsetting long positions
held by the purchaser in the purchasing account or any other
account(s), would not be considered by a broker-dealer when making a
``buy to cover'' order marking determination. The Proposed CAT
Amendments, discussed below, would require CAT reporting firms to
report ``buy to cover'' order marking information to CAT.

B. Comments

Some commenters expressed support to adopt Proposed Rule 205, and
generally applauded the potential added transparency that ``buy to
cover'' order marking could help provide.\348\ Other commenters stated
that the proposed rule would assist the Commission in monitoring short
selling activity and help to ensure compliance with the requirements of
Regulation SHO.\349\
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\348\ See, e.g., Comment from Mark Tate (Mar. 1, 2022),
available at https://www.sec.gov/comments/s7-08-22/s70822-20118151-271054.htm (``Mark Tate Comment'') (believed that increased
information about marking trades as ``buy to cover'' is a ``good
thing for the market''); Comment from An Investor (Apr. 4, 2022),
available at https://www.sec.gov/comments/s7-08-22/s70822-20122297-278355.htm (expressing general support for Proposed Rule 205 and the
``gross'' short position approach); Comment from Jean Garcia-Gomez
(Oct. 9, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-309610.htm (``Jean Garciz-Gomez Comment'') (expressing
general support for ``buy to cover'' order marking); Comment from
Aladdin Erzrumly (Oct. 19, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-312058.htm (expressing general support for
``buy to cover'' order marking); Comment from Brian Herrmann (Jan.
20, 2023), available at https://www.sec.gov/comments/s7-08-22/s70822-323670.htm (expressing general support for Proposed Rule
205).
\349\ See, e.g., Better Markets Letter (stating that ``buy to
cover'' order marking should assist the Commission in monitoring
short sale activity and actually ensure compliance with Regulation
SHO requirements); ICI Letter (Apr. 26, 2022) (stating that, to the
extent that the Commission requires information on close outs of
open short positions, ICI supports the proposed approach of amending
Rule 205 of Regulation SHO to require a broker-dealer to mark
transactions as ``buy to cover,'' and supports the simplified single
account gross short position approach as proposed); BIO Letter
(stating that ``buy to cover'' reporting would assist in
understanding ``the full lifecycle of short positioning in the
biotechnology industry'').
---------------------------------------------------------------------------

The Commission also received numerous comments that opposed the
adoption of Proposed Rule 205.\350\ In opposing Proposed Rule 205,
these commenters voiced concerns regarding the extensive costs and
burdens associated with anticipated systems changes necessary to
implement and report ``buy to cover'' order marking as proposed.\351\ A
number of these commenters stated that a ``buy to cover'' order mark
does not currently exist and would require broker-dealers to
effectively redesign and update their order creation systems and
communications protocols to accommodate the recording and downstream
reporting of a ``buy to cover'' order mark.\352\ One commenter stated
that all industry participants (which it described as ``all
institutions and all broker-dealers'') will also need to create a new
``buy to cover'' order type and capture that in their respective books
and records protocols and regulatory reporting systems.\353\ One
commenter suggested that costs to implement changes necessary to comply
with the requirements of Proposed Rule 205 could range from $5 million
to $10 million, or more.\354\
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\350\ See, e.g., SIFMA Letter; Virtu Letter; AIMA Letter;
Comment Letter from Joanna Mallers, Secretary, FIA Principal Traders
Group (Apr. 27, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20127313-288259.pdf (``FIA PTG Letter''); Comment
Letter from Howard Meyerson, Managing Director, Financial
Information Forum (Apr. 25, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20126605-287256.pdf (``FIF Letter''); STA
Letter; XR Securities Letter; Comment Letter from Kirsten Wegner,
Chief Executive Officer, Modern Markets Initiative (Apr. 4, 2022),
available at https://www.sec.gov/comments/s7-08-22/s70822-20122473-278481.pdf (``MMI Letter'').
\351\ See, e.g., FIA PTG Letter, at 2 (requiring the reporting
of orders on an order-by-order basis with either a ``buy to cover''
or bona fide market making attestation appears unnecessary from an
added transparency perspective and therefore unnecessarily costly);
MMI Letter, at 2; Virtu Letter, at 3 (``If this aspect of the
Proposal were adopted, firms would have to reprogram their systems
to recognize a `buy to cover' order. We believe that this would be
exceedingly burdensome, costly, and challenging for broker-dealers
to make the required changes and provide the required
information.''); STA Letter, at 4 (stating that ``buy to cover'' as
proposed would ``impose tremendous costs on industry firms by
essentially forcing them to keep two separate position
aggregations'' and suggesting that there be an exemption for firms
with ``low'' amounts of ``buy to cover'' order types); FIF Letter,
at 10; XR Securities Letter, at 2; SIFMA Letter, at 3; FIA PTG
Letter, at 2.
\352\ See, e.g., SIFMA Letter, at 23-24; Virtu Letter, at 3; FIF
Letter, at 3; STA Letter, at 6; XR Securities Letter, at 2; FIA PTG
Letter, at 2-3.
\353\ See FIF Letter, at 3.
\354\ See SIFMA Letter, at 24.
---------------------------------------------------------------------------

Some commenters that opposed the adoption of Proposed Rule 205
expressed general concerns that the proposed single account ``gross''
short position methodology (which, by design, does not require the
broker-dealer to consider the purchaser's other positions held in that
account, in other accounts at the broker-dealer, or elsewhere) could
routinely result in inaccurate ``buy to cover'' order marking reporting
by broker-dealers.\355\ Some commenters also questioned whether

[[Page 75134]]

the proposed ``buy to cover'' order marking reporting would provide
regulatory benefits, including identifying signals of a ``short
squeeze,'' as was suggested by the Commission in the proposing
release.\356\
---------------------------------------------------------------------------

\355\ See, e.g., Virtu Letter, at 5; AIMA Letter, at 16; SIFMA
Letter, at 22-23; FIF Letter, a 6.
\356\ See e.g., Virtu Letter, at 6 (``The Proposal's rationale
for requiring broker-dealers to mark transactions a `buy to cover'--
i.e. to facilitate the identification of potential `short squeeze'
activity--is equally unpersuasive. As described above, the data that
will be reported under this provision will bear little resemblance
to a firm's actual short sale positions and therefore will not yield
meaningful information that would allow the Commission to target
short squeeze activity.''); SIFMA Letter, at 23 (believed there is
only a remote chance that Proposed Rule 205 reporting might identify
signals of a short squeeze that would not otherwise be identifiable
to the Commission through other currently available information).
---------------------------------------------------------------------------

Commenters highlighted the inherent differences and resulting
complexities between Proposed Rule 205's single account ``gross'' short
position methodology for purchases, and Regulation SHO's all accounts
net position order marking requirements for sales. These commenters
generally stated that if Proposed Rule 205 were adopted, broker-dealers
would be required to create and maintain, at great expense, two
separate order marking systems that utilize very different
methodologies--one for determining whether a purchase order should be
marked as ``buy'' or ``buy to cover,'' and another for determining
whether a sell order should be marked as ``long'' or ``short.'' \357\
Some of these commenters suggested that if the Commission were intent
on adopting a ``buy to cover'' order marking reporting requirement, it
should instead consider utilizing the Commission's ``alternative''
approach.\358\ These commenters stated that utilizing this
``alternative'' approach would help to ensure that Proposed Rule 205
would operate in a manner that is more consistent with current
Regulation SHO order marking requirements, which would effectively help
reduce complexity and interpretive confusion for broker-dealers.
Another commenter suggested that the Commission consider an exception
for firms with ``low'' amounts of ``buy to cover'' order types.\359\
---------------------------------------------------------------------------

\357\ See, e.g., STA Letter, at 4; FIF Letter, at 8; FIA PTG
Letter, at 2-3; MMI Letter, at 2; SIFMA Letter, at 24; XR Securities
Letter, at 2; Virtu Letter, at 5.
\358\ See, e.g., MMI Letter at 2; FIF Letter, at 2. In the
Proposing Release, the Commission explained that it had considered
an ``alternative approach'' that would have required the broker-
dealer, when making a ``buy to cover'' order marking determination,
to net all positions (long positions and short positions) held by
the purchaser in any account, whether at the broker-dealer itself,
or elsewhere. See Proposing Release, at 14968.
\359\ STA Letter, at 5.
---------------------------------------------------------------------------

One commenter stated that additional guidance or clarification
would be necessary if the Commission adopted Proposed Rule 205.\360\
Another commenter stated that Proposed Rule 205 fails to recognize that
broker-dealers would need to rely on representations from purchasers/
account holders in order to accurately report ``buy to cover'' order
marking information, similar to how broker-dealers currently rely on
account holders when marking sale orders ``long'' or ``short.'' \361\
One commenter stated that this would be especially true where the
broker-dealer does not custody the purchaser's positions (i.e., where
the customer's positions are custodied ``away,'' such as at a prime
broker or bank), and for a number of operational reasons, be equally
true even when the broker-dealer custodies the purchaser's
positions.\362\
---------------------------------------------------------------------------

\360\ XR Securities Letter, at 2.
\361\ SIFMA Letter, at 23.
\362\ SIFMA Letter, at 23.
---------------------------------------------------------------------------

The Commission is not adopting Proposed Rule 205 in light of
questions raised by commenters regarding potential operational issues
with the requirement as proposed that merit further consideration, and
the Commission will continue to evaluate the issues raised to determine
if any further action is appropriate.

IV. Amendments to CAT

In July 2012, the Commission adopted 17 CFR 242.613 (``Rule 613 of
Regulation NMS''), which required national securities exchanges and
national securities associations (the ``Participants'') \363\ to
jointly develop and submit to the Commission a national market system
plan to create, implement, and maintain a CAT that captures customer
and order event information for orders in NMS securities.\364\ The goal
of Rule 613 was to create a modernized audit trail system that provides
regulators with more timely access to a sufficiently comprehensive set
of trading data, thus enabling regulators to more efficiently and
effectively reconstruct market events, oversee market behavior, and
investigate misconduct. On November 15, 2016, the Commission approved
the national market system plan required by Rule 613, the National
Market System Plan Governing the Consolidated Audit Trail (the ``CAT
NMS Plan'').\365\
---------------------------------------------------------------------------

\363\ The Participants include: BOX Exchange LLC; Cboe BYX
Exchange, Inc.; Cboe BZX Exchange, Inc.; Cboe C2 Exchange, Inc.;
Cboe EDGA Exchange, Inc.; Cboe EDGX Exchange, Inc.; Cboe Exchange,
Inc.; Financial Industry Regulatory Authority, Inc.; Investors'
Exchange LLC; Long-Term Stock Exchange, Inc.; MEMX LLC; Miami
International Securities Exchange LLC; MIAX Emerald, LLC; MIAX
PEARL, LLC; Nasdaq BX, Inc.; Nasdaq GEMX, LLC; Nasdaq ISE, LLC;
Nasdaq MRX, LLC; Nasdaq PHLX LLC; The Nasdaq Stock Market LLC; New
York Stock Exchange LLC; NYSE American LLC; NYSE Arca, Inc.; NYSE
Chicago, Inc.; and NYSE National, Inc.
\364\ See Consolidated Audit Trail, Exchange Act Release No.
67457 (July 18, 2012), 77 FR 45722 (Aug. 1, 2012).
\365\ Exchange Act Release No. 79318 (Nov. 15, 2016), 81 FR
84696 (Nov. 23, 2016) (``CAT NMS Plan Approval Order''). The CAT NMS
Plan is Exhibit A to the CAT NMS Plan Approval Order. See CAT NMS
Plan Approval Order, 81 FR 84943 at 84696. The CAT NMS Plan
functions as the limited liability company agreement of the jointly
owned limited liability company formed under Delaware state law
through which the Participants conduct the activities of the CAT
(the ``Company''). Each Participant is a member of the Company and
jointly owns the Company on an equal basis. The Participants
submitted to the Commission a proposed amendment to the CAT NMS Plan
on Aug. 29, 2019, which they designated as effective on filing.
Under the amendment, the limited liability company agreement of a
new limited liability company named Consolidated Audit Trail, LLC
serves as the CAT NMS Plan, replacing in its entirety the CAT NMS
Plan. See Exchange Act Release No. 87149 (Sept. 27, 2019), 84 FR
52905 (Oct. 3, 2019).
---------------------------------------------------------------------------

Section 6.4(d) of the CAT NMS Plan provides that each Participant,
through its Compliance Rule,\366\ must require Industry Members \367\
to record and electronically report certain information to the CAT
Central Repository. Compliance rules have been adopted by each
Participant. As such, any broker-dealer that is a member of a national
securities exchange or a member of a national securities association
must report each order and reportable event, which includes the
original receipt or origination, modification, cancellation, routing,
execution (in whole or in part) and allocation of an order, and receipt
of a routed order to the CAT.\368\ This requirement is designed to
provide regulators, including the Commission, access to comprehensive
information regarding the lifecycle of orders, from origination to
execution, as well as the post-execution allocation of shares.
---------------------------------------------------------------------------

\366\ ``Compliance Rule'' means, with respect to a Participant,
the rule(s) promulgated by such Participant as contemplated by
section 3.11 of the CAT NMS Plan. See CAT NMS Plan, section 1.1.
\367\ An ``Industry Member'' means a member of a national
securities exchange or a member of a national securities
association. See CAT NMS Plan, section 1.1.
\368\ ``Central Repository'' means a repository responsible for
the receipt, consolidation, and retention of all information
reported to the CAT pursuant to Rule 613 of Regulation NMS and the
CAT NMS Plan. See CAT NMS Plan, section 1.1.

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[[Page 75135]]

Broker-dealers, through the Compliance Rule adopted pursuant to the
CAT NMS Plan, are required to report certain short sale order data,
including for sell orders, whether an order is long, short, or short
exempt,\369\ but not other short sale order data, including when a buy
order is designed to close out an existing short position, or whether a
market participant is relying on the bona fide market making exception
to the Regulation SHO locate requirement in Rule 203. To supplement the
short sale-related data that would be reported by Managers to the
Commission pursuant to Proposed Rule 13f-2 and on Proposed Form SHO,
the Commission proposed to amend the CAT NMS Plan to require the
Participants to require CAT reporting firms to report certain
additional short sale-related data to the CAT, as discussed below.
---------------------------------------------------------------------------

\369\ Section 1.1 of CAT NMS Plan defines ``Material Terms of
the Order,'' which includes, for sell orders, ``whether the order is
long, short, [or] short exempt[.]''
---------------------------------------------------------------------------

A. Proposal To Require ``Buy to Cover'' Order Marking

The Commission proposed that Industry Members be required to report
to the CAT ``buy to cover'' information, which was proposed to be
collected pursuant to Regulation SHO through Proposed Rule 205
(discussed above). Specifically, the Commission proposed to amend
section 6.4(d)(ii) of the CAT NMS Plan by adding new paragraph
6.4(d)(ii)(D) which would require the Participants to update their
Compliance Rules to require Industry Members to report for the original
receipt or origination of an order to buy an equity security, whether
such buy order is for an equity security that is a ``buy to cover''
order as defined by Proposed Rule 205(a).\370\ This provision would
have required Industry Members to identify ``buy to cover'' equity
orders received or originated by Industry Members and Customers \371\
as ``buy to cover'' orders in order receipt and order origination
reports submitted to the CAT Central Repository.
---------------------------------------------------------------------------

\370\ See Proposed section 6.4(d)(ii)(D) of the CAT NMS Plan;
Proposed Rule 205(a) of Regulation SHO, 17 CFR 242.205(a)).
\371\ Section 1.1 of the CAT NMS Plan defines the term
``Customer'' as (a) the account holder(s) of the account at a
registered broker-dealer originating the order; and (b) any person
from whom the broker-dealer is authorized to accept trading
instructions for such account, if different from the account
holder(s). See also 17 CFR 242.613(j)(3).
---------------------------------------------------------------------------

The Commission, as discussed in Part III above, is not adopting
Proposed Rule 205 which would have established a new ``buy to cover''
order marking requirement. Accordingly, the Commission is likewise not
adopting an amendment to add new paragraph 6.4(d)(ii)(D) to the CAT NMS
Plan which would have required the Participants to update their
Compliance Rules to require Industry Members to report ``buy to cover''
order marking information to CAT.

B. Proposal To Require Reporting of Reliance on Bona Fide Market Making
Exception

The Commission also proposed to require CAT reporting firms that
are reporting short sales to indicate whether such reporting firm is
asserting use of the bona fide market making exception under Regulation
SHO for the locate requirement in Rule 203(b)(2)(iii) (i.e., the BFMM
locate exception) for the reported short sales. Specifically, the
Commission proposed to amend section 6.4(d)(ii) of the CAT NMS Plan to
add a new paragraph (E) which would require Participants to update
their Compliance Rules to require Industry Members to report to the
CAT, for the original receipt or origination of an order to sell an
equity security, whether the order is a short sale effected by a market
maker in connection with bona fide market making activities in the
security for which the BFMM locate exception is claimed.\372\ The
Commission believed that this information would provide valuable data
to both the Commission and other regulators regarding the use of this
narrow exception. The Commission believed that requiring Industry
Members to identify short sales for which they are claiming the bona
fide market making exception would provide the Commission and other
regulators an additional tool to determine whether such activity
qualifies for the exception, or instead could be indicative of, for
example, proprietary trading instead of bona fide market making
activity.
---------------------------------------------------------------------------

\372\ See Proposed section 6.4(d)(ii)(E) of the CAT NMS Plan.
---------------------------------------------------------------------------

Rule 203(b)(1) of Regulation SHO generally prohibits a broker-
dealer from accepting a short sale order in an equity security from
another person, or effecting a short sale in an equity security for its
own account, unless the broker-dealer (i) has borrowed the security,
(ii) has entered into a bona fide arrangement to borrow the security,
or (iii) has reasonable grounds to believe that the security can be
borrowed so that it can be delivered on the date delivery is due.\373\
This is generally referred to as the locate requirement. Rule 203(b)(2)
of Regulation SHO provides an exception to the locate requirement for
short sales effected by a market maker in connection with bona fide
market making activities.\374\ To qualify for the BFMM locate
exception,\375\ a market maker must be engaged in bona fide market
making activities at the time they effect a short sale. The Commission
adopted this narrow exception to Regulation SHO's locate requirement
for market makers that may need to facilitate customer orders in a fast
moving market without possible delays associated with complying with
such a requirement.\376\
---------------------------------------------------------------------------

\373\ 17 CFR 242.203(b)(1).
\374\ 17 CFR 242.203(b)(2). The Commission has provided guidance
on indicia of bona fide market making activities eligible for the
locate exception. See Regulation SHO Adopting Release (setting forth
examples of activities that would not be considered to be bona fide
market making activities); see also Exchange Act Release No. 58775
(Oct. 14, 2008), 73 FR 61698 at 61690 (Oct. 17, 2008) (``2008
Regulation SHO Amendments'') (adopting amendments to Regulation SHO
and providing additional guidance on what constitutes bona fide
market making). Only market makers that are engaged in bona fide
market making activity in the security at the time they effect a
short sale are eligible for the locate exception. See 2008
Regulation SHO Amendments, at 61699.
\375\ Rule 204 of Regulation SHO also provides an extended
close-out period for a fail to deliver resulting from bona fide
market making activities. 17 CFR 242.204.
\376\ See Regulation SHO Adopting Release, at 48015 n.67; see
also Emergency Order Pursuant to Section 12(k)(2) of the Securities
Exchange Act of 1934 Taking Temporary Action to Respond to Market
Developments, Exchange Act Release No. 58166 (July 15, 2008);
Amendment to Emergency Order Pursuant to Section 12(k)(2) of the
Securities Exchange Act of 1934 Taking Temporary Action to Respond
to Market Developments, Exchange Act Release No. 58190 (July 18,
2008) (excepting from the Emergency Order bona fide market makers);
see also Proposing Release, at 14970-71 (Mar. 16, 2022) (``To
qualify for the bona fide market making exception, however, a firm
must be engaged in bona fide market making at the time of the short
sale in question. The Commission adopted this narrow exception to
Regulation SHO's locate requirement for market makers that may need
to facilitate customer orders in a fast moving market without
possible delays associated with complying with such a
requirement.'').
---------------------------------------------------------------------------

Comments and Final Rule
Some commenters supported requiring CAT reporting firms to report
the use of the BFMM locate exception to CAT.\377\ These commenters were
in favor of the potential added transparency that BFMM locate exception
reporting could provide.\378\

[[Page 75136]]

Other commenters stated that such reporting would help the Commission
to monitor short selling activity and ensure compliance with Regulation
SHO's requirements, and stated that it is important that the Commission
have the surveillance tools and data such as BFMM locate exception
reporting to improve the Commission's oversight of financial markets
and compliance with existing regulations and otherwise ``police'' the
markets.\379\
---------------------------------------------------------------------------

\377\ Virtually all these comments were submitted by individual
investors, with the vast majority being submitted through an
identical (or nearly identical) base letter from a grassroots
advocacy campaign ``by, and for, retail investors.'' These
commenters stated that they were part of a self-identified group
called ``We the Investors'' (``WTI''). WTI supported the adoption of
BFMM locate exception reporting. WTI also suggested that the BFMM
locate exception be eliminated altogether. See WTI Letter.
\378\ See e.g., Michael Behrens Comment; Mark Tate Comment;
Comment from Taj Reilly (Mar. 14, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20119322-272211.htm; Comment
from Sebastian Stankiewicz Comment (Mar. 15, 2022), available at
https://www.sec.gov/comments/s7-08-22/s70822-272501.htm; Comment
from An Investor (Apr. 4, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20122297-278355.htm; Jean-Garcia Gomez
Comment; Comment from Andrew Gatley (Oct. 31, 2022), available at
https://www.sec.gov/comments/s7-08-22/s70822-317527.htm. See also
WTI Letter.
\379\ See e.g., Better Markets Letter; WTI Letter.
---------------------------------------------------------------------------

Other commenters opposed the adoption of BFMM locate exception
reporting to CAT.\380\ These commenters generally believed that the
costs and burdens associated with the proposal, including costs to
update systems to accommodate BFMM locate exception reporting to CAT,
would materially outweigh the benefit of the information reported to
CAT.\381\ These commenters, however, did not provide cost estimates.
The Commission continues to believe, as stated in the Proposing
Release, that Industry Members will incur an initial, one-time external
expense for software and hardware to facilitate reporting of the new
data elements to CAT, and separately estimated such costs for Industry
Members that report directly to the CAT, and those that use third-party
reporting agents for CAT reporting. The Commission continues to believe
that the ongoing burden associated with reporting to the CAT is already
accounted for in the existing information collections burdens
associated with Rule 613 and the CAT NMS Plan Approval Order submitted
under Office of Management and Budget (OMB) number 3235-0671.\382\
---------------------------------------------------------------------------

\380\ See e.g., SIFMA Letter; Virtu Letter; STA Letter; XR
Securities Letter; FIA PTG Letter.
\381\ See e.g., SIFMA Letter, at 24-25; FIA PTG Letter, at 3;
Virtu Letter, at 6.
\382\ See infra Part VII.C.
---------------------------------------------------------------------------

One commenter stated that adopting the proposed BFMM locate
exception would be operationally difficult and costly to
implement.\383\ This commenter stated that, under the proposal, the
BFMM locate exception information would be required to be reported at
the time the short sale order is effected, requiring that order entry
systems, and other downstream systems, be updated to allow the BFMM
locate exception information to be reported to CAT.\384\ To implement
the rule, the Commission expects that Industry Members will incur an
initial, one-time external expense for software and hardware to
facilitate reporting of the new data elements to CAT but believes that
the benefits of such data, as discussed further below, will justify
such costs. Brokers or dealers generally include fields in order-entry
systems, and related downstream systems, to indicate whether the broker
or dealer obtained a locate as well as the source of such locate under
Rule 203(b). As stated by the commenter, brokers or dealers may wish to
update their order entry systems and related downstream systems as a
convenient method to track their use of the BFMM locate exception to
ensure accurate reporting of the use of the BFMM locate exception to
CAT. As a result, brokers or dealers may wish to make one-time updates
to such systems to add a field or notation to indicate whether the
broker or dealer is claiming the BFMM locate exception for the short
sale transaction. However, brokers or dealers may also use other means
to ensure compliance with the final rule.
---------------------------------------------------------------------------

\383\ See, e.g., SIFMA Letter, at 24-25; Virtu Letter, at 5.
\384\ SIFMA Letter, at 24-25.
---------------------------------------------------------------------------

This commenter agreed with the Commission that a broker-dealer is
required to determine whether the firm is eligible for the BFMM locate
exception at the time a short sale is effected but expressed concerns
that market makers that quote and trade on multiple trading venues, for
example, might encounter certain systematic or operational difficulties
in making, and reporting, such determination using existing systems
design. Specifically, this commenter stated that ``it may be
systematically and/or operationally difficult for the broker to define
when it is globally acting in a bona fide market maker capacity given
the granular details of a market maker's many activities, and the
existing systems design.'' \385\ However, the final rule does not alter
the requirements for the use of the BFMM locate exception. The final
rule requires that brokers or dealers report their use of the BFMM
locate exception as provided under Regulation SHO.
---------------------------------------------------------------------------

\385\ SIFMA Letter, at 25 n.64.
---------------------------------------------------------------------------

Rule 203(b)(2)(iii) provides an exception to the locate requirement
for ``[s]hort sales effected by a market maker in connection with bona-
fide market making activities in the security for which this exception
is claimed.'' \386\ Thus, for purposes of qualifying for the BFMM
locate exception, ``a market maker must also be a market maker in the
security being sold, and must be engaged in bona-fide market making in
that security at the time of the short sale.'' \387\
---------------------------------------------------------------------------

\386\ 17 CFR 242.203(b)(2)(iii). Further, the locate is required
prior to each short sale order unless the broker or dealer has
determined that an exception applies. See Rule 203(b)(1). A broker
or dealer may not accept a short sale order in an equity security
from another person, or effect a short sale in an equity security
for its own account, unless the broker or dealer has: (i) borrowed
the security, or entered into a bona-fide arrangement to borrow the
security; or (ii) reasonable grounds to believe that the security
can be borrowed so that it can be delivered on the date delivery is
due; and (iii) documented compliance with Rule 203(b)(1).
\387\ See 2008 Regulation SHO Amendments, at 61699; Shortening
the Securities Transaction Settlement Cycle, Exchange Act Release
No. 96930 (Feb. 15, 2023), 88 FR 13872, 13911-12 at n.411 (May 5,
2023) (``Settlement Cycle Adopting Release'').
---------------------------------------------------------------------------

Some commenters stated that the Commission and other regulators can
currently request a particular market maker to provide information
regarding its use of the BFMM locate exception, and questioned why the
Commission would need to require such costly reporting to CAT.\388\
Another commenter stated that there is no data or evidence in the
Proposing Release to suggest that the Commission's access to such data
has been limited in any way under the current request process.\389\
However, the Commission has stated that Regulation SHO does not require
market makers to specifically record whether they are relying on the
BFMM locate exception,\390\ although brokers or dealers should be able
to identify what trading activity qualifies for the BFMM locate
exception so a firm can demonstrate its eligibility for the asserted
exception.\391\ To the extent a broker or dealer has documented such
eligibility, the Commission and its staff have access to such
documents.\392\ The final rule will capture information regarding the
use of the BFMM locate

[[Page 75137]]

exception to Regulation SHO \393\ which will provide the Commission and
SROs with comprehensive information about market practices with respect
to the use of the BFMM locate exception.\394\ Because brokers or
dealers asserting the BFMM locate exception are already required to
demonstrate eligibility for the exception, the costs of reporting
should be confined primarily to the one-time implementation costs
related to updating CAT and any methods elected by the broker or
dealer, such as updating order entry systems and related systems, to
ensure compliance.
---------------------------------------------------------------------------

\388\ See e.g., SIFMA Letter, at 24-25 (``Given that the
information that would result from this proposed reporting
requirement is already available to the SEC and other regulators on
demand, SIFMA believes that the cost and burden of implementing the
requirement would materially outweigh the benefit of such
information.''); Virtu Letter, at 6 (``The Proposal offers no data
or evidence that its access to data about the use of the exception
has been limited in any way under the current process it uses to
collect such information from broker-dealers, nor that there are
widespread violations or other abuses of the exception that warrant
imposing substantial costs and burdens on market makers also to
report this information to CAT.'').
\389\ Virtu Letter, at 6.
\390\ Proposing Release, at 14971.
\391\ See Regulation SHO Adopting Release, 48011 n.27 (``As with
any rule, broker-dealers relying on [an] exception should be
prepared to monitor for compliance with its conditions, and maintain
records documenting such compliance.'').
\392\ See, e.g., section 17(b) of the Exchange Act.
\393\ Proposing Release, at 14971.
\394\ FIA PTG Letter, at 3 (``Requiring the reporting of orders
on an order-by-order basis with either a `buy to cover' or bona fide
market making attestation appears unnecessary from an added
transparency perspective and therefore unnecessarily costly.'').
---------------------------------------------------------------------------

Another commenter stated that regulators should utilize other
existing short sale data available through CAT that could identify
activity that is ``disproportionate to the usual market making patterns
of practices of the broker-dealer'' in order to determine if the BFMM
locate exception is being misused.\395\ The commenter, however, did not
provide detail describing how disproportionate the activity would be
before the Commission could determine whether the exception is being
misused. Data showing the existence of short sales would not be
sufficient to assess whether the exception is being misused. Another
commenter suggested that CAT already has ample existing data fields,
including a market maker account holder designation field, and
questioned the need for a BFMM locate exception data field.\396\
Further, a broker or dealer's status as a market maker under an
exchange's rules, or by self-assertion, is not sufficient by itself to
establish eligibility to use the BFMM locate exception; the broker or
dealer that is a market maker must be effecting short sales ``in
connection with bona-fide market making activities in the security for
which [the] exception is being claimed.'' \397\ Further, as discussed
above, the broker or dealer, whether it calls itself a market maker, or
has an account it describes as a market maker account, must still
determine eligibility for the BFMM locate exception for each
transaction rather than globally.\398\ Therefore, collecting the data
regarding the use of the BFMM locate exception will be useful for the
Commission, including to assess the use of the exception throughout the
industry.
---------------------------------------------------------------------------

\395\ STA Letter, at 3.
\396\ XR Securities Letter, at 2.
\397\ See, e.g., Rule 203(b)(2)(iii), which requires that the
broker or dealer (1) be a market maker; (2) that is effecting short
sales in connection with bona-fide market making activities, and (3)
in the security for which the exception is claimed. Section 3(a)(38)
defines the term ``market maker.''
\398\ See supra n.374.
---------------------------------------------------------------------------

Another commenter stated that there was no data or evidence in the
Proposing Release to suggest that there are widespread violations or
abuses of the BFMM locate exception that warrant the costs imposed by
the CAT reporting requirements for the BFMM locate exception.\399\ As
the Commission stated in the Proposing Release, there are a number of
settled enforcement actions against brokers or dealers in connection
with their use of the exception.\400\ In addition, one commenter stated
that ``it may be systematically and/or operationally difficult for the
broker to define when it is globally acting in a bona fide market maker
capacity given the granular details of a market maker's many
activities, and the existing systems design.'' \401\ However, this
comment concerns compliance with Regulation SHO rather than reporting
of the use of the BFMM locate exception in CAT; the new requirements do
not affect compliance with Regulation SHO.
---------------------------------------------------------------------------

\399\ Virtu Letter, at 6.
\400\ See Proposing Release, at 14971.
\401\ See SIFMA Letter, at 25 n.64.
---------------------------------------------------------------------------

Another commenter did not believe that the BFMM locate exception
information reported to CAT would assist the Commission in identifying
violations or misuse of the BFMM locate exception ``because the data
can be manipulated by bad actors and is susceptible to human errors of
inappropriately marking short sales with the BFMM indicator when they
are not eligible.'' \402\ The fact that bad actors may act contrary to
the requirement is not an appropriate reason not to adopt a
requirement. Similarly, human error is always possible. In addition,
the human error the commenter describes, if widespread, could be an
indication of noncompliant use of the BFMM locate exception.
---------------------------------------------------------------------------

\402\ STA Letter, at 3.
---------------------------------------------------------------------------

Another commenter stated that if BFMM locate exception reporting
were adopted, ``most market making firms will simply tag that new [BFMM
locate exception] field with the affirmative.'' \403\ Again, the fact
that a commenter speculated that some brokers or dealers may violate
the requirement by providing incorrect data is not a reason to not
adopt a requirement. Understanding whether market makers always claim
the BFMM locate exception (as this commenter suggests), sometimes claim
the exception, or never claim the exception, will provide important
information and context regarding how market makers use the
exception.\404\
---------------------------------------------------------------------------

\403\ XR Securities Letter, at 3.
\404\ One commenter disagreed with existing Regulation SHO order
marking requirements, with a specific focus on a statement made by
Commission staff that a broker or dealer should generally not
continue to mark orders ``long'' if it has submitted orders beyond
the number of shares for which it is long. See Virtu Letter, at 3-5;
see also FAQ 2.5, Responses to Frequently Asked Questions Concerning
Regulation SHO, Division of Market Reg., available at https://www.sec.gov/divisions/marketreg/mrfaqregsho1204.htm. This commenter
generally stated that this results in virtually all sell orders
being marked as short sales and thus, information that is reported
to CAT under the proposal would not be representative of the market
maker's ``actual'' short position and would not be useful short
sale-related information. Brokers or dealers must mark sell orders
``long,'' ``short,'' or ``short exempt,'' and must obtain a locate
for all sales marked short unless the broker or dealer can determine
that the short sale is ``effected by a market maker in connection
with bona-fide market making activities in the security for which
this exception [BFMM locate exception] is claimed.'' See 17 CFR
242.203(b)(2)(iii).
---------------------------------------------------------------------------

Some commenters asked that the Commission provide additional
clarity regarding what constitutes bona fide market making activities
eligible for the BFMM locate exception, and requested that the
Commission confirm that certain market making activity (e.g., through
wholesale market making and other activities in connection with
facilitating customer orders in the OTC market) was bona fide market
making activity for purposes of claiming the BFMM locate
exception.\405\ One of these commenters expressed concerns regarding
recent Commission statements related to the BFMM locate exception.\406\
The statements that the

[[Page 75138]]

commenter references in particular releases are restatements of
multiple prior Commission statements regarding the BFMM locate
exception.\407\ One commenter expressed concerns that the proposal to
require BFMM locate exception reporting to CAT was an effort by the
Commission to further limit the availability of the BFMM locate
exception in a manner that would be inconsistent with Commission's
original Regulation SHO guidance.\408\ This commenter expressed
particular concerns with the Commission's statement in the Proposing
Release that the proposed BFMM locate exception reporting would be an
additional tool to determine whether such activity qualifies for the
BFMM locate exception or conversely ``could be indicative of, for
example, proprietary trading instead of bona fide market making.'' The
Commission has consistently stated that the BFMM was intended to be a
``narrow'' exception,\409\ and the collection of information about its
usage will be helpful for the Commission to determine whether it is
being used appropriately as such. The reported information will indeed
be used as an ``additional tool to determine whether such activity
qualifies'' for the BFMM locate exception as part of the Commission's
regulation of short sales, for example, by determining whether brokers
or dealers are using the exception for proprietary trading, which is
not appropriate. Other commenters called for the elimination of the
BFMM locate exception itself.\410\ Such requests are outside the scope
of this rulemaking. However, the BFMM locate exception is useful for
brokers and dealers that are, for example, trying to meet demand in
fast-moving markets where they might otherwise be forced to back away
from published, marketable quotes being hit by prospective purchasers
solely because of the locate requirement.
---------------------------------------------------------------------------

\405\ See SIFMA Letter, at 25 (``Moreover, and especially to the
extent that there is a requirement to identify reliance on the
exception through CAT, the SEC should re-confirm that, while bona
fide market making is based on certain `facts and circumstances' as
set forth in prior interpretive guidance, there are different ways
in which broker-dealers engage in bona fide market making, including
not only through making markets on exchanges, but equally through
wholesale market making and other activities in connection with
facilitating customer orders in the OTC market.''); see also STA
Letter, at 3 (STA recommends that the Commission clarify its views
on the scope of the BFMM exception, citing as an example an ``OTC
market makers that provide extensive liquidity for retail trades but
do not affect the trades pursuant to published quotations.'').
\406\ See SIFMA Letter, at 25 n.67 (``SIFMA further notes the
SEC's recent statements in its recent proposing release on
registration of significant market participants that `bona fide
market-making exceptions under Regulation SHO are only available to
registered broker-dealers that publish continuous quotations for a
specific security in a manner that puts the broker-dealer at
economic risk', that `[b]roker-dealers that do not publish
continuous quotations, or publish quotations that do not subject the
broker-dealer to such risk (e.g., quotations that are not publicly
accessible, are not near or at the market, or are skewed
directionally towards one side of the market), would not be eligible
for the bona fide market maker exceptions' and that `broker-dealers
that publish quotations but fill orders at different prices than
those quoted would not be engaged in bona fide market making for
purposes of Regulation SHO.''). SIFMA cited to Further Definition of
``As a Part of a Regular Business'' in the Definition of Dealer and
Government Securities Dealer, Exchange Act Release No. 94524 (Mar.
28, 2022), 87 FR 23054, 23068-69 at n.157 (Apr. 18, 2022).
\407\ See 2008 Regulation SHO Amendments, at 61698-99;
Regulation SHO Adopting Release, at 48015.
\408\ SIFMA Letter, at 25.
\409\ See 2008 Regulation SHO Amendments, at 61698-99;
Regulation SHO Adopting Release, at 48015.
\410\ See Better Markets Letter, at 14 (``The SEC has correctly
concluded that naked short sales are abusive. The SEC established
this loophole, which permits the largest proprietary trading firms
to engage in naked short selling, on the theory that it facilitates
trading in hard-to-borrow securities. However, the SEC's settlement
regulations with respect to mandatory buy-ins already provide
special accommodations to market-makers that cannot close out their
short positions within the standard failure-to-deliver close-out
timeframe. This accommodation already in place calls into serious
question whether the large loophole in the locate requirement serves
any legitimate purpose. At the very least, the SEC must closely
monitor the information it receives regarding reliance on this
exception to determine whether elimination of this exception is
warranted.''); see also WTI Letter.
---------------------------------------------------------------------------

One commenter stated that the costs imposed on market makers to
implement and maintain the proposed regulatory requirements might
result in wider spreads, reduced liquidity, and might represent a
barrier to entry for new market participants.\411\ To the extent the
commenter is concerned that the costs of implementing reporting may be
passed on in the form of wider spreads or reduced liquidity, on balance
the benefits of transparency justify such costs. Importantly, it is
unclear how reporting the data would create negative results on spreads
or market liquidity because the reported exception data will only be
provided to regulators and not made public. If the commenter is
concerned that once the data is reported, the Commission may become
more aware of potential misuse of the BFMM locate exception as
described by commenters, the consequences identified by the commenter
would not flow from the requirement to report the use of the exception,
but may instead result from the misuse of it. Collecting the data will
help the Commission with its oversight of the use of the exception,
including with regard to potentially abusive ``naked'' short
selling.\412\ The BFMM locate exception, if properly utilized, benefits
investors and the market by preserving market liquidity,\413\ but it
should not be used for speculative \414\ or potentially abusive
``naked'' short selling.\415\ Instead, the BFMM locate exception data
reported to the CAT will provide the Commission with a better
understanding of the use of this limited exception, which should help
to ensure that the exception is not subject to misuse by brokers or
dealers in violation of the Commission's short selling rules.
---------------------------------------------------------------------------

\411\ See STA Letter, at 4.
\412\ See generally Amendments to Regulation SHO, Exchange Act
Release No. 60388 (July 27, 2009), 74 FR 38266, 38267-68 (July 31,
2009) (``2009 Regulation SHO Amendments'').
\413\ See Regulation SHO Adopting Release, at 48025
(``[e]xcepting bona-fide market making activity from the locate
requirement will benefit investors and the market by preserving
necessary market liquidity.'').
\414\ See, e.g., 2008 Regulation SHO Amendments, at 61699 (``For
example, the Commission has stated that bona-fide market making does
not include activity that is related to speculative selling
strategies or investment purposes of the broker-dealer and is
disproportionate to the usual market making patterns or practices of
the broker-dealer in that security.''); see also Regulation SHO
Adopting Release, at 48015.
\415\ See, e.g., 2008 Regulation SHO Amendments, at 61691 (``We
have previously noted that abusive `naked' short selling, while not
defined in the federal securities laws generally refers to selling
short without having stock available for delivery and intentionally
failing to deliver stock within the standard . . . settlement
cycle.''). See also Regulation SHO Adopting Release, at 48009, n.10;
Exchange Act Release No. 56212 (Aug. 7, 2007), 72 FR 45544, n.3
(Aug. 14, 2007) (``2007 Regulation SHO Final Amendments''); Exchange
Act Release No. 57511 (Mar. 17, 2008), 73 FR 15376 (Mar. 21, 2008)
(``Naked Short Selling Anti-Fraud Rule Proposing Release'').
---------------------------------------------------------------------------

In response to commenters that generally requested additional
guidance \416\ regarding the scope of bona fide market making activity
eligible for the BFMM locate exception, the primary requirement is that
a broker or dealer that is a market maker provide widely accessible,
continuous quotations at or near the market for which it is at
risk.\417\ For example, the Commission has stated that for purposes of
Regulation SHO, a market maker engaged in bona fide market making is a
``broker-dealer that deals on a regular basis with other broker-
dealers, actively buying and selling the subject security as well as
regularly and continuously placing quotations in a quotation medium on
both the bid and ask side of the market.'' \418\ Moreover, the
Commission has stated that ``[b]roker-dealers that do not publish
continuous quotations, or publish quotations that do not subject the
broker-dealer to such risk (e.g., quotations that are not publicly
accessible, are not near or at the market, or are skewed directionally
towards one side of the market), would not be eligible for the bona-
fide market-maker

[[Page 75139]]

exceptions under Regulation SHO.'' \419\ Notably, ``broker-dealers that
publish quotations but fill orders at different prices than those
quoted would not be engaged in bona-fide market making for purposes of
Regulation SHO.'' \420\
---------------------------------------------------------------------------

\416\ See, e.g., SIFMA Letter, at 25; STA Letter, at 3.
\417\ See, e.g., Settlement Cycle Adopting Release, at n.411
(``Under Regulation SHO's bona fide market making exceptions, the
broker-dealer generally should be holding itself out as standing
ready and willing to buy and sell the security by continuously
posting widely accessible quotes that are near or at the market. The
market maker must be at economic risk for such quotes.''); see also
2008 Regulation SHO Amendments, at 61699. Thus, a market-maker that
continually executed short sales away from its posted quotes would
generally be unable to rely on the bona-fide market making
exceptions of Regulation SHO. See Regulation SHO Adopting Release,
at 48015 n.68. The market-maker must also be engaged in bona fide
market making in that security at the time of the short sale for
eligibility for the exceptions. See 2008 Regulation SHO Amendments,
at 61699.
\418\ See, e.g., 2008 Regulation SHO Amendments, at 61699; see
also Self-Regulatory Organizations; National Association of
Securities Dealers, Inc.; Order Approving Proposed Rule Change
Relating to Close-Out Requirements for Short Sales and an
Interpretation on Prompt Receipt and Delivery of Securities,
Exchange Act Release No. 32632 (July 14, 1993), 58 FR 39072, 39074
(July 21, 1993); see also Settlement Cycle Adopting Release, at
13911-12 n.411.
\419\ See Settlement Cycle Adopting Release, at 13911-12 n.411.
\420\ Id. See also Regulation SHO Adopting Release, at 48015
n.68 (``Moreover, a market maker that continually executed short
sales away from its posted quotes would generally be unable to rely
on the bona-fide market making exception'' of Regulation SHO).
---------------------------------------------------------------------------

After considering the comments received regarding the proposal to
require CAT reporting firms that are reporting short sales to indicate
whether such CAT reporting firm is asserting use of the BFMM locate
exception, the Commission is adopting this proposed amendment to CAT
with a few technical modifications to improve the readability of the
amendment.\421\ The Commission recognizes that there will be costs to
broker-dealers to implement changes to their respective systems and
processes to accommodate the reporting of the BFMM locate exception
information to CAT. For the reasons described above, as well as reasons
stated in the Proposing Release, the Commission believes that the
benefits to the Commission in its administration of short sale
regulations will justify the burdens and costs to CAT reporting firms.
This reporting requirement will not adversely affect short selling
activity or liquidity in the market as it requires that brokers or
dealers that are market makers provide information that is, or should
be, readily available to the market maker at the time they effect a
short sale, to the Commission without having to request access. The
requirement does not change how such brokers or dealers that are market
makers use the exception itself, and the data will not be published.
---------------------------------------------------------------------------

\421\ The amendment includes the following non-substantive,
technical changes to the rule text: adding the word ``for''
preceding ``a short sale'' to clarify that reporting is required for
a short sale in which the bona fide market maker exception is
claimed, adding ``the'' preceding ``exception'' and adding ``in''
preceding Rule 203(b)(2)(iii) to clarify that the bona fide market
making exception is found in Rule 203(b)(2)(iii).
---------------------------------------------------------------------------

V. Other Comments

Other commenters also discussed issues that were beyond the scope
of the rulemaking, such as suggestions for the Commission to ban short
selling, enhance Regulation SHO's locate or close-out requirements,
address potentially abusive ``naked'' short selling, and reduce the
reporting timeframes or requirements for Form 13F reporting, among
others.\422\
---------------------------------------------------------------------------

\422\ One commenter understood the rule as a ``self-reporting''
rule rather than as a mandatory reporting rule. Comment from Sarah
(Feb. 25, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20117824-270590.htm.
---------------------------------------------------------------------------

VI. Compliance Date

The Commission received one comment regarding a compliance date for
Rule 13f-2 reporting requirements; that commenter recommended that
Managers be given at least 18 months to comply with the new
requirements.\423\ Specifically, the commenter stated that ``[g]iven
the complexity and significance of the operational build required by
the proposed rule, we think a minimum of 18 months would be an
appropriate implementation timeframe to give advisers adequate time to
come into compliance with any new requirements.'' \424\ Due to the
modifications from the proposal which will reduce the complexity of the
operational build, Managers should require less time than suggested by
the commenter. Although the data that will result from the Rule 13f-2
reporting requirements will be useful to market participants and
regulators as soon as it is available, it is prudent to implement the
rule at a measured pace to help ensure that Managers have adequate time
to update systems to meet the reporting requirements of Rule 13f-2.
Accordingly, a compliance date of 12 months after the effective date of
this release for Rule 13f-2 strikes the appropriate balance between the
Commission's goal of increasing transparency of short sale-related
information and providing Managers with adequate time to implement
systems and processes to comply with the Rule 13f-2 reporting
requirements.\425\
---------------------------------------------------------------------------

\423\ MFA Letter 2, at 3 (stating that the Commission should
``provide an appropriate amount of time for firms to comply with any
new requirements [under Rule 13f-2] (18 months at a minimum)'' due
to the operational build required for compliance with Proposed Rule
13f-2 and Proposed Form SHO).
\424\ Id.
\425\ In addition, with respect to the compliance date, several
commenters requested the Commission to consider interactions between
the proposed rule and other recent Commission rules. In determining
compliance dates, the Commission considers the benefits of the rules
as well as the costs of delayed compliance dates and potential
overlapping compliance dates. For the reasons discussed throughout
the release, to the extent that there are costs from overlapping
compliance dates, the benefits of the rule justify such costs. See
infra Parts VIII.B, VIII.C.6.f, and VIII.D.2 for a discussion of the
interactions of the final rule with certain other Commission rules.
---------------------------------------------------------------------------

The Commission will begin publishing the aggregated short sale
related data collected, pursuant to Rule 13f-2, three months after the
above stated compliance date of 12 months after the effective date of
this release. The three-month window for the Commission to publish
aggregated Form SHO data is intended to ensure that Commission systems
are operating as designed in order to publish the aggregated data.
Consistent with a suggestion by the commenter, the compliance date
for the CAT amendments will be 18 months after the effective date of
this release, as there were not modifications to that requirement from
proposal. This will allow CAT reporting firms adequate time to update
systems to facilitate reporting to CAT.\426\ An 18-month compliance
period for the amendment to CAT strikes the appropriate balance between
improving the Commission's administration of short sale regulations and
providing CAT reporting firms adequate time to implement changes to
their respective systems and processes to accommodate the reporting of
BFMM locate exception information to CAT, and is reasonable given that
the information to be reported is, or should be, readily available to
the market maker at the time they effect a short sale.\427\
---------------------------------------------------------------------------

\426\ For discussion of the compliance date for the adopted
amendment to the CAT NMS Plan to require the reporting to the CAT of
reliance on the bona fide market making exception in Regulation SHO,
see Notice of the Text of the Amendment to the National Market
System Plan Governing the Consolidated Audit Trail for Purposes of
Short Sale-Related Data Collection, Exchange Act Release No. 34-
98739 (Oct. 13, 2023), published elsewhere in this issue of the
Federal Register, which will have an effective date of 60 days after
date of publication in the Federal Register and a compliance date of
18 months after the effective date.
\427\ See supra Part IV.B. See also infra Part VII.C for
discussion of costs and burden estimates related to compliance with
the amendment to CAT.
---------------------------------------------------------------------------

VII. Paperwork Reduction Act Analysis

A. Background

Certain provisions of Rule 13f-2, Form SHO, and the Amendment to
CAT impose ``collection of information'' requirements within the
meaning of the Paperwork Reduction Act of 1995 (``PRA'').\428\ The
title for the collection of information is: ``Amendments to Enhance
Short Sale Data'' (OMB Control No. 3235-0804). An agency may not
conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a current valid control
number. The requirements of this collection of information are
mandatory for Managers under Rule 13f-2 and Form SHO, and Plan
Participants and CAT reporting firms under the Amendment to CAT.
---------------------------------------------------------------------------

\428\ 44 U.S.C. 3501 et seq.

---------------------------------------------------------------------------

[[Page 75140]]

In accordance with the PRA, the Commission is submitting the final
amendments to the rules to the Office of Management and Budget (OMB)
for review. The Commission published a request for comments on these
collection of information requirements in the Proposing Release,\429\
and submitted the proposed requirements to the Office of Management and
Budget (OMB) for review in accordance with the PRA.\430\ The Commission
received some comments regarding the Commission's estimates of
paperwork burdens and costs associated with anticipated compliance of
Rule 13f-2, Form SHO, and the Amendment to CAT, which are addressed in
this section.
---------------------------------------------------------------------------

\429\ See Proposing Release, at 14980-81.
\430\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
---------------------------------------------------------------------------

As discussed above, Rule 13f-2 and related Form SHO are designed to
provide greater transparency of short sale-related data to regulators,
investors, and other market participants by requiring certain Managers
to file monthly on Form SHO, through EDGAR in Form SHO-specific XML,
certain short position and activity data. Under Rule 13f-2 and Form
SHO, only those Managers that meet a specified Reporting Threshold for
an equity security will be required to file Form SHO. Such information
will provide additional context to the Commission and other regulators
regarding the lifecycle of short sales, assist in reconstructing market
events, and improve Commission oversight of short selling.
The Amendment to CAT is intended to supplement the short sale-
related data that will be reported by certain broker-dealers to the
Commission pursuant to Rule 13f-2 and Form SHO. The Commission's
amendment to CAT requires, for original receipt or origination of an
order for equities, the Participants' Compliance Rules require their
broker-dealer members record and report whether the order is a short
sale for which the BFMM locate exception in Rule 203 under Regulation
SHO for the reported short sale is being claimed. This information will
provide valuable data to both the Commission and other regulators
regarding the use of the BFMM locate exception. Given the differences
in the information collections applicable to these parties, the burdens
applicable to Managers and broker-dealers are separated in the analysis
below.

B. Burdens for Managers Under Rule 13f-2 and Form SHO

1. Applicable Respondents
As discussed above, Rule 13f-2 and Form SHO require Managers that
trigger a Reporting Threshold to file monthly via EDGAR, on Form SHO,
certain short position and activity data. Under section 13(f)(6)(A) of
the Exchange Act and for purposes of Rule 13f-2, Managers include any
person, other than a natural person, investing in or buying and selling
securities for its own account, and any person (including a natural
person) exercising investment discretion with respect to the account of
any other person.\431\ Thus, the requirements of Rule 13f-2 could
apply, for example, to investment advisers that exercise investment
discretion over client assets, including investment company assets;
broker-dealers; insurance companies; banks and bank trust departments;
and pension fund managers or corporations that manage corporate
investments or employee retirement assets.
---------------------------------------------------------------------------

\431\ See also Instructions to Form 13F.
---------------------------------------------------------------------------

In the Proposing Release, the Commission stated that it believed
that the burden associated with Proposed Rule 13f-2 and the related
Proposed Form SHO reporting in EDGAR would be similar to a Manager's
reporting requirements under former Form SH. In October 2008, the
Commission adopted interim final temporary Rule 10a-3T, which required
institutional investment managers that exercise investment discretion
with respect to accounts holding section 13(f) securities having an
aggregate fair market value of at least $100 million to file Form SH
with the Commission following a calendar week in which it effected a
short sale in a section 13(f) security, with some exceptions. Form SH
included information on short sales and positions of section 13(f)
securities, other than options.\432\ The Commission estimated in the
Proposing Release, that based on Form SH data, each month,
approximately 1,000 Managers would trigger a Reporting Threshold for at
least one security, and therefore be required to file a Proposed Form
SHO.\433\ The Commission did not receive any comments regarding the
estimated number of Managers that would be required to file a Form SHO,
or an alternative estimated number of Managers that commenters believed
would be more appropriate.
---------------------------------------------------------------------------

\432\ Disclosure of Short Sales and Short Positions by
Institutional Investment Managers, 73 FR 61678. The rule extended
the reporting requirements established by the Commission's Emergency
Orders dated September 18, 2008, September 21, 2008, and October 2,
2008, with some modifications. See supra n.103.
\433\ This estimate is similar to the estimate provided in the
Disclosure of Short Sales and Short Positions by Institutional
Investment Managers, Exchange Act Release No. 58785 (Oct. 15, 2008),
73 FR 61678 (Oct. 17, 2008). However, the number of estimated Form
SHO filers represents a monthly, as opposed to weekly, filing, and
therefore the Commission estimates fewer overall filings per month.
Additionally, the estimate accounts for the estimate by the
Commission staff that 252 Form SH filers would have been required to
file had a threshold of 2.5% of shares outstanding or $10 million
monthly average gross short position in an equity security been
imposed during the analyzed time period. The estimate of 1,000 is
higher than the 252 estimated Form SH filers to account for: (1)
Managers with discretion over less than $100 million, which were not
required to file Form SH; (2) the fact that Form SH was only
required to be filed for 13(f) securities as opposed to all equity
securities of both reporting and non-reporting company issuers; and
(3) the fact that Form SH did not include a second, lower threshold
(Threshold B) for short positions in securities of non-reporting
company issuers.
---------------------------------------------------------------------------

As discussed above, the Commission is adopting aspects of the
Proposal with certain modifications to Form SHO reporting requirements.
For example, the modified reporting threshold for the U.S. dollar
value-based prong of Threshold A for reporting company issuer
securities is being adopted as a monthly average rather than a daily
end-of-day calculation, which could result in fewer Managers being
subject to Form SHO reporting requirements under Threshold A than under
the Proposed Reporting Thresholds. However, the Commission continues to
believe that 1,000 Managers is an accurate estimate when considering
(1) Managers with discretion over less than $100 million, which were
not required to file Form SH; (2) the fact that Form SH was only
required to be filed for 13(f) securities that are included on the 13F
List as opposed to all equity securities of both reporting and non-
reporting company issuers; and (3) the fact that Form SH did not
include a second, lower threshold (Threshold B) for short positions in
securities of non-reporting company issuers. As such, the Commission
continues to estimate that, each month, approximately 1,000 Managers
will trigger a Reporting Threshold for at least one security, and
therefore be required to file a Form SHO.
2. Burdens and Costs
The Commission explained in the Proposing Release that it believed
that the burden associated with Proposed Rule 13f-2 and the related
Proposed Form SHO reporting in EDGAR would be similar to a Manager's
reporting requirements for former Form SH.\434\ The Commission
continues to believe

[[Page 75141]]

that the burden associated with Rule 13f-2 and related Form SHO
reporting in EDGAR is similar to a Manager's reporting requirements for
former Form SH. With respect to each applicable section 13(f) security,
the Form SH filing identified the issuer and CUSIP number of the
relevant security and required the Manager's start of day short
position, the number and value of securities sold short during the day,
the end of day short position, the largest intraday short position, and
the time of the largest intraday short position.\435\ In adopting
interim temporary Rule 10a-3T, which required certain Managers to file
weekly non-public reports via Form SH, the Commission estimated that
Managers would spend approximately 20 hours to prepare and file each
Form SH.\436\ The Commission estimated in the Proposing Release for
Form SHO that the burden associated with preparing and filing Form SHO
in EDGAR would be approximately 20 hours per filing, consistent with
that of former Form SH.\437\
---------------------------------------------------------------------------

\434\ See Proposing Release, at 14972-73.
\435\ Form SH was adopted in the wake of the 2008 financial
crisis and remained in effect until July 2009.
\436\ See Disclosure of Short Sales and Short Positions by
Institutional Investment Managers, 73 FR 61686 (stating that,
``[t]he 20 hour per filing estimate is based on data received from a
small sample of actual filers and a random sample of filings
conducted by our Office of Economic Analysis.'').
\437\ See Proposing Release, at 14973-74.
---------------------------------------------------------------------------

Some commenters were concerned about the Commission's reliance on
prior Form SH data in estimating Form SHO reporting burdens, as well as
the estimated time burden of 20 hours for preparing and filing each
required Form SHO.\438\ One commenter stated that the estimated 20
hours to file Form SHO was ``not realistic'' and felt that reliance on
Form SH for Form SHO burden estimates was not adequately justified in
the Proposing Release.\439\ Specifically, some commenters stated that
the Proposing Release underestimated the costs of preparing proposed
Information Table 2 in relying on the Form SH and Rule 10a-3T
estimates, emphasizing the complexity of Form SHO as compared to Form
SH.\440\ One commenter stated that the Proposing Release's estimate of
20 hours needed to process and file Form SHO per month may be too low,
and even if accurate, will impose a ``substantial ongoing burden.''
\441\ However, these commenters did not provide the Commission with
alternative burden estimates for reporting Form SHO, or alternative
sources of data for which to base Form SHO burden estimates.
---------------------------------------------------------------------------

\438\ See, e.g., MFA Letter, at 15; Two Sigma Letter, at 5-7.
\439\ Two Sigma Letter, at 5-7 (citing letters received by the
Commission that it had underestimated the burden of Form SH and
describing the complexity of Form SHO as compared to Form SH).
\440\ See, e.g., MFA Letter, at 15; Two Sigma Letter, at 5-7.
\441\ Anonymous Fund Manager Letter, at 8.
---------------------------------------------------------------------------

In contrast, one commenter believed that Managers were not being
genuine about their concerns regarding costs and burdens of complying
with Form SHO reporting requirements, stating that they were able to
comply with Form SH requirements.\442\ The commenter also stated that
the requirements of Form SHO should be less burdensome than the
requirements of Form SH due to the decreased frequency of reporting.
---------------------------------------------------------------------------

\442\ See WTI Letter, at 2 (``The protests of the industry in
terms of the effort required to comply with the Proposal ring hollow
given the Commission's experience with interim temporary Rule 10a-
3T--firms had no problem complying and the data provided was useful
to the Commission. Indeed, the Proposal is easier to comply with,
given the monthly rather than weekly reporting of interim temporary
Rule 10a-3T.'').
---------------------------------------------------------------------------

Regarding comments of Form SHO's complexity as compared to Form SH,
the adopted Form SHO, as described above, does not include the proposed
requirement to report hedging status, which several commenters thought
would be particularly burdensome or operationally difficult to
implement.\443\ As adopted, Form SHO also includes a streamlined
Information Table 2, which reduces the granularity of the information
reported, decreasing the costs and burdens that more detailed reporting
of daily activity data as proposed would have imposed, further reducing
complexity from the proposed rule and form.
---------------------------------------------------------------------------

\443\ See, e.g., T. Rowe Price Letter, at 3-4; Virtu Letter, at
3; MFA Letter, at 4.
---------------------------------------------------------------------------

As the Commission acknowledged in the Proposing Release, and
continues to acknowledge, the information required under former Form SH
differs from that required under Form SHO. However, the Commission
continues to believe that Form SH is an appropriate basis for Form SHO
burden estimates. Form SH involved the same type of entities (Managers)
and the same activity (short positions) as Form SHO. While recognizing
that the information required under former Form SH differs from that
required under Form SHO, the Commission continues to believe that both
forms require the reporting of short sale-related data of similar depth
and complexity.\444\ Notably, Rule 13f-2 requires monthly reporting if
certain conditions are met, as opposed to the weekly reporting required
by Form SH for Managers that effected short sales within the preceding
week,\445\ which is anticipated to decrease the overall volume of
reports required to be filed by Managers under Form SHO in comparison
to Form SH.
---------------------------------------------------------------------------

\444\ Under Form SH, Managers who met the applicable threshold
and effected a short sale in a section 13(f) security in the
preceding week were required to file a report identifying the open
short position, closing short position, largest intraday short
position, and the time of the largest intraday short position, for
that security during each calendar day of the prior week. See
Emergency Order Pursuant to Section 12(k)(2) of the Securities
Exchange Act of 1934 Taking Temporary Action To Respond to Market
Developments, Exchange Act Release No. 58591 (Sept. 18, 2008), 73 FR
55175, 55176 (Sept. 24, 2008).
\445\ See id.
---------------------------------------------------------------------------

As such, and since the Commission did not receive comments citing
alternative sources of data that commenters believed would result in
more accurate Form SHO burden estimates, the Commission continues to
believe that Form SH is an appropriate basis for which to estimate Form
SHO burdens. The Commission continues to estimate that the burden
associated with preparing and filing Form SHO in EDGAR will be
approximately 20 hours per filing, consistent with the corresponding
burdens for former Form SH, and consistent with estimates in the
Proposing Release.\446\ Accordingly, the Commission estimates that the
burden associated with preparing and filing Form SHO across all
managers collectively is approximately 240,000 hours per year.\447\
---------------------------------------------------------------------------

\446\ Proposing Release, at 14973.
\447\ 20 hours per filing x 1,000 filings by Managers each month
x 12 months = 240,000 hours. In the Proposing Release PRA, the
Commission estimated that 346 Form SH filers would have been
required to file Form SHO had a threshold of 2.5% of shares
outstanding or $10 million position dollar value been imposed during
the analyzed time period. Due to the change in the Threshold A
calculation of the dollar value prong of the Reporting Threshold for
equity securities of reporting company issuers to be based on a
monthly average gross short position rather than the proposed daily
calculation, the estimated number of Form SH filers that would have
been required to file a Form SHO decreased from 346 to 252. However,
the Commission continues to estimate that 1,000 Managers will be
subject to Form SHO reporting per month.
\448\ See Two Sigma Letter, at 5-7.
---------------------------------------------------------------------------

The Commission received one comment regarding the approximate
overall cost of $217.55 per Form SHO filing from the Proposing Release.
This commenter stated that this cost was ``not realistic,'' but, again,
did not provide a more accurate cost estimate, or alternative data
source for which to base a cost estimate.\448\ The Commission believes
that the hourly cost of internal expertise required for each filing
will be $251.36, which includes a blended calculation of the estimated
hourly rate for a compliance attorney, senior programmer, and in-house
compliance clerk, an increase from the Proposing

[[Page 75142]]

Release's estimated $217.55 to account for inflation.\449\ Taken
together, the estimated burden hours and hourly rate for the filing of
Form SHO result in an estimated annual cost to the industry of
$60,326,400.\450\ The Commission, however, recognizes that advances in
technology over time could result in Managers spending less time
preparing and filing Form SHO than is estimated above.\451\
---------------------------------------------------------------------------

\449\ The $251.36 wage rate reflects current estimates of the
blended hourly rate for an in-house compliance attorney ($425), a
senior programmer ($386) and in-house compliance clerk ($82).
$251.36 is based on the following calculation: (($425) + ((($386 +
$82) / 2) x 10)) / 11) = $251.36. The estimated proportion of
compliance attorney (1/11th) to senior programmer and in-house
compliance clerk (10/11th) time burden is based on commenter input
and computation of the estimated burden for the filing of Form 13F-
HR. See Electronic Submission of Applications for Orders, Exchange
Act Release No. 93518 (Nov. 4, 2021), 86 FR 64839 (Nov. 19, 2021) at
64860-61 (``Electronic Submission of Applications for Orders''). The
$425 per hour and $386 per hour figures for a compliance attorney
and a senior programmer, respectively, are based on salary
information for the securities industry compiled by the Securities
Industry and Financial Markets Association's Office Salaries in the
Securities Industry 2013 (``SIFMA Report''), modified by Commission
staff to account for an 1,800-hour work year and inflation, and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits, and overhead. The $82 per hour figure for a compliance
clerk is based on salary information from the SIFMA Report, modified
by Commission staff to account for an 1,800-hour work-year and
inflation, and multiplied by 2.93 to account for bonuses, firm size,
employee benefits, and overhead. See also Form PF; Event Reporting
for Large Hedge Fund Advisers and Private Equity Fund Advisers;
Requirements for Large Private Equity Fund Adviser Reporting,
Release No. IA-6297, 88 FR 38146, 38195-98 (June 12, 2023).
\450\ 20 hours per filing x 1,000 filings by Managers each month
x 12 months x $251.36 per hour = $60,326,400.
\451\ See Electronic Submission of Applications for Orders, 86
FR 64859 (stating that ``[c]ommenters stated that the advances in
technology have made the process of completing and filing Form 13F
highly automated, reducing the time and external costs to managers
in complying with this requirement.'').
---------------------------------------------------------------------------

Consistent with its estimates in the Proposing Release, the
Commission also anticipates that most Managers will file Form SHO
directly in the structured XML-based data language for Form SHO,\452\
rather than using the fillable web form provided by EDGAR, resulting in
some limited additional costs for each filing. While the Commission
received comments about the use of Form SHO-specific XML
generally,\453\ it did not receive comments regarding the PRA burden
estimates of using Form SHO-specific XML. The Commission estimates that
Managers that file Form SHO using a structured XML-based data language
could incur an additional burden of 2 hours of work by a
programmer,\454\ at an estimated cost of $772.\455\ The Commission
further estimates that Managers will collectively spend up to
approximately 24,000 hours and $9,264,000 per year to file Form SHO
directly in a structured XML-based data language.\456\ The Commission
also estimates that a similar, additional burden of 2 hours of work by
a programmer per filing will apply to Managers filing an amended Form
SHO directly in a structured XML-based data language.
---------------------------------------------------------------------------

\452\ Most Managers will be familiar with other EDGAR Form-
specific XML data languages, the use of which is required for the
filing (by Managers that exercise investment discretion with respect
to accounts holding 13(f) securities having an aggregate fair market
value on the last trading day of any month of any calendar year of
at least $100 million) of Form 13F. See Frequently Asked Questions
About 13F, available at https://www.sec.gov/divisions/investment/13ffaq.htm. The Commission estimates that all of the 1,000 Managers
estimated to file Form SHO each month will do so directly using the
structured XML-based data language rather than the fillable web form
provided by EDGAR.
\453\ See XBRL Letter; Comment from An Investor (Apr. 4, 2022),
available at https://www.sec.gov/comments/s7-08-22/s70822-20122297-278355.htm. Comments regarding the use of XML are addressed in Part
II.A.4.
\454\ The 2-hour estimated burden is consistent with similar
estimates for the use of structured XML data formats for the filing
of Form N-CR and Form 24F-2. See Money Market Fund Reforms; Form PF
Reporting Requirements for Large Liquidity Fund Advisers; Technical
Amendments to Form N-CSR and Form N-1A, Exchange Act Release No. 34-
97876 (July 12, 2023), 88 FR 51404, 51514 (Aug. 3, 2023); see also
Securities Offering Reform for Closed-End Investment Companies,
Exchange Act Release No. 88606 (Apr. 8, 2020), 85 FR 33290, 33329
n.439 (June 1, 2020) (stating that ``[w]e assume that the burden of
tagging Form 24F-2 in a structured XML format would be 2 hours for
each filing.'').
\455\ The $386 per hour figure for a senior programmer is based
on salary information from the SIFMA Report. 2 hours x $386 = $772.
\456\ 2 hours per filing x $386 per hour x 1,000 filings each
month x 12 months = $9,264,000.
---------------------------------------------------------------------------

Also consistent with the estimates in the Proposing Release, the
Commission estimates that approximately 3.5 percent of the Managers
that file Form SHO each month will also file an amended Form SHO,
resulting in an additional burden and cost for an estimated 35 Managers
each month.\457\ The additional burden could take up to the original 20
hours to process and file, as it will require the filing of an entirely
new Form SHO.\458\ The associated wage rate for filing the amended Form
SHO is consistent with the cost of expertise required to file the
original Form SHO, estimated to be $251.36 per hour.\459\ The
Commission also estimates that each amended Form SHO will be filed
directly using a structured XML-based data language, resulting in a
corresponding additional burden of 2 hours of work by a programmer per
amended Form SHO filing. The Commission did not receive any comments
regarding the estimated percentage of Managers that will file an
amended Form SHO each month, or the costs and burden estimates of
filing an amended Form SHO.
---------------------------------------------------------------------------

\457\ The estimate of 3.5% of Regulation SHO filers that are
anticipated to file an amended Form SHO is based on the frequency of
recent filings of amended Form 13F. For the reporting period of Dec.
31, 2022, there were 6,924 holdings reports for Form 13F-HR
submitted, 244 of which were amended. (244 / 6,924 = 3.5%).
\458\ See Form SHO, Special Instructions, at 4.
\459\ See Proposing Release, at 14974.

PRA Table 1--Estimated Manager Burden and Costs Associated With Form SHO Reporting
--------------------------------------------------------------------------------------------------------------------------------------------------------
Form SHO Total industry
reports Hours needed burden hours to Total industry
Managers processed to process and process and file Wage rate cost burden
(monthly) and filed file Form SHO Form SHO (average) (annual)
(annual) (average) (annual)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Form SHO Filings............................................... 1,000 12,000 20 240,000 $251.36 $60,326,400
Use of Structured XML-Based Data Language in Form SHO Filings.. 1,000 12,000 2 24,000 386 9,264,000
Amended Form SHO Filings....................................... 35 420 20 8,400 251.36 2,111,424
Use of Structured XML-Based Data Language in Amended Form SHO 35 420 2 840 386 324,240
Filings.......................................................
----------------------------------------------------------------------------------------
Total...................................................... ........... ........... .............. 273,240 ........... 72,026,064
--------------------------------------------------------------------------------------------------------------------------------------------------------

[[Page 75143]]

Consistent with estimates in the Proposing Release, in addition to
the costs associated with the reporting burden, Managers could incur an
initial technology-related burden of 325 hours, at an hourly estimated
wage rate of $366,\460\ for an estimated total cost of $118,950 per
Manager,\461\ to update their current systems to capture the required
information and automate and facilitate the completion and filing of
Form SHO. The Commission generally believes that the type of Managers
that will trigger a Reporting Threshold will likely have sophisticated
technologies and be able to implement systems to help automate the
reporting requirements of Rule 13f-2. As discussed in the Proposing
Release, the estimate of 325 initial technology-related burden hours
for Managers filing Form SHO was based on the estimated initial filing
burden (325 hours) for large hedge fund advisers to fulfill amendments
to the reporting requirements for Form PF,\462\ and is similar to the
initial technological infrastructure-related burden (355 hours) for the
proposed security-based swap position reporting requirements of
proposed Rule 10B-1(a).\463\ While Managers most likely have other
existing reporting obligations, the Commission recognizes that Managers
may need to update their systems to ensure timely and accurate filing
of the specific information required under Form SHO.
---------------------------------------------------------------------------

\460\ The Commission estimates that, of a total estimated burden
of 325 hours, approximately 195 hours will most likely be performed
by compliance professionals and 130 hours will most likely be
performed by programmers working on system configuration and
reporting automation. Of the work performed by compliance
professionals, we anticipate that it will be performed equally by a
compliance manager at a cost of $360 per hour and a senior risk
management specialist at a cost of $416 per hour. Of the work
performed by programmers, we anticipate that it will be performed
equally by a senior programmer at a cost of $386 per hour and a
programmer analyst at a cost of $280 per hour. ((($360 per hour x
0.5) + ($416 per hour x 0.5)) x 195 hours) + ((($386 per hour x 0.5)
+ ($280 per hour x 0.5)) x 130 hours) / 325 = $366. See Form PF;
Event Reporting for Large Hedge Fund Advisers and Private Equity
Fund Advisers; Requirements for Large Private Equity Fund Adviser
Reporting, Release No. IA-6297 (May 3, 2023), 88 FR 38146, 38195
(June 12, 2023). See also SIFMA Report.
\461\ 325 initial technology-related burden hours x $366 per
hour = $118,950.
\462\ See Form PF; Event Reporting for Large Hedge Fund Advisers
and Private Equity Fund Advisers; Requirements for Large Private
Equity Fund Adviser Reporting, Release No. IA-6297 (May 3, 2023), 88
FR 38146, 38195 (June 12, 2023). (The Commission recognizes that
adopted Rule 13f-2 will cover persons other than large hedge fund
advisers, and that large hedge fund advisers may generally be more
accustomed to existing Commission reporting requirements than some
other persons that will be covered by adopted Rule 13f-2.).
\463\ See Rule 10B-1 Proposal.
---------------------------------------------------------------------------

One commenter stated that the estimated 325 hours initial
technology-related burden was ``not realistic'' but did not provide an
alternative estimate.\464\ One commenter stated that the initial
estimated costs for initial technology projects per Manager represented
a ``significant portion'' of a smaller Manager's information technology
budget but did not state that the estimate was inaccurate.\465\ As a
result of not adopting the proposed hedging requirement, which a number
of commenters thought would be operationally difficult to
implement,\466\ the technology-related burden will likely be reduced
from that which was estimated in the Proposing Release.
---------------------------------------------------------------------------

\464\ See Two Sigma Letter, at 5.
\465\ See Anonymous Fund Manager Letter, at 6-7.
\466\ See Virtu Letter, at 3.
---------------------------------------------------------------------------

The Commission did not receive any comments that provided an
alternative hourly estimate for the initial technology related burden
for Managers filing Form SHO, or an alternative, more accurate source
for which to base the initial technology related burden for Managers
filing Form SHO. Additionally, in response to the comment that the
Commission generally underestimated the initial technology-related
burden, and that the technology-related burden is likely reduced from
the Proposing Release given the Commission's decision not to adopt the
proposed hedging requirement, the Commission continues to believe that
an estimate of 325-hours for the initial technology-related burden is
appropriate.

PRA Table 2--Estimated Manager Burden and Costs Associated With Form SHO Initial Technology Projects
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of hours
Managers with needed for Industry burden
proposed Form SHO initial hours for initial Wage rate Total industry
reportable short technology technology (average) cost burden
interest positions projects projects
(average)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Form SHO Initial Technology Projects........................... 1,000 325 325,000 $366 $118,950,000
--------------------------------------------------------------------------------------------------------------------------------------------------------

C. Burdens and Costs Associated With the Amendment to CAT

1. Summary of Collections of Information
The amendment to the CAT NMS Plan requires Participants to update
their Compliance Rules to require reporting by Industry Members of
whether an original receipt or origination of an order to sell an
equity security is a short sale for which a market maker is claiming
the bona fide market making exception to the locate requirement in Rule
203(b)(2)(iii) of Regulation SHO.\467\
---------------------------------------------------------------------------

\467\ See supra Part IV.
---------------------------------------------------------------------------

2. Use of Information
As discussed above, reporting of certain short sale information to
the CAT provides valuable information for the Commission and other
regulators in investigations and reconstruction of market events.
Requiring Industry Members to identify short sales for which they are
claiming the BFMM locate exception will provide the Commission staff
and other regulators an additional tool to determine whether such
activity qualifies for the exception, or instead is indicative of, for
example, proprietary trading instead of bona fide market making.
3. Respondents
a. National Securities Exchanges and National Securities Associations
The respondents for the amendment to CAT include the 25 Plan
Participants (the 24 national securities exchanges and one national
securities association (FINRA)).\468\
---------------------------------------------------------------------------

\468\ The Participants are: BOX Options Exchange LLC; Cboe BZX
Exchange, Inc.; Cboe BYX Exchange, Inc.; Cboe C2 Exchange, Inc.;
Cboe EDGA Exchange, Inc.; Cboe EDGX, Inc.; Cboe Exchange, Inc.;
Financial Industry Regulatory Authority, Inc.; Investors Exchange
Inc.; Long-Term Stock Exchange, Inc.; MEMX, LLC; Miami International
Securities Exchange LLC; MIAX PEARL, LLC; MIAX Emerald, LLC; NASDAQ
BX, Inc.; NASDAQ GEMX, LLC; NASDAQ ISE, LLC; NASDAQ MRX, LLC; NASDAQ
PHLX LLC; The NASDAQ Stock Market LLC; New York Stock Exchange LLC;
NYSE MKT LLC; and NYSE Arca, Inc., NYSE Chicago Stock Exchange,
Inc., NYSE National, Inc.

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[[Page 75144]]

b. Members of National Securities Exchanges and National Securities
Associations
The respondents for the Amendment to CAT also include the
Participants' broker-dealer members, that is, Industry Members. The
Commission understands that there are currently 3,501 registered
broker-dealers; \469\ however, not all broker-dealers are expected to
have new CAT reporting obligations under the Amendment to CAT.\470\
Based on an analysis of CAT data from May 2023, conducted by Commission
staff, the Commission estimates that approximately 100 broker-dealers
will be required to report for the original receipt or origination of
an order to sell an equity security whether the order is a short sale
effected by a market maker in connection with bona fide market making
activities in the security for which the BFMM locate exception in Rule
203(b)(2)(iii) of Regulation SHO is claimed. This is a decrease from
the Commission's estimate in the Proposing Release of 104 broker-
dealers that would be required to report for the original receipt or
origination of an order to sell an equity security whether the order is
a short sale effected by a market maker in connection with bona-fide
market making activities in the security for which the exception in
Rule 203(b)(2)(iii) of Regulation SHO is claimed, because there were
104 CAT reporters listed as equity market makers in CAT in November
2021, and 100 CAT reporters listed as equity market makers in CAT in
May 2023.\471\ The Commission also included an estimate of 1,218
broker-dealers that would have been required to report ``buy to cover''
information on buy orders for equity securities to CAT in the Proposing
Release,\472\ but since the Commission is not adopting the proposed
``buy to cover'' reporting requirement, such estimate is not included
here. The Commission did not receive any comments on the estimated
number of respondents under the proposed amendments to CAT.
---------------------------------------------------------------------------

\469\ This is based on FOCUS quarterly filings for 2023 Q1.
\470\ See supra Part IV.B.
\471\ See Proposing Release, at 14977.
\472\ Id.
---------------------------------------------------------------------------

4. Total Initial and Annual Reporting and Recordkeeping Burdens
The Commission received comments regarding the costs and burdens of
the proposed amendments to CAT generally \473\ but did not receive
specific comments regarding the Proposing Release's PRA estimates
related to the proposed CAT amendments. General comments regarding
costs and burdens of the proposed CAT amendments are addressed in Part
IV. The Commission's total burden estimates in this Paperwork Reduction
Act section reflect the total burden on all Participants and Industry
Members. The burden estimates per Participant or Industry Member are
intended to reflect the average paperwork burden for each Participant
or Industry Member, but some Participants or Industry Members may
experience more burden than the Commission's estimates, while others
may experience less. The burden figures set forth in this section are
based on a variety of sources, including Commission staff's experience
with the development of the CAT and estimated burdens for other
rulemakings. Because the CAT NMS Plan applies to and obligates the
Participants and not the Plan Processor, the Commission believes it is
appropriate to estimate the Participants' external cost burden based on
the estimated Plan Processor staff hours required to comply with the
proposed obligations.\474\ Put another way, pursuant to the Amendment
to the CAT NMS Plan, the Participants will be obligated to make changes
to the CAT, but the CAT is managed by the Plan Processor pursuant to
contractual agreement, and so the Participants will be required to
engage the Plan Processor to make any required changes.
---------------------------------------------------------------------------

\473\ See, e.g., SIFMA Letter, at 25; FIA PTG Letter, at 3;
Virtu Letter, at 6.
\474\ The Commission derives estimated costs associated with
Plan Processor and Industry Member staff time based on per hour
figures from the SIFMA Report, modified by Commission staff to
account for an 1,800-hour work-year and inflation, and multiplied by
5.35 to account for bonuses, firm size, employee benefits and
overhead.
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a. Participant Burdens
The Amendment to CAT will require the Participants to engage the
Plan Processor to modify the Central Repository to accept and process
the new BFMM locate exception information on order receipt and
origination reports. The Commission estimates that the Participants
will incur an initial, one-time burden of 130 hours, or 5.2 hours per
Participant, of staff time required to supervise and implement the
changes necessary for the Plan Processor to accept and process the new
data elements, and an initial, one-time, external cost of $113,800, or
a per Participant expense of approximately $4,552 to compensate the
Plan Processor for staff time required to make the initial necessary
programming and systems changes to accept and process the new data
elements, based on an estimate that it will take 300 hours of Plan
Processor staff time to implement these changes.\475\ The Commission
did not receive comment on these estimates.
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\475\ The estimated 300 hours of Plan Processor staff time
include 200 hours by a Senior Programmer, 40 hours by a Senior
Database Administrator, 40 hours for a Senior Business Analyst, and
20 hours for an Attorney. The Commission estimates that the initial,
one-time external expense for Participants will be $113,800 =
(Senior Programmer for 200 hours at $386 an hour = $77,200) +
(Senior Database Administrator for 40 hours at $379 an hour =
$15,160) + (Senior Business Analyst for 40 hours at $305 an hour =
$12,200) + (Attorney for 20 hours at $462 an hour = $9,240).
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The Commission continues to believe that other Paperwork Reduction
Act burdens that will apply to the Participants, including ongoing
burdens and external expenses for the Plan Processor's acceptance and
processing of the new data elements, are already accounted for in the
existing Paperwork Reduction Act estimate that applies for Rule 613 and
the CAT NMS Plan Approval Order, submitted under OMB number 3235-
0671.\476\ The prior Paperwork Reduction Act analysis incorporates any
other potential Paperwork Reduction Act burdens for the Participants,
because the existing Paperwork Reduction Act analysis accounts for
initial and ongoing costs for, among other things, operating and
maintaining the Central Repository, including the cost of systems and
connectivity upgrades or changes necessary to receive and consolidate
the reported order and execution information from Participants and
their members, the cost to store data and make it available to
regulators, the cost of monitoring the required validation parameters,
and management of the Central Repository.\477\ In addition, the
Commission anticipates that each exchange and national securities
association will file one Form 19b-4 filing to implement updated
Compliance Rules. While such filings may impose certain costs on the
exchanges, those burdens are already accounted for in the comprehensive
Paperwork Reduction Act Information Collection submission for Form 19b-
4.\478\ The Commission does not expect the baseline number of 19b-4
filings to increase as a result of the Amendment to CAT, nor does it
believe that the incremental costs exceed those costs used to arrive at
the average costs and/

[[Page 75145]]

or burdens reflected in the Form 19b-4 PRA submission.
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\476\ See CAT NMS Plan Approval Order, 81 FR 84911-43; see also
OMB Control No. 3235-0671, 85 FR 37721 (June 23, 2020) (notice of
submission of request for approval of extension).
\477\ See CAT NMS Plan Approval Order, 81 FR 84918.
\478\ See OMB Control No. 3235-0045 (Aug. 19, 2016), 81 FR 57946
(Aug. 24, 2016) (Request to OMB for Extension of Rule 19b-4 and Form
19b-4 PRA).
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b. Broker-Dealer Burdens
The Commission anticipates that certain Industry Members will have
initial, one-time burdens and costs relating to the Amendment to CAT,
to update systems and processes as necessary to capture and report use
of the BFMM locate exception to CAT. The Commission has estimated these
initial burdens and costs below.
The Amendment to CAT will impose an ongoing annual burden relating
to, among other things, personnel time to monitor each broker-dealer's
reporting of the required data and the maintenance of the systems to
report the required data and implementing changes to trading systems
that might result in additional reports to the Central Repository.
However, the Commission estimates that the ongoing burden imposed by
the Amendment to CAT related to reporting to the CAT is already
accounted for in the existing information collections burdens
associated with Rule 613 and the CAT NMS Plan Approval Order submitted
under OMB number 3235-0671.\479\ Specifically, the CAT NMS Plan
Approval Order takes into account requirements on broker-dealer members
to comply with the CAT NMS Plan, including the requirement to maintain
the systems necessary to collect and transmit information to the
Central Repository,\480\ provides aggregate burden hour and external
cost estimates for the broker-dealer data collection and reporting
requirement of Rule 613, and did not quantify the burden hours or
external cost estimates for each individual component of the broker-
dealer's data collection and reporting responsibility.\481\ The
Amendment to CAT will not require any Industry Member to submit new
reports to the CAT, but to add limited additional information to
existing reports in certain circumstances for certain Industry Members.
The Commission does not believe that this will alter the estimates of
ongoing burden and external costs in the existing Paperwork Reduction
Act Analysis and the ongoing burden associated with these new
collection requirements are accounted for in the existing Paperwork
Reduction Act Analysis.
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\479\ See CAT NMS Plan Approval Order, 81 FR 84911-43. While
there is no recordkeeping requirement related to reporting use of
the BFMM locate exception, brokers or dealers should be prepared to
monitor for compliance with conditions and maintain records
documenting such compliance. See Regulation SHO Adopting Release,
48011 n.27 (``As with any rule, broker-dealers relying on [an]
exception should be prepared to monitor for compliance with its
conditions, and maintain records documenting such compliance.'').
There would be a minimal additional ongoing burden for such brokers
or dealers to record that they have determined such eligibility for
each transaction reported to CAT.
\480\ See, e.g., CAT NMS Plan Approval Order, 81 FR 84930.
\481\ See CAT NMS Plan Approval Order, 81 FR 84930.
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The Amendment to CAT will impose additional burdens on Industry
Members that trade equity securities and rely upon or plan to rely upon
the BFMM locate exception. Based on an analysis of data reported to the
CAT in May 2023, and specifically the identification of all unique CAT
Reporters that were identified as equity market makers (including
different classes of market makers such as ``designated'' or ``lead''
market makers, and secondary liquidity providers), approximately 100
CAT Reporters will be subject to the new reporting obligation. Some
broker-dealers that rely upon this exception may retain records
regarding their eligibility for this exception for specific orders or
for orders originated by specific desks or units of their business.
Regarding the obligation to report the BFMM locate exception
information to the CAT, the Commission believes that it is appropriate
to divide the 100 Industry Members, i.e., the CAT reporters listed as
equity market makers in CAT as of May 2023, that will be required to
report this information into two categories: (i) Industry Members that
report directly to the CAT; and (ii) Industry Members that use third-
party reporting agents for CAT reporting. For purposes of this
Paperwork Reduction Act analysis, the Commission estimates that of the
100 Industry Members that will be required to report this information,
58 Industry Members will be reporting this information directly to the
CAT, and 42 Industry Members will be reporting this information through
third-party reporting agents. The Commission believes this is a
reasonable estimation because the majority of Industry Members that are
identified as market makers in the CAT have developed their own systems
and technology to report directly to the CAT. The Commission believes
that the majority of market makers handle reporting themselves because
they likely submit a sufficient number of reportable events. The
Commission did not receive any comments regarding the estimated number
of broker-dealers that would be required to report for the original
receipt or origination of an order to sell an equity security whether
the order is a short sale effected by a market maker in connection with
bona-fide market making activities in the security for which the
exception in Rule 203(b)(2)(iii) of Regulation SHO is claimed, or about
the estimated proportion of insourcing vs. outsourcing Industry
Members. As such, the Commission is keeping the proportion of
insourcing vs. outsourcing Industry Members the same as in the
Proposing Release, but reflective of the estimated 100 broker-dealers
rather than 104 broker-dealers from the Proposing Release.
The Commission estimates that the 58 insourcing Industry Members
that report directly to the CAT will incur an initial, aggregate, one-
time burden of 15,080 hours, or that each of these CAT Reporters will
incur an initial, average one-time burden of 260 hours, and that each
of these 58 insourcing Industry Members will incur an initial,
aggregate, one-time external expense of approximately $870,000 for
software and hardware to facilitate reporting of the new data elements
to CAT, or that each insourcing Industry Member will incur an initial,
average one-time external expense of approximately $15,000.\482\ The
Commission did not receive any comments about the cost and burden
estimates for insourcing Industry members.
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\482\ The Commission is basing this figure on the estimated
burden and external costs for a broker-dealer that handles orders
subject to customer specific disclosures required by Rule 606(b)(3)
to update their systems to capture the data and produce a report to
comply with Rule 606. See Disclosure of Order Handling Information,
Exchange Act Release No. 84528 (Nov. 2, 2018), 83 FR 58338, 58383
(Nov. 19, 2018). This is a reasonable proxy for estimating the
burdens and costs associated with updating data capture systems for
reporting purposes here because in both rulemakings broker-dealers
were required to update in-house data reported for pre-existing
reporting obligations.
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The Commission estimates that the 42 outsourcing Industry Members
that use third-party reporting agents to report to the CAT will incur
an initial, aggregate, one-time burden of 420 hours, or that each of
these outsourcing Industry Members will incur an initial, one-time
burden of 10 hours on average, and that these 42 outsourcing Industry
Members will incur an initial, aggregate, one-time external expense of
approximately $42,000 for software and hardware to facilitate reporting
use of the BFMM locate exception to CAT, or that each outsourcing
Industry Member will incur an initial, average one-time external
expense of approximately $1,000.\483\

[[Page 75146]]

The Commission did not receive any comments about the cost and burden
estimates for outsourcing Industry Members.
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\483\ The Commission believes that the estimated burden and
external costs for outsourcing Industry Members is reasonable
because the burden on individual Industry Members should be
significantly lower than insourcing Industry Members because of the
difference in how these firms report to the CAT. Outsourcing
Industry Members will not be required to change internal CAT
reporting systems, but instead will be responsible for making any
updates necessary for CAT reporting agents to report this
information to the CAT. The outsourcing Industry Members will have
external costs associated with paying CAT reporting agents for any
additional fees relating to the change, but because CAT reporting
agents can report on behalf of numerous outsourcing Industry Members
at the same time, the costs of any updates to their systems can be
distributed amongst outsourcing Industry Members.
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As discussed above, the Commission continues to believe that the
ongoing burden associated with reporting to the CAT is already
accounted for in the existing information collections burdens
associated with Rule 613 and the CAT NMS Plan Approval Order submitted
under OMB number 3235-0671.\484\ Because this information is already
collected and maintained by market makers that engage in equity trading
and claim the exception pursuant to 17 CFR 240.17a-3 (``Rule 17a-3 of
the Exchange Act''), there is no new ongoing burden associated with
collecting or recording the information necessary to effectuate CAT
reporting of this new element.
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\484\ See supra n.476.

PRA Table 3--Summary of Estimated Initial One-Time Burdens Related to CAT BFMM Amendment
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of Initial one- Aggregate one- Aggregate
Name of information collection Type of burden entities time hourly time hourly Initial one- one-time
impacted burden burden time cost cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
CAT: Central Repository--Short Sale Recordkeeping.......................... 25 5.2 130 $4,552 $113,800
Data.
CAT: Reporting of Bona Fide Market Direct Report.......................... 58 260 15,080 15,000 870,000
Making Exception--Insourcers.
CAT: Reporting of Bona Fide Market Third Party Disclosure................. 42 10 420 1,000 42,000
Making Exception--Outsourcers.
--------------------------------------------------------------------------------------------------------------------------------------------------------

D. Collection of Information Is Mandatory

The information collections are required under Rule 13f-2 and Form
SHO for Managers that meet the Reporting Threshold and the Amendment to
CAT for Plan Participants to collect and process new CAT reportable
information and for CAT Industry Members that engage in certain short
sale activity.

E. Retention Period of Recordkeeping Requirement

Pursuant to 17 CFR 240.17a-4(b)(7) (``Exchange Act Rule 17a-
4(b)(7)''), a broker-dealer must preserve for a period of not less than
three years, the first two years in an easily accessible place, all
written agreements (or copies thereof) entered into by such member,
broker or dealer relating to its business as such, including agreements
with respect to any account.
Pursuant to 17 CFR 240.17a-4(e)(7), a broker-dealer must maintain
and preserve in an easily accessible place each compliance,
supervisory, and procedures manual, including any updates,
modifications, and revisions to the manual, describing the policies and
practices of the member, broker or dealer with respect to compliance
with applicable laws and rules, and supervision of the activities of
each natural person associated with the member, broker or dealer until
three years after the termination of the use of the manual.
Pursuant to 17 CFR 240.17a-1, every national securities exchange
and national securities association shall keep and preserve at least
one copy of all documents, including all correspondence, memoranda,
papers, books, notices, accounts, and other such records as shall be
made or received by it in the course of its business as such and in the
conduct of its self-regulatory activity for a period of not less than
five years, the first two years in an easily accessible place, subject
to the destruction and disposition provisions of 17 CFR 240.17a-6
(``Rule 17a-6'').

F. Confidentiality

As discussed above, Rule 13f-2 requires certain Managers to file
monthly in EDGAR, on Form SHO, certain short sale volume data and short
interest position data. However, the Commission will aggregate the
information reported by Managers on Form SHO prior to publication to
protect the identity of reporting Managers.
To the extent that the Commission receives--through its examination
and oversight program, through an investigation, or by some other
means--records or disclosures from a broker-dealer that relate to or
arise from the Rule that are not publicly available, such information
will be kept confidential, subject to the provisions of applicable law.
With respect to the Amendment to CAT, Rule 613, and the CAT NMS
Plan, information collected and electronically provided to the Central
Repository will only be available to the national securities exchanges,
national securities association, and the Commission. Further, the CAT
NMS Plan includes policies and procedures designed to ensure the
security and confidentiality of all information submitted to the
Central Repository, and to ensure that all SROs and their employees, as
well as all employees of the Central Repository, shall use appropriate
safeguards to ensure the confidentiality of such data. The Commission
will receive confidential information pursuant to this collection of
information, and such information will be kept confidential, subject to
the provisions of applicable law.

VIII. Economic Analysis

A. Introduction

The Commission is adopting a new rule and related form as well as
an amendment that introduce new reporting requirements in connection
with short sales. Rule 13f-2, Form SHO, and the amendment to CAT
(collectively, the ``adoptions'') will improve the transparency of
short selling activity to regulators, market participants and the
investing public. The data provided by these adoptions will close
informational gaps in the currently available data, which in turn will
benefit market participants and help foster fair and orderly markets.
The adoptions will also improve regulatory oversight and enhance
regulators' examination of market behavior and recreation of
significant market events. These improvements may, in turn, discourage
market manipulation to the extent that it occurs.\485\
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\485\ See infra Part VIII.C.1 for additional discussion on
potential market manipulation.
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The Commission is mindful of the economic effects that may result
from the adoptions of Rule 13f-2, Form SHO, and the amendment to CAT,
including the benefits, costs, and the effects on efficiency,
competition, and capital

[[Page 75147]]

formation.\486\ The Commission recognizes that the adoptions might
impose significant compliance costs on market participants. Requiring
Managers \487\ to report large positions and short sale activity will
likely impose significant initial and ongoing costs on Managers. The
amendment to CAT will also impose compliance costs on broker-dealers.
The Commission is cognizant of these costs and has modified the
Proposals in a way that is intended to reduce the burdens incurred by
market participants without sacrificing the transparency that is
expected to result from the adoption of the Proposals. Modifications
from the proposed rule and form that are likely to reduce reporting
costs to Managers relative to the Proposals include: revising a key
reporting threshold based on a monthly average calculation instead of a
daily calculation, which is expected to reduce the number of reporting
entities; streamlining the reporting requirements of Forms SHO; not
adopting the ``buy to cover'' CAT reporting requirement; and not
adopting Rule 205. Overall, the Commission has sought to balance the
costs of the adoptions against the benefit to transparency that will be
provided to regulators and the public.
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\486\ Exchange Act section 3(f) requires the Commission, when it
is engaged in rulemaking pursuant to the Exchange Act and is
required to consider or determine whether an action is necessary or
appropriate in the public interest, to consider, in addition to the
protection of investors, whether the action would promote
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f). In addition, Exchange Act section 23(a)(2) requires the
Commission, when making rules pursuant to the Exchange Act, to
consider among other matters the impact that any such rule would
have on competition and not to adopt any rule that would impose a
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Exchange Act. See 15 U.S.C.
78w(a)(2).
\487\ See infra note 506 and the accompanying discussion in the
text on the definition of ``Manager''.
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The Commission recognizes that the adoptions may lead to tradeoffs
in market quality, with a risk of negative effects on price efficiency.
A potential reduction in market manipulation through improved
regulatory oversight stemming from the adoptions may have a positive
impact on market quality. Furthermore, the adoptions will provide
market participants with improved transparency into short selling
activity, which might also lead to improved price efficiency. On the
other hand, Rule 13f-2 and the disclosures Form SHO requires will
increase the costs and risks of implementing large short positions,
which might reduce price efficiency by reducing short selling and the
positive effects of such short selling. Furthermore, public disclosure
of information resulting from Rule 13f-2 and Form SHO might facilitate
short squeezes, which in turn might also reduce market quality.\488\
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\488\ See infra Part VII.C.1. The Commission expects that for
many securities, a limited number of Manager positions may surpass
the reporting requirement thresholds. Given the eventual public
release of the aggregate position sizes, there is a risk that other
market participants will be able to potentially identify the
Managers with large short positions and orchestrate short squeeze
efforts against them (should they seem vulnerable against a short
squeeze). Nevertheless, the Commission maintains the ability of
identifying such behavior using CAT data, which could mitigate
initiation of such behavior.
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The Commission has considered the economic effects of the adoptions
and wherever possible, has quantified their likely economic effects.
The Commission is providing both a qualitative assessment and
quantified estimates of the adopted rule and CAT amendment's economic
effects where feasible. The Commission has received comments on the
Proposals and has addressed commenters' concerns with the economic
analysis. The Commission has incorporated data and other information to
assist it in the analysis of the economic effects of the adoptions.
However, as explained in more detail below, because the Commission does
not have, and in certain cases does not believe it can reasonably
obtain data that may inform the Commission on certain economic effects,
the Commission is unable to quantify certain economic effects. Further,
even in cases where the Commission has some data, quantification is not
practicable due to the number and type of assumptions necessary to
quantify certain economic effects, which render any such quantification
unreliable. Our inability to quantify certain costs, benefits, and
effects does not imply that the Commission believes such costs,
benefits, or effects are not significant.
The Commission is adopting the Manager reporting and disclosures to
implement the statutory mandate of section 929X of the Dodd-Frank Act.
Accordingly, many of the costs and benefits of Rule 13f-2 and Form SHO
stem from the Commission's implementation of the statutory mandate. In
addition, the Commission is exercising discretion in its design and
implementation of Rule 13f-2 and Form SHO and recognizes that this
discretion has economic effects. Specifically, the Commission is using
this discretion to ensure that the disclosures are additive to
currently available data and will be useful to both market participants
and regulators, with a focus on addressing data limitations exposed by
market events, especially the market volatility in January 2021.
Additionally, the Commission is adopting a Proposed CAT amendment in
order to address such data limitations outside of the context of the
statutory mandate of section 929X.
The Commission has access to several sources of data that provide
some short selling information, one of which is CAT. CAT data can be
used by regulators for regulatory purposes, including analysis and
reconstruction of broad-based market events; in market analysis in
support of regulatory decisions; in market surveillance,
investigations, and other enforcement activities. At times, these
regulatory functions can benefit from information on short sale
positions of market participants and how these positions change over
time. CAT does not include data that can be used to track such
positions, and as discussed further above, Commission staff experience
in reconstructing the events of January 2021 provided insights into the
challenges of using existing CAT data for this purpose. Other existing
data sources, including public data sources, are also limited for these
purposes as well as for informing members of the public and market
participants. Specifically, current data fail to distinguish the type
of trader engaged in short selling or identify individual short
positions, as well as the fluctuation in those positions, even for
regulatory use. Furthermore, current data do not track the use of the
bona fide market maker exemption when short selling without the
``locate''.\489\ The adopted rule will serve to increase the
Commission's awareness and understanding of short sale activity by
Managers with large short sale positions by requiring reporting of
their reliance on the bona fide marker maker locate exception. The
adopted amendment will serve the Commission in its regulatory capacity.
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\489\ See supra note 10 for description of the locate
requirement of Rule 203 of Regulation SHO.

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[[Page 75148]]

Existing data sources fail to accurately represent economic short
positions of Managers due to several limitations.\490\ While FINRA
publishes aggregate short interest on a bimonthly basis, these data do
not reflect the timing with which short positions expand or shrink in
the two-week period between reporting dates.\491\ Some other data
sources report daily short sale volume \492\ without distinguishing
between short sale transactions that affect economic short positions
and short sale transactions meant for purposes such as liquidity
provision or hedging of long positions. As such, these existing short
volume data may not be combined with the bimonthly short interest data
to construct aggregate daily short positions of any particular Manager.
Securities lending data, bolstered by the recently adopted 17 CFR
240.10c-1a (``Exchange Act Rule 10c-1a''), will offer a clearer picture
of the relationship between short interest and securities being lent;
\493\ however, this does not allow the Commission or the public to
observe and monitor large short positions of Managers.\494\ No existing
data identify short positions of individual traders. Even though some
regulatory data, e.g., CAT data, identify short transactions of
individual traders, they may not be utilized to reconstruct short
positions because economic short positions may change in the absence of
any short sale transactions. Thus, the Commission is adding to the
existing data sources to further illuminate the short selling
market.\495\
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\490\ One commenter stated that the data reported from Form SHO
would only provide very limited additional relevant insight relative
to FINRA short interest data. See SBAI Letter at 2. The Commission
reiterates that Form SHO data are additive to existing data,
including FINRA short interest data. More specifically, publicly
released Form SHO data will indicate which equities have large short
positions held by institutional investment managers. This is
different from seeing large short interest, which may indicate many
smaller positions, including those held by retail investors. Large
short positions accumulated by Managers are often based on
fundamental research, in contrast to smaller positions which more
likely stem from hedging or arbitrage strategies. Therefore,
information on the magnitude of aggregate large short positions,
especially in relation to overall short interest, may highlight the
degree to which short sales of a particular security are
concentrated among Managers guided by fundamental research relative
to hedging or arbitrage strategies. Thus, Form SHO will provide
novel information on short sale behavior relative to other short
sale data sources.
\491\ FINRA requires all members to report settled short
positions in equities of all customer and proprietary accounts twice
per month. According to the schedule it has adopted, FINRA publishes
the short sale data about a week after each reporting due date. See,
e.g., Short Interest Reporting, available at https://www.finra.org/filing-reporting/regulatory-filing-systems/short-interest.
\492\ FINRA reports daily off-exchange short sale volume data
that aggregate, for each exchange-listed security, short sale
transactions reported to a FINRA TRF or ADF. See Short Sale Volume
Data, FINRA, available at https://www.finra.org/finra-data/browse-catalog/short-sale-volume-data. Registered exchanges also report
daily short sale volume aggregated at the security level, often
charging a fee. See, e.g., TAQ Group Short Sales & Short Volume, New
York Stock Exchange, available at https://www.nyse.com/market-data/historical/taq-nyse-group-short-sales.
\493\ Specifically, one will be able to look at a particular
securities lending data to see if changes in short interest
correspond to many smaller lending transactions or a smaller
quantity of large securities loans, which may indicate market
sentiment towards the particular company. However, it is impossible
to discern whether these securities loans are being borrowed by
numerous short sellers or instead concentrated among a small number
of large short sellers. This information will be covered by Rule
13f-2 if the short seller(s) crosses the Report Thresholds. In
addition, unlike FINRA short interest data, Rule 13f-2 data will
incorporate Managers that are not FINRA members. Furthermore, while
fees are required to access exchanges' short volume and short
transaction data, market participants will not have to pay a fee to
view publicly released Form SHO data.
\494\ Unlike the Commission, however, the public will observe
anonymized, aggregated data covering gross short sale positions of
Managers that exceed at least one of the Reporting Thresholds.
\495\ One commenter stated that Form SHO data collected by the
Commission would not fully capture the short selling market. See
SBAI Letter at 3. The Commission has not stated that Form SHO data
provides a complete perspective of the short selling market.
However, Form SHO data will reveal large short positions of
Managers, which is not readily available from any other data source.
---------------------------------------------------------------------------

These data limitations inhibit regulators from performing functions
such as market surveillance and market reconstruction. For example, the
Commission does not have regular access to information about Managers
who hold large short positions, even if those positions are held for a
long period of time. If the positions are sufficiently large and prices
move against the positions, the Commission currently cannot efficiently
assess the risk that these positions impose on the market more
broadly.\496\ Further, with existing data, the Commission may have
difficulty reconstructing significant market events, thereby inhibiting
the Commission from quickly understanding market events and providing
efficient market oversight.
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\496\ See infra Part VIII.C.1 for discussion of how the
Commission might use Form SHO data for understanding market events.
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B. Baseline

The baseline against which the costs, benefits, and the effects on
efficiency, competition, and capital formation of the final rule are
measured consists of the current state of the equity market, current
practices of Managers and broker-dealers, and the current regulatory
framework. The economic analysis considers existing regulatory
requirements, including recently adopted rules, as part of its economic
baseline against which the costs and benefits of the final rule are
measured.\497\
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\497\ See, e.g., Nasdaq v. SEC, 34 F.4th 1105, 1111-15 (D.C.
Cir. 2022). This approach also follows SEC staff guidance on
economic analysis for rulemaking. See Staff's ``Current Guidance on
Economic Analysis in SEC Rulemaking'' (March 16, 2012), available at
https://www.sec.gov/divisions/riskfin/rsfi_guidance_econ_analy_secrulemaking.pdf (``The economic
consequences of proposed rules (potential costs and benefits
including effects on efficiency, competition, and capital formation)
should be measured against a baseline, which is the best assessment
of how the world would look in the absence of the proposed
action.''); Id. at 7 (``The baseline includes both the economic
attributes of the relevant market and the existing regulatory
structure.''). The best assessment of how the world would look in
the absence of the proposed or final action typically does not
include recently proposed actions, because doing so would improperly
assume the adoption of those proposed actions.

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[[Page 75149]]

Several commenters requested the Commission consider interactions
between the economic effects of the proposed rule and other recent
Commission proposals.\498\ Commenters indicated there could be
interactions between this rulemaking and five proposals \499\ that have
since been adopted: Rule 10c-1a,\500\ Beneficial Ownership
Reporting,\501\ Private Fund Advisers,\502\ Settlement Cycle,\503\ and
the May 2023 SEC Form PF Amending Release.\504\ These rules were not
included as part of the baseline in the Proposing Release because they
were not adopted at that time. In response to commenters, this economic
analysis considers potential economic effects arising from any overlap
between the compliance period for the final amendments and each of
these recently adopted rules.\505\
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\498\ See, e.g., MFA Letter 2, at 3-4 (``We believe the
Commission should take into account the sheer scope of all its
recently proposed rules when determining whether to adopt any final
rules or in setting compliance dates for any of the new
requirements''); Eric J. Pan, President and CEO, and Susan Olson,
General Counsel, Investment Company Institute (Aug. 17, 2023), at 3,
available at https://www.sec.gov/comments/s7-04-22/s70422-246959-547222.pdf (``ICI Letter 2'') (``we request that the Commission . .
. publish a thorough analysis of the cumulative effects of the
Interconnected Rules that accounts for interconnections and
dependencies among them'').
\499\ Reporting of Securities Loans, Release No. 34-93613 (Nov.
18, 2021), 86 FR 69802 (Dec. 8, 2021) (see Ji [rcaron][iacute]
Kr[oacute]l,Deputy CEO, Global Head of Government Affairs,
Alternative Investment Management Association Ltd (Aug. 11, 2023),
at 4, available at https://www.sec.gov/comments/s7-08-22/s70822-243880-514482.pdf) (``AIMA Letter 2''); Modernization of Beneficial
Ownership Reporting, Release No. 33-11030 (Feb. 10, 2022), 87 FR
13846 (Mar. 10, 2022) (see MFA Letter 2, at 3; Jennifer Han,
Executive Vice President, Chief Counsel and Head of Regulatory
Affairs, Managed Funds Association, and National Association of
Private Fund Managers (July 21, 2023), at 14-15, available at
https://www.sec.gov/comments/s7-08-22/s70822-233179-486723.pdf)
(``NAPFM Letter''); ICI Letter 2, at 7 n. 13); Amendments to Form PF
to Require Current Reporting and Amend Reporting Requirements for
Large Private Equity Advisers and Large Liquidity Fund Advisers,
Release No. IA-5950 (Jan. 26, 2022), 87 FR 9106 (Feb. 17, 2022) (see
MFA Letter 2, at 3; NAPFM Letter 10-12); Private Fund Advisers;
Documentation of Registered Investment Adviser Compliance Reviews,
Release No. 1A-5955 (Feb. 9, 2022), 87 FR 16886 (Mar. 24, 2022) (see
MFA Letter 2, at 3; NAPFM Letter 10-12); Shortening the Securities
Transaction Settlement Cycle, Release No. 34-94196 (Feb. 9, 2022),
87 FR 10436 (Feb. 24, 2022) (see ICI Letter 2 at 7 n. 13).
\500\ See Reporting of Securities Loans, Release No. 34-98737
(Oct. 13, 2023) (``Rule 10c-1a''). The securities loan reporting
rule requires any person who loans a security on behalf of itself or
another person to report information about securities loans to a
registered national securities association (namely, FINRA) and
requires FINRA to make certain information it receives available to
the public. The covered persons will include market intermediaries,
securities lenders, broker-dealers, and reporting agents. The final
rule's compliance dates require that FINRA propose its rules within
four months of the effective date of final Rule 10c-1a, or
approximately May 2024, and finalize them no later than 12 months
after the effective date of final Rule 10c-1a, or approximately
January 2025; that FINRA implement data retention and availability
requirements for reporting 24 months after the effective date of
final Rule 10c-1a, or approximately January 2026; that covered
persons report Rule 10c-1a information to FINRA starting on the
first business day thereafter; and that FINRA publicly report Rule
10c-1a information within 90 calendar days thereafter, or
approximately May 2026. See Rule 10c-1a, Part VIII.
\501\ See Modernization of Beneficial Ownership Reporting,
Release No. 33-11253 (Oct. 10, 2023) (``Beneficial Ownership
Reporting''). Among other things, the amendments generally shorten
the filing deadlines for initial and amended beneficial ownership
reports filed on Schedules 13D and 13G, and require that Schedule
13D and 13G filings be made using a structured, machine-readable
data language. The new disclosure requirements and filing deadlines
for Schedule 13D are effective 90 days after publication in the
Federal Register. The new filing deadline for Schedule 13G takes
effect on September 30, 2024, and the rule's structured data
requirements have a one-year implementation period ending December
18, 2024. See Beneficial Ownership Reporting, Part II.G.
\502\ See Private Fund Advisers; Documentation of Registered
Investment Adviser Compliance Reviews, Release No. IA-6383 (Aug. 23,
2023), 88 FR 63206 (Sept. 14, 2023) (``Private Fund Advisers
Adopting Release''). The Private Fund Advisers Adopting Release
includes new rules designed to protect investors who directly or
indirectly invest in private funds by increasing visibility into
certain practices and restricting other practices, along with
amendments to the Advisers Act books and records rule and compliance
rule. The amended Advisers Act compliance provision for registered
investment advisers has a November 13, 2023 compliance date. The
compliance date is March 14, 2025 for the rule's quarterly statement
and audit requirements for registered investment advisers with
private fund clients. For the rule's adviser-led secondaries,
restricted activity, and preferential treatment requirements, the
compliance date is September 14, 2024 for larger advisers and March
14, 2025 for smaller advisers. See Private Fund Advisers Adopting
Release, Parts IV, VI.C.1.
\503\ See Settlement Cycle Adopting Release. Settlement Cycle
Adopting Release shortens the standard settlement cycle for most
broker-dealer transactions from two business days after the trade
date to one business day after the trade date (``T+1''). With
certain exceptions, the rule has a compliance date of May 28, 2024.
See Settlement Cycle Adopting Release, Parts VII, VII.B.3.
\504\ See Form PF; Event Reporting for Large Hedge Fund Advisers
and Private Equity Fund Advisers; Requirements for Large Private
Equity Fund Adviser Reporting, Release No. IA-6297 (May 3, 2023), 88
FR 38146 (June 12, 2023) (``May 2023 SEC Form PF Amending
Release''). The Form PF amendments require large hedge fund advisers
and all private equity fund advisers to file reports upon the
occurrence of certain reporting events. For new sections 5 and 6 of
Form PF, the compliance date is December 11, 2023; for the amended,
existing sections, it is June 11, 2024. See May 2023 SEC Form PF
Amending Release, Part II.E.
\505\ In addition, commenters indicated there could also be
overlapping compliance costs between the final amendments and
proposals (or in the case of Release No. 34-93784, a portion of the
proposal) that have not been adopted. Cybersecurity Risk Management
for Investment Advisers, Registered Investment Companies, and
Business Development Companies, Release No. 33-11028 (Feb. 9, 2022),
87 FR 13524 (Mar. 9, 2022) (see MFA Letter 2, at 3; NAPFM Letter 18-
19); Outsourcing by Investment Advisers, Release No. IA-6176 (Oct.
26, 2022), 87 FR 68816 (Nov. 16, 2022) (see MFA Letter 2, at 3;
NAPFM Letter 17-18); Enhanced Disclosures by Certain Investment
Advisers and Investment Companies about Environmental, Social, and
Governance Investment Practices, Release No. 33-11068 (May 25,
2022), 87 FR 36654 (June 17, 2022) (see MFA Letter 2, at 3; NAPFM
Letter 19-20); Safeguarding Advisory Client Assets, Release No. IA-
6240 (Feb. 15, 2023), 88 FR 14672 (Mar. 9, 2023) (see MFA Letter 2,
at 3; NAPFM Letter 9-10); Prohibition Against Fraud, Manipulation,
or Deception in Connection With Security-Based Swaps; Prohibition
Against Undue Influence Over Chief Compliance Officers; Position
Reporting of Large Security-Based Swap Positions, Release No. 34-
93784 (Dec. 15, 2021), 87 FR 6652 (Feb. 4, 2022) (see MFA Letter 2,
at 3; NAPFM Letter 13-14; AIMA Letter 2, at 3; ICI Letter 2, at 7 n.
13); Prohibition Against Conflicts of Interest in Certain
Securitizations, Release No. 33-11151 (Jan. 25, 2023), 88 FR 9678
(Feb. 14, 2023) (see MFA Letter 2, at 3; NAPFM Letter at 21-22);
Further Definition of ``As a Part of a Regular Business'' in the
Definition of Dealer and Government Securities Dealer, Release No.
34-94524 (Mar. 28, 2022), 87 FR 23054 (Apr. 18, 2022) (see NAPFM
Letter 12-13); Standards for Covered Clearing Agencies for U.S.
Treasury Securities and Application of the Broker-Dealer Customer
Protection Rule With Respect to U.S. Treasury Securities, Release
No. 34-95763 (Sept. 14, 2022), 87 FR 64610 (Oct. 25, 2022) (see
NAPFM Letter 16-17); Amendments Regarding the Definition of
``Exchange'' and Alternative Trading Systems (ATSs) That Trade U.S.
Treasury and Agency Securities, National Market System (NMS) Stocks,
and Other Securities, Release No. 34-94062 (Jan. 26, 2022), 87 FR
15496 (Mar. 18, 2022) (see NAPFM Letter 22-23). To the extent those
proposals are adopted, the baseline in those subsequent rulemakings
will reflect the existing regulatory requirements at that time.
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1. Institutional Investment Managers
The potential universe of persons who meet the definition of
Manager is broad and diverse. Exchange Act section 13(f)(6)(A) defines
the term ``institutional investment manager'' as ``includ[ing] any
person, other than a natural person, investing in or buying and selling
securities for its own account, and any person exercising investment
discretion with respect to the account of any other person.'' \506\
Exchange Act section 3(a)(9) states that ``[t]he term `person' means a
natural person, company, government, or political subdivision, agency,
or instrumentality of a government.'' `` `Company' means a corporation,
a partnership, an association, a joint-stock company, a trust, a fund,
or any organized group of persons whether incorporated or not; or any
receiver, trustee in a case under title 11 of the United States Code or
similar official or any liquidating agent for any of the foregoing, in
his capacity as such.'' \507\ As a result, Managers exercising
discretion over the accounts of others include but are not limited to

[[Page 75150]]

investment advisers exercising investment discretion over client
assets, including investment company assets such as mutual funds, ETFs,
and closed-end funds; banks and bank trust corporations offering
investment management services; pension fund managers; firms, including
broker-dealers and insurance companies, managing corporate or employee
investment assets; and individuals exercising investment discretion
over the accounts of others. Also, as a result of the definition of
Manager, the set of Managers excludes natural persons buying and
selling securities only for their own account but does include natural
persons exercising discretion over the account of another person.\508\
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\506\ See also Exchange Act section 3(a)(35) defining when a
person exercises ``investment discretion'' with respect to an
account.
\507\ See section 2(a)(8) of the Investment Company Act. The
term ``company'' in the Exchange Act ``ha[s] the same meaning[ ] as
in the Investment Company Act of 1940.'' Exchange Act section
3(a)(19).
\508\ To the extent that a natural person exercising discretion
over the account of another person has a short position exceeding
the thresholds, that natural person would be subject to the costs
associated with Rule 13f-2 and the Form SHO. We expect such a
natural person would likely use the fillable web form provided by
EDGAR to input Form SHO disclosures. Few Managers that are natural
persons would be likely to have short positions large enough to
exceed the threshold. See infra Part VIII.C.6 for more information
on Managers' costs.
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Notwithstanding the broad statutory definition of Manager, it is
the Commission's understanding that only a fraction of Managers is
believed to engage in short selling and fewer still engage in any
substantial short selling. Registered broker-dealers' market making
operations, for example, engage in short selling but, with the
exception of option market makers, generally do not hold large
positions overnight. The Commission is also aware, for example, that
advisers to both hedge funds and registered investment companies engage
in short selling to varying degrees. However, with the exception of
hedge funds, institutional investors are viewed as ``largely absent''
from the short selling portion of the financial markets.\509\ Using
actual investment strategies employed by registered investment
companies \510\ as a proxy for the number of Managers in the public
fund markets engaged in short selling, the number of such Managers is
likely to be relatively small. A Division of Economic and Risk Analysis
White Paper survey of all mutual fund Form N-SAR filings in 2014 found
that ``[w]hile 64 percent of all funds were allowed to engage in short
selling, only 5 percent of all funds actually did so.'' \511\ As of
December 2022, there were 7,164 registered investment companies with
total equity positions valued at approximately $14.7 trillion. Of
those, 138 funds had short positions with a total short position value
of approximately $15 billion. Of the funds with short positions, only
15 funds held positions equal to or greater than $10 million.\512\
Additionally, according to an analysis of publicly available Form PF
data, approximately sixteen percent of single-strategy hedge funds
employ strategies involving short selling.\513\
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\509\ Peter Molk Frank Partnoy, Institutional Investors as Short
Sellers?, 99 B.U. L. Rev. 837, 839 (2019). Molk and Partnoy's paper
``identif[ies] the regulatory and other barriers that keep key
categories of institutions, specifically, mutual funds, insurance
companies, pension funds, banks, sovereign wealth funds, endowments,
and foundations, from acquiring significant short positions.'' Id.
at 844.
\510\ As of Dec. 20212, there were 9,050 mutual funds (excluding
money market funds) with approximately $22,652 billion in total net
assets, 2,819 ETFs organized as an open-end fund or as a share-class
of an open-end fund with approximately $5,910 billion in total net
assets, 680 registered closed-end funds with approximately $363
billion in total net assets, 701 unit investment trusts with
approximately $2,184 billion in total net assets, and 15 variable
annuity separate accounts registered as management investment
companies on Form N-3 with $237 billion in total net assets.
Estimates of the number of registered investment companies and their
total net assets are based on an analysis of Form N-CEN filings as
of July 31, 2023. For open-end management funds, closed-end funds,
and management company separate accounts, total net assets equals
the sum of monthly average net assets across all funds in the sample
during the reporting period. See Item C.19.a (Form N-CEN). For UITs,
we use the total assets as of the end of the reporting period, and
for UITs with missing total assets information, we use the
aggregated contract value for the reporting period instead. See Item
F.11 and F.14.c in Form N-CEN.
\511\ Daniel Deli et al., Use of Derivatives By Registered
Investment Companies at 8, DERA White Paper (2015), available at
https://www.sec.gov/files/derivatives12-2015.pdf.
\512\ This is based on an analysis of data provided by
registered investment companies to the Commission on Form N-PORT
filings received through July 31, 2023.
\513\ As of 2022 Q4, there are 1,107 hedge funds out of 6,553
Equity Single-Strategy hedge funds (excluding fund-of-funds hedge
funds) that employ short selling in an Long/Short and Short Bias
strategy. Assets under management (AUM) in these types of hedge
funds total approximately $1.165 trillion. 2022 Q2 Private Fund
Statistics, Division of Investment Management Analytics Office,
available at https://www.sec.gov/divisions/investment/private-funds-statistics.shtml. Data includes both U.S. and non-U.S. domicile
hedge funds managed by SEC-registered investment advisers with at
least $150 million in private fund assets under management. The data
do not include hedge funds that were classified as multi-strategy on
Form PF. These hedge funds could employ short selling as part of
their multi-strategy. Data for non-U.S. domicile hedge funds with an
equity short-bias strategy is not publicly available for 2022 Q2. In
this case the last publicly available values were used (7 funds with
a total AUM of $1 billion) from 2019 Q3. As of the end of 2021,
hedge fund assets totaled approximately $4 trillion. Global Hedge
Fund Industry Assets Top $4 Trillion for the First Time, Reuters
(Jan. 20, 2022) (retrieved from Factiva database).
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While information about Managers' investments other than from funds
managed by investment advisers is limited, the Commission understands
that such other Managers, other than options market makers due to their
routine use of hedging transactions, do not frequently establish short
positions that would be large enough to be subject to the rule's
reporting requirement.\514\ One possible proxy for the number of
Managers that might potentially have a reporting obligation is a
fraction of the number of Managers reporting positions on Form 13F
because such persons by definition manage accounts holding section
13(f) securities having an aggregate fair market value of at least $100
million, making such Managers more likely to have the resources to
engage in short selling that exceeds Rule 13f-2's thresholds. As of
March 31, 2023, 8,551 Managers \515\ with investment discretion over
approximately $38.79 trillion reported holdings on Form 13F in Section
13(f) securities.\516\ The Commission also believes that registered
investment advisers, particularly those managing hedge funds, are the
primary Managers likely to be affected by Rule 13f-2. Though the
Commission lacks data to quantify the exact number affected parties,
the Commission estimates that the total number of Managers with
reporting obligations will be between 252 and 1,000.\517\
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\514\ For example, according to Molk and Partnoy ``insurance
companies generally are not active short sellers. Short selling by
insurance companies is used almost exclusively to hedge positions,
and generally is not used with respect to equity positions at all.''
Supra note 509, at 850. See also Molk and Partnoy discussion about
banks and trusts. ``Trust administrators . . . have a history of
adopting conservative investment strategies. Although shorting can
be used to reduce risk when matched with similar long positions,
using short selling as an income generation tool is not consistent
with the overall conservative investment tradition.'' Id. at 854.
\515\ A portion of these filings are Form 13Fs filed to declare
that the filer's holdings are reported on another filer's Form 13F.
Thus, not all 8,551 Managers' Form 13Fs represent unique holdings.
\516\ The statistic is computed by the Commission from data
filed on Form 13F.
\517\ See supra Part VII.B.1 for more information on the
estimates of how many Managers would have reporting obligations. The
Commission estimated the number of reporting Managers using the
short sale activity of Managers that submitted Form SH. Only
Managers that exercised investment discretion over accounts with
aggregate fair market values of at least $100,000,000 in securities
described in Rule 13f-1(c) under the Exchange Act, and effected
short sales of those securities, were required to file Form SH.
Given that Managers included in the Form SH data may be a subset of
Managers with obligations under Rule 13f-2, the estimate of 252
Managers is likely lower than the number who will ultimately report
Form SHO. However, the Commission lacks data to better estimate the
universe of Managers with obligations under 13f-2. See also infra
Part VIII for a discussion of the applicability of Form SH data to
estimating the number of Managers affected by Rule 13f-2.
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2. Short Selling
Short selling is a widely used market practice, which allows
investors to

[[Page 75151]]

profit if an asset declines in value or to hedge risks. Market
participants can build an economic short position using traditional
means (i.e., borrowing shares and selling them into the market to buy
back later) or they can gain short exposure using derivatives. This
section provides an overview of the current state of obtaining short
exposure to equities and the different means of short selling--i.e.,
traditional means and using derivatives.
a. Short Selling Equities
A short sale is the sale of a security that the seller does not own
or any sale that is consummated by the delivery of a security borrowed
by, or for the account of, the seller.\518\ In general, short selling
is used to profit from an expected downward price movement, to provide
liquidity in response to unanticipated demand, or to hedge the risk of
an economic long position in the same security or in a related
security.\519\ To short sell a stock, the short seller borrows shares
of a stock from a lender--typically a long-term investor such as a
mutual fund or pension fund--and sells those shares into the market.
Later, the short seller purchases the same number of shares and returns
them to the lender. The profit on the transaction for the short seller
is the difference between the price at which the shares were initially
sold and the price at which the investor re-purchased the shares--less
any fees such as securities lending fees. If the price of the stock
goes down then this difference will be positive and the short seller
will make money. Short selling contributes to price efficiency when
short sellers trade to incorporate negative information into stock
prices.
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\518\ See Rule 200(a) of Regulation SHO, 17 CFR 242.200(a). See
also Regulation SHO Adopting Release.
\519\ One commenter supported this statement, stating that short
selling provides liquidity and is an important hedging tool. See
SBAI Letter at 2.
---------------------------------------------------------------------------

In addition to short selling based on negative sentiment, market
participants also short sell to hedge existing positions. Hedging is a
particularly potent motive to short sell a stock for options market
makers who can hedge the risk of writing a call option by short selling
the underlying stock in the stock market. Other investors use short
selling to hedge out an unwanted component of a stock's return. For
example, an investor who wants to buy a particular stock to trade on
stock specific information but does not want to expose itself to
industry risk can hedge industry risk by short selling an industry
index ETF while purchasing the underlying security. Market makers also
use short selling extensively to maintain two sided quotes in the
temporary absence of inventory. Lastly, traders may use short selling
as part of algorithmic trading strategies attempting to benefit from
temporary pricing anomalies. While short selling to trade on
information or to hedge generally results in short positions that are
held for some time, registered broker-dealers engaged in market making
operations and algorithmic technical traders generally close their
positions by the end of the day and thus their short positions
generally do not show up in existing measures of short interest.\520\
---------------------------------------------------------------------------

\520\ See infra Part VIII.B.4.i for a discussion of existing
short interest data.
---------------------------------------------------------------------------

Short selling generally entails more risk than holding a long
position. At worst, a buyer of a long position can lose its entire
investment. This is not true for a short seller. If the stock price
increases from the short sale price, the investor loses money and since
prices could potentially rise indefinitely, the short seller could lose
more than the value of its original investment. Additionally, margin
requirements for short selling are typically 150 percent--including the
proceeds of the short sale plus an additional 50 percent of the value
of the short position.\521\ If the stock price goes up, the investor
may receive a margin call, which would require the investor to commit
additional assets to meet margin requirements. To protect itself from
losses, if an investor is unable to meet margin requirements, the
broker-dealer may close the short position at a significant loss to the
short seller. These dynamics can make it difficult for investors to
maintain short positions in highly volatile stocks.
---------------------------------------------------------------------------

\521\ Regulation T specifies that in most situations margin
requirements for equity short sales must be 150%. See 12 CFR 220.12.
---------------------------------------------------------------------------

Short selling is facilitated by the securities lending market.
Borrowing shares generally occurs two days after the short sale is
executed. This is because stock market transactions normally settle two
business days after the transaction occurs, while securities lending
transactions settle on the same day.\522\ Consequently, a short seller
(or its broker-dealer) will gauge the ability to borrow shares prior to
executing the short sale, referred to as obtaining a ``locate,'' but
would actually borrow the share on the day that it is required to
deliver the share to settle the stock market transaction.
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\522\ On Feb. 15, 2023, the Commission adopted a rule to shorten
the settlement cycle to one business day; compliance by broker-
dealers will be required as of May 28, 2024. See Settlement Cycle
Adopting Release.
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Short selling is prevalent in equity markets in general. A common
ratio used to capture the amount of short selling is the short interest
ratio, which measures the fraction of shares sold short at a given
point in time divided by the total shares outstanding for that
security. Figure 1 below presents the time series average for short
interest outstanding for equities with different characteristics. This
Figure shows that short interest tends to be higher for small-cap
stocks than for mid- or large-cap stocks.\523\
---------------------------------------------------------------------------

\523\ One commenter stated that biotechnology companies, 90% of
which have market capitalizations that would qualify as small-cap or
micro-cap stocks, face an outsized proportion of short positions.
See infra note 593.
---------------------------------------------------------------------------

Another way to measure the prevalence of short selling in financial
markets is by analyzing the fraction of transactions that involve a
short seller. Short sellers are involved in nearly 50 percent of
trading volume, while only about 2 percent of shares outstanding are
held short in the U.S. equity markets.\524\ This average volume of
short selling tends to be much higher than the typical changes in short
interest,\525\ suggesting that a significant fraction of short selling
volume is reversed very quickly. Such short selling is indicative of
the fact that short selling is a key component of modern market making
strategies and technical algorithmic trading.\526\
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\524\ See DERA 417(a)(2) Study. Figure F.1 in the DERA 417(a)(2)
Study (showing that the level of short selling as a percentage of
trading volume grew from 2007 to 2013 to about 50%). See also D.
Rapach, M.C. Ringgenberg, and G. Zhou, Short Interest and Aggregate
Stock Returns, J. of Fin. Econ. 46-65 (2016).
\525\ The Commission analyzed trading volume for common shares
during the year 2019. This analysis revealed that the average common
share during this period traded approximately 5% of shares
outstanding each week, with approximately half of all trades
involving short sellers. Consequently, total short selling volume
amounts to approximately 5% of shares outstanding every two weeks
for a typical stock. In contrast, from 2015 through 2019, absolute
changes in short interest approximately every two weeks have equaled
about a half of a percent of shares outstanding. Thus, the total
amount of short selling volume occurring is an order of magnitude
larger than the changes in short interest over the same time period.
These statistics suggest that the majority of short selling
transactions likely do not involve long term traders building short
positions. Additionally, the correlation coefficient for bimonthly
changes in short interest and short selling volume in 2019 is only
about 0.018. This low correlation suggests that the economic forces
driving total short selling volume and changes in short interest are
likely different.
\526\ See infra Part VIII.C.3 for a more detailed discussion of
short selling and liquidity provision.
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BILLING CODE 8011-01-P

[[Page 75152]]

[GRAPHIC] [TIFF OMITTED] TR01NO23.000

BILLING CODE 8011-01-C
b. Taking Short Positions Via Derivatives
Trading in derivatives affects short selling in two key ways.
First, derivatives offer investors an alternative means to express
negative sentiment rather than short selling the stock. For instance,
an investor wishing to profit from the decline of a security's value
can also trade in various derivative contracts, including options and
security-based swaps. Providing evidence of this alternative means of
short selling, academic research shows that investors do indeed use
options as an alternative means to obtain short-like economic exposure
when standard short selling is restricted.\527\
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\527\ See Robert Battalio and Paul Schultz, Regulatory
Uncertainty and Market Liquidity: The 2008 Short Sale Ban's Impact
on Equity Option Markets, 66 J. of Fin. 2013-2053 (2011); B.D.
Grundy, B. Lim, and P. Verwijmeren, Do Option Markets Undo
Restrictions on Short Sales? Evidence from the 2008 Short-Sale Ban,
106 J. of Fin. Econ. 331-348 (2012). See also G.J. Jiang, Y.
Shimizu, and C. Strong, Back to the Futures: When Short Selling is
Banned (2019), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3420275.

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[[Page 75153]]

Among the most popular derivative contracts are options,
specifically put and call options. Call options give the owner of the
option the right but not the obligation to purchase a stock at a
specific price on a future date. Put options are similar but give the
owner of the option the right but not the obligation to sell a stock at
a specific price at a future date. In a put option the seller of the
option is taking a long position in the underlying security while the
purchaser of the put is taking a short position. The opposite is true
for a call option.
In addition to options, convertible securities (in which the
security can be converted into an equity security) and security-based
swaps can be used to create the same economic exposure as a short
position.\528\ Convertible debt securities offer the owner a stream of
payments and the ability to convert the security into equity should the
owner's strategy deem this beneficial.\529\ Security-based swaps
include total-return swaps in which two counterparties agree to
exchange or ``swap'' payment with each other as a result of changes in
a security characteristic, such as its price.\530\ As with options, in
each of these derivative contracts one party is inherently long and the
other party is inherently short. These derivatives, and other more
exotic derivatives, tend not to be as standardized as options, and are
traded over-the-counter. Security-based swap transactions are reported
to and publicly disseminated by security-based swap data
repositories.\531\
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\528\ On Sept. 19, 2019, the Commission approved the
``Recordkeeping and Reporting Requirements for Security-Based Swap
Dealers, Major Security-based Swap Participants, and Broker-
Dealers'' which established a regulatory regime for security-based
swaps under Title VII of the Dodd-Frank Act. See Recordkeeping and
Reporting Requirements for Security-Based Swap Dealers, Major
Security-Based Swap Participants, and Broker-Dealers, Exchange Act
Release No. 87005 (Sept. 19, 2019), 84 FR 68550 (Dec. 16, 2019),
available at https://www.sec.gov/rules/final/2019/34-87005.pdf.
\529\ Convertible debt securities are also employed in hedging
strategies whereby the equity is sold short while the convertible
security of that equity is held long.
\530\ On July 9, 2012, the Commission approved rules and
definitions of Security based swaps. See 17 CFR parts 230, 240, and
241; Further Definition of ``Swap,'' ``Security-Based Swap,'' and
``Security-Based Swap Agreement''; Mixed Swaps; Security-Based Swap
Agreement Recordkeeping, Commodity Futures Trading Commission and
Securities and Exchange Commission, 77 FR 48208 (Aug. 13, 2012),
available at https://www.sec.gov/rules/final/2012/33-9338.pdf.
\531\ See, e.g., 2015 Regulation SBSR Adopting Release, supra
note 97; Security-Based Swap Data Repository Registration, Duties,
and Core Principles, Exchange Act Release No. 74246 (Feb. 11, 2015),
80 FR 14437 (Mar. 19, 2015); Regulation SBSR--Reporting and
Dissemination of Security-Based Swap Information, Exchange Act
Release No. 78321 (July 14, 2016), 81 FR 53545 (Aug. 12, 2016)
(``2016 Regulation SBSR Adopting Release''). See also Order
Approving Application for Registration as a Security-Based Swap Data
Repository, 86 FR 8977 (Feb. 10, 2021), available at https://www.sec.gov/rules/other/2021/34-91798.pdf.
---------------------------------------------------------------------------

In addition to providing an alternative means of expressing a
bearish sentiment, trading in derivatives frequently leads to related
trading in the stock market as derivatives' counterparties seek to
hedge their risk. For example, an options market maker who sells a put
has taken on long exposure to the underlying security and may hedge
this position by opening a short position in the underlying security.
Thus, option market makers who sell large quantities of put options may
amass large short positions in the underlying equities to hedge their
options exposure.
3. Current Short Selling Regulations
The Commission adopted Regulation SHO \532\ to update short sale
regulation in light of numerous market developments since short sale
regulation was first adopted in 1938 and to address concerns regarding
persistent failures to deliver and potentially abusive ``naked'' short
selling.\533\
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\532\ See Regulation SHO Adopting Release.
\533\ In a ``naked'' short sale, the seller does not borrow or
arrange to borrow the securities in time to make delivery to the
buyer within the standard two-day settlement cycle. As a result, the
seller fails to deliver securities to the buyer when delivery is due
(also known as a ``failure to deliver'').
---------------------------------------------------------------------------

In adopting Regulation SHO, the Commission recognized that short
sales can provide important pricing information \534\ and liquidity to
the market.\535\ However, the Commission was also concerned with the
negative effect that failures to deliver may have on shareholders and
the markets. For example, large and persistent failures to deliver may
deprive shareholders of the benefits of ownership, such as voting and
lending, and sellers that fail to deliver securities on settlement date
may attempt to use their failures to engage in trading activities to
improperly depress the price of a security.
---------------------------------------------------------------------------

\534\ Efficient markets require that prices fully reflect all
buy and sell interest. Market participants who believe a stock is
overvalued may engage in short sales in an attempt to profit from a
perceived divergence of prices from true economic values. Such short
sellers add to stock pricing efficiency because their transactions
inform the market of their evaluation of future stock price
performance. This evaluation is reflected in the resulting market
price of the security. See 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#P179_15857.
\535\ Market liquidity is generally provided through short
selling by market professionals, such as market makers, who offset
temporary imbalances in the buying and selling interest for
securities. Short sales effected in the market add to the selling
interest of stock available to purchasers, and reduce the risk that
the price paid by investors is artificially high due to a temporary
contraction of selling interest. Short sellers covering their sales
also may add to the buying interest of stock available to sellers.
See 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#P179_15857.
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Due to continued concerns regarding failures to deliver, and to
promote market stability and preserve investor confidence, the
Commission has amended Regulation SHO on several occasions. For
example, the Commission eliminated certain original exceptions to
Regulation SHO's close-out requirements,\536\ strengthened those same
close-out requirements by adopting Rule 204,\537\ and reintroduced a
short sale price test restriction by adopting Rule 201.\538\ In
addition, the Commission adopted a targeted antifraud rule, Rule 10b-
21, to further address failures to deliver in securities

[[Page 75154]]

that have been associated with ``naked'' short selling.\539\
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\536\ As initially adopted, Regulation SHO included two major
exceptions to its then existing close out requirements: the
``grandfather'' provision and the ``options market maker''
exception. Due to continued concerns regarding failures to deliver,
and the fact that the Commission continued to observe certain
securities with failures to deliver that were not being closed out
consistent with its then existing close out requirements, the
Commission eliminated the ``grandfather'' provision in 2007 and the
``options market maker'' exception in 2008. See Exchange Act Release
No. 56212 (Aug. 7, 2007), 72 FR 45544 (Aug. 14, 2007) (eliminating
the ``grandfather'' provision to Regulation SHO's close out
requirement), available at https://www.sec.gov/rules/final/2007/34-56212fr.pdf; Exchange Act Release No. 58775 (Oct. 14, 2008), 73 FR
61690 (Oct. 17, 2008) (eliminating the ``options market maker''
exception to Regulation SHO's close out requirement), available at
https://www.sec.gov/rules/final/2008/34-58775fr.pdf.
\537\ In 2008, the Commission adopted 17 CFR 242.204T
(``temporary Rule 204T''), and in 2009 adopted Rule 204. Rule 204
further strengthens Regulation SHO's close out requirements by
making those requirements applicable to failing to deliver results
from sales of all equity securities, while reducing the time-frame
within which failures to deliver must be closed out. See Exchange
Act Release No. 60388 (July 27, 2009), 74 FR 38266 (July 31, 2009),
available at https://www.sec.gov/rules/final/2009/34-60388fr.pdf.
\538\ In 2004, the Commission initiated a year-long pilot to
study the removal of short sale price tests for approximately one-
third of the largest stocks. After review of the pilot's data, the
Commission proposed the elimination of all short sale price tests.
In June 2007, the Commission adopted a rule that eliminated all
short sale price tests, including Rule 10a-1, a predecessor to
Regulation SHO. The rule became effective in July 2007. In 2010, the
Commission reinstituted a short sale price test restriction by
adopting Rule 201. See Exchange Act Release No. 61595 (Feb. 26,
2010), 75 FR 11232 (Mar. 10, 2010), available at https://www.sec.gov/rules/final/2010/34-61595fr.pdf.
\539\ Rule 10b-21 is an antifraud provision that supplements
existing antifraud rules, including 17 CFR 240.10b-5 (``Rule 10b-
5''), and was adopted to further evidence the liability of short
sellers. Specifically, Rule 10b-21 applies to short sellers,
including broker-dealers acting for their own accounts, who deceive
specified persons about their intention or ability to deliver
securities in time for settlement, while failing to deliver
securities by settlement date. Among other things, the rule
highlights the specific liability of short sellers who deceive their
broker-dealers about their source of borrowable shares for purposes
of complying with Regulation SHO's locate requirement, or who
misrepresent to their broker-dealers that they own the shares being
sold and subsequently fail to deliver shares. See supra note 14,
available at https://www.sec.gov/rules/final/2008/34-58774.pdf.
---------------------------------------------------------------------------

Regulation SHO requires broker-dealers to properly mark sale orders
as ``long,'' ``short,'' or ``short exempt,'' to locate a source of
shares prior to effecting a short sale (also known as the locate
requirement), and to close out failures to deliver that result from
long or short sales. In addition, if the price of an equity security
has experienced significant downward price pressure, Regulation SHO
temporarily restricts the price at which short sales may be effected.
Regulation SHO imposes certain recordkeeping obligations on broker-
dealers. However, the Commission does not have market-wide information
on how often the bona fide market making exception is used.
Furthermore, bona fide market making information is not reported on a
regular basis, instead the Commission must request bona fide market
making records on a broker-dealer by broker-dealer basis.\540\
---------------------------------------------------------------------------

\540\ See supra Part IV.B for a discussion on the use of the
bona fide market making locate exception.
---------------------------------------------------------------------------

In addition, regulations currently do not require market
participants to record, report, or track when short sellers ``buy to
cover'' their short sales. This makes it difficult for regulators to
assess compliance with Rule 105 and with close out requirements in Rule
204.
4. Existing Short Selling Data
There are several sources of short selling data that are available
both publicly and for regulatory purposes. In general, these data
sources lack information about levels of and the timing of changes in
economic short positions for specific Managers in specific securities.
Some sources report aggregate short positions at the security level,
but their content is not granular enough to further the understanding
of short selling strategies. Other sources provide granular short
volume information, but they are unable to distinguish short
transactions that impact short positions from those that do not and do
not contain all activity that can change short positions. Some
regulatory data sources report short transactions at the individual
investor level, but using these data to estimate short positions would
be significantly inaccurate and inefficient.
a. Bimonthly Short Interest Data
One of the primary data sources for aggregate short selling data is
the bimonthly short interest data collected by FINRA.\541\ FINRA
collects aggregate short interest information in individual securities
on a bimonthly basis as the total number of shares sold short in a
given stock as of the middle and end of each month. Then the exchange
that lists the given stock, or FINRA itself in the case of OTC stocks,
distributes the collected data.\542\ FINRA computes short interest
using information it receives from its broker-dealer members pursuant
to FINRA Rule 4560 reflecting all trades cleared through clearing
broker-dealers.\543\ FINRA Rule 4560 requires generally that broker-
dealers that are FINRA members report ``short positions'' in customer
and proprietary firm accounts in all equity securities twice a month
through FINRA's web-based Regulation Filing Applications (RFA)
system.\544\ FINRA defines ``short positions'' for this purpose simply
as those resulting from ``short sales'' as defined in Rule 200(a) of
Regulation SHO under the Exchange Act.\545\ Member firms must report
their short positions to FINRA regardless of position size.\546\ The
process of gathering and validating short interest data takes
approximately two weeks.\547\ Thus the data are available with
approximately a two week lag.
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\541\ See DERA 417(a)(2) Study at 17-18, supra note 6.
\542\ See Short Interest--What It Is, What It Is Not, FINRA
Inv'r Insights (Apr. 12, 2021), available at https://www.finra.org/investors/insights/short-interest.
\543\ Id. (Short interest for a listed security at any date
reported by FINRA is ``a snapshot of the total open short positions
in a security existing on the books and records of brokerage firms
on a given date.'').
\544\ FINRA Rule 4560 excludes short sales in ``restricted
equity securities,'' as defined in Securities Act Rule 144, from the
reporting requirement.
\545\ See FINRA Rule 4560(b)(1).
\546\ See FINRA Market Regulation Department, General for Short
Interest Reporting Instructions (Dec. 18, 2008) (reporting
instructions to FINRA member firms), available at https://www.finra.org/Industry/Compliance/RegulatoryFilings/ShortInterestReporting/P037072.
\547\ See DERA 417(a)(2) Study at 17-18, supra note 6.
---------------------------------------------------------------------------

FINRA short interest data are widely available and are used by
academics and other market participants.\548\ Furthermore, these short
interest data are found to predict future stock and market returns over
the monthly and annual horizons, suggesting that the bimonthly short
interest data capture the economic short selling based on fundamental
research.\549\ However, these data face two major limitations. First,
the information does not provide insight into the timing with which
short positions are established or covered over the two-week reporting
period. This precludes the possibility of understanding the behavior of
aggregate economic short selling in the two weeks leading up to the
reporting date.\550\ Second, given that short interest is aggregated at
the security-level, the aggregation does not provide an understanding
of certain aspects of the underlying short selling activity. For
example, the data cannot inform on whether short sentiment is broadly
or narrowly held or held by persons with larger positions. The data
also does not inform on the extent to which short interest has been
hedged.
---------------------------------------------------------------------------

\548\ See supra note 491. FINRA and the listing exchanges make
these data publicly available with biweekly updates.
\549\ See, e.g., Peter N. Dixon and Eric K. Kelley, Business
Cycle Variation in Short Selling Strategies: Picking During
Expansions and Timing During Recessions, 57(8) J. of Fin. and
Quantitative Analysis 3018-3047 (2022); see also Ekkehart Boehmer,
Zsuzsa R. Huszar, and Bradford D. Jordan, The Good News in Short
Interest, 96 (1) Journal of Financial Economics 80-97 (2010);
Stephen Figlewski, The Informational Effects of Restrictions on
Short Sales: Some Empirical Evidence, 16 (4) J. of Fin. and
Quantitative Analysis 463-476 (1981).
\550\ For example, the public will not have information on
stock-specific volatility in real-time that may relate to short
selling of the particular stock. Such volatility may be explained,
though only through assumption, once the bimonthly short interest
data becomes available. Assumption is necessary because the data are
still not at the daily level.
---------------------------------------------------------------------------

b. Short Selling Volume and Transactions From SROs
Since 2009, many SROs have been publishing two short selling data
sets, including same day publication of daily aggregated short sale
volume in individual securities \551\ and publication of short sale
transaction information on no more than a two-month delay.\552\

[[Page 75155]]

Some SROs make the historical daily short volume data available to
market participants for a fee.\553\ The fact that market participants
and academic users pay these subscription fees indicate that these data
are utilized. In addition to these daily short volume data, several
SROs provide intraday short sale transaction information for the orders
that execute on their respective venues. As an example, FINRA provides
information from FINRA's Trade Reporting Facility (``TRF'') and
Alternative Display Facility (``ADF'') \554\ (the TRF and ADF are
together referred to herein as ``FINRA's Reporting Facilities'').
Overall, these different sources of daily and intraday short volume
data provide greater, though different, levels of granularity relative
to the bimonthly short interest observations discussed earlier.
---------------------------------------------------------------------------

\551\ See Short Sale Volume and Transaction Data, available at
https://www.sec.gov/answers/shortsalevolume.htm (showing hyperlinks
to the websites where SROs publish this data). See also supra note
492. See, e.g., FINRA's Daily Short Sale Volume Files (which provide
aggregated volume by security on all short sale trades executed and
reported to a FINRA reporting facility during normal market hours).
See FINRA Information Notice, Publication of Daily and Monthly Short
Sale Reports (Sept. 29, 2009), available at https://www.finra.org/sites/default/files/NoticeDocument/p120044.pdf.
\552\ See FINRA's Monthly Short Sale Transaction Files (which
provide detailed trade activity of all short sale trades reported to
a consolidated tape. See supra note 492. See also Short Sale Volume
and Transaction Data, available at https://www.sec.gov/answers/shortsalevolume.htm. Additional transaction data has been available
at various times, including transaction data from the Regulation SHO
Pilot, which has been discontinued by most exchanges in July 2007
when the uptick rule was removed. See Exchange Act Release No. 55970
(June 28, 2007), 72 FR 36348 (July 3, 2007), available at https://www.sec.gov/rules/final/2007/34-55970.pdf. The Pilot data comprised
short selling records available from each of nine markets: American
Stock Exchange, Archipelago Exchange, Boston Stock Exchange, Chicago
Stock Exchange, NASD, Nasdaq Stock Market, New York Stock Exchange,
National Stock Exchange, and the Philadelphia Stock Exchange. See
SEC Division of Trading and Markets, Regulation SHO Pilot Data FAQ,
available at https://www.sec.gov/spotlight/shopilot.htm#pilotfaq.
\553\ See, e.g., TAQ Group Short Sale & Short Volume, New York
Stock Exchange, available at https://www.nyse.com/market-data/historical/taq-nyse-group-short-sales (for short sale data relating
to all NYSE owned exchanges). See Short Sale Volume and Transaction
Reports from Nasdaq Trader, available at https://nasdaqtrader.com/Trader.aspx?id=shortsale (for short sale data for Nasdaq exchanges);
see also Short Sale Daily Reports, Chicago Board Options Exchange
(for Cboe exchanges), available at https://datashop.cboe.com/us-equity-short-volume-and-trades.
\554\ Each TRF provides FINRA members with a mechanism for the
public reporting of transactions effected otherwise than on an
exchange. See FINRA, Market Transparency Trade Reporting Facility,
available at https://www.finra.org/Industry/Compliance/MarketTransparency/TRF/.
---------------------------------------------------------------------------

Despite offering higher granularity than bimonthly short interest
data, these existing short volume data provided by the SROs, including
FINRA, have a number of limitations. First, the data do not provide
insight into the activities of either individual traders, or different
trader types. Consequently, it is not possible with existing short
selling data provided by the SROs to separate trading volume associated
with market makers, algorithmic traders, investment managers, or other
trader types. Form SHO will address this limitation by providing data
on the gross short sale positions and activity of investment managers
with large short sale positions.
Additionally, the data do not provide insight into activities that
may reduce exposure, making the use of these data to estimate investor
sentiment fraught with potential bias. Moreover, these data provide
information only on short sales, whereas short positions could also
change because investors can increase or decrease their positions in
ways other than short selling the stock. For example, investors can
increase their short positions by exercising put options and delivering
borrowed shares or by delivering borrowed shares when they are assigned
call options. Investors can reduce their short positions in an equity
when they, for example, ``buy to cover'' their positions, purchase
shares in a secondary offering,\555\ convert bonds to stock, or redeem
ETF shares containing the equity. As a result, the short selling volume
and transactions data cannot easily explain changes in short interest,
exposing a gap between these two types of existing data.
---------------------------------------------------------------------------

\555\ See supra note 285.
---------------------------------------------------------------------------

Aggregate short selling statistics and short selling transactions
data have different lags with which they are available. Aggregate short
selling volume statistics are usually made available by the SROs by the
end of the following business day. For the transactions data, the lag
can be much longer, and in some cases the data are released with a one-
month lag--implying that some short selling transactions data are not
available for two months.\556\
---------------------------------------------------------------------------

\556\ For example, a short sale transaction that takes place in
late June could be released in a dataset in the month of August.
---------------------------------------------------------------------------

There is also a concern that these data may over-represent the
total volume of short sales occurring in the market. This is because
Regulation SHO provides specific criteria regarding what is a long
sale.\557\ If a market participant is unclear whether its trade will
meet all the requirements at settlement to be marked a long sale, then
it may choose to mark the trade as short to not run afoul of Regulation
SHO requirements, even if the trade is likely an economic long
sale.\558\
---------------------------------------------------------------------------

\557\ See Rule 200(g) of Regulation SHO specifies when an order
can be marked as long. See also Part IV.B; Regulation SHO Adopting
Release. An economic long sale is a sale of an owned, not borrowed,
security.
\558\ See 2009 letter from Securities Industry and Financial
Markets Association (``SIFMA'') commenting on an alternative short
sale price test, expressing concern that compliance with Regulation
SHO short selling marking requirements ``will result in a
substantial over-marking of orders as ``short'' in situations where
firms are, in fact, ``long'' the securities being sold.'' Letter
from Securities Industry and Financial Markets Association (``SIFMA
Letter''), available at https://www.sec.gov/comments/s7-08-09/s70809-4654.pdf.
---------------------------------------------------------------------------

c. Securities Lending
Securities lending data provide information on stock loan volume,
lending costs, and the percentage of available stock out on loan. In
the equity market, a primary reason for end borrowers to engage in a
securities loan is to facilitate a short sale,\559\ leading to a close
correlation between information about certain loan volumes and short
interest. Therefore, some market participants use securities lending
data as a measure of short sale positions.\560\ Since the proposing
release, the Commission has adopted Rule 10c-1a. Below, we describe the
baseline securities lending data--commercial securities lending data as
well as forthcoming Rule 10c-1a data.\561\
---------------------------------------------------------------------------

\559\ One reason for this is that the ``permitted purpose
requirement'' of the Board of Governors of the Federal Reserve
System's Regulation T, which broadly governs the lending activities
of broker-dealers, specifies that a broker dealer may generally
borrow or lend U.S. securities from or to a (non-broker-dealer)
customer solely ``for the purpose of making delivery of the
securities in the case of short sales, failure to receive securities
required to be delivered, or other similar situations,'' unless an
exemption applies. See 12 CFR 220.10(a).
\560\ Some research has used stock lending data as a proxy for
actual short sales. See, e.g., Oliver Wyman, The Effects of Short
Selling Public Disclosure of Individual Positions on Equity Markets,
Alternative Investment Management Association (Feb. 2011), available
at https://www.managedfunds.org/industry-resources/industry-research/the-effects-of-short-selling-public-disclosure-of-individual-positions-on-equity-markets/.
\561\ While the adoption of Rule 10c-1a occurred before the
adoption of Rule 13f-2, and Rule 10c-1a has certain intermediate
compliance dates related to FINRA rulemaking that precede Rule 13f-2
compliance dates, we expect that the reporting and publication of
Rule 13f-2 information will occur before the reporting and
publication of Rule 10c-1a information. See supra Part VI and infra
note 585. Rule 10c-1a is thus part of the baseline for Rule 13f-2,
but significant aspects of Rule 10c-1a will be implemented later.
---------------------------------------------------------------------------

i. Commercial Securities Lending Data
The securities lending industry appears to use commercial
securities lending data widely,\562\ though these data are generally
available only by subscription.\563\ The use of commercial

[[Page 75156]]

security lending data as proxy for economic short interest has several
limitations. These include the fact that commercial vendors of the
securities lending data often impose access restrictions via give-to-
get models. In addition, the data are not comprehensive and are based
on voluntary contributions, which leads to self-selection bias. In this
setting, the entities contributing data are mindful of whether other
entities can access the data. As such, participation rates in data
sharing reflects strategic considerations that may lower the extent of
data shared by each entity, reducing the information content of the
pool of data collected by each vendor.
---------------------------------------------------------------------------

\562\ Several commercial entities sell data on securities
lending to clients. See, e.g., 2011 Letter from Data Explorers
(hereafter ``Data Explorers Letter'') in response to the request for
comment relating to the proposed study of the cost and benefits of
short selling required by Dodd Frank Act section 417(a)(2) available
at https://www.sec.gov/comments/4-627/4627-152.pdf. As some
commenters have stated, stock lending facilitates short selling.
See, e.g., Speech by Chester Spatt, former Chief Economist of the
SEC (Apr. 20, 2007), available at https://www.sec.gov/news/speech/2007/spch042007css.htm. The information sold by vendors may include
volume of loans, lending costs, and the percentage of available
stock out on loan.
\563\ See DERA 417(a)(2) Study at 22-23. See also Rule 10c-a,
Part IX.B.5.
---------------------------------------------------------------------------

The data for securities lending is potentially biased \564\--either
containing information about the wholesale market or the customer
market, but not both, making it difficult for a given market
participants to obtain comprehensive security lending information from
one source. Furthermore, even the cumulative data provided by vendors
is still not be comprehensive, primarily because it is based on
voluntary data contributions.\565\ The reliance on voluntary data
contributions increases the likelihood that data are missing in a non-
random manner which can introduce biases into the data. To this end,
the existing data accessible by an individual market participant may
not accurately proxy short selling activity.
---------------------------------------------------------------------------

\564\ For example, while the Commission believes that certain
currently available securities lending data products may be biased
due to missing observations, the extent of the biases cannot be
quantified as the data that would be needed to assess the extent of
the bias are missing.
\565\ Voluntary data contributions are provided either through
customer market surveys or using a give-to-get model. The Commission
believes that both give-to-get and customer market survey data lack
comprehensiveness, as it is unlikely that the full universe of
lending programs and borrowers contribute all data to any given data
vendor. The voluntary nature of submissions to both give-to-get and
customer market survey data may mean that some data may be withheld.
Market participants that choose not to disclose their data to the
commercial data vendors likely make that choice because it is in
their strategic interest not to disclose, resulting in nonrandom
omissions. These omissions likely insert bias into the commercial
databases.
---------------------------------------------------------------------------

Existing commercial securities lending data only provide a noisy
proxy of short sentiment. This is because current commercial securities
lending data originates from either surveys of a subset of asset
managers about their securities lending experience, or it comes from
give-to-get arrangements where those involved in securities lending
must give data to the data providers in order to be able access data
from the data providers. Because the survey data are not comprehensive
it can only provide a noisy proxy of actual short sentiment. The give-
to-get data also provides only a noisy proxy because it too relies on
voluntary data submissions. It is also generally limited to information
about loans from lending programs to broker dealers (``Wholesale
Loans''), which are made largely to facilitate clearing and settlement
on a net basis at a clearing broker, rather than by transaction or
position.\566\ Thus, Wholesale Loans are not traceable to individual
short sellers. Further, the Commission understands that broker-dealers
will usually source shares to meet their net clearing and settlement
requirements from other sources, such as their own inventory or
customer margin accounts, before engaging in Wholesale Loans. Thus,
current commercial securities lending data serve only as an imperfect
measure of short sentiment.
---------------------------------------------------------------------------

\566\ See Rule 10c-1a, Part IX.B.2 for a more detailed
discussion.
---------------------------------------------------------------------------

ii. Rule 10c-1a Data
On October 13, 2023, the Commission adopted Rule 10c-1a.\567\ Rule
10c-1a requires that the data elements in paragraph (c) of Rule 10c-1a,
except for the size of the loan, are required to be made publicly
available by an RNSA not later than the morning of the business day
immediately after the covered securities loan is effected. Rule 10c-1a
requires that the size of the loan be made publicly available by an
RNSA on the twentieth day immediately after the covered securities loan
is effected. In addition, Rule 10c-1a requires covered persons to
report to an RNSA the legal name of each party to the loan (lender,
borrower, and intermediary) and that an RNSA keep such information
confidential. Next-day summary volume information will indicate the
magnitude but not the direction of the activity, such that loan
decreases are added to, not subtracted from, loan increases. Therefore,
these data will not allow a viewer to discern between increases in
aggregate short positions and decreases of aggregate short positions.
---------------------------------------------------------------------------

\567\ Rule 10c-1a will provide the Commission and market
participants with access to comprehensive securities lending data
market data. See Rule 10c-1a; see also supra note 561.
---------------------------------------------------------------------------

Because loans to end-borrowers are usually made to facilitate short
sales,\568\ these loans relate very closely to those customers' short
positions. By aggregating the total amount of shares on loan in the
``customer'' category, market participants could likely estimate
outstanding short interest with considerable accuracy, though with an
approximately one-month delay.\569\ Additionally, since each loan
likely relates to a unique market participant, the Rule 10c-1a data
will provide an indication of the distribution of short sentiment--that
is, whether short interest is concentrated on a few short sellers with
large positions, or whether it is spread out over many short
sellers.\570\ Examining the change in the size of a loan from the
reported data can also indicate when individual market participants
increased or decreased their short positions, albeit with an
approximate one-month delay.
---------------------------------------------------------------------------

\568\ See infra Part VIII.C.2.
\569\ While most loans that facilitate short sales likely come
from this category of `customer' loans, not all will. Some large
market participants do not use broker dealers as an intermediary
when sourcing loans, rather they maintain relationships directly
with lending programs to source shares when they wish to short sale.
These transactions would show up in the data as loans to ``Other''
entities. Lastly, to the extent that a broker dealer borrows shares
to facilitate their own short selling, the loan would show up in the
data as a loan to a broker dealer. However, by summing up all
`customer' and `other' loans, market participants could likely
estimate aggregate short interest with considerable accuracy.
However, only publicly released Form SHO data will isolate large
gross short sale positions of Managers. The delay of 21 days is due
to the settlement of the loan occurring in T+1 manner plus the
publication of the data 20 days after settlement.
\570\ The ability to identify changes in customer short
positions is reduced to the extent that some short sellers, such as
large institutions, have relationships with and are able to spread
their borrowing across multiple prime brokers, which would make
short interest appear less concentrated.
---------------------------------------------------------------------------

Pursuant to Rule 10c-1a, persons will be required to identify the
legal name of all the parties to a securities loan without any delay to
the RNSA. Consequently, regulators can use the data to track the size
of shares on loan, and thus approximate an individual entity's short
position with little delay, potentially even if that entity uses
multiple broker-dealers to source shares. Because loan modifications,
such as increases, decreases, or terminations of loans, must be
reported, regulators can produce running estimates of changes in
individual entity's estimated short positions.
d. CAT Data
Regulators can also extract short sale information from CAT data,
which provide order lifecycle information for stocks and options.\571\
The data contain an order mark that is a part of the ``material terms
of the trade'' that indicates whether an order is a short sale. This
order mark allows regulators to identify traders who are short selling
and to see the order entry and execution times of these short sales.
However, CAT was not designed to track traders'

[[Page 75157]]

positions or changes in those positions, but rather collects
information to analyze trading and order lifecycles. As such, using CAT
data to estimate positions and changes in those positions can be
challenging.
---------------------------------------------------------------------------

\571\ It is important to note that only regulators have access
to CAT data.
---------------------------------------------------------------------------

Theoretically, one could use the order execution information in CAT
data to estimate trader positions and track how those positions change
over time. However, such estimates could be inaccurate due to several
circumstances. First, CAT data do not include information on the long
or short positions held in each account at the time that an Industry
Member initially begins reporting to CAT. Thus, CAT does not provide an
appropriate starting point for building short positions using investor-
specific transaction information. Second, some investors may establish
or cover short positions via other means that are not CAT-reportable
events, for example: secondary offering transactions; option
assignments; option exercises; conversions; or ETF creations and
redemptions. Thus, there are activities that affect positions that are
not contained in CAT in any capacity.
While CAT is not designed to track positions, CAT data can be used
in very limited and specific circumstances to offer rough position
estimates. When focused on one or few accounts, estimating positions,
though potentially inaccurate, can be manageable. However, using
transaction information to track positions across a broad set of
positions is inefficient. Even in situations in which the above
limitations do not apply, the use of CAT data to estimate short
positions and changes in those positions for all or a large set of
accounts is inefficient and would require a considerable amount of
processing power, which would take time and reduce the processing power
available for other CAT queries. This hinders the Commission's
estimation of short positions in a timely fashion.
Other than the inefficient means of estimating positions described
above, CAT does not distinguish buy orders that establish a long
position from those that cover, and therefore reduce, a short position.
While Commission staff were able to identify some short covering
activity during the volatile period in January 2021, due to the
difficulties described above, the staff analyzing the volatility
associated with meme stocks could not easily identify short covering
activity using CAT data alone and was thus hindered in their
reconstruction of key events.\572\
---------------------------------------------------------------------------

\572\ See Staff Report on Equity and Options Market Structure
Conditions in Early 2021, SEC (Oct. 14, 2021), available at https://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-early-2021.pdf.
---------------------------------------------------------------------------

Finally, even though CAT data identify short selling by market
makers, the data do not provide information as to whether a broker-
dealer is claiming use of the exception for bona fide market making
from Regulation SHO's locate requirement. Rather, the Commission has to
make individual document requests to obtain such information currently.
The adopted amendment will make this information readily available to
regulators in a uniform electronic format and consolidate it with the
other material terms of orders required to be reported to CAT.
There are 24 national securities exchanges and one national
securities association (FINRA) that are CAT Plan Participants. There
are also 3,501 broker-dealers who have reporting obligations to CAT as
Industry Members.\573\ These Industry Members often use third-party
reporting agents such as service bureaus for CAT reporting.
---------------------------------------------------------------------------

\573\ See supra Part VII.C.4.b for discussion of PRA costs for
broker-dealers due to the CAT amendment. Not all 3,501 broker-
dealers will bear the same costs due to the CAT amendment.
---------------------------------------------------------------------------

e. Exchange Act Form SH
For a ten-month period in 2008 and 2009,\574\ the Commission
required certain Managers to file confidential weekly reports of their
short positions in section 13(f) securities, other than options, on
Exchange Act Form SH, through temporary Rule 10a-3T.\575\ De minimis
short positions of less than 0.25 percent of the class of shares with a
fair market value of less than $10 million were not required to be
reported.\576\ Additionally, only Managers that exercise investment
discretion with respect to accounts holding section 13(f) securities
having an aggregate fair market value of at least $100 million were
required to report. The investment manager was required to report short
positions to the Commission on Form SH on a nonpublic basis on the last
business day of each calendar week immediately following any calendar
week in which it effected short sales,\577\ a more frequent disclosure
interval than the quarterly public reporting of long positions required
on Exchange Act Form 13F.\578\
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\574\ See DERA 417(a)(2) Study at 18, supra Part II.A.3 at 6.
\575\ With respect to each applicable section 13(f) security,
the Form SH filing was required to identify the issuer and CUSIP
number of the relevant security and reflect the manager's start of
day short position, the number and value of securities sold short
during the day, the end of day short position, the largest intraday
short position, and the time of the largest intraday short position.
The reporting requirement was implemented via a series of emergency
orders followed by an interim final temporary rule, Rule 10a-3T.
Exchange Act Release No. 58591 (Sept.18, 2008), 73 FR 55175 (Sept.
24, 2008); Exchange Act Release No. 58591A (Sept. 21, 2008), 73 FR
58987 (Sept. 25, 2008); Exchange Act Release No. 58724 (Oct. 2,
2008), 73 FR 58987 (Oct. 8, 2008); Exchange Act Release No. 58785
(Oct. 15, 2008), 73 FR 61678 (Oct. 17, 2008).
\576\ See Exchange Act Release No. 58591 (Sept.18, 2008), 73 FR
55175 (Sept. 24, 2008).
\577\ See Exchange Act Release No. 58785, 73 FR 61678.
\578\ Id.
---------------------------------------------------------------------------

In addition to the limited and temporary time period during which
disclosure of short positions was required to be reported on Exchange
Act Form SH, even at the regulatory level, the reporting requirements
and data had several drawbacks and limitations. One drawback was that
only Managers who exercised investment discretion with respect to
accounts holding section 13(f) securities having an aggregate fair
market value of at least $100 million were required to file Form SH,
which excluded short-only funds and other large short sellers who did
not file Form 13F. Additionally, the report was costly as Managers
filing Form SH had a weekly reporting requirement. Additionally, data
fields in Form SH including start of day short position, gross number
of securities sold short during the day, and end of day short position
were each subject to the de minimis reporting threshold, which resulted
in unreported data points when only a subset of the fields exceeded the
de minimis threshold. Furthermore, Form SH data were difficult to work
with because they were not validated for errors such as duplicate
entries, missing fields, or positions that were below the de minimis
threshold and therefore did not need to be reported.\579\
---------------------------------------------------------------------------

\579\ See Proposing Release, at 14963 for information on the
methodology and caveats of using Form SH data.
---------------------------------------------------------------------------

5. Competition
Many Managers operate in the investment management industry.\580\
In broad terms, investment management is a highly competitive industry.
Investment managers compete for investors and investor funds. Among the
bases on which Managers compete are returns, fees and costs, trading
strategies, risk management, and the ability to gather information. It
is costly for investment managers to do market research to gain an
informational advantage. Investment managers who own a security have an
advantage over those who do not in that a security owner can trade more
cheaply on

[[Page 75158]]

negative information by simply selling whereas investment managers not
owning the same security must establish some form of short exposure,
such as selling a security short, to capitalize on any negative
information that they have uncovered. Academic research suggests that
when the cost of short selling increases, a security owner's advantage
in terms of being able to profitably trade on gathered information
increases, leading investors not owning a security to engage in less
fundamental research.\581\ The Commission is cognizant of such research
and has taken steps to help ensure that the impact of published data
will be minimized by delaying publication by approximately one month
and anonymizing and aggregating reporting Managers' short position
data.
---------------------------------------------------------------------------

\580\ See supra Part VIII.B.1 for discussion of Institutional
Investment Managers.
\581\ This occurs because if an investor not owning the asset
engages in fundamental research and discovers evidence that a stock
may be overpriced, then it is costly for that investor to act on
that information. This is not true for investors who own the asset
as they can simply sell the shares that they own. See, e.g., Peter
N. Dixon, Why Do Short Selling Bans Increase Adverse Selection and
Decrease Price Efficiency?, 11 (1) The Rev. of Asset Pricing Studies
122-168 (2021).
---------------------------------------------------------------------------

Investment managers, like other investors that could be subject to
Rule 13f-2, also compete by using proprietary trading strategies. They
typically seek to trade in ways that would not expose their strategies
because, if their strategies became known to others, the strategies
could lose value and such Managers could also suffer higher trading
costs. More specifically, other traders could use copycat trading
strategies to try to mimic the Managers' strategy, potentially
competing away the profitability of the strategy or other traders could
anticipate when the Manager might trade, which could result in higher
trading costs for the Manager. Some Managers also compete for returns
by engaging in securities lending whereby assets are lent to other
investors, often short sellers, for a fee. These fees in aggregate can
be substantial.\582\
---------------------------------------------------------------------------

\582\ The securities lending market is large and complex. See
Parts IX.B.1-IX.B.4 of Rule 10c-1a for a more detailed description
of this market and players.
---------------------------------------------------------------------------

The Commission estimates there are 3,501 broker-dealers. These
broker-dealers also compete with each other for order flow. The broker-
dealer industry is a competitive industry with reasonably low barriers
to entry to many segments of the industry. Most trading activity is
concentrated among a small number of large broker-dealers, with
thousands of small broker-dealers competing for niche or regional
segments of the market. To limit costs and make business more viable,
the small broker-dealers often contract with bigger broker-dealers to
handle certain functions, such as clearing and execution, or to update
technology. Larger broker-dealers often enjoy economies of scale over
smaller broker-dealers and compete with each other to service the
smaller broker-dealers who are both their competitors and
customers.\583\ Broker-dealers compete in multiple ways: reputation,
convenience, and fees. Broker-dealers typically pass operating costs
down to their customers in the form of fees.
---------------------------------------------------------------------------

\583\ See Rule 613 Adopting Release.
---------------------------------------------------------------------------

C. Economic Effects \584\
---------------------------------------------------------------------------

\584\ In preparing this economic analysis, the Commission
accounted for the various types of Managers that could be subject to
the reporting requirements. In general, the Commission believes that
the economic effects of the rule are more influenced by the
Managers' investment strategy and motivation for short selling
rather than by the type of Manager that is reporting. Any exceptions
are noted in the analysis. See supra Part VIII.C.1.
---------------------------------------------------------------------------

1. Investor Protection and Market Manipulation
The adopted Rule 13f-2 and CAT amendment will enhance the
Commission's ability to protect investors and investigate market
manipulation by providing a clearer view into the short selling market
and improving the Commission's reconstruction of significant market
events. This in turn may lead to improved identification of
manipulative short selling strategies which may also serve as a
deterrent to would-be manipulators and thus may help prevent
manipulation. It will also improve the Commission's observation of
short sale activity that potentially poses a systemic risk. The
Commission believes that the adoption of Rule 13f-2 and the CAT
amendment will benefit investors by facilitating the Commission's
observation of short selling and will thus help protect investors and
help ensure the sufficiency of information related to short selling in
the market.
The Commission believes that the Rule 13f-2, Form SHO, and the CAT
Amendment will improve regulators' oversight of markets and enhance the
Commission's and SROs' reconstruction of significant market events by
providing a clearer view into the role that short selling plays in
market events of interest. Specifically, the Commission could have used
Form SHO data combined with other data to reconstruct market events and
better understand the link between trading activity of large short
seller and contemporaneous price volatility during the recent
volatility associated with meme stocks. For example, while short
sellers as a whole were exiting their positions during the period of
heightened volatility, large short sellers may have been engaging in
trading behavior that was distinct from other short sellers.
The recent adoption of Rule 10c-1a will further enhance the
usefulness of adopted Form SHO.\585\ As another source of data covering
the short selling market, the Commission may use Rule 10c-1a data
combined with Form SHO data in an attempt to match securities lending
with actual short positions taken. While the timing of the data being
received may be asynchronous, Form SHO and Rule 10c-1a data sources
will have a natural relationship with each other. This combination of
data can be useful for market reconstructions, but also useful in
detecting activities such as naked short selling or other potential
violations.
---------------------------------------------------------------------------

\585\ Rule 10c-1a, which was adopted prior to Rule 13f-2,
includes multiple compliance dates, and certain disclosures required
by Rule 13f-2 may be implemented before certain of Rule 10c-1a's
compliance dates. Due to this uncertainty, the Commission describes
the effects of Rule 13f-2 and the CAT amendment as coming into
existence prior to those associated with Rule 10c-1a but
acknowledges that there may be a period in which this is not true.
The beneficial combined effects will not materialize until the
disclosure requirements of both rules are implemented. See infra
note 615.
---------------------------------------------------------------------------

Hypothetically, if Form SHO data had been available to the
Commission at the time of the market events of January 2021, the
Commission could have used these data to examine the short selling
behavior of individual large short sellers. Additionally, because short
positions often take some time to create, the Commission could have
attempted to identify individual short sellers with large short
positions in the various meme stocks in January 2021 based on the most
recent reports; the Commission could then have used CAT data to better
understand how these short sellers traded during the heightened
volatility.\586\ One commenter stated that the lack of transparency
into short positions did not just hamper the SEC's understanding of
these events as they unfolded but, ``. . . may also be interfering with
the SEC's and market

[[Page 75159]]

observers' ability to say with confidence what happened in
retrospect.'' \587\ The Commission agrees that more data, as is being
generated by the adoption of this rule, would have aided the Commission
in analysis of the events of January 2021.
---------------------------------------------------------------------------

\586\ Some academics have critiqued the Commission Staff's
GameStop report, the Report on Equity and Options Market Structure
Conditions in Early 2021, available at https://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-early-2021.pdf, and some of its methods, which were driven by data
availability. See Joshua Mitts, Robert Battalio, Jonathan Brogaard,
Matthew Cain, Lawrence Glosten, and Brent Kochuba, A Report by the
Ad Hoc Academic Committee on Equity and Options Market Structure
Conditions in Early 2021 (working paper) (2022), available at
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4030179.
\587\ See Better Markets Letter at 7.
---------------------------------------------------------------------------

As noted above in Part VIII.B, Form SHO data will provide the
Commission with data that are additive rather than duplicative.\588\
After implementation of Rule 13f-2, the activity data provided in Form
SHO will allow the Commission to observe how large short sellers
respond to the heightened volatility, albeit with a time lag, due to
the filing deadline. Specifically, the Commission will be able to
observe more precisely which days reporting short sellers most actively
increase or decrease their short positions and correlate this activity
to market conditions on those days.
---------------------------------------------------------------------------

\588\ See supra Part VIII.B for discussion.
---------------------------------------------------------------------------

Analysis of Form SHO data during periods of high volatility might
help the Commission maintain fair and orderly markets by highlighting
key economic channels and mechanisms through which short selling could
both impact and be impacted by periods of volatility. This information
can, in turn, allow the Commission to more specifically tailor
responses to similar or related events in the future. While the data
provided by the CAT amendment will be visible to the Commission
relatively quickly, the Form SHO data will only be available following
a lag of at least two weeks.\589\ Thus, while Form SHO data will be
useful in market reconstruction, it will have limitations in its
timeliness.
---------------------------------------------------------------------------

\589\ Form SHO is required to be reported 14 days after the end
of the month. Thus, trades happening in the first two weeks of the
month will not be reported for more than a month.
---------------------------------------------------------------------------

The bona fide market making information from the CAT Amendment will
facilitate regulatory analysis of the use of the bona fide market
making exceptions to Regulation SHO.\590\ In particular, this
information will provide regulators investigating potential Regulation
SHO violations with clearer evidence regarding whether a market maker
was relying on a bona fide market making exception. This might save a
significant amount of time during an investigation. Having regular
access to these data will provide the Commission with further insight
into whether the exceptions for bona fide market making in Regulation
SHO Rules 203 and 204 are being used appropriately, which may assist in
assessing compliance with Regulation SHO.
---------------------------------------------------------------------------

\590\ Two Regulation SHO rules include exceptions for bona fide
market making. Rule 203(b)(2)(iii) exempts market makers selling
short in connection with bona fide market making activities from the
requirement that a short seller must either borrow or have
reasonable grounds to believe he can borrow a security in time for
delivery prior to effecting a short sale. See 17 CFR
242.203(b)(2)(iii). Rule 204(a)(3) provides that a failure to
deliver positions attributable to bona fide market making activities
by registered market makers, options market makers, or other market
makers obligated to quote in the over-the-counter markets, must be
closed out by no later than the beginning of regular trading hours
on the third consecutive settlement day following the settlement
date (T+4), rather than the settlement day following the settlement
date (T+1). See 17 CFR 242.204(a)(3).
---------------------------------------------------------------------------

The bona fide market making information might improve regulators'
ability to interpret certain information in market reconstructions.
Market reconstructions can sometimes benefit from regulators knowing
when certain activity is either directional or market neutral because
the motives and profitability of such trading types are different. The
bona fide market making information will help regulators separate short
selling that represents market makers' liquidity provision to
facilitate investor demand from other short selling, including other
market maker short selling. Since such short selling is more likely to
be in response to customer demand, it is less likely to signify that
the short seller anticipates a price decline, relative to cases in
which the short seller is trading directionally.
Additionally, the data provided by adopted Rule 13f-2 and the CAT
amendment may improve the Commission's ability and effectiveness in
detecting certain types of fraud. Form SHO data will provide the
Commission flags that may signal potential fraud during an examination.
Additionally, the enhanced CAT data will provide the Commission with
regular access to improved information with which to examine potential
instances of fraud without needing to ask broker-dealers for
information.
Enhanced fraud detection by the Commission may also help deter
fraud, resulting in improved price efficiency and market quality. Some
market participants and academics have raised concerns that short
selling may in some instances offer the potential for stock price
manipulation, including ``short and distort'' campaigns.\591\ In
``short and distort'' strategies, which are illegal, the goal of
manipulators is to first short a stock and then engage in a campaign to
spread unverified bad news about the stock with the objective of
panicking other investors into selling their stock in order to drive
the price down.\592\ If a ``short and distort'' campaign is suspected,
then detecting this behavior using the position and activity data in
Form SHO will be easier than using current data.
---------------------------------------------------------------------------

\591\ See, e.g., comment letters submitted with regards to Short
Sale Reporting Study Required by Dodd-Frank Act section 417(a)(2):
Naphtali M. Hamlet (May 6, 2011); Jan Sargent (May 6, 2011); Lee R.
Donais, President and CEO, L.R. Donais Company (May 8, 2011); Joseph
A. Scilla (May 9, 2011); Jane M. Reichold (May 17, 2011); John
Gensen (May 18, 2011); Victor Y. Wong (May 20, 2011); Kevin Rentzsch
(May 24, 2011); Lynn C. Jasper (May 27, 2011); Donald L. Eddy (May
28, 2011); Al S. (June 10, 2011); Jeffrey D. Morgan, President and
CEO, National Investor Relations Institute, at 3 (June 21, 2011)
(``NIRI''); Professor James J. Angel, at 2 (June 24, 2011); and
Dennis Nixon, CEO and Chairman, International Bancshares
Corporation, at 1 (July 18, 2011). All letters are available at
https://www.sec.gov/comments/4-627/4-627.shtml.
\592\ If 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. Short sellers could also engage
in price manipulations by systematically taking short positions in
one firm while taking long positions in the competitor. See Bodie
Zvi, Alex Kane, and Alan J. Marcus, Investments and Portfolio
Management, McGraw Hill Education (2011). See also Rafael Matta,
Sergio H. Rocha, and Paulo Vaz, Predatory Stock Price Manipulation,
available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3551282.
---------------------------------------------------------------------------

Short and distort campaigns are more likely to occur in stocks with
lower market capitalizations with less public information.\593\
Consequently, among these stocks, it may not take a very large short
position in dollar terms to reach the daily average 2.5 percent of
shares outstanding over the preceding calendar month threshold for
smaller reporting issuers or the $500,000 or more at the end of a
settlement day threshold for non-reporting company issuers.\594\ As a
result, it is likely that an entity engaging in such a practice will be
required to report Form SHO data.\595\ Consequently,

[[Page 75160]]

if ``short and distort'' type behavior is suspected, then the
Commission will be more likely to identify Managers with large short
positions and thus quickly focus their inquiries on entities that could
potentially profit from manipulation. The Commission could then match
estimated ``buy to cover'' trading on individual days to statements or
other actions of the investor which may indicate that the investor was
engaging in such behavior.\596\ In addition, the Commission could use
CAT data to further investigate the trading activity of the alleged
manipulator. CAT data would be used to corroborate Form SHO reporting
to CAT reported transactions. Using the identified manager's data in
CAT, the Commission could see all CAT reportable activity, but will not
be able to see other activity such as options exercises or
participation in secondary offerings from an issuer.
---------------------------------------------------------------------------

\593\ One commenter stated that biotechnology companies, 90% of
which have market capitalizations that would qualify as small-cap or
micro-cap stocks, face a disproportionately high share of short
positions. The commenter believes that biotechnology firms are
disproportionately targeted by short sellers for multiple reasons.
First, because biotechnology companies cannot disclose interim data
until validated, the time gap between milestone announcements makes
these stocks targets for ``short-and-distort'' campaigns. Second,
the commenter stated that short sellers of biotechnology firms will
challenge patent claims in order to drive their stock prices lower,
which makes short positions on these stocks more valuable. The
commenter supports the Commission's inclusion of the 2.5% threshold,
which would be reached before the $10 million daily average
threshold for the majority of biotechnology firms. See Bio Letter at
5-8.
\594\ Academic research has found that the average short
interest in stocks targeted by activist short sellers is about 10%,
while it is only 4% for non-targeted firms. Consistent with high
information asymmetries, targeted firms also appear to have wider
bid-ask spreads and higher disagreement among analysts. See W. Zhao,
Activist Short-Selling and Corporate Opacity (Working Paper) (2020),
available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2852041.
\595\ See, e.g., Y.T.F. Wong and W. Zhao, Post-Apocalyptic: The
Real Consequences of Activist Short-Selling. (Working Paper) (2017),
available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2941015. Several commenters agreed that the
2.5% threshold for Rule 13f-2 was important because it protects
firms with lower market capitalizations. See, e.g., BIO Letter at 9.
\596\ ``Buy to cover'' activity would be inferred from position
changes reported on Form SHO. This method is only a proxy for ``buy
to cover'' information. Specifically, the Commission would be
assuming that changes in position came from ``buy to cover''
activity, though there are other mechanisms which could change a
Manager's net position that do not occur from ``buy to cover''
transactions. Further, Form SHO will not show intraday short sales
and buying to cover if the amounts are equal, as the net position
will not change.
---------------------------------------------------------------------------

Enhanced oversight due to the adopted rule and amendment could also
provide increased protection from other sources of harm caused by
manipulative short sale activity. First, if firm manager decision-
making is influenced by shifts in stock prices, as one theoretical
study suggests,\597\ then short sellers could seek to drive down stock
prices when profitable projects are announced, which may cause firm
managers to reassess these projects. Doing so may lead to worse
managerial decision making and lower stock prices. Second, another
theoretical study argues that due to high levels of leverage and
interconnectedness in the finance industry, even small declines in
stock prices due to manipulative short sellers could ripple through the
financial system with large effects.\598\ While manipulation is
difficult to verify, should it be suspected, such activity might be
more easily identified with Form SHO positions and activity data. The
positions data will allow the Commission to more quickly identify
individuals with large short positions and then use the activity to
identify what data to gather, including CAT data to investigate their
trading behavior to look for signs of manipulation. Improved detection
capacity may also deter manipulative behavior due to increased fear of
detection, potentially leading to an overall decline in fraudulent
activity.\599\
---------------------------------------------------------------------------

\597\ See I. Goldstein and A. Guembel, Manipulation and the
Allocational Role of Prices, 75 (1) The Rev. of Econ. Studies 133-
164 (2008).
\598\ See Markus K. Brunnermeier and Martin Oehmke, Predatory
Short Selling, 18 (6) Rev. of Fin. 2153-2195 (2014). Similarly, some
have also stated that short sellers may have played a role in the
stock market crash at the beginning of the Great Depression. See,
e.g., Jonathan R. Macey, Mark Mitchell, and Jeffry Netter,
Restrictions on Short Sales: An Analysis of the Uptick Rule and its
Role in View of the October 1987 Stock Market Crash, 74 Cornell L.
Rev 799, 801-802 (1989) (collecting reports of such allegations).
\599\ See letters from Christine Lambrechts (hereafter
``Lambrechts Letter''), available at https://www.sec.gov/comments/4-627/4627-14.htm; see also International Association of Small Broker
Dealers and Advisor, available at https://www.sec.gov/comments/4-627/4627-109.pdf. See NIRI Letter, available at https://www.sec.gov/comments/4-627/4627-134.pdf.
---------------------------------------------------------------------------

Publicly releasing aggregated information about large short
positions may, in some instances, increase the risk of trading behavior
that is harmful to short sellers, including orchestrated short
squeezes. More specifically, to the extent that Managers are still
holding their short positions when the data becomes public, the
Commission believes that the information disclosed pursuant to Rule
13f-2 and the disclosures Form SHO requires also might, in some cases,
potentially facilitate manipulative strategies targeting short sellers,
such as short squeezes.
However, the Commission has sought to reduce this risk by releasing
only aggregated and anonymized data. Several commenters agreed that
only aggregated and anonymized data should be published by the
Commission in order to reduce the likelihood of short squeezes and
chilling short sale activity, the latter of which could harm stock
price efficiency and market liquidity.\600\ In contrast, however,
multiple commenters stated that individual Manager's positions should
be publicly disclosed in order to uncover hidden short positions, which
one commenter stated pose risks to investors and the markets.\601\ The
Commission has sought to balance the costs and benefits of Rule 13f-2
and Form SHO by collecting Manager-specific data, which should provide
the Commission with improved detection of manipulative and potentially
destabilizing activity, while publicly releasing only aggregated,
anonymized data, which should reduce the likelihood of short squeezes
and copycat behavior but still increase the transparency of large short
sale activity.\602\
---------------------------------------------------------------------------

\600\ For discussion of data aggregation, see supra Part II.C.
See also MFA Letter, at 18; SIFMA Letter, at 22; AIMA Letter, at 5
comment letters of supporters.
\601\ This commenter stated that reducing or eliminating the
reporting thresholds to Form SHO would provide benefits. See Better
Markets Letter, at 13. Several retail investor commenters also said
that the reporting thresholds to Form SHO should be reduced or
eliminated. See supra note 25.
\602\ One commenter stated it was confusing that the Commission
believes that the public release of Form SHO may give opportunities
to orchestrate short squeezes, but at the same time, also help
detect short squeezes. See Two Sigma Letter, at 10-12. While
publicly released Form SHO data may, in some cases, increase the
opportunity to orchestrate short squeezes, the Commission has
reduced this risk by only releasing, aggregated, anonymized data.
Moreover, this risk is further reduced by the Commission's ability
to utilize disaggregated, Manager-identified short sale data in
order to increase its detection of short squeezes and other
manipulative behavior.
---------------------------------------------------------------------------

The Commission recognizes that the position size thresholds that
underlie publicly released information may lead to the risk of Managers
being identified by the public. The Commission estimates that 39
percent of stocks reported on Form SHO would only have one Manager
above the reporting Threshold A.\603\ By focusing on stocks in which
market participants can ascertain that only one Manager exceeded the
threshold,\604\ combined with a Manager's posts on social media or
information discovered by a private investigator, market participants
may be able to identify the Manager holding the short position.\605\ As
such, the limited

[[Page 75161]]

number of reporters potentially risks shining a spotlight on the few
Managers with large short positions.\606\ However, due to the delay
before publicly releasing the data, public Form SHO information will
not be as up-to-date and thus may not as accurately reflect current
short positions.\607\ Thus, efforts to orchestrate a short squeeze
based on the public Form SHO data could result in losses to the
initiators of the short squeeze if the short positions they target no
longer exist.\608\ Based on analysis using Form SH data, the Commission
expects that most, but not all, of the short positions leading to
reporting on Form SHO will be closed by the time that the aggregated
Form SHO data are released.\609\ An additional factor that may help
mitigate the risk of a short squeeze due to the public release of Form
SHO data is the fact that non-public Form SHO data, in coordination
with CAT data, will improve the SEC's ability to detect short squeeze
activity, which may deter some market participants from seeking to
orchestrate a short squeeze.
---------------------------------------------------------------------------

\603\ Based on analysis of Form SH data. See Proposing Release,
at 14963. Commenters questioned the use of Form SH data in this and
other contexts. See infra Box 1: Use of Form SH Data for responses
to comments on the use of these data.
\604\ In some cases, identifying which equity securities
reported to the public via Form SHO data had only one Manager
reporting may not be difficult. For example, if the aggregated short
positions reported in an equity security were less than $20 million,
it could be estimated that one Manager had a short position of at
least $10 million average over the month. However, this estimation
could be incorrect if Managers' end of month gross short position
differs significantly from their average gross short position over
the month. This estimation could be further honed by looking at
daily data to see changes in daily short positions to better
estimate the size of the position, and thus the number of Managers.
\605\ For example, one issuer, upon learning that short sellers
had taken a large short position in the issuer, reportedly sent a
letter to all shareholders urging them to request physical custody
of their shares from their broker-dealers in an apparent attempt to
disrupt securities lending which supports short selling. This
strategy appeared to work initially as the share price increased by
nearly 50% in the subsequent three weeks. The issuer also hired
private investigators to determine who was behind the short selling
and filed suit against a well-known short seller. The issuer,
however, entered bankruptcy less than a year later. The bankruptcy
courts ruled that the issuer defrauded investors. See G. Weiss, The
Secret World of Short-Sellers, Business Week, 62a (Aug. 5, 1996).
See also Owen A. Lamont, Go Down Fighting: Short Sellers vs. Firms,
2 (1) The Rev. of Asset Pricing Studies 1-30 (2012).
\606\ Though the count of Managers filing Form SHO in any
particular equity security may sometimes be able to be estimated
with some accuracy, the identities of Managers will not be disclosed
by Form SHO data.
\607\ Analysis of Form SH data found that short positions were
held at or above the $10 million or 2.5% thresholds only for an
average of 9.85 days after the end of each month. See Proposing
Release, at 14963 for information on the methodology and caveats of
using Form SH data. Commenters questioned the use of Form SH data in
this and other contexts. See infra Box 1: Use of Form SH Data for
responses to comments on the use of these data.
\608\ That is because the short position has already been closed
and the organizers of the short squeeze are incorrectly assuming the
Manager still has an open short position. Depending on the Manager's
desired length of time of the short position, the public version of
Form SHO data may still accurately portray the aggregated short
position in a given equity security. However, those basing their
decisions on public Form SHO data will not know whether the Managers
underlying the aggregated short positions in Form SHO data have
closed out their positions within the two weeks publication delay.
Other data sources, combined with Form SHO data, can be used in an
attempt to discover if the position is closed out, but those are
also on a delayed basis.
\609\ See infra note 622 for a discussion on the Commission's
estimates on how long Managers hold short positions. See also infra
note 629 for more information on short sellers that do hold their
positions for longer periods of time. Commenters questioned the use
of Form SH data in this and other contexts. See infra Box 1: Use of
Form SH Data for responses to comments on the use of these data.
---------------------------------------------------------------------------

Having detailed confidential information about which Managers
currently hold large positions might also help the Commission observe
potential systemic risk concerns regarding short selling. Large and
concentrated short positions have the potential to increase systemic
risk. As discussed previously, unlike long transactions, short selling
places an investor at risk of losing significantly more than the
investor's initial investment, should the value of the underlying asset
increase significantly. Even temporary spikes in asset value can lead
to significant losses--by triggering margin calls or even position
liquidations if capital requirements cannot be met.\610\ If the value
of an underlying asset increases, a short seller may be required to
post additional collateral to meet margin requirements. If the investor
is unable to do so, then the investor's broker-dealer may liquidate the
investor's position with existing collateral leading to steep losses
for the short seller. Consequently, it may be more difficult for a
short seller to ride out periods of turbulence than a long seller.
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\610\ Due to imperfect information and market frictions, a short
seller who ``does not have access to additional capital when
security prices diverge . . . may be forced to prematurely unwind
the position and incur a loss[.]'' See, e.g., Mark Mitchell, Todd
Pulvino, and Erik Stafford, Limited Arbitrage in Equity Markets, 57
J. of Fin. 551-584 (2002). See also, e.g., Andrei Shleifer and
Robert W. Vishny, The Limits of Arbitrage, 52 J. of Fin. 35-55
(1997) and Denis Gromb and Dimitri Vayanos, Limits of Arbitrage, 2
Annu. Rev. Fin. Econ. 251-275 (2010) (citations therein).
---------------------------------------------------------------------------

One commenter stated they were unaware of cases of short selling
causing systemic harm.\611\ However, the potential instability that the
Commission wishes to detect includes spillovers from events in one
asset, such as a particular equity security, to the market for another
asset.
---------------------------------------------------------------------------

\611\ See SBAI Letter at 4.
---------------------------------------------------------------------------

Manager level short position data of individuals with large short
positions might allow the Commission to better observe these positions,
study, and more appropriately respond to any market events that arise.
For example, if the Commission had Form SHO data during the meme stock
events of January 2021 then it would have had a clearer view as to
which Managers held large short positions prior to the volatility event
and thus which Managers could have been at greatest risk of suffering
significant harm from a short squeeze. However, the ability of the
Commission to respond to market events is likely impacted by the
timeliness of the short sale data that it receives. One commenter
stated that due to the delay in reporting of Form SHO, the data would
not be useful to the Commission to respond to market events.\612\ While
the delay will not aid the Commission in responding in real-time to
market events, it does aid the Commission in developing responses to
events over a longer time horizon. Regulatory changes rarely happen in
real time and involve careful analysis prior to implementation. The
Commission has chosen a reporting regime which balances the benefits of
more frequent and timely data with the costs incurred by Managers
having to report more quickly, including higher explicit reporting
costs as well as heightened risks of short squeezes and copycat
trading.
---------------------------------------------------------------------------

\612\ See SBAI Letter at 2.
---------------------------------------------------------------------------

All the effects, positive and negative, associated with the data
collected by Rule 13f-2 discussed in this section will be limited by
data accuracy. Upon filing, Form SHO will be checked for technical
errors but not for the accuracy of the position and activity data in
the Form. If Managers make mistakes in their calculations, such
mistakes will reduce the utility of the data. However, the amendment
process will require Managers to amend filings when they discover
errors, thus promoting the accuracy of the information.
2. Effects on Stock Price Efficiency
The Commission believes that Rule 13f-2 and Form SHO may have
uncertain effects on stock price efficiency.\613\ The uncertain effects
on price efficiency stems from increased transparency of short sales
generally increasing efficiency, whereas increased transparency might
also discourage potential short sellers from gathering information--
which harms price efficiency. This section discusses both the concept
of price efficiency and the positive and negative impacts that adopted
Rule13f-2 and the CAT amendment may have on price efficiency.
---------------------------------------------------------------------------

\613\ See infra Part VIII.D.1 for additional discussion of the
effect of adopted Rule 13f-2 and the CAT amendment on efficiency.
---------------------------------------------------------------------------

a. Comparisons to Other Public Short Selling Data
The publicly released aggregated data from Form SHO will provide
information to market participants about the aggregate activities of
large short sellers--with a planned lag of approximately fourteen days
from the end of the filing deadline, which is fourteen days after the
last day of the month.\614\ Existing short selling data, such as the
FINRA short interest data, is timelier than the data that will be

[[Page 75162]]

filed pursuant to Rule 13f-2 and Form SHO. Forthcoming information from
Rule 10c-1a data, which could be used to estimate short interest, is
also expected to be timelier than Rule 13f-2 and Form SHO data.\615\
Nevertheless, Rule 13f-2 and Form SHO data will provide information on
short sale behavior that is not available from other short sale data
sources. For example, while FINRA short interest data includes short
interest for all short sales known to clearing broker-dealers, it does
not provide the Commission or the public with daily information on
short sellers' activities. In contrast, Form SHO data will provide
daily information on gross short positions of Managers that exceed
Reporting Thresholds.\616\ Moreover, while Rule 10c-1a data will
disseminate to the public anonymized transactions-by-transaction
securities lending data by all market participants, it does not allow
for an accounting of the timing of aggregate short sales conducted by
Managers, nor does it reveal aggregate short positions of Managers with
large short positions, as will the data from publicly available Form
SHO.\617\ Thus with the adoption of Rule 13f-2 and Form SHO, market
participants, who will only see anonymized data, will have increased
awareness into the activity of Managers with large short sale
positions.\618\ These benefits are afforded by the adoption of Rule
13f-2 and the required reporting of Form SHO.
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\614\ Thus, it will be a one-month delay after the last day of
the month of data being reported. See supra Part II.B.3 for more
information on the delay of public dissemination of Form SHO data.
\615\ We expect that the reporting and publication of Rule 13f-2
information will occur before the reporting and publication of Rule
10c-1 information. See supra note 531. Reporting and disclosure
under Rule 13f-2 will provide more information over current short
selling data until reporting and disclosure under Rule 10c-1a are
fully implemented. This could temporarily magnify the benefits and
costs of many of the effects discussed in this section and elsewhere
in the Economic Analysis.
\616\ The Commission will anonymize these data before they are
publicly disseminated.
\617\ For example, a Manager could accumulate a large short
position in a particular security using securities loans from
multiple prime brokers. Each of these loans will be reported as a
distinct Rule 10c-1a securities loan, and observers may not be able
to ascertain whether they are part of a single Manager's short
position. As a result, a large securities loan in Rule 10c-1a data
may not represent a single large position reportable under Rule 13f-
2.
\618\ The Commission will have enhanced data regarding Managers
and trading activity of stocks in which thresholds are triggered.
See supra Part VIII.C.1 for discussion.
---------------------------------------------------------------------------

There is overlap between the information about stock fundamentals
contained in FINRA short interest data, forthcoming Rule 10c-1a data,
and the data that will be aggregated from Form SHO filings. However,
the information in Form SHO filings provides data on Managers,
including their aggregated daily net changes in positions.\619\ Thus,
Form SHO will increase the information available to investors about
past bearish sentiment in the market on a specific time frame. For
example, Form SHO data could be combined with FINRA short interest data
to calculate the proportion of short interest comprised of Managers
with substantial positions. Furthermore, the accompanying activity
information of Form SHO will provide market participants with an
enhanced view of short interest and securities lending as well as
increased insight on how the short sale activity measured by these data
series change over time. Further, the use of the last day of the month
as the reference month for the Form SHO reports will allow for a direct
comparison of the Form SHO data to the FINRA short interest data. For
example, market participants might search for correlations between
significant increases or decreases in short positions found in Form SHO
data with corporate events or announcements to gather a more precise
view of how the market views corporate actions or events and which
events contributed to the FINRA final short interest tally at the end
of the month. While Rule 10c-1a data could also be used with FINRA
short interest data for such analysis, Form SHO data will more clearly
reveal how Managers with large gross short positions view these actions
or events. Thus, market participants and regulators will be able to use
Form SHO data along with FINRA short interest data to assess the degree
to which short interest is concentrated among Managers with large
positions. It will also allow regulators to better assess which
securities face the greatest risk of short squeezes and other
manipulative strategies.
---------------------------------------------------------------------------

\619\ This is in contrast to other data sources, which only
provide data on securities such as the short interest in a
particular security (i.e., FINRA short interest) or the volume of
securities lent (i.e., Rule 10c-1a data).
---------------------------------------------------------------------------

Form SHO data could also be combined with forthcoming Rule 10c-1a
data in order to assess the degree to which securities lending is
widely dispersed among market participants or concentrated among
Managers who filed Form SHO.
b. Potential Improvements to Price Efficiency
Rule 13f-2 and Form SHO may also improve price efficiency if they
mitigate fraud as discussed in Part VIII.C.1. Fraud is inherently non-
efficient trading and harms price efficiency because a fraudster's
motive is to create a deviation of a firm's value from fundamentals and
to profit from this deviation. Thus, to the extent that fraudulent
trading, such as short and distort campaigns, are limited by
regulator's access to the data provided by Form SHO, Rule 13f-2 will
result in improved price efficiency.
More generally, the impact of Form SHO on price efficiency will be
commensurate with the degree to which aggregated Form SHO data are
newer or more timely than other publicly available short selling
information and useful for valuing stocks. Price efficiency (also known
as market efficiency) refers to how accurately prices reflect available
information relevant to the value of the asset.\620\ This information
may allow market participants to more effectively make trading
decisions and manage risk--increasing price efficiency. For example, if
aggregate Manager short positions provide better info on bearish
sentiment, then prices could react to updated Form SHO information on
bearish sentiment.\621\ Although the majority of Managers' short
positions may be closed by the time the aggregated data from Form SHO
will be made public due to the lag in reporting and public
dissemination, a portion of the short positions may still be open.\622\
Information on the aggregate size and activity of positions that remain
open could be combined with FINRA short interest and forthcoming Rule
10c-1a data to estimate the proportion of short positions held by large
short sellers. If this proportion is not yet reflected in prices,
prices will adjust upon publication.
---------------------------------------------------------------------------

\620\ See, e.g., Eugene Fama, Efficient Capital Markets II,
46(5) J. Fin. 1575-1617 (1991).
\621\ See, e.g., A. Senchack and L. Starks, Short-Sale
Restrictions and Market Reaction to Short-Interest Announcements, 28
J. of Fin. and Quantitative Analysis 177-194 (1993).
\622\ The Commission estimates that the median number of days
that the short position is held above the threshold after the end of
the month is 0, while the average number of days that a short
position is held above the threshold is 9.68. This suggests that the
majority of positions will be closed while some are held longer than
the delay in reporting.

---------------------------------------------------------------------------

[[Page 75163]]

Even if many positions are closed by the time the information is
disseminated, Tables 1 and 2 will still promote price efficiency if the
prices do not yet reflect the historical short position and activity
information. Table 2, for example, will provide information on the
variability of large short positions in a security and how large short
positions changed around corporate events. Such information will
improve the precision of signals from Table 1 information and corporate
events.
c. Potential Harms to Price Efficiency
Rule 13f-2 may harm price efficiency by increasing the cost of
short selling.\623\ Academic studies, both theoretical and empirical,
have shown that when short selling becomes more costly, stock prices
are less reflective of fundamental information both because costly
short selling makes trading on information more difficult, and because
costly short selling dissuades investors from collecting information in
the first place.\624\ Short sellers fill the role of incorporating
negative information by making short sales that reflect the short
sellers' beliefs about the true value of the company.\625\
---------------------------------------------------------------------------

\623\ Adopted Rule 13f-2 will have direct impacts on
establishing large short positions which may trigger reporting
obligations. Additionally, there may be lesser effects which
dissuade market participants from short selling in fear of
triggering reporting of Form SHO.
\624\ See supra note 597. See Edward Miller, Risk, Uncertainty,
and Divergence of Opinion, 32 J. of Fin. (1977). See Robert F.
Stambaugh, Jianfeng Yu, and Yu Yuan, The Short of It: Investor
Sentiment and Anomalies, 104 J. of Fin. Econ. 288-302 (2012).
\625\ Several commenters made statements and cited research on
how short selling improves price efficiency. See, e.g, NASDAQ Letter
at 1, AIMA Letter at 5, which state that short selling promotes
efficient price formation, enhances liquidity, and facilitates risk
management. Furthermore, one comment letter, ``. . . urge(d) the
Commission to consider the widely-cited academic law and finance
literature as part of its analysis of the Proposed Short Reporting
Rules,'' and cited multiple studies that provide evidence that short
selling contributes to price efficiency. See also ``Law and Finance
Professors letter'' at 2. Cited studies include Jonathan M. Karpoff
and Xiaoxia Lou, Short Sellers and Financial Misconduct, 65 J. of
Fin. 1879-1913 (2010) and Ekkehart Boehmer, Charles Jones, and
Xiaoyan Zhang, Which Shorts Are Informed? 63 J. of Fin. 491-527
(2008), and Lauren Cohen, Karl Diether, and Christopher Malloy,
Supply and Demand Shifts in the Shorting Market, 62 J. of Fin. 62,
2061-2096 (2007). Other cited studies find evidence that constraints
on short selling reduce market efficiency, including Joseph E.
Engelberg, Adam V. Reed, and Matthew C. Ringgenberg, Short Selling
Risk, 73 J. of Fin. 755-786 (2018), Ekkehart Boehmer, Charles Jones,
and Xiaoyan Zhang, 2013, Shackling the Short Sellers: The 2008
Shorting Ban, Review of Financial Studies 26, 1363-1400, Pedro Saffi
and Kari Sigurdsson, Price Efficiency and Short Selling, Review of
Financial Studies 24, 821-852 (2011). One cited paper favors reduced
regulation of short selling in order to avoid undermining the market
quality improvements provided by short selling. See Peter Molk and
Frank Partnoy, The Long-Term Effects of Negative Activism, Univ. of
Illinois L. Rev., 1-70 (2022). Another cited paper favors less
regulation of short selling that enhances price efficiency but
increased regulation of short selling that is aimed at disabling the
fundamental value of targeted firms. See Barbara Bliss, Peter Molk,
and Frank Partnoy, Negative Activism, 97 Wash. Univ. L. Rev. 1333-
1395 (2020)). The comment letter's suggestion to delay public
release of Form SHO data for one year and receive additional input
on which Form SHO thresholds to apply stem from a concern that Rule
13f-2 could undermine the market quality benefits of short selling,
of which the above cited studies find evidence. However, the
Commission is also cognizant of the of the benefits provided by
short selling, as noted in supra Part VIII.B.2. Furthermore, the
Commission discusses in detail below the potential costs to price
efficiency stemming from Rule 13f-2 and Form SHO. See infra Part
VIII.C.2.c.ii.
---------------------------------------------------------------------------

i. Costs That Impact Price Efficiency
Rule 13f-2 increases the costs of short selling in at least four
ways: (1) Compliance costs, (2) potentially revealing short sellers'
information that may have been acquired through fundamental research,
(3) potentially revealing short sellers' trading strategies, and (4)
increasing the threat of retaliation against Managers by other market
participants.
(a) Compliance Cost Effects
The compliance costs associated with reporting large short
positions will result in an increase in the cost of short selling.\626\
As many Managers have underlying investors, these costs will likely be
passed on to end consumers in the form of lower returns due to limiting
the strategies that Managers could profitably employ and reducing the
profitability of strategies still employed. On net, an increase in the
cost of short selling will reduce short selling, harming price
efficiency.\627\
---------------------------------------------------------------------------

\626\ See infra Part VIII.D.2 for a discussion of how these
direct costs may affect investors in funds that employ short
selling.
\627\ See supra note 624 and accompanying text.
---------------------------------------------------------------------------

(b) Potentially Revealing Information of Short Sellers
Publicly releasing aggregated Form SHO data has the potential to
reveal some of the information that short sellers may have acquired
through fundamental research.\628\ Revealing this information to the
market may cause prices to adjust to the information that the short
seller uncovered before the short seller is able to acquire their full
desired position--decreasing the profits to acquiring this information
and providing less incentive to produce fundamental research. Thus, the
publication of Form SHO data represents an additional cost to short
selling in the form of potentially lower profitability for trading on
negative information. Relative to the proposed rule, the Commission has
modified the final rule's requirements for publication of Form SHO data
(from the proposed rule) to decrease the risks of revealing this
information by requiring much less granular information in Table 2 of
Form SHO. In addition, adopted Rule 13f-2 will mitigate revealing
information by delaying publication at least 14 days from the last day
of a month and only publishing aggregated data.
---------------------------------------------------------------------------

\628\ Several commenters agreed. See, e.g., SBAI Letter at 2-3,
Two Sigma Letter at 1-2, SIFMA Letter at 2.
---------------------------------------------------------------------------

To avoid price impacts, a short seller seeking to build a sizeable
position in a firm generally does so by building up small positions
over time until the desired position is accumulated.\629\ Because short
positions can take a long time to accumulate, even with a lag, the
information motivating the trades being reported may not be stale.
While aggregation limits the precision with which markets can estimate
an individual short seller's motivation, it does not eliminate it.\630\
Additionally, the threshold may protect short sellers with smaller
short positions from having the information in their trades revealed.
In contrast, Rule 13f-2 may highlight large positions, potentially
increasing the likelihood that some of the information contained in the
trades of large short sellers will be acted on by other market
participants before the short seller could acquire their optimal
position. Thus, the Commission expects that publication of aggregated
Form

[[Page 75164]]

SHO data will still represent a cost to short selling.\631\
---------------------------------------------------------------------------

\629\ See Albert S. Kyle, Continuous Auctions and Insider
Trading, Econometrica: J. of the Econometric Society 1315-1335
(1985). See Kirilenko, Andrei, Albert S. Kyle, Mehrdad Samadi, and
Tugkan Tuzun, The Flash Crash: High[hyphen]Frequency Trading in an
Electronic Market, 72 (3) The J. of Fin. 967-998 (2017) (for a
discussion of this type of trading); Amir E. Khandani and Andrew W.
Lo., What Happened to the Quants in August 2007? Evidence from
Factors and Transactions Data, 14 (1) J. of Fin. Markets, 1-46
(2011) (for a discussion of what happens when investors build large
positions without properly smoothing their trading). Well-known
short seller Gabe Plotkin testified that his firm had built and
maintained a short position in GameStop for over 5 years prior to
the significant volatility experienced in January 2021. See Game
Stopped? Who Wins and Loses When Short Sellers, Social Media, and
Retail Investors Collide (Hearing), U.S. House of Representatives
Committee Repository (``Game Stopped Hearing''), https://docs.house.gov/Committee/Calendar/ByEvent.aspx?EventID=111207; See
also Juliet Chung and Melvin Capital Says It Was Short GameStop
Since 2014, Wall Street Journal (Feb 17, 2021). In the Form SH data,
17.9% of positions were held above the proposed Threshold A for at
least a month. Commenters questioned the use of Form SH data in this
and other contexts. See infra Box 1: Use of Form SH Data for
responses to comments on the use of these data.
\630\ See supra Part VIII.C.1 for a discussion of how market
participants may attempt to uncover individual identities.
\631\ Consistent with this expectation, research on similar
regulations in Europe has documented a similar effect there. See
Market Impact of Short Sale Position Disclosures, Copenhagen
Economics: Office of Global Research and Markets at the MFA,
available at https://www.copenhageneconomics.com/publications/publication/market-impact-of-short-sale-position-disclosures.
---------------------------------------------------------------------------

Relatedly, Managers who wish to build large short positions may
choose to execute their transactions at a pace that is faster than what
they would have done otherwise to attempt to profit from their research
before information is disclosed and copycat investors are able to trade
based on the reported data. Executing transactions at a faster speed
than would be optimal imposes increased transaction costs on Managers
than they would have incurred otherwise.\632\ Additionally, trading
faster than is optimal may harm price efficiency by leading prices to
over-react to the aggressive trading.\633\
---------------------------------------------------------------------------

\632\ See Kyle (1985) at supra note 630.
\633\ See e.g., Albert S. Kyle and Anna A. Obizhaeva, Large Bets
and Stock Market Crashes (Mar. 22, 2019), available at https://ssrn.com/abstract=2023776 or https://dx.doi.org/10.2139/ssrn.2023776.
---------------------------------------------------------------------------

(c) Potentially Revealing Trading Strategies of Short Sellers
If Form SHO data provides information about the specific trading
strategies or identities of certain short sellers, those short sellers
could be harmed by actions such as others profiting from predicting
their trading or copycat trading.\634\ This harm could result in less
short selling, reducing the price efficiency benefits of short selling.
---------------------------------------------------------------------------

\634\ If the identity of the short seller is exposed, then this
may also incentivize retaliation against them. See infra Part
VIII.C.2.i.(d).
---------------------------------------------------------------------------

While Rule 13f-2 was designed to minimize the possibility of
identifying Managers or their proprietary information, there are
conditions that may arise that would be conducive to revealing
proprietary trading strategies. For example, in cases where market
participants may be able to discern that there is only one Form SHO
filer,\635\ then market participants might attempt to use the activity
data to extract information about the specific trading strategies that
short sellers use to implement their trades. Market participants might
then try to identify similar patterns in the real time market trading
and quote data and alter their trading strategies to attempt to profit
from any predictability in the short seller's trading strategy. This
behavior would further limit the benefit to short selling as it may
allow other market participants to game the short seller's trading
behavior--increasing the cost of implementing short selling trading
strategies. The Commission received several comment letters that
addressed the risk of copycat trading due to public disclosure of Form
SHO data.\636\ While the Commission acknowledges this risk, it believes
that the design of the published activity data will significantly limit
this risk. In particular, the netting of short selling activity across
short sellers will mask much of the trading behavior of individual
short sellers while still providing information about changes in
bearish sentiment in the market. By netting trading activity in the
aggregations across Form SHO filers, market participants viewing the
publicly reported Form SHO data will still get a view of changes in
bearish sentiment while keeping Manager specific trading strategies
hidden.
---------------------------------------------------------------------------

\635\ This could partially be achieved through the use of Rule
10c-1a data, depending on the timing of the securities loan, among
other factors. However, such risk is mitigated by the fact that
securities lending transaction sizes in Rule 10c-1a data are not
publicly disseminated for 20 business days and counterparties
identities are not publicly disseminated.
\636\ See, e.g., SBAI letter at 2, Two Sigma letter at 1, David
Kwon letter at 3. Furthermore, supporting commenters' views, there
is empirical evidence that copycat trading in response to media
reports may harm price efficiency. See Jiang, George and Strong,
Cuyler, Unusual Option Activity: Is it Smart to Follow `Smart
Money'? (Aug. 29, 2022). available at https://ssrn.com/abstract=3618427.
---------------------------------------------------------------------------

(d) Retaliation Against Short Sellers
The public disclosure requirements might also increase short
selling costs by exposing Managers to the risk of retaliation by other
market participants, but the risk may be low.\637\ An issuer's
directors or shareholders may have the incentive to retaliate if they
believe short sellers are inappropriately reducing the value of the
stock.\638\
---------------------------------------------------------------------------

\637\ See 2011 MFA Letter; Owen A. Lamont, Go Down Fighting:
Short Sellers vs. Firms, 2(1) The Rev. of Asset Pricing Studies 1-30
(2012); Lorien Stice-Lawrence, Yu Ting Wong, Yu Ting Forester Wong,
and Wuyang Zhao, Short Squeezes After Short-Selling Attacks (Nov.
2021), available at https://ssrn.com/abstract=3849581 or https://dx.doi.org/10.2139/ssrn.3849581.
\638\ The motivation behind such retaliation may be strengthened
by the belief that the short seller's aim is to profit from reducing
the value of the stock rather than uncovering mismanagement or other
negative information about the firm to shareholders. See generally
Barbara Bliss, B., Peter Molk, and Frank Partnoy (2020), Negative
Activism, Wash. U. Law Review 97:1333-1395 (2020), which
distinguishes between ``informational negative activism,'' which
serves to uncover, ``. . . the truth about companies whose shares
the activists believe are overvalued,'' and ``operational negative
activism,'' which, ``. . . involves dismantling or disabling sources
of value at companies.''
---------------------------------------------------------------------------

Although aggregating the data before releasing it to the public on
a delay will provide some protection to Managers from having their
identities uncovered, in certain cases motivated market participants
may still be able to identify individual investors. For instance, in
the case that the aggregated short position reported to the public is
just above the threshold, market participants might reasonably assume
that only one Manager has a short position large enough to report,
which may facilitate identifying who that manager is. The Commission
believes that even if the probability of identifying individual short
sellers is low, the threat of this additional exposure to retaliation
may disincentivize short selling.
In the event that Managers can be identified from Form SHO
disclosures, issuers might take retaliatory action against individual
short sellers through lawsuits and by forwarding information to
regulators in attempts to precipitate regulatory investigations,
through claims in the media, or by applying pressure on the shorting
firm through business relationships that may exist outside of
trading.\639\ One commenter provided further examples of retaliatory
behavior that short sellers may face the threat of, including short
squeezes, nuisance lawsuits, intimidation, and physical violence.\640\
There is also evidence that when short sellers' positions become
public, market participants strive to orchestrate short squeezes and
are successful a significant fraction of the time.\641\ Short sellers
often face lawsuits when they take their information public or their
identities otherwise become known--regardless of whether the
information the short sellers brought forth was legitimate.\642\ Some
issuers have even been known to hire private investigators in an
attempt to uncover the identities of individuals short selling their
stock.\643\ Some short sellers have also expressed that they have
experienced threats to their personal safety after their short
positions were revealed.\644\
---------------------------------------------------------------------------

\639\ See 2011 letter from Security Traders Association of New
York on the Short Sale Reporting Study Required by Dodd-Frank Act
section 417(a)(2), available at https://www.sec.gov/comments/4-627/4627-155.pdf.
\640\ See MFA Letter at 9.
\641\ See infra note 645.
\642\ See Owen A. Lamont, Go Down Fighting: Short Sellers vs.
Firms, 2 (1) The Rev. of Asset Pricing Studies 1-30 (2012).
\643\ Id.
\644\ See Game Stopped? Who Wins and Loses When Short Sellers,
Social Media, and Retail Investors Collide: Hearing Before the H.
Comm. on Fin. Serv., 117th Cong. (2021) (statement of Gabriel
Plotkin, Founder and CEO, Melvin Capital Management), available at
https://www.congress.gov/117/meeting/house/111207/witnesses/HHRG-117-BA00-Wstate-PlotkinG-20210218.pdf (stating that after company's
short positions were made known, Reddit users made posts and others
sent personal text messages that were laced with anti-Semitic slurs
and threats of physical harm to him and others).

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[[Page 75165]]

In addition, publicly disclosing that Managers, in aggregate, have
amassed large aggregate short positions may expose the Managers to
increased risk of being the target of predatory strategies such as
short squeezes. The risk of short squeeze increases if market
participants are able to identify the individuals with large short
positions, as discussed in Part VIII.C.1.\645\ In this case, they may
be able to better estimate the capital constraints of the short seller
to identify the likelihood of a squeeze being successful.
---------------------------------------------------------------------------

\645\ As noted in Part VIII.C.1, the Commission will also be
better able to detect short squeezes.
---------------------------------------------------------------------------

ii. Impact of the Costs
Because reporting information on Form SHO increases the costs of
short selling, the adopted rules could have several negative effects on
price efficiency. In particular, negative price efficiency effects
could derive from a reduction in fundamental research,\646\ strategic
trading to avoid exceeding the thresholds, and reduced liquidity in
options markets. Reduced short selling could also take place from the
effect of negative price efficiency. Rule 13f-2 and Form SHO have been
designed to reduce the likelihood of these risks occurring to the
extent possible while still providing market participants and
regulators with enhanced transparency of short sale behavior. To the
extent that fundamental research decreases, price efficiency might be
harmed as prices will not necessarily reflect all available relevant
information, only that portion that had been discovered by investors
continuing to perform fundamental research.
---------------------------------------------------------------------------

\646\ Several commenters also stated there could be a possible
reduction in fundamental research. See, e.g., MFA Letter at 10.
---------------------------------------------------------------------------

It is possible that short sellers may strategically select average
short position just below the threshold in order to avoid reporting.
The size of a short position is often related to the expected magnitude
of the short seller's negative information, with revelations of larger
negative information being associated with larger short positions.\647\
Consequently, to the extent that Managers may choose to select
otherwise sub-optimal short positions to avoid reaching the reporting
threshold, Rule 13f-2 and Form SHO might result in a sub-optimal
allocation of capital and may harm price efficiency. To this end, some
have argued that stock prices can be viewed as a weighted average of
investor sentiment. If short sellers limit their positions to avoid
disclosure requirements, then stock prices may skew towards being
overvalued.\648\
---------------------------------------------------------------------------

\647\ See, e.g., supra note 629.
\648\ See, e.g., supra note 625. In contrast, some argue that
short selling itself increases the value of assets as it provides
demand for securities lending and allows owners to collect
securities lending fees. From this perspective, restricting short
selling may decrease stock prices by restricting the demand for
securities loans. See Darrell Duffie, Nicolae Garleanu, and Lasse
Heje Pedersen, Securities Lending, Shorting, and Pricing, 66 (2-3)
J. of Fin. Econ. 307-339 (2002). Consistent with statements in the
Proposing Release, the Commission continues to believe that this
effect is the not predominate effect of short selling on asset
prices, because the average fee earned from securities lending is
usually very small relative to the average long term stock returns.
Thus, it appears that other economic effects tend to dominate the
relationship between short selling and stock prices and that on net
short selling restrictions lead to stock overvaluation. Proposing
Release at 14996 n. 281. See also letters from OTC Markets, Provable
Markets, SIFMA, and Chester Spatt responding to FINRA's regulatory
notice 21-19 (arguing that short selling is vital to price
efficiency), available at https://www.finra.org/rules-guidance/notices/21-19#. In contrast, others have argued markets adjust to
short selling constraints as to not overvalue stocks. See Douglas
Diamond and Robert E. Verrecchia, Constraints on Short-Selling and
Asset Price Adjustment to Private Information, 18 J. of Fin. Econ.
277-311 (1987).
---------------------------------------------------------------------------

Additionally, Rule 13f-2 might dissuade options market makers from
holding large short positions and providing liquidity in options
markets and, thus, might harm price efficiency in equity markets.
Research has found that options play an important informational role in
stock price discovery, therefore reductions in liquidity in the options
market can reduce the price efficiency in the equity market.\649\
---------------------------------------------------------------------------

\649\ See infra Part VIII.C.3. See also David Easley, Maureen
O'Hara, and Pulle Subrahmanya Srinivas, Option Volume and Stock
Prices: Evidence on Where Informed Traders Trade, 52 J. of Fin. 431-
465 (1998).
---------------------------------------------------------------------------

d. Limitations on Price Efficiency Effects
As with the discussion in Part VIII.C.1, many of the economic
effects articulated in this section relating to the reporting of Form
SHO might be limited to the extent that the data reported in Form SHO
contains factual errors. The EDGAR system will check the data for
technical errors but not the accuracy of the data entry by filers.
Thus, the data reported in Form SHO might contain errors. To the extent
that these errors exist and meaningfully affect the usability of the
data, the value of the data and the economic benefits and costs
associated with collecting the data would be limited. Additionally, the
benefits and costs are lessened by the delay in the publication of the
data. Furthermore, the data will only be available for those securities
with Managers who have short positions over the threshold, which may
not be representative of all short positions, and the number of
reporting Managers may change from month to month.
3. Effect on Market Liquidity
The effect of the adopted Rule 13f-2 and CAT amendment on liquidity
is uncertain. Part VIII.C.2.c discusses the possibility that Rule 13f-2
and Form SHO may harm price efficiency by dissuading investors from
pursuing fundamental research. Alternatively, Rule 13f-2 and Form SHO
may help price efficiency by increasing transparency with respect to
the actions of large short sellers. To the extent that the adopted rule
and amendment improve price efficiency, this might also indirectly
improve liquidity because market makers would be subject to less
mispricing risk. Mispricing risk leads to lower liquidity because
market makers must be compensated in the form of wider bid ask spreads
for the potential that there is information relevant to the firm that
has not yet been discovered and may affect prices. Thus, to the extent
that the Rule 13f-2 enhances price efficiency, it may also enhance
liquidity by mitigating mispricing risk. Conversely, if the Rule harms
price efficiency, it may also harm liquidity.
Equity market makers generally do not carry large gross short
positions overnight. However, adopted Rule 13f-2 and Form SHO may make
market makers more concerned that a particularly volatile trading day
may cross the Reporting Thresholds requiring the filing of Form SHO.
One commenter described the concern for unintentionally crossing the
threshold while market making.\650\ While the Commission believes the
adopted Reporting Thresholds will generally be very difficult for
market makers to trigger,\651\ market makers could still choose to
reduce market making activities during periods of volatility due to
concerns over having to report Form SHO. To the extent market makers
believe high volatility may necessitate a large short position, the
adopted rule may reduce market liquidity.
---------------------------------------------------------------------------

\650\ See HSBC Letter at 15.
\651\ Market makers typically use short selling to maintain two
sided quotes in the absence of inventory and other high frequency
traders. While market makers trade in large volumes, they tend to
end trading sessions fairly flat on inventory in larger stocks.
Therefore, while it is possible that market makers may end a single
trading day holding a gross short position of $10 million, it is
highly unlikely that this will occur frequently enough for them to
end the month with an average daily position of $10 million.

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[[Page 75166]]

Additionally, in the event that an options market maker might have
short equity position close to the Reporting Thresholds, Rule 13f-2
might dissuade these option market makers from increasing their short
position, which may harm their willingness to provide liquidity in
options markets. Alternatively, Rule 13f-2 might not cause option
market makers that exceed the Reporting Thresholds to reduce their
positions in order to avoid filing Form SHO, in which case the
additional associated spending on filing Form SHO (and other compliance
costs) might result in wider spreads if the compliance costs are large
enough.
4. Effect on Corporate Decision Making
The Commission believes that Rule 13f-2 and Form SHO might have
mixed effects on corporate decision making. On one hand, research
suggests that corporate managers learn from market reactions to
announcements.\652\ Consequently, Rule 13f-2 and Form SHO may provide
corporate managers with additional feedback on their decisions, albeit
with a delay. Projects often take some time to design and implement
after announcement, and consequently, even with the lag in the
reporting time of Form SHO data, a corporate manager might review the
data around significant announcements to better understand how some
Managers viewed a particular project or announcement. For example, if
large short positions were built shortly after a corporate project
announcement, then this may help signal to a corporate manager that the
market viewed that project announcement negatively, and this
information could enhance the corporate manager's decision-making on
the project.
---------------------------------------------------------------------------

\652\ See, e.g., James B Kau, James S. Linck, and Paul H. Rubin,
Do Managers Listen to the Market?,14 (4) J. of Corporate Fin. 347-
362 (2008).
---------------------------------------------------------------------------

In another aspect, short sellers, and particularly large short
sellers with the resources to perform fundamental research, serve as
valuable external monitors of management. If a corporate manager knows
that short sellers are monitoring their actions and financial
statements and are willing to expose wrongdoing, then they are less
likely to engage in fraud or do other things that may hurt the value of
the company. Historically, short sellers have, at times, through doing
research, uncovered fraudulent behavior.\653\ Academic research has
also shown that even the threat of short selling serves to discipline
managers.\654\ As discussed in Parts VI.C.1 and VI.C.2, Rule 13f-2 may
discourage Managers from performing fundamental research. If less
fundamental research is performed by short sellers,\655\ then their
role as monitors of the firm diminishes. Less monitoring might lead to
higher incidences of fraud as managers feel that the likelihood of
being caught declines.\656\ Thus, to the extent that Rule 13f-2 and
Form SHO discourage fundamental research it may lead to both an
increase in the total amount of corporate fraud in the economy as well
as decrease the fraction of fraudulent actors that are discovered by
investors.
---------------------------------------------------------------------------

\653\ See, e.g., A. Dyck, A. Morse, and L Zingales, Who Blows
the Whistle on Corporate Fraud?, 65(6) The J. of Fin. 2213-2253
(2010) (using a large sample of fraud cases between 1996 and 2004,
the authors find that short sellers uncovered the fraud in nearly
15% of cases.). See also Cassell Bryan-Low and Suzanne McGee, Enron
Short Seller Detected Red Flags in Regulatory Filings, The Wall
Street J. (Nov. 5, 2001) (discussing an Enron short seller that
detected red flags reviewing, among other things, the company's SEC
filings) (retrieved from Factiva database). Cf. Nessim Mezrahi et
al., More Securities Class Actions May Rely on Short-Seller Data,
Law360 (Jan. 10, 2022, 7:07 p.m.) available at https://www.law360.com/articles/1453499/ more-securities-class-actions-may-
rely-on-short-seller-data (authors' ``analysis of 131 Rule 10b-5
securities class actions indicates that plaintiffs continue to rely
on short-seller research to substantiate fraud-on-the-market
claims'').
\654\ See, e.g., Massimo Massa, Bohui Zhang and Hong Zhang, The
Invisible Hand of Short Selling: Does Short Selling Discipline
Earnings Management? 28 (6) The Rev. of Fin. Studies 1701-1736
(2015).
\655\ See supra Part VIII.C.2 for a discussion of the potential
for the final rule to reduce the incentives for short sellers to
conduct fundamental research.
\656\ See, e.g., Paul Povel, Rajdeep Singh, and Andrew Winton,
Booms, Busts, and Fraud, 20 (4) The Rev. of Fin. Studies 1219-1254
(2007) (linking variations in monitoring intensity to the incidence
rate of financial fraud.).
---------------------------------------------------------------------------

5. Effect on the Securities Lending Market
As discussed in Parts VIII.C.1 and VIII.C.2, the adopted rule and
related Form SHO will increase the cost of short selling, particularly
large short positions--potentially leading to less overall short
selling. As discussed in Part VIII.C.2, short sellers must borrow
shares for their short position. When short sellers borrow shares, they
pay a borrowing fee to the owner of the share. These fees can represent
a significant source of revenue for pension funds, mutual funds, and
others who engage in securities lending.\657\ Consequently, to the
extent that the adoptions discourage short selling, they may also lower
overall portfolio returns, including for institutional investors that
engage in securities lending.\658\
---------------------------------------------------------------------------

\657\ See supra note 563.
\658\ Commenters on the Short Sale Reporting Study Required by
Dodd-Frank Act section 417(a)(2) argue that increased public short
selling disclosure may result in reduced short selling, thereby
lowering revenues to institutions that maintain long positions in
equities for extended periods (such as pension funds). See, e.g.,
2011 Letter from Alternative Investment Management Association,
available at https://www.sec.gov/comments/4-627/4627-138.pdf.
---------------------------------------------------------------------------

6. Compliance Costs
The Commission believes that there will be direct costs associated
with adopted Rule 13f-2, Form SHO, and the CAT amendment. These costs
include Managers reporting position and activity data, broker-dealers
updating CAT reporting processes, and the Commission processing and
releasing the Manager reports through EDGAR. Rule 13f-2, related Form
SHO, and the amendment to CAT in aggregate, will result in an estimated
maximum of $119,975,800 in initial costs and $72,026,064 in annual
costs.\659\
---------------------------------------------------------------------------

\659\ See supra Table 1, Table 2, and Table 3 in Part VII. These
costs assume 1,000 Managers would file Form SHO annually and 35
Managers would file amendments each month. The initial costs are
calculated by adding the Form SHO Initial Technology Projects cost,
the CAT: Central Repository--Short Sale Data cost, CAT: Reporting of
Bona Fide Market Making Exception--Insourcers cost, and the CAT:
Reporting of Bona Fide Market Making Exception--Outsourcers cost.
($118,950,000 + $113,800 + $870,000 + $42,000 = $119,975,800). The
annual costs are calculated by adding the Form SHO Filings cost, the
Use of Structured XML-Based Data Language cost, the Amended Form SHO
Filings cost, and the amending Use of Structured XML-Based Data
Language cost. ($60,326,400 + $9,264,000 + $2,111,424 + $324,240 =
$72,026,064). See also infra Part VIII.C.6.a and Part VIII.C.6.c for
further explanations of these costs.
---------------------------------------------------------------------------

The Commission received several comments from industry groups
concerned about the cost of implementing Rule 13f-2, Form SHO, and the
CAT amendment. One commenter stated that Managers currently do not have
systems in place to comply with Rule 13f-2, Form SHO, and the CAT
amendment. Multiple commenters stated that there would be high costs
associated with tracking positions for the purpose of seeing if they
had crossed the Reporting Thresholds.\660\ Another commenter stated
that the Commission's estimated costs in the proposing release, in
general, were ``materially understated''.\661\ However, the Commission
has attempted to use the applicable resources available to it to
estimate the costs of implementing adopted Rule 13f-2, Form SHO, and
the CAT amendment. The Commission did not receive any information from
commenters that might otherwise have been used to refine or adjust its
estimates of the implementation costs of adopted Rule 13f-2, Form SHO,
and the CAT amendment. Thus, the Commission believes its estimates to
be reasonable given the information it has

[[Page 75167]]

available. Furthermore, the Commission has adjusted estimates in
response to policy choices that differ from the Proposing Release, some
of which will lower compliance costs, including the exclusion of the
``buy to cover'' proposals (proposed Rule 205 and the related CAT
amendment) and a change to one of the reporting thresholds that will
likely result in fewer Managers having to report Form SHO. As discussed
in Part II.B, these policy changes, to the extent possible, address or
are in response to statements from commenters regarding costs stemming
from the Proposing Release.
---------------------------------------------------------------------------

\660\ See infra note 679.
\661\ See MFA Letter, at 19.
---------------------------------------------------------------------------

a. Form SHO Compliance Costs
The Commission believes that Managers will incur an initial
technology-related burden to update their current systems to capture
the required information and automate and facilitate the completion and
filing of Form SHO.\662\ While Managers likely have other existing
reporting obligations that are similar to Form SHO filing obligations,
Managers will need to update their systems to ensure timely and
accurate filing of the specific information required under Form
SHO.\663\ The estimated aggregate cost of Form SHO initial technology
projects across all Managers ranges from $29,975,400 to $118,950,000.
The Commission estimates that between 252 \664\ and 1,000 Managers will
be required to file Form SHO. The lower estimate is based on the number
of Form SH filers above Threshold A. The actual number of reporting
Managers will likely be higher than our low estimate, because Managers
that exercise investment discretion with respect to accounts holding
section 13(f) securities having an aggregate fair market value of less
than $100 million were not required to file Form SH.\665\ However, the
actual number of reporting Managers will likely be lower than the
Commission's high estimate, since this estimate is also based on an
initial analysis of Form SH filings, which were filed weekly and
therefore more likely to trigger reporting thresholds, as compared to
adopted Form SHO, which will involve monthly assessment and therefore
require a longer-held large short position to trigger a reporting
threshold.\666\ The Commission discusses the use of Form SH Data,
including commenter concerns about the use of the data in this and
other contexts, in Box 1: Use of Form SH Data.
---------------------------------------------------------------------------

\662\ See supra Part VII.4.
\663\ See infra Part VIII.C.6.c.
\664\ In the Proposing Release, the Commission estimated 346
Managers would be required (on the low end of the estimate). The
Commission changed the parameters for this estimate to match the
scenario of a $10 million daily average over the month or 2.5% daily
average over the month of shares outstanding thresholds that are
being adopted as Threshold A.
\665\ See Proposing Release, at Table I. See also Proposing
Release, at 14963 for more information on the methodology and
caveats of using Form SH data.
\666\ See Disclosure of Short Sales and Short Positions by
Institutional Investment Managers, 73 FR 61679. Form SH filers filed
weekly reports. As a result, each reporting manager would file fewer
reports under Rule 13f-2, because Form SHO would be filed monthly.
See also 73 FR 61686 (estimating 1,000 weekly Form SH filings by
reporting Managers).

------------------------------------------------------------------------

-------------------------------------------------------------------------
Box 1: Use of Form SH Data:
The Commission's estimation of the minimum number of Managers likely
to report Form SHO draws on an analysis of data collected under
Form SH, the only existing data source of individual Manager-level
short sale positions. In addition to estimating the minimum number
of reporting Managers, the Economic Analysis also uses Form SH data
for comparisons of alternative thresholds and to estimate the share
and number of potential reported securities with only one reporting
Manager, the potential share of gross short sale dollar volume
covered by reporting Managers, and statistics on potential holding
periods after hitting a threshold.
The Commission received several comment letters questioning the
applicability of Form SH data to the current time period.\a\ One
commenter stated that the period surrounding the filing of Form SH
was an abnormal period for financial markets, and also stated that
many prominent short sellers have left the industry.\b\ While there
are various limitations to be considered when using Form SH
data,\c\ Form SH data are the most relevant and applicable source
of data available for the purposes of estimating the costs of the
design and analysis of Rule 13f-2. There are no other data sources,
public or regulatory, which specifically track Managers' short
position activities in the U.S. While the Commission agrees that
having more current data would be useful for the purposes of Rule
13f-2's design and analysis, no commenters provided such data, and
the Commission believes Form SH data are sufficiently informative
to analyze the predicted impact of the amendments.\d\
Further, in response to these comments, the Commission analyzed
FINRA short interest data over the period of 2008 to present with
the goal of seeing if short interest was comparable between the
current period and the period surrounding Form SH filings.\e\
Specifically, we compared the trend of average short interest to
the trend of the number of equities counted from each FINRA short
interest files covered 2009 to 2023. The analysis revealed that the
average short interest per equity symbol has increased over time by
approximately 46 percent, while the number of symbols has increased
at a much slower rate of 17 percent. Thus, we observe that the
average short interest per equity symbol has increased from 2009 to
present. However, the Commission cannot assess whether the size of
Manager positions has changed over time.\f\ Without this piece of
knowledge, it is indeterminate whether the average amount of short
interest generated by a manager has changed over time. If there are
currently more Managers relative to 2008, it is possible that the
average short position per manager is smaller than during the
period Form SH was used. Conversely, if there are fewer Managers,
it is likely the average short position per manager has increased
relative to 2008.
------------------------------------------------------------------------
\a\ See, e.g., Law and Finance Professors Letter, at 3; AIMA Letter at
11-12; Two Sigma Letter at 5-6.
\b\ See Law and Finance Professors Letter, at 3.
\c\ See supra Part VIII.B.4.e and note 670 for a discussion of
limitations in the use of Form SH data. See also Part VII.B.1 for a
discussion of other ways Form SH data differ from Form SHO data.
\d\ See supra Part II.A.3 for additional discussion of comments
regarding the Reporting Thresholds and note 177 for further discussion
of the time period of the data.
\e\ FINRA Short Interest data are available at https://www.finra.org/finra-data/browse-catalog/equity-short-interest/data. See also Part
VIII.B.4 a for further information about FINRA Short Interest Data.
\f\ See supra Part VII.B.1 for a discussion of estimates of the number
of affected Managers using Form SH, which most closely mirrors the
criteria of Rule 13f-2 and Form SHO and how the number may have
changed over time.

The Commission estimates that the annual cost to Managers for
filing Form SHO ranges from $15,202,252 to $60,326,400.\667\ The
Commission estimates that Managers will collectively spend an
additional $2,334,528 to $9,264,000 per year to structure Form SHO
directly in Form SHO-specific XML.\668\ The Commission estimates that
the Managers that will file amended Form SHOs will collectively spend
$542,938 to $2,111,424 per year to file amended Form SHOs.\669\
Further,

[[Page 75168]]

the Commission estimates that Managers filing amended Form SHO will
collectively spend an additional $83,376 to $324,240 per year to
structure Form SHO directly in Form SHO-specific XML.\670\ The
Commission thus estimates that the aggregate cost of structuring and
filing Form SHO across all Managers ranges from $18,163,094 to
$72,026,064.\671\ Costs might be underestimated to the extent that
wages are higher than those used in the estimation. The initial costs
are likely higher than the lower bound estimates as Managers who may
not file Form SHO on a monthly basis will likely still incur the
initial costs. Furthermore, because Manager short positions are fluid,
some Managers will not be required to file a report every month when
they do not cross the reporting threshold. As a result of this
fluidity, ongoing costs could be lower than our estimates. Moreover, to
the extent that the number of reportable short positions varies across
Managers, the costs to track and report those positions will also vary
by Manager. Initial costs might also be higher for some Managers who do
not currently have systems built to report to EDGAR.\672\ By contrast,
because we expect Managers will have a financial incentive to automate
the reporting process by leveraging Form SHO-specific XML reporting,
the aggregate costs associated with Form SHO-specific reporting may be
meaningfully lower going forward.\673\
---------------------------------------------------------------------------

\667\ See supra PRA Table 2 and note 450. The lower estimate was
calculated using 252 Managers. 20 hours per filing x 252 filings by
Managers each month x 12 months x $251.36 = $15,202,252. The
Commission estimates that 252 Managers would have been required to
file Form SH had Form SH been subject to the same $10 million and
2.5% threshold.
\668\ See infra Part VIII.C.6.c and infra note 686. The lower
estimate was calculated as follows: 2 hours per filing x $386 per
hour for a programmer x 252 filings by Managers each month x 12
months = $2,334,528.
\669\ See supra PRA Table 1 and accompanying text discussing
amended Form SHO estimates. We maintain the assumption of 3.5% of
Managers amending monthly in all of our estimated costs for amending
Form SHO. Using the lower estimate of 252 Managers, this would
result in 9 Managers filing amendments monthly. 20 hours per filing
x 9 filings by Managers each month x 12 months x $251.36 per hour =
$542,938.
\670\ Using the lower estimate of 9 Managers filing amendments
monthly would result in $83,376 to structure amended Form SHO
filings in Form SHO-specific XML. 2 hours per filing x 9 filings by
Managers each month x 12 months x $386 per hour = $83,376.
\671\ See supra PRA Table 2. These costs are calculated by
adding the costs for Form SHO Filings, Use of Structured XML-Based
Data Language, Amended Form SHO Filings, and the amending Use of
Structured XML-Based Data Language together. For the lower estimate,
we calculate using 252 Managers filing each month annually and 9
Managers filing amendments monthly. ($15,202,252 + $2,334,528 +
$542,938 + $83,376 = $18,163,094).
\672\ Most Managers will be familiar with EDGAR filing
requirements through other reporting obligations, such as Form 13F.
See supra notes 193 and 452. See also infra Part VIII.C.6.c.
\673\ See supra note 451 and infra note 711.
---------------------------------------------------------------------------

For some Managers, there may be additional considerations, which
may increase costs. For example, rules for filing Form SHO require
Managers to prevent duplicative reporting.\674\ The burden to ensure
that duplicative reporting doesn't occur will vary by Manager and will
depend on whether two or more Managers exercise investment discretion
over the same reportable securities position. Also, Managers managing
multiple accounts with short positions requiring aggregation may have
additional costs associated with the aggregation when modifying systems
to track the Reporting Thresholds and report positions on Form SHO.
---------------------------------------------------------------------------

\674\ See Form SHO, General Instructions at Rules to Prevent
Duplicative Reporting.
---------------------------------------------------------------------------

The Commission believes the need to amend Form SHO may vary by
familiarity with filing Form SHO. These costs may be more common for
Managers who do not hold short positions often and are likely to
decrease with time as Managers become more experienced with filing Form
SHO. As part of updating systems to comply with the reporting
requirements of Rule 13f-2, Managers must calculate the market value of
their position using the official closing price as of the close of
regular trading hours for the trade settlement date in question at the
end of the month, which may not be the fair market value at the time in
which the trade occurred.\675\ However, the Commission believes that in
most cases this will be a small burden on Managers as the data needed
for the calculation will be publicly available and that Managers may
already track the end of day fair market value of short positions. Even
in cases that the reportable equity security is not traded on an
exchange, the Commission believes that Managers may be able to
calculate the value of their short positions by using publicly
available closing prices from the OTC Reporting Facility. In
circumstances where closing prices of non-reporting company issuers are
not available, the Commission believes the tracking such information
will still not impose a large burden as a Manager can use the price at
which they last purchased or sold any share of that security, which
will be readily available to the Manager.
---------------------------------------------------------------------------

\675\ See Form SHO, General Instructions at INSTRUCTIONS FOR
CALCULATING REPORTING THRESHOLD. See also PRA Table 2 in Part VII
for an estimate of these burden hour.
---------------------------------------------------------------------------

b. Costs of Tracking Threshold Status
There will be costs associated with tracking short positions in
relation to the threshold.\676\ Particularly, after the last day of
each calendar month, Managers must calculate their average short
positions over the month to be aware if their average daily gross short
position exceeds $10 million \677\ or 2.5 percent of shares
outstanding; or in the case of equity securities of non-reporting
company issuers, if Managers meet or exceed a gross short position of
$500,000 at the close of regular trading hours on any settlement date.
However, the Commission believes that the Reporting Thresholds will
generally limit the burden on Managers, in aggregate, as fewer Managers
will be required to report than if the Commission did not adopt an
amended reporting threshold. For example, the Commission believes that
certain types of Managers that carry short positions will not meet a
Reporting Threshold.\678\ Additionally, certain types of Managers may
be less likely to meet the threshold, resulting in lower overall costs
for these Managers.\679\ Using Form SH data, the Commission estimates
that an average of 442 Managers were required to file Form SH each
month under the threshold in place during temporary Rule 10a-3T.
However, only 252 eligible Managers would have been required to file
had Threshold A of adopted Form SHO been in place instead of the
threshold in temporary Rule 10a-3T.\680\
---------------------------------------------------------------------------

\676\ As stated in the proposing release, based on the number of
registered investment companies reporting short positions and the
number of hedge funds engaged in a strategy including short selling,
we continue to anticipate that only a small fraction of Managers is
likely to have monitoring responsibilities pursuant to the rule and,
given the Reporting Thresholds and the modification of Threshold A,
an even smaller fraction is likely to have reporting obligations.
Proposing Release at 14998 n. 298.
\677\ Under Proposed Form SHO, the threshold was triggered if a
gross short position exceeded $10 million on a single day. Adopted
Form SHO requires a daily average gross short position of $10
million over the month.
\678\ See supra Part VIII.B.1 for a discussion on why certain
types of Managers are more likely to have reporting requirements.
For example, market makers and algorithmic technical traders are not
likely to meet the thresholds because they generally close their
positions by the end of the day.
\679\ However, Managers that trigger a threshold(s) but do not
currently report to EDGAR may face additional compliance costs
associated with Rule 13f-2.
\680\ The lower number of estimated reporting Managers in Form
SHO compared to Form SH is due to the fact that the Reporting
Thresholds are higher for Form SHO than Form SH in Threshold A
(average daily gross position of $10 million vs. a single day
threshold of $10 million, and 2.5% of shares outstanding vs. 0.25%
of shares outstanding). This estimate differs from the Proposing
Release due to modification of the part of the threshold from $10
million daily to $10 million average daily over the month.
Commenters questioned the use of Form SH data in this and other
contexts. See supra Box 1: Use of Form SH Data for responses to
comments on the use of these data.

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[[Page 75169]]

The Commission received several comment letters that described what
they believed were the high cost of monitoring with respect to the
thresholds to file Form SHO under Rule 13f-2.\681\ One commenter stated
that the cost of daily monitoring would be high, although no specific
estimated cost is provided.\682\ While the costs would likely be higher
if firms choose to monitor daily, Rule 13f-2 does not require daily
monitoring, either for reporting or non-reporting stocks.
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\681\ See, e.g., MFA Letter, at 13; AIMA Letter, at 12-14; ICI
Letter, at 5; Ropes & Gray Letter, at 2 and 5-7; SBAI Letter, at 4;
SIFMA Letter, at 4, 7-8, and 13-19; T. Rowe Price Letter, at 3-4,
Two Sigma Letter, at 6-7 and 10.
\682\ See ICI Letter, at 11.
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For Managers engaged in shorting selling, the rule necessitates
that Managers calculate their average daily gross short position in
equity securities for which they have conducted short sales during that
calendar month in order to know if they are required to file Form SHO
within 14 days of the end of that month.\683\ Managers may choose to do
this calculation on a rolling basis, or to do the calculation after the
month has ended. While some Managers may choose to incur the higher
costs of daily tracking and calculation for purposes of compliance with
Rule 13f-2, the final rule's reporting threshold is not based on a
Manager's gross short position on a single trading date, reducing the
need for daily tracking.
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\683\ As discussed in supra Part II.A.3, Managers with gross
short sale positions that exceed a daily average during the previous
month of $10 million or a daily average of 2.5% of a reporting
firm's shares outstanding will have to file Form SHO. With regard to
short sale positions of non-reporting firms, Managers will have to
file Form SHO if their short sale position exceeded $500,000 on any
single day during the previous month.
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The Commission understands that the cost of tracking short
positions might be higher for certain types of equity securities. For
example, tracking the short position in an ETF as a percent of shares
outstanding will be more difficult as the number of shares outstanding
changes frequently. Additionally, Managers who hold short positions in
non-reporting company issuers may have difficulty calculating the value
of their position, however Managers may use the last price at which the
Manager traded even though the price may be stale.\684\
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\684\ See supra Part II.A.3.b for discussion of comments
received related to tracking non-reporting company short positions.
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c. Cost of Reporting Form SHO to EDGAR
Requiring Form SHO to be filed on EDGAR in Form SHO-specific XML
will not impose significant incremental costs on Managers. The
Commission expects most Managers who will be required to file Form SHO
will likely have experience filing EDGAR forms that use similar EDGAR
Form-specific XML data languages, such as Form 13F. In that regard, the
process for filing Form SHO, as well as the XML-based data language
used for Form SHO, will be similar to the filing process and data
language used for Form 13F.\685\ We expect that Managers with such
experience that choose to file Form SHO directly in Form SHO-specific
XML will incur some compliance costs associated with doing so.\686\
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\685\ See EDGAR Filer Manual (Volume II) version 67 (September
2023), at 9-1 (``EDGAR Filer Manual Volume II'') (describing process
for submitting Form-specific XML filings directly to EDGAR); see
also Form 13F XML Technical Specification, available at https://www.sec.gov/edgar/filer-information/current-edgar-technical-specifications.
\686\ See supra PRA Table 2 (estimating the ongoing burden for
the Form SHO-specific XML requirement at two hours per Manager per
filing and two hours per amended filing). These estimates
conservatively assume that Managers will structure their filings in
Form SHO-specific XML, incurring $772 (2 hours x $386 per hour for a
programmer = $772) per filing or amended filing, rather than use a
fillable form. Assuming 1,000 Managers filing 12 Form SHO filings
per year would equal 12,000 filings per year, resulting in 24,000
total annual industry burden hours (12 filings x 1,000 Managers x 2
hours = 24,000) and $9,264,000 in industry costs for filings per
year (24,000 hours * $386 per hour = $9,264,000) attributable to the
Form SHO-specific XML requirement. In addition, based on an estimate
of 420 amended filings per year, the total industry cost for the
Form SHO-specific XML would be $324,240 for amended filings (420
amended filings x 2 hours per amended filing x $386 per hour =
$324,240). As such, the total annual industry cost attributable to
the Form SHO-specific XML requirement (including amended filings) is
$9,588,240 ($9,264,000 for filings + $324,240 for amended filings =
$9,588,240). Using a lower estimate of 252 Managers would result in
$2,417,904 in total annual industry costs to structure initial and
amended filings in Form SHO-specific XML. See supra note 517.
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In addition, Managers will be given the alternate option of filing
Form SHO using a fillable web form that will render into Form SHO-
specific XML in EDGAR, rather than filing directly in Form SHO-specific
XML using the technical specifications published on the Commission's
website. We expect Managers who do not have experience filing Form 13F
or other EDGAR Form-specific XML filings will likely choose this
option. In that regard, Managers are only required to file Form 13F if
they exercise investment discretion with respect to accounts holding
section 13(f) securities having an aggregate fair market value on the
last trading day of any month of any calendar year of at least $100
million.\687\ Of Managers that do not have experience filing Form 13F,
only a subset are subject to other EDGAR Form-specific XML filing
requirements.\688\ For any Managers that choose to file Form SHO using
a fillable web form, whether or not they have prior experience with
filing forms in EDGAR Form-specific XML, the Form SHO-specific XML
requirement (i.e., the requirement to place the collected information
in a fillable web form provided by EDGAR, rather than in an HTML or
ASCII document to be filed on EDGAR as is required for most other EDGAR
forms) will not impose any additional compliance costs.\689\
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\687\ See 17 CFR 240.13f-1(a).
\688\ For example, registered brokers or dealers that are
subject to the reporting requirements set forth in 17 CFR 240.17h-2T
must file Form 17-H either electronically or in paper. Those that
choose to file electronically must file Form 17-H partially in EDGAR
Form-specific XML. Insurance companies may offer variable contracts
that are registered under the Investment Company Act of 1940, and
would thus be required to file annual reports on Form N-CEN in EDGAR
Form-specific XML as well as, in some cases, monthly portfolio
information on Form N-PORT in EDGAR Form-specific XML. Corporations
may make exempt offerings and be required to file Form 1-A, Form C,
or Form D in EDGAR Form-specific XML either in part or in full,
depending on the nature of the offering.
\689\ See 17 CFR 232.101(a)(1)(iv); 17 CFR 232.301; EDGAR Filer
Manual Volume II at 5-1 (requiring EDGAR filers generally to use
ASCII or HTML for their filed documents, subject to certain
exceptions).
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d. Costs Associated With Reporting Bona Fide Market Making Locate
Exception to CAT
The 25 Plan Participants will face costs associated with the CAT
amendment, as they will be required to engage the Plan Processor to
modify the Central Repository to accept and process new short sale data
elements on order receipt and origination reports. Additionally, the
Commission estimates an external cost of $4,522 per participant or
$113,800 total to compensate the Plan Processor for staff time required
to make the initial necessary programming and systems changes.\690\
However, these initial costs might be higher if the Commission
underestimated the time and wages necessary for programming and systems
changes for the plan processor to accept and process new data elements.
Furthermore, the Commission believes that CAT amendment will not impose
additional ongoing cost to Participants beyond those costs already
accounted for in existing Paperwork Reduction Act

[[Page 75170]]

estimates that apply for Rule 613 and the CAT NMS Plan approval
order.\691\
---------------------------------------------------------------------------

\690\ See supra note 475.
\691\ See supra Part VII.C.4 for more information on costs for
CAT Plan Participants.
---------------------------------------------------------------------------

The Commission believes that the CAT amendment involving the bona
fide market making exception from the locate requirement will impose a
one-time cost to Industry Members.\692\ These costs will involve
creating an additional field in the order origination report. Some
broker-dealers will incur ongoing costs related to the recording of the
use of the BFMM locate exception.\693\ To the extent that broker-
dealers are not already recording the use of the exception, broker-
dealers may have costs to inputting the use of the exception into their
current systems.\694\
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\692\ Id.
\693\ The Commission believes these costs will be comparable to
those estimated in the Proposing Release in connection to the burden
of marking an order. The Commission estimates that recording
(marking) this information will take between 0.42 and 0.5 seconds
per trade, with an annual time burden per Manager equal to 592-7,104
hours. See Table 3 from Proposing Release at 14975, available at
https://www.sec.gov/files/rules/proposed/2022/34-94313.pdf.
\694\ See supra Part IV.B for description of Industry Members'
use of BFMM.
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The Commission recognizes that costs will vary broadly across
Industry Members, particularly depending on whether the Industry Member
outsources the provision of an order handling system and regulatory
data reporting to a service provider. In the CAT NMS Plan Approval
Order,\695\ the Commission identified 126 Industry Members that do not
outsource these activities. For these Industry Members, implementation
is likely to require changes both to their order handling systems as
well as their regulatory data reporting systems that produce their CAT
reporting data. Additionally, 58 insourcing Industry Members will incur
an aggregate initial cost of $870,000 or $15,000 individually to update
systems to facilitate reporting the new bona fide market making
exception elements to CAT.\696\ However, this cost might be lower if
the Commission is overestimating the number of insourcing industry
members, in particular, the additional cost might drive some insourcing
industry members to begin to outsource. The Commission believes that
ongoing costs associated with reporting the newly required information
to CAT will already be covered by ongoing cost estimates included in
its cost estimates for the CAT NMS Plan. The Commission further
believes that similar implementation and ongoing costs will be borne by
each of the service providers that provide order handling systems and
regulatory data reporting services to Industry Members that outsource
these systems.
---------------------------------------------------------------------------

\695\ See CAT NMS Plan Approval Order, 81 FR 84860.
\696\ See supra Part VII.C.4.
---------------------------------------------------------------------------

For Industry Members that outsource, the Commission believes that
implementation costs will be far lower because the service bureaus that
provide them with order handling systems and regulatory data reporting
services will adapt those systems on their customers' behalf.\697\
Additionally, 42 outsourcing industry members will incur an aggregate
one-time cost of $42,000 or $1,000 individually to update systems to
facilitate reporting the new bona fide market making exception elements
to CAT.\698\ However, these costs might be higher if some current
insourcing industry members begin to outsource as a result of the
increased costs, which will lead to an overall reduced cost for the
rule as outsourcing is less costly than insourcing. The Commission
believes that the costs of service bureaus adapting those systems will
be passed to their Industry Member customers.
---------------------------------------------------------------------------

\697\ One commenter stated that support from third-party data
service providers could make Form SHO reporting less burdensome. See
S3 Letter, at 5.
\698\ See supra Part VII.C.4.
---------------------------------------------------------------------------

e. Comparison to Rule 10a-3T Costs
The Commission is cognizant of the burdens Managers experienced of
filing Form SH in compliance with temporary Rule 10a-3T and has
designed Rule 13f-2 and Form SHO to attempt to reduce those burdens.
First, commenters on the temporary Rule 10a-3T stated that the 0.25
percent threshold was too low.\699\ The two-pronged threshold in Rule
13f-2 is higher than the threshold in Rule 10a-3T, reducing the number
of Managers likely to have a reporting obligation. For example, the
Commission estimates that only 28 percent of positions reported under
Rule 10a-3T will be required to report given the higher threshold in
Rule 13f-2 and Form SHO, while still collecting 78 percent of the
dollar value.\700\ Additionally the threshold might be less burdensome
to assess than the one in Rule 10a-3T because it requires the Manager
to assess whether it is above the threshold on a monthly basis rather
than on each individual day.\701\ Second, many commenters believed that
weekly reporting was overly burdensome.\702\ The short selling
information required by Rule 13f-2 and Form SHO will be reported less
frequently (monthly rather than weekly) and will involve reporting end
of month positions rather than daily positions. Third, Managers will
have more time to compile and file the Form SHO reports than they had
to compile Form SH.
---------------------------------------------------------------------------

\699\ See Temporary Rule 10a-3T Comment letters (including
Seward & Kissel LLP Letter), available at https://www.sec.gov/comments/s7-31-08/s73108-43.pdf; MFA Letter, available at https://www.sec.gov/comments/s7-31-08/s73108-41.pdf; IAA Letter, available
at https://www.sec.gov/comments/s7-31-08/s73108-38.pdf; ICI Letter,
available at https://www.sec.gov/comments/s7-31-08/s73108-47.pdf;
SIFMA Letter, available at https://www.sec.gov/comments/s7-31-08/s73108-52.pdf. See also supra Part III.D.2. (for more information on
Threshold A using Form SH data).
\700\ See Proposing Release at Economic Analysis Table I:
Various Threshold Levels for Monthly Average Positions and Monthly
Maximum Dollar Value. However, the Commission recognizes that
temporary Rule 10a-3T was in effect in 2008-2009 and the market may
be different, particularly the average short position may be larger.
Only Managers that exercise investment discretion with respect to
accounts holding section 13(f) securities having an aggregate fair
market value of at least $100 million were required to file Form SH.
Additionally, the data lacked data validation according to the needs
of the end user when filed, making the data hard to work with.
\701\ This example assumes the equity is from a reporting
company. Thresholds for non-reporting companies are triggered
following a single day in which the short sale position exceeds
$500,000. See supra Part II.A.3
\702\ See supra note 697 for the comment letters in note, as
well Coalition of Private Investment Companies letter, available at
https://www.sec.gov/comments/s7-31-08/s73108-46.pdf.
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Notwithstanding these cost-reducing differences, the Commission
does recognize that other differences might offset some or all of these
cost reductions. In particular, Rule 13f-2 and Form SHO will require
that the information on activity include daily records if the Manager
exceeds a position threshold that month rather than include daily
records if the Manager exceeds an activity threshold that week.\703\
Also, unlike the Form SH required under Rule 10a-3T, the Form SHO that
will be required by Rule 13f-2 will feature an XML schema that will
incorporate technical validations of certain data fields on the Form,
and will flag technical errors and require the filer to correct the
technical errors before successful submission on EDGAR. However,
because the field validations implemented by Rule 13f-2 and Form SHO
will be limited to technical errors (e.g., letters instead of numbers
in a field requiring only numbers) that will be straightforward to
resolve, such resubmission costs will not be

[[Page 75171]]

significant. Finally, the rule might impose costs on Managers who were
not required to report Form SH because Rule 10a-3T and Form SH did not
apply to Managers that exercise investment discretion with respect to
accounts holding section 13(f) securities with an aggregate fair market
value of less than $100 million.
---------------------------------------------------------------------------

\703\ Rule 10a-3T required institutional investment managers to
report beginning and end of day short position, number of securities
sold short each day if the particular data item exceeded the
threshold. See P 3 final Rule 10a-3T, 73 FR 61678 (Oct. 17, 2008),
available at https://www.sec.gov/rules/final/2008/34-58785fr.pdf.
However, in analysis of Form SH data intraday short selling volume
could not be examined for Form SH because the data field for
``Number of Securities Sold Short'' was populated in only 7% of
observations after filters were applied. See Proposing Release note
80 at 14963 for more information on short volume in Form SH data.
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f. Other Compliance Costs
One commenter stated that the Commission should consider that ``the
sheer number and complexity of the Proposals, when considered in their
totality, if adopted, would impose staggering aggregate costs, as well
as unprecedented operational and other practical challenges.'' \704\
But, consistent with its long-standing practice, the Commission's
economic analysis in each adopting release considers the incremental
benefits and costs for the specific rule--that is the benefits and
costs stemming from that rule compared to the baseline. In doing so,
the Commission acknowledges that in some cases resource limitations can
lead to higher compliance costs when the compliance period of the rule
being considered overlaps with the compliance period of other rules. In
determining compliance periods, the Commission considers the benefits
of the rules as well as the costs of delayed compliance periods and
potential overlapping compliance periods.
---------------------------------------------------------------------------

\704\ NAPFM Letter 3.
---------------------------------------------------------------------------

In this regard, some commenters mentioned the proposals which
culminated in the recent adoptions of Rule 10c-1a, Beneficial Ownership
Reporting, Private Fund Advisers, Settlement Cycle Adopting Release,
and May 2023 SEC Form PF Amending Release.\705\ The Commission
acknowledges that there are compliance dates for certain requirements
of these rules that overlap in time with the final rule, which may
impose costs on resource constrained entities affected by multiple
rules.\706\
---------------------------------------------------------------------------

\705\ See supra note 499. As stated above, commenters also
specifically suggested the Commission consider potential overlapping
compliance costs between the final rule and certain proposing
releases. See supra note 505. These proposals have not been adopted
and thus have not been considered as part of the baseline here. To
the extent those proposals are adopted in the future, the baseline
in those subsequent rulemakings will reflect the regulatory
landscape that is current at that time.
\706\ See supra notes 500-504 (summarizing compliance dates).
---------------------------------------------------------------------------

However, we do not think these increased costs from overlapping
compliance periods will be significant for several reasons. First, the
number of Managers who will also be subject to one or more of these
recently adopted rules could be limited; we estimate that 252 to 1000
Managers may be required under the final rules to report on new Form
SHO, and of those, depending on their activities, only a portion may
also be required to comply with one or more of the recently adopted
rules raised by commenters (and even fewer may need to comply with more
than one of those other rules).\707\ In addition, commenters' concerns
about the costs of overlapping compliance periods were raised in
response to the proposal and as discussed above, we have taken steps to
reduce costs of the final rule.\708\ Finally, although the compliance
periods for these rules overlap in part, the compliance dates adopted
by the Commission are generally spread out over more than a two-year
period from 2023 to 2026.\709\
---------------------------------------------------------------------------

\707\ For example, broker-dealers who need to report on Form SHO
under Rule 13f-2 will also need to comply with Settlement Cycle
Adopting Release but may not need to comply with the requirements of
any of the other recently adopted rules.
\708\ The final rule mitigates costs relative to the proposal in
three ways. First, the reporting threshold for the U.S. dollar
value-based prong for reporting company issuer securities is being
adopted as a monthly average, rather than the daily end-of-day
calculation that was proposed. See supra Part II.A.3.b. Second, Form
SHO is being adopted without the proposed requirement to report
hedging classifications in Information Table 1, and includes a
streamlined Information Table 2, which reduces the form's complexity
and the granularity of the information reported. See supra Parts
II.A.4.d.iii, II.A.4.d.iv. Third, proposed Rule 205 and related CAT
reporting requirements are not adopted. See supra Part III.B.
\709\ For example, compliance periods for the May 2023 SEC Form
PF Amending Release and the Settlement Cycle conclude by mid-2024
while reporting under the final rule will be required by the end of
2024 at the earliest. Similarly, certain compliance deadlines for
Rule 10c-1a extend into early 2026. See supra notes 500-504.
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7. Effect of Certain Electronic Filing and Dissemination Requirements
Rule 13f-2 and Form SHO will require the short position and
activity disclosures to be filed on the Commission's EDGAR system using
a structured, machine-readable data language. In particular, the rule
and Form will require Form SHO to be filed on EDGAR in a custom XML-
based data language specific to that Form (``custom XML,'' here ``Form
SHO-specific XML''). The XML schema for Form SHO-specific XML will
incorporate validations of certain data fields on the Form to help
ensure consistent formatting and completeness.\710\ While the field
validations will act as an automated form completeness check when a
Manager files a Form SHO, the field validations will not be designed to
verify the accuracy of the information filed in Form SHO filings. EDGAR
will subsequently aggregate the reported information at the equity
security level and release the aggregated data to the public on EDGAR.
These requirements will incrementally augment the various effects of
the short position and activity disclosures discussed herein by
enhancing the accessibility, usability, and quality of the Form SHO
disclosures (for use by the Commission) and the aggregate security-
level disclosures (for use by the public). By requiring a structured
machine-readable data language and a centralized filing location
(EDGAR) for the disclosures on Form SHO, the Commission will be able to
access and download large volumes of Form SHO disclosures in an
efficient manner. To the extent that the efficiencies derived from the
centralized filing of the Form SHO disclosures facilitate more rapid
Commission response to potential market manipulation, investors could
indirectly benefit from the fact that such practices are detected, and
possibly addressed, earlier than might otherwise be the case.
---------------------------------------------------------------------------

\710\ See supra Part II.A.4.b. Field validations are
restrictions placed on each data element which would not allow a
filer to file a form if there are certain technical errors in
critical fields. If a Form SHO were to include, for example, letters
instead of numbers in a field requiring only numbers, it would be
flagged as a technical error, at which point the filer would either
be unable to file the Form (if completed using the fillable web form
provided by EDGAR) or the filing would be rejected (if directly
filed in EDGAR in Form SHO-specific XML). To complete the filing,
the filer would need to correct the error and re-file.
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One commenter agreed with the Commission's proposal to require
Managers to provide Form SHO in EDGAR in a Form SHO-specific XML.\711\
Another commenter stated that ``XML is a widely used language and
therefore implementation and maintenance would keep costs low and
efficiency high.'' \712\
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\711\ See Comment Letter from Aaron Franz, available at https://www.sec.gov/comments/s7-18-21/s71821-20120685-272855.pdf (``This
form and forum are ideal for reporting purposes. Further, since the
Form SHO is proposed to be published in XML format it should be easy
for Managers to automate the process of filling and filing the Form
SHO.'').
\712\ ``[XML] would also allow for easy parsing and review of
the data. The costs shouldn't vary very much between managers as the
SHO form should be uniform for all managers, which means they will
all use similar implementations to conform to its usage.'' Anonymous
Comment Letter (Apr. 4, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20122297-278355.htm.
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Similarly, the provision of the aggregated security-level
information at a centralized, publicly accessible location in a
structured, machine-readable data language, will enable investors and
other public data users to download the aggregated information

[[Page 75172]]

directly, and the data might then be analyzed using various tools and
applications. Placing the security-level information someplace other
than a centralized location in a structured, machine-readable language
would mean that data users seeking to analyze the information using
tools and applications would need to search for, extract, and structure
the security-level short position and activity information or pay a
third-party vendor to do so.
Requiring the short position and activity disclosures to be filed
in Form SHO-specific XML will facilitate more thorough review and
analysis of the reported short sale disclosures by the Commission,
which will increase the efficiency and effectiveness with which the
Commission could identify manipulative short selling strategies--which
may also serve as a deterrent to would be manipulators and thus may
help prevent manipulation.
The requirement for short sale disclosures to be filed on EDGAR in
Form SHO-specific XML will result in additional incremental compliance
costs on filing Managers. These direct compliance costs are detailed in
a subsequent section.\713\ Moreover, to the extent these incremental
compliance costs further chill the incidence of short-selling, the
EDGAR and Form SHO-specific XML requirements will increase the
likelihood of the indirect costs that are discussed elsewhere in Parts
VII.C.2, VII.C.3, VII.C.4, and VII.C.6.
---------------------------------------------------------------------------

\713\ See supra Part VIII.C.6.
---------------------------------------------------------------------------

Some commenters expressed concerns with regard to the risks of
cyber criminals accessing non-public Form SHO data.\714\ Although the
SEC is not exempt from cyberattacks, the Commission is pursuing several
actions to protect SEC data and strengthen the EDGAR system as
described above. The Commission recently deployed security and
modernization enhancements focusing on technology upgrades to the EDGAR
system.\715\ The Commission recognizes that the Rule collects sensitive
information and that, while the likelihood of a data breach is low, the
costs of a data breach could be substantial. These costs include but
are not limited to the following: trading losses that could occur due
to the revelation of private trading strategies or economic positions
which may enable identifying and trading opportunistically around such
strategies, such as facilitating a short squeeze; business disruptions
that could occur if the data breach results in temporary system down
time; data breach response costs as market participants must devote
resources to determining how to respond to the data breach; and
reputational harm to individual Managers and the broker-dealers that
employ them. While the potential costs of a breach, to the extent that
one occurs, could be severe, RNSAs, ATSs, and SROs, are currently
subject to existing requirements designed to improve the resiliency and
oversight of securities market technology infrastructure, such as
Regulation Systems Compliance and Integrity (``Regulation SCI'') (17
CFR 242.1000 through 242.1007). Adherence to such regulations can
reduce the probability of a data breach and mitigate the costs
associated with a breach, should it occur.
---------------------------------------------------------------------------

\714\ See MFA Letter, at 8 and Two Sigma Letter, at 5.
\715\ See Annual Report on SEC website Modernization Pursuant to
Section 3(d) of the 21st Century Integrated Digital Experience Act
(Dec. 2022), available at https://www.sec.gov/files/21st-century-idea-act-report-2022-12.pdf.
---------------------------------------------------------------------------

As stated previously, one commenter stated that the LEI and the
FIGI of issuers is ``not commonly provided'' in other holding reports
and would therefore cause Managers to incur additional costs.\716\
While LEIs are widely used in the global financial markets (for
example, the Commission currently requires funds to identify themselves
with LEIs in portfolio holding reports on Form N-PORT),\717\ we agree
that there are costs associated with obtaining and maintaining LEIs.
Currently, U.S. entities may obtain an LEI for a one-time fee of $60
and an annual renewal fee of $40.\718\
---------------------------------------------------------------------------

\716\ MFA Letter, at 9.
\717\ Item A.1.d and Item A.2.c of Form N-PORT. See also Item
B.1.d of Form N-CEN (requiring funds to disclose their LEIs on
annual reports); 17 CFR 242.903(a) (requiring security-based swap
participants to report LEIs to swap data repositories).
Additionally, other U.S. and foreign regulators require firms to
identify themselves with LEIs. For example, Commodity Futures
Trading Commission (CFTC) regulations require counterparties to
swaps, including interest-rate swaps, to report their LEIs. See 17
CFR 45.6 (CFTC LEI requirement for parties to swap transactions).
\718\ A U.S. entity can currently obtain and renew an LEI from
one of eleven LEI operating units. See Get an LEI: Find LEI Issuing
Organizations, Glob. Legal Entity Identifiner Found., available at
https://www/gleif.org/en/about-lei/get-an-lei-find-lei-issuing-organizations (2003). One LEI operating unit currently discloses an
initial fee of $60 and a renewal fee of $40. See Frequently Asked
Questions, Fees, Payments & Taxes, Bloomberg LEI, available at
https://lei.bloomberg.com/docs/faq#what-fees-are-involved (2023).
---------------------------------------------------------------------------

FIGIs also are widely used in the financial markets, and the
Commission recently added FIGI as an optional securities identifier on
Form 13F.\719\ Further, FIGIs, which are automatically assigned and are
retrievable and redistributable without licensing restrictions and at
no cost,\720\ are not expected to result in compliance costs for
reporting persons. Lastly, firms can use identifier mapping tables, and
thus likely would not need new technology systems to accept LEIs and
FIGIs.\721\ However, the Commission recognizes that Managers who do not
currently use those identifiers and who do not already have identifier
mapping capabilities in their data systems would incur one-time costs
to build such functionality.
---------------------------------------------------------------------------

\719\ Special Instruction 11.b.iii of Form 13F. Based on
Commission staff analysis of Form 13F filings in EDGAR, at least 500
unique filers have included FIGIs on their Form 13F filings since
the amendments to Form 13F became effective on January 3, 2023. As
of the second quarter of 2022, 1 billion FIGIs had been assigned to
financial instruments. Financial Instrument Global Identifier
Newsletter Q2 2022, OpenFIGI (June 30, 2022), available at https://www.openfigi.com/about/news/2022/6/30/financial-instrument-global-identifier-newsletter-q-2-2022.
\720\ Allocation Rules for the Fin. Instrument Glob. Identifier
(FIGI) Standard (Object Mgmt. Grp. & Am. Nat'l Comm. X9, amended
2022) section 1.2.1, available at https://www.openfigi.com/assets/local/figi-allocation-rules.pdf (``FIGI Allocation Rules'');
Symbology, OpenFIGI, available at https://www.openfigi.com/about/symbology. FIGI is an open-source, non-proprietary data standard for
the identification of financial instruments across asset classes.
FIGI Allocation Rules sections 1.1.1, 1.2.1, 1.4.1. The Share Class
level FIGI is assigned to equities and funds, and enables users to
link multiple FIGIs for the same instrument to obtain an aggregated
view for that instrument across all countries globally. Id. section
1.4.3.
\721\ FIGI allows users to link various identifiers for the same
security to each other, which includes mapping the FIGI of a
security to its corresponding CUSIP number. See Financial Instrument
Global Identifier, OMG Standards Dev. Org. (2023), available at
https://www.omg.org/figi/.
---------------------------------------------------------------------------

8. Potential Increased Use of Derivatives
The Commission recognizes the risk that the benefits of Form SHO
data could be diminished to the extent that Managers avail themselves
of economically similar arrangements. For example, Managers might
consider trading derivatives in place of engaging in short selling,
particularly for stocks with liquid options.\722\ Benefits might
similarly be diminished if a robust single-stock futures market
develops over time.\723\ Indeed, Rule 13f-2 and its accompanying Form
SHO might be a catalyst for growth in derivatives markets if short
sellers were to look for avenues to take the economic equivalent of
short positions that did not require similar disclosures.
---------------------------------------------------------------------------

\722\ See supra note 527, R. Battalio, and P. Schultz (2011),
Grundy, Lim, and Verwijmeren (2012). One commenter agreed that this
is a likely outcome. See Better Markets Letter at 9-10.
\723\ See supra note 527, Jiang, Shimizu, and Strong (2019).
---------------------------------------------------------------------------

The Reporting Thresholds in Rule 13f-2 are based on a Manager's
gross short position in the equity security itself, and do not consider
derivative

[[Page 75173]]

positions. Consequently, a Manager seeking to build a large short
position without incurring a reporting obligation might hold a short
position just below a Reporting Threshold and use derivatives to take
positions that effectively rise above that threshold.\724\ One
commenter stated that this may be viewed as regulatory arbitrage.\725\
---------------------------------------------------------------------------

\724\ While combining short positions with derivatives may allow
a Manager not to trigger the Reporting Thresholds, using options may
trigger a report to FINRA's LOPR. See supra note 78.
\725\ See Law and Finance Professors Letter, at 3.
---------------------------------------------------------------------------

Using derivatives to establish an economically equivalent short
position that does not include a reporting obligation may be costly.
Options tend to be more expensive than equity transactions,
particularly for less liquid securities. Additionally, some equities do
not have listed options. Consequently, the Managers' desire to avoid
the costs associated with reporting Form SHO information articulated in
Parts VIII.C.1 and VII.C.2 is balanced against the increased cost of
using derivatives such as options to execute a short position. Thus,
for some stocks, i.e., those with illiquid or non-existent options, the
likelihood that Managers will seek to employ alternative arrangements
through options may be minimal. However, academic research has shown
that investors have used options as an alternative means to obtain
short-like economic exposure when short selling is restricted, thus
there is a significant risk that there will be some attempt to employ
alternative arrangements using derivatives, particularly in stocks with
liquid options markets.\726\
---------------------------------------------------------------------------

\726\ See supra note 527.
---------------------------------------------------------------------------

D. Efficiency, Competition and Capital Formation

1. Efficiency
Markets function best and are most efficient when all relevant
information regarding a security is known and is incorporated into
prices.\727\ This includes negative information. When negative
information is not tradable, stocks tend to be overpriced, leading to
an inefficient allocation of capital across the economy.\728\ More
efficient prices lead to better economic outcomes for the macro economy
as capital flows into high value projects and out of low value
projects. Short sellers have incentive to uncover negative information
and to trade in order to profit from that information.\729\ As
discussed in Part VIII.D.2, more transparency in short selling will
improve the amount of information that investors have to value a
stock--increasing price efficiency. However, it might also
disincentivize fundamental research which may harm price efficiency by
limiting the amount of total information has been discovered, and thus,
limiting the amount of information incorporated into stock prices.
Overall, the impact of the adopted rule and CAT amendment on price
efficiency is uncertain.\730\
---------------------------------------------------------------------------

\727\ See Eugene F. Fama, Efficient Capital Markets a Review of
Theory and Empirical Work, The Fama Portfolio 76-121 (2021).
\728\ See supra note 624.
\729\ See supra Part VIII.C.2 for discussion of short selling
motivation.
\730\ See supra Part VIII.C.2 for discussion of price efficiency
effects.
---------------------------------------------------------------------------

Additionally, the CAT amendment will improve the efficiency of the
Commission's oversight and enforcement of regulations relating to the
bona fide market making exception by providing more efficient access to
data on how individual market makers are using the exception.
Currently, the Commission must request information about the use of the
market maker exception from specific broker-dealers.\731\
---------------------------------------------------------------------------

\731\ See supra Part VIII.B.3 for a further discussion of the
inefficiencies of existing data with regards to oversight and
enforcement of rules relating to bona fide market making. In
examinations and enforcement matters, the Commission has used
broker-dealer trade blotters in combination with other regulatory
data to consider whether conditions were met for the use of BFMM
locate exemptions.
---------------------------------------------------------------------------

2. Competition
Investors compete with one another to gather information that they
use to enact trading strategies. Academic research indicates that when
short selling is costly, investors owning the asset have an advantage
in gathering information due to the reduced cost of acting on whatever
information that they gather.\732\ The final rule may increase this
advantage since it will increase the cost of short selling for Managers
above the Reporting Thresholds, as discussed in Parts VIII.C.1 and
VIII.C.2. Relatedly, fund performance is a key determinate of drawing
investor flows. The Commission believes that Rule 13f-2 and Form SHO
might harm competition for fund flows between Managers who do and do
not use short selling strategies. For instance, Managers that are
skilled at uncovering negative information may face additional costs
when transacting on this information, potentially leading to lower
returns.
---------------------------------------------------------------------------

\732\ See Dixon (2022), supra note 581.
---------------------------------------------------------------------------

The Commission believes that the CAT amendment will not alter
significantly the competitive landscape for broker-dealer services.
Because small broker-dealers are likely to use a service bureau to
report their CAT data,\733\ the Commission believes that implementation
costs will be borne by service bureaus and are likely to be recovered
across many service bureau-client broker-dealers. Individual small
broker-dealers may face expenses in configuring service bureau software
packages, but these expenses are likely to be one-time and modest
because the bulk of implementation activities will have been performed
by the service bureau.\734\ Because larger broker-dealers that self-
report CAT Data enjoy economies of scale, they should be able to absorb
the costs associated with compliance more easily, and they may choose
to contract with a service bureau if implementation is unusually
burdensome due to the operation of multiple legacy order-handling
systems.
---------------------------------------------------------------------------

\733\ See Rule 613 Adopting Release for the Commission
discussion of CAT costs to broker-dealers.
\734\ See supra Part VIII.C.6 for a discussion of compliance
costs.
---------------------------------------------------------------------------

In addition, as stated above, some commenters requested the
Commission consider interactions between the economic effects of the
proposed rule and other recent Commission rules, as well as practical
realities such as implementation timelines.\735\ As discussed above,
the Commission acknowledges that overlapping compliance periods may in
some cases increase costs.\736\ This may be particularly true for
smaller entities with more limited compliance resources.\737\ This
effect can negatively impact some competitors because these entities
may be less able to absorb or pass on these additional costs, making it
more difficult for them to remain in business or compete. However, the
final rule mitigates overall costs relative to the proposal,\738\ and
we do not believe these increased compliance costs will be significant
for most Managers.\739\ We therefore do not expect the risk of negative
competitive effects from increased compliance costs due to simultaneous
compliance periods to be significant.
---------------------------------------------------------------------------

\735\ See supra Part VIII.C.6.
\736\ See id.
\737\ But see supra Part VII.B.2 and infra Part IX (the
Commission anticipates that the type of Manager that will trigger a
reporting threshold likely already has sophisticated information
technology and the ability to automate reporting; and that the
reporting thresholds will not apply to a significant number of small
Managers).
\738\ See supra note 706 and accompanying text.
\739\ See supra Part VIII.C.6.f.
---------------------------------------------------------------------------

3. Capital Formation
One of the primary roles of the securities markets is to allocate
capital

[[Page 75174]]

(money) across the economy. If investors believe that a company is
undervalued then, all else being equal, they will buy that stock; if
many investors buy the stock, the price for that stock will increase--
lowering the cost of equity financing and making funding projects
easier for the firm. On the other hand, if investors believe that a
company is overvalued then, all else being equal, they will sell or
short sell the stock to invest in other more profitable ventures. If
enough investors sell or short the stock, then the stock price will
decline. A lower stock price implies more expensive equity financing
and thus a higher weighted average cost of capital. When stocks are
overpriced, they are inherently allocated too much capital, which
deprives more productive ventures from receiving optimal capital and
hinders economic progress. Consequently, short sellers contribute to
capital formation by enhancing price efficiency which helps to ensures
an optimal allocation of capital across firms. Thus, to the extent that
the adopted rule and CAT amendment discourage short selling, as
discussed in Parts VIII.C.1 and VIII.C.2, it may lead to the
overpricing of some stocks and the underpricing of others.\740\ This
mispricing distorts optimal capital formation as it implies that some
firms may have a cost of capital that is relatively too high or too low
with respect to that firm's fundamentals and risk profile.
---------------------------------------------------------------------------

\740\ See supra note 624, Miller (1977).
---------------------------------------------------------------------------

Additionally, academic research suggests that managers learn from
stock price changes, using them as a way to tap into the `wisdom of
crowds' phenomena to improve decisions.\741\ For instance, if a firm
announces a capital investment or other project, and the stock price
moves up or down, then managers may use this information as a signal
about the market's perception of the value of that project. Thus, stock
price reactions may be an input into manager decisions in terms of when
and how to invest capital. To the extent that the rule discourages
short selling, it may make it more difficult for managers to extract
signals from stock prices about the value of capital investments--
particularly low value projects as the rule may attenuate the market's
ability to respond to negative information.
---------------------------------------------------------------------------

\741\ See I. Goldstein and A. Guembel, Manipulation and the
Allocational Role of Prices, 75 (1) The Rev. of Econ. Studies 133-
164 (2008).
---------------------------------------------------------------------------

The costs associated with Managers monitoring their short positions
for compliance with reporting Form SHO along with the negative economic
effects detailed in Parts VIII.C.1, VIII.C.2, and VIII.C.7 may harm
capital formation, specifically capital formation using convertible
debt, if it increases the cost of short selling. Investors may be less
inclined to purchase convertible debt if the cost of hedging that
purchase by short selling the security becomes more expensive--through
both the direct and indirect costs associated with Form SHO.\742\ Thus,
to the extent that the costs associated with Form SHO increase the cost
of short selling they may also increase the cost of hedging convertible
debt and may make that form of financing more expensive. This
effectively increases the weighted cost of capital for firms that use
convertible debt and may hinder their ability to fund operations,
including new investments.
---------------------------------------------------------------------------

\742\ See, e.g., Stephen J. Brown, Bruce D. Grundy, Craig M.
Lewis and Patrick Verwijmeren, Convertibles and Hedge Funds as
Distributors of Equity Exposure, 25 (10) Rev. Fin. Stud 3077-3112
(Oct. 2012).
---------------------------------------------------------------------------

In contrast, adopted Rule 13f-2, Form SHO, and the CAT amendment
may have a positive influence on capital formation if they
disincentivize short selling that takes place in connection with
securities fraud. For example, in one type of fraud, investors holding
convertible debt would engage in a manipulation including short sales
of a stock in an attempt to drive down the price artificially in order
to convert their debt to equity and cover their short positions at a
lower price. To the extent that the rule facilitates better oversight
and prosecution of this sort of fraud, it may facilitate capital
formation by lowering the risk that convertible debt holders will
engage in this sort of fraud. More generally, to the extent that
enhanced oversight of short sale activity deters manipulative activity
such as short squeezes and associated price bubbles stemming from short
squeezes, price efficiency may be enhanced, which in turn, could
further promote capital formation.
Rule 13f-2 may also affect capital formation through investor
confidence. Some commenters on FINRA's short interest proposal
suggested that short selling, and in particular a lack of short selling
disclosure, leads some investors to have less confidence in financial
markets.\743\ One commenter, however, stated that, ``Rule 13f-2 will
not promote greater risk management among market participants, and
hence, not bolster confidence in the markets by providing greater
transparency,'' because investors already use aggregate short interest
data from FINRA, the exchanges, and data vendors for risk management
purposes.\744\ As discussed throughout this release, the Commission,
however, believes that the data from Form SHO and the amendment to CAT
will provide information that is additive to these and other data
sources and will therefore improve short selling transparency and
strengthen investor confidence, which might increase investment
activity and, in turn, promote capital formation.
---------------------------------------------------------------------------

\743\ See letters from NASDAQ, OTC Markets, and CFA Institute in
response to FINRA's short interest proposal) available at https://www.finra.org/rules-guidance/notices/21-19#comments.
\744\ See SBAI Letter, at 3.
---------------------------------------------------------------------------

E. Reasonable Alternatives

1. Alternative Approaches
a. Releasing Aggregated CAT Data
As an alternative to collecting, aggregating, and publishing Form
SHO, the Commission considered amending the CAT NMS Plan to collect
additional information so that the Commission or the Plan Processor
could aggregate and publish CAT Data. This alternative would
effectively eliminate the thresholds for reporting.\745\
---------------------------------------------------------------------------

\745\ See Proposing Release, at 15003.
---------------------------------------------------------------------------

CAT data currently contains a short sale mark and, as part of the
implementation of the Customer Account Information System (CAIS), will
also provide the identities of those transacting. Consequently, the
Commission or the Plan Processor could aggregate information on the
number of short sales that Managers engage in from CAT, assuming that
the Commission or the Plan Processor could determine that a transaction
is by or on behalf of a Manager, and disseminate aggregated information
to the public at monthly intervals--or more frequently. The Commission
or Plan Processor could publish daily statistics on the number of short
sales engaged in by Managers each day in the prior month as reported in
CAT. Additionally, the reports could include information on options
transactions that lead to short exposure, such as purchasing a put
option, or writing a call option.\746\ Furthermore, a longer time
series (for example, a rolling year) to estimate a Manager's position
could be aggregated using CAT data. These could be aggregated to create
a market-wide short position estimate. However, this estimate would be
inaccurate because the alternative does not consider collecting in CAT
information on changes in positions that come from activity other than
secondary market transactions, such as secondary offering purchases,
conversions, creations and redemptions, and option

[[Page 75175]]

exercises and assignments. This inaccuracy could also result in the
market-wide short position estimate being less accurate than current
short interest data.\747\
---------------------------------------------------------------------------

\746\ In this alternative, however, CAT would not contain the
information on option expirations or assignments.
\747\ FINRA's process of gathering and validating short interest
data takes approximately two weeks. See supra note 561.
---------------------------------------------------------------------------

The alternative would result in lower benefits than those from Rule
13f-2 and the disclosures Form SHO requires. The data published under
this alternative would have significant overlap with the data that
would be published under Rule 13f-2 and Form SHO. However, again
assuming that the Commission or the Plan Processor could determine that
a transaction is by or on behalf of a Manager, the data in this
alternative could be more comprehensive in terms of the breadth of
Managers whose short selling information could be aggregated and
published,\748\ because the Commission could publish aggregated data on
short selling transactions from all Managers instead of just those that
meet the threshold. However, the published data would be less accurate
in terms of estimating positions and changes in positions as they would
not include certain activity, such as options assignments, that are not
collected in CAT but that may affect a short position. As a result of
these differences, this alternative would result in less clarity about
bearish sentiment among Managers. Thus, in terms of price efficiency,
this approach would not have many of the same benefits as adopted Rule
13f-2 and Form SHO.
---------------------------------------------------------------------------

\748\ This assumes the Managers that could be identified in CAT
could include all those that would be responsible for reporting
under Proposed Rule 13f-2 and Proposed Form SHO.
---------------------------------------------------------------------------

The alternative would also reduce the benefits of comparing the
published data to short interest because the alternative would focus on
transaction dates rather than settlement dates and the alternative
would not be restricted to large positions.\749\ Short interest
measures short positions as of two settlement dates per month. A
comparison of the data in the alternative to the short interest data
would require either publishing the position data as of the transaction
dates that correspond to the short interest settlement dates or users
would have to use the activity data to offset the dates themselves.
Further, the inclusion of more than just Managers with large short
positions means that the information conveyed by the alternative
relative to short interest data would be less additive than the data
provided that will be provided by adopted Rule 13f-2 and Form SHO.
---------------------------------------------------------------------------

\749\ Adopted Rule 13f-2 requires reporting based on the
settlement date, which is normally two business days after the
transaction day.
---------------------------------------------------------------------------

This alternative would mitigate some of the concerns associated
with Managers being exposed to increased risk of short squeezes or
other retaliation as discussed in Parts VIII.C.1 and VIII.C.2. This
reduced risk stems from the fact that it would be more difficult to
determine whether the short selling activity reported was due to many
Managers short selling small amounts, or just a few Managers short
selling large amounts. It would also be more difficult to identify
individual short sellers based on the data. A lower risk of retaliation
or short squeezes may also mitigate some of the negative effects of
Rule 13f-2 and Form SHO with regard to less overall short selling or
fundamental research that are described in Part VIII.C.2, depending on
the delay in publication under the alternative.
Additionally, this approach would have lower compliance costs for
Managers than the current proposal, as it would not require Managers to
file Proposed Form SHO. One commenter agreed that releasing CAT data
with short sale information would be less costly for Managers than
Proposed Form SHO.\750\ While it would result in the same costs for
Industry Member reporting as those associated with the CAT amendment,
it would increase costs associated with the Plan Processor improving
processing power for the aggregation of CAT data if such computations
could not be performed with existing resources (without reducing other
functionality). Any costs incurred by the Plan Processor would be
passed along to Plan Participants and Industry Members.
---------------------------------------------------------------------------

\750\ See SBAI Letter, at 2.
---------------------------------------------------------------------------

There are several drawbacks to this alternative relative to the
existing proposal. First, it would take some time before CAT data could
be used to develop an estimate of the size of short positions. Thus,
the data would not immediately provide the Commission or market
participants with information about the size of individual large short
positions. Consequently, to the extent that knowing the total size of
short positions held by Managers with large positions conveys
fundamental information to the market, then this fundamental
information would not be immediately available if the Commission were
to adopt a version of this alternative. Additionally, the data provided
by this alternative would exclude transactions outside of the purview
of CAT that may affect short positions. Thus, the data provided under
this alternative would always be estimates of total short positions,
which could be inaccurate for some Managers. Another drawback to this
alternative is that releasing CAT data to the public could increase
security risks. CAT contains highly sensitive information and creating
a process that would release portions of the data, even if aggregated,
could present risks.
A larger expansion of CAT could achieve at least the same data
value as in Rule 13f-2 and Form SHO.\751\ For example, CAT could expand
to require the reporting of all the information that will be collected
in adopted Form SHO. Specifically, the Commission could expand CAT to
include data on account positions, including short selling positions
associated with those positions. In addition, CAT could be expanded to
capture information on changes in those positions. Under this approach,
regulators would have access to the same data as if Managers filed Form
SHO but for all short sellers, not only the subset of Managers
reporting on Form SHO. This approach would also result in additional
information available to regulators not collected in Form SHO that
could improve investor protections. In addition, this alternative would
reduce costs for Managers who are not Industry Members because they
would not be required to report new information. However, costs would
increase for Industry Members, who would have to report a significant
amount of new information on CAT report types that do not exist today
and for Participants who would have to work out technical
specifications and implement changes for new types of CAT reports.
Further, more Industry Members would report this information to CAT
than Managers who, under the final rule, would be required to report
information on Form SHO. It would be a major undertaking for both the
Plan Processor and industry participants to build out and adapt systems
to collect, process, and publish this information. This implementation
would likely be very complex and take a significant amount of time to
compile. Overall, the cost of this alternative is likely to exceed the
costs of adopted Rule 13f-2 and Form SHO.
---------------------------------------------------------------------------

\751\ See Proposing Release, at 15004.
---------------------------------------------------------------------------

Further, if the Commission were to expand CAT to collect additional
information beyond what would be captured by the amendment to CAT, such
as position information, then these additional expansions would impose
significant direct costs to CAT-reporting firms.

[[Page 75176]]

a. FINRA Reporting
As discussed in Part VIII.C.4.i, FINRA already collects and,
together with the listing exchanges, disseminates aggregate short
interest that it collects from member broker-dealers. Consequently, the
Commission could codify FINRA's existing process to ensure that it
continues in perpetuity.\752\ This alternative would have no additional
costs to market participants but would substitute a Commission mandate
for the publication of the short interest data. Several commenters
expressed support for the use of FINRA to satisfy DFA requirements in
lieu of Rule 13f-2 and Form SHO.\753\ The commenters' support is
motivated by familiarity with current FINRA short reporting
requirements and costs that would not be incurred to comply with Rule
13f-2 and Form SHO.
---------------------------------------------------------------------------

\752\ See Proposing Release, at 15004.
\753\ See, e.g., AIMA Letter, at 8; ICI Letter, at 51; Ropes &
Gray Letter, at 4; Two Sigma Letter, at 9.
---------------------------------------------------------------------------

Similarly, the Commission could require FINRA to publish a version
of its short interest information that specifically identifies the
aggregate short interest of Managers--separate from other short
interest.\754\ To accomplish this, reporting broker-dealers would
separately include in their reports to FINRA the short positions that
originate from Managers. FINRA would then compile both total short
interest, as it currently does, as well as a Manager specific short
interest. Because broker-dealers already have experience reporting
short interest data to FINRA and would thus not need to build out new
systems to report the data, this alternative might have been less
expensive than the existing proposal as it would have only required a
modification of an existing process. Since this alternative would not
have provided the Commission with the positions of any identified
Managers or any Manager-specific activity data, the benefits and risks
associated with these data articulated throughout Part VIII.D would
decline. In addition, it would not have distinguished Managers with
large positions from other Managers. Therefore, neither market
participants nor regulators would know what share of short interest was
concentrated among Managers with large positions. As discussed above in
Part VIII.C.1, Managers often accumulate large short sale positions
based on fundamental market research or other factors that differ from
investors with smaller positions, the latter of which are more likely
shorting for hedging or smaller-scale speculative purposes. Therefore,
this alternative would have provided less transparency into the short
sale market relative to the Rule 13f-2 and Form SHO because it would
not have revealed the degree to which short interest was concentrated
among Managers with large positions.
---------------------------------------------------------------------------

\754\ See Proposing Release, at 15004.
---------------------------------------------------------------------------

The Commission also expects that data on Manager short interest in
addition to total short interest would have likely not provided much
incremental value over the existing short interest data due to the
likely significant overlap of the short positions of Managers and total
short interest, and the absence of activity information to better
understand changes in short interest.\755\ Thus, while the alternative
that requires FINRA to produce separate short interest data for
Managers would have reduced costs to market participants relative to
the existing proposal, it also might not have provided the market or
regulators a significant incremental benefit relative to existing short
selling data.
---------------------------------------------------------------------------

\755\ Analysis of Form SH data indicates that these data, which
would be a subset of the data collected in this alternative,
amounted to a high percentage of short interest. Commenters
questioned the use of Form SH data in this and other contexts. See
supra Box 1: Use of Form SH Data for responses to comments on the
use of these data.
---------------------------------------------------------------------------

b. Broker-Dealer Reporting to EDGAR on Behalf of Managers
The Commission could adopt a modified rule that allows broker-
dealers to file Form SHO reports with the Commission on behalf of
Managers.\756\ This alternative might reduce costs as it could
concentrate reporting with broker-dealers that have significant
experience collecting and providing such information--increasing
operational efficiency. On the other hand, Managers may use multiple
prime brokers and thus the reporting prime broker may not have easy
access to information about all such Manager's positions and activity
in a security. Consequently, the reporting prime broker may not know
whether the sum of the manager's positions exceeds either of the
thresholds and thus whether reporting is necessary. Thus, the reporting
broker would need to gather additional information from the Manager
about activity associated with other prime broker(s).\757\ In the
absence of such information gathering, the reporting broker may
mistakenly not report Form SHO for a Manager whose position with that
particular reporting broker is under the threshold, but over the
threshold when positions across brokers are combined. Requiring
additional data collection of a Manager's short positions by the
reporting broker might increase complexity and costs as Managers and
broker-dealers would need to develop systems by which a Manager
provides information to its reporting broker about its activity with
other prime brokers. Alternatively, the Commission could permit broker-
dealers to report on behalf of Managers only if the broker-dealer could
report full information. Thus, Managers using multiple prime brokers
would have the option of providing comprehensive information to their
reporting prime broker, or they could report Proposed Form SHO data
themselves.
---------------------------------------------------------------------------

\756\ See Proposing Release, at 15004.
\757\ The latter could result in the additional complication of
double reporting or prime brokers having to coordinate on who
reports a position. Likely, the least costly solution could involve
Managers being responsible for informing their prime brokers of
their threshold status.
---------------------------------------------------------------------------

c. Harmonization With European Disclosure Requirements
The Commission could also craft Rule 13f-2 and Form SHO to be
consistent with European disclosure requirements.\758\ In 2012, the
European Parliament and the Council of the European Union adopted
regulations on short selling (the ``SSR'') that standardized the
reporting threshold for all EU member states.\759\ Under the SSR, a
natural or legal person holding a short position is required to report
to the relevant regulator when its short position (``net short
position''), computed by taking into account relevant derivative
positions such as options, if any, reaches the initial threshold of 0.2
percent of the issued share capital of the company, and in 0.1 percent
up and down increments thereafter.\760\ The threshold for reporting to
a regulator recently was lowered to 0.1 percent.\761\ If the net short
position reaches 0.5 percent of the share capital of the company, then
the relevant market regulator reports the net short position to the
public with the identity of the short seller revealed.

[[Page 75177]]

New filings are required to be made whenever the net short position
increases or decreases by 0.1 percent of the share capital of the
company. In the EU, trading entities must submit their data to the
relevant regulator by 3:30 p.m. on the following trading day.\762\
Trading entities accomplish public disclosure via a central website
operated or supervised by the relevant competent authority.\763\
---------------------------------------------------------------------------

\758\ See Proposing Release, at 15005.
\759\ See European Parliament and Council Regulation 236/2012,
2012 O.J. (L 86) 1, available at https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2012:086:0001:0024:en:PDF. The SSR
was adopted on Mar. 14, 2012 and its provisions had applicability
dates of Mar. 25 and Nov. 1, 2012.
\760\ Id. at Article 5(2).
\761\ The threshold was temporarily lowered in Mar. 2020 in
response to the COVID-19 pandemic. See ESMA Decision of 16 Mar.
2020, ESMA 70-155-9546, available at https://www.esma.europa.eu/sites/default/files/library/esma70-155-9546_esma_decision_-_article_28_ssr_reporting_threshold.pdf. In September 2021, the
change was adopted on a permanent basis. See European Union,
Commission Delegated Regulation 2022/27, art. 1, 2022 O.J. (L 6) 9,
available at https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32022R0027.
\762\ Id. at Article 9(2).
\763\ Id. at Article 9(4).
---------------------------------------------------------------------------

Consequently, the Commission could structure the rule to require
Manager short selling reports that are consistent with the European
regulations in terms of the thresholds for reporting, the computation
of the threshold, the items reported, the timing for when short sale
information is made public, and the timing for when new reports have to
be issued. This alternative would provide directional information about
short positions because only net short positions are required to be
reported; would likely impose lower compliance costs to Managers; \764\
would likely raise the risk of abusive practices towards short sellers;
would likely increase Managers' ability to evade the threshold; and
would lower the detail of the data the Commission receives relative to
the data from adopted Form SHO.
---------------------------------------------------------------------------

\764\ For Managers operating in both the EU and the US, these
costs may be lower.
---------------------------------------------------------------------------

One advantage of this alternative would be likely lower compliance
costs for Managers that engage in short selling in both the EU and
US.\765\ By only needing one set of compliance systems in place to
satisfy both rules, Managers might enjoy lower costs to comply in both
systems. Additionally, Managers might face lower costs to track and
report net short positions. Moreover, in connection with Regulation SHO
compliance, some Managers already track net positions on an aggregation
unit basis.\766\ Thus, the computation of net positions for such
Managers might be less costly than that of gross short positions as
required by Rule 13f-2. However, for other Managers who are not
currently aggregating positions on a net basis, costs of tracking may
be higher under this alternative than under Rule 13f-2.
---------------------------------------------------------------------------

\765\ Due to uncertainties regarding the EU short selling data
regarding the identities of short sellers and the ability to map
those IDs to US Managers, the Commission cannot identify the number
of US Managers that currently comply with EU regulations.
\766\ See supra note 263.
---------------------------------------------------------------------------

This alternative also could have some negative consequences. The EU
data are timelier than data available under adopted Rule 13f-2, since
the forms are posted publicly immediately after receipt by the
regulator, which potentially facilitates greater price discovery.
However, this comes at the cost of increasing the possibility of
revealing short sellers' proprietary information and its associated
risks, including short squeezes and copycat trading. Additionally, the
EU structure, whereby individual short sellers' names are made public,
might raise the risk of retaliation towards short individual sellers,
as well as the ability for market participants to engage in copycat
strategies that decrease the profitability of gathering information. As
a result of these costs to short sellers, investors may not be able to
gather as much fundamental information as under the final rule.\767\
One commenter,\768\ however, stated that a recent study has found that
the EU's regulation finds no evidence that the disclosure requirements
have resulted in increased coordination or have resulted in short
sellers being targeted for short squeezes.\769\
---------------------------------------------------------------------------

\767\ For analyses of how the SSR lead to increased copycat
trading, lower price efficiency, and increased volatility, see
Stephan Jank, Christoph Roling, and Esad Smajlbegovic, Flying Under
the Radar: The Effects of Short-Sale Disclosure Rules on Investor
Behavior and Stock Prices, 139 (1) J. of Fin. Econ. 209-233 (2021);
Charles M. Jones, Adam V. Reed, and William Waller, Revealing Shorts
an Examination of Large Short Position Disclosures, 29 (12) The Rev.
of Fin. Studies 3278-3320 (2016).
\768\ See Better Markets Letter, at 13.
\769\ See Charles M. Jones, Adam V. Reed, and William Waller,
Revealing Shorts an Examination of Large Short. Position
Disclosures, 29 Rev. of Fin. Studies 3278, 3282 (2016).
---------------------------------------------------------------------------

Another potential consequence of this alternative would be
adjusting position sizes to evade the Reporting Threshold. Multiple
studies found evidence that short sales in the EU are clustered below
the threshold, suggesting that investors are trying to conceal their
positions to protect their underlying investment strategies.\770\ Thus,
short sellers may adjust their positions to either increase their long
exposure or reduce their short exposure, leading to loss of price
efficiency. The Commission believes that since there are benefits to
short sale activity, including increased price efficiency, then there
would likely be increased costs to disclosing manager identities, since
this would reduce short sale activity.
---------------------------------------------------------------------------

\770\ See Stephan Jank, Christoph Roling, and Esad Smajlbegovic,
Flying Under the Radar: The Effects of Short-Sale Disclosure Rules
on Investor Behavior and Stock Prices, 139 (1) J. of Fin. Econ. 209-
233 (2021); Mazzacurati, Julien, The Public Disclosure of Net Short
Positions, European Securities and Markets Authority (ESMA), Trends,
Risks, Vulnerabilities (TRV) Report No. 1, 2018.
---------------------------------------------------------------------------

By reporting net short positions, rather than gross short position,
the Commission and the public would not receive information about
large, but hedged, short positions. For instance, the alternative would
allow \771\ a comparison of total short interest with reported large
hedged short positions, which might provide additional information to
the market about the activities of large, though perhaps non-
information based, traders. While hedged short positions are less
likely to be manipulative in nature, or to pose systemic risk, large
short positions are still potential sources of systemic risk. One
commenter stated that using thresholds based on net short positions
would allow market makers that carry large gross short positions for
market making purposes rather than directional trading strategies to
avoid having to submit Form SHO and incur its associated costs.
According to the commenter, since net positions of market makers tend
to be close to zero, including market maker gross positions in the
public release of Rule 13f-2 data could be misleading to market
participants (assuming that those market participants did not
understand what data Rule 13f-2 will and will not provide).\772\ The
Commission believes, however, that market makers will rarely if ever be
required to report their short positions because the dollar-value
threshold of Rule 13f-2 was increased from the proposal's $10 million
on a single trading day to a $10 million daily average over the course
of a month. It is the Commission's understanding that markets makers
are highly unlikely to hold a gross short position averaging $10
million over the course of trading month.
---------------------------------------------------------------------------

\771\ This comparison, however, would be different than that of
comparing Form SHO data to short interest data.
\772\ See HSBC Letter 2, at 3.
---------------------------------------------------------------------------

A reporting requirement for only net short positions would reduce
the value of Rule 13f-2 data for use in reconstructing market events.
For instance, during the recent meme stock phenomenon, for certain
stocks it became difficult to hedge options transactions using the
underlying security due to the significant price changes in the spot
market. Consequently, positions that were previously judged to have
been hedged, and thus low risk, may no longer have been hedged. In
addition, large short positions with hedges that have been
significantly weakened or broken due to unforeseen extreme market
events, may have become systemically important. In such cases, it would
be useful for the Commission to have information on large short
positions, regardless of perceived net short position, in order to

[[Page 75178]]

aid in the reconstruction of market events. This is a loss of value
compared to adopted Rule 13f-2 and Form SHO, which are triggered by
large gross short positions.
Further, the EU regulations provide activity data if positions
change by 0.1 percent or more. Thus, market participants could only
learn about measured positions changes, rather than position changes of
all sizes. As an example, there may be times where the public may be
interested in seeing the reaction to a corporate announcement, but this
may be limited if Managers do not adjust short positions above the 0.1
percent threshold to trigger reporting.
2. Data Modifications
a. Release Proposed Form SHO Data in Alternative Formats
The Commission could release the information included in Form SHO
in a different manner. This alternative could take one of several
forms.\773\ For example, the Commission could release each Form SHO
report to the public exactly as it is filed, identifying the Managers.
The Commission could also release the Forms as filed, but with the
identities of the filers removed. The Commission could also release the
aggregated data as in the current proposal, but it could publish the
data in different ways in the aggregated Form SHO report, such as
publishing the number of entities underlying the aggregated data or
publishing increases in short positions separate from decreases.
---------------------------------------------------------------------------

\773\ See Proposing Release, at 15005.
---------------------------------------------------------------------------

In the first alternative, the Commission could release Form SHO as
filed, allowing all market participants to see the identities of short
sellers--similar to the EU regulation discussed above. This would
increase the information that market participants have to evaluate
sentiment on particular equities in the market. In particular, for some
market participants, this information would also allow market
participants to better manage risk by allowing them to manage their
exposure to Managers with large short positions. There are also
potential costs to this alternative. One potential result from this
alternative is that if a short seller is viewed as sophisticated and
informed, then releasing identifying information would likely spur
copy-cat trading strategies. This outcome has been documented with
respect to the EU regulation and suggests that revealing the identities
of the short sellers may diminish the value of becoming informed.\774\
In addition, the detailed information on daily short activity could
reveal not just market sentiment, but trading strategies of individual
Managers. Additionally, releasing the names of large short sellers
would further increase the likelihood that the short seller would be
the victim of a short squeeze or other retaliatory actions as described
in Part VIII.C.1.
---------------------------------------------------------------------------

\774\ See supra Part VIII.F.1.iv.
---------------------------------------------------------------------------

Similarly, the Commission could publicly release individual Form
SHO filings with identification information removed from the released
data. This alternative would provide market participants a clearer view
into the activities of large short sellers, potentially improving their
ability to learn from the actions of large short sellers relative to
the current proposal. For instance, the data would allow market
participants to know whether short sentiment was broadly held--as would
be indicated by many filings--or concentrated--as would be indicated by
few filings. This information could potentially improve the market
assessment of bearish sentiment relative to Rule 13f-2, improving price
efficiency.
However, the indirect costs of this alternative would be greater
than for Rule 13f-2 and Form SHO. Releasing all the information from
Proposed Form SHO could reveal trading strategies that would be costly
even if the identities of the short sellers remained anonymous. For
example, releasing this information, even without naming the short
sellers, might increase the risk of copycat trading which reduces the
profits of acquiring information. It might also provide information
about how vulnerable short sellers may be to a short squeeze as it
could give a signal about whether a short seller has a large and
potentially vulnerable short position. In this case, the negative
effects of the rule on the value of collecting information and of short
selling in general would be greater than under the final rule, leading
to less price efficiency and potentially more volatility. Additionally,
even though the data could be released anonymously, it is not clear
that in all cases the identities of the individual short sellers would
remain anonymous.\775\ If market participants were able to uncover the
identities of individual short sellers, then the risk of retaliation or
short squeezes would increase relative to Rule 13f-2 and Form SHO.
---------------------------------------------------------------------------

\775\ Issuers have been known to hire private investigators to
try and uncover the identities of short sellers when they learn that
their stock is being targeted by short sellers. See supra note 622.
Additionally, researchers have used algorithms to unmask the
identities of individuals from masked data released to the public by
the SEC. See Huaizhi Chen, Lauren Cohen, Umit Gurun, Dong Lou, and
Christopher Malloy, IQ from IP: Simplifying Search in Portfolio
Choice, 138 (1) J. of Fin. Econ. 118-137 (2020). While the
Commission could design this alternative to avoid the specific
vulnerabilities exploited by Chen et al (2020) it is possible that
motivated researchers and market participants could find some other
unforeseen way to link the public data to individual short sellers.
---------------------------------------------------------------------------

Alternatively, the Commission could release the data as specified
in the current proposal but also include the number of entities whose
Form SHO reports were collected. This information would provide the
market with additional detail about whether short sentiment was broadly
held by multiple Managers, or narrowly held by just one or a few. This
information could be useful as market participants assess bearish
sentiment in the market and adjust their actions accordingly. However,
adding this information might also increase the risk of short squeezes
or other retaliatory actions in the case where there are very few
reporters of Form SHO. In the Form SH data collected under temporary
Rule 10a-3T, 32 percent of stocks had only one Manager reporting a
position per month.\776\ Such a situation could signal to market
participants that one, or a few, short sellers have large short
positions that could potentially be vulnerable to a short squeeze.
---------------------------------------------------------------------------

\776\ See Proposing Release, at 14963 for more information on
methodologies and caveats for using Form SH data. See also supra Box
1: Use of Form SH Data for responses to comments on the use of these
data.
---------------------------------------------------------------------------

Similarly, the Commission could collect Form SHO data but publicly
release the daily aggregate increases separately from the daily
aggregate decreases in short positions as opposed to daily net changes
to short positions as adopted in Form SHO. This approach would provide
the public more detailed information and understanding on what drives
changes to short positions. However, separating daily aggregate
increase from decreases in short positions could increase the risk of
revealing trading strategies, which could disincentivize short selling
and harm market quality.
b. Collect Data on Derivatives Positions
Investors can use derivatives to take an economically short
position in a security. For example, an investor with a bearish view of
a stock can purchase a put option in that stock. Consequently, for a
more complete view of the total economic short position that a Manager
has taken, the Commission could require Managers who report adopted
Form SHO to also disclose their derivatives positions on underlying
equity securities such as options and

[[Page 75179]]

total-return swaps as an alternative to Form SHO as adopted, which does
not directly collect information on derivatives.\777\ This alternative
refers only to options and other derivative securities for which their
transactions do not fit the definition of a short sale under Rule
200(a) of Reg SHO.
---------------------------------------------------------------------------

\777\ See Proposing Release, at 15006.
---------------------------------------------------------------------------

Requiring this data would provide a more complete view of the
economic short position that a Manager engaging in a large short sale
has taken.\778\ Consequently, the information would aid market
participants in gauging bearish sentiment in a security relative to
Rule 13f-2 and Form SHO, as adopted. This information may also help the
Commission to better evaluate potentially risky short positions and
respond more quickly in the case of a market event. The Commission
could also better reconstruct market events, such as the recent meme
stock events in January 2021, with options positions data.
---------------------------------------------------------------------------

\778\ One commenter argued including derivatives for Rule 13f-2
would give a more complete picture of Managers' positions. See
NASDAQ Letter, at 3.
---------------------------------------------------------------------------

Requiring options data to be reported on Form SHO would increase
the compliance costs to Managers of reporting on Proposed Form SHO. One
commenter stated that the inclusion of derivatives, warrants,
convertible debt, and ETFs would be costly.\779\ Adopted Rule 13f-2
will compel Managers to track their gross short positions in individual
equities in a month. Tracking of ETFs for the purposes of adopted Rule
13f-2 is the same as tracking any equity security with the exception of
tracking shares outstanding, which might be marginally more costly.
Additionally, securities that may be used to change a gross short
position, such as options or convertible debt, are unaffected by Rule
13f-2 unless they are used in a manner that changes gross short
position in an equity security.\780\ The alternative discussed here
would require explicit tracking and reporting of such securities.
---------------------------------------------------------------------------

\779\ See MFA Letter, at 12.
\780\ Such as a Manager exercising a call option to buy equity,
and thus decreasing the Manager's gross short position, if any.
---------------------------------------------------------------------------

While Managers generally track their options exposure carefully, it
is frequently different trading desks that execute options trades and
equity transactions. Thus, it is possible that Managers use separate
systems to track their options and equity positions. For these
Managers, collecting options and equity transactions to report the data
required for Proposed Form SHO would require building a process to pull
data from two separate systems--increasing the cost of complying with
the rule. Requiring derivative position information might also be
duplicative of other derivatives reporting requirements.
3. Threshold Modifications
As an alternative to the adopted Form SHO Thresholds, the
Commission could require reporting Form SHO at either higher or lower
thresholds--or no threshold.\781\ Commenters to the Proposal Release
expressed a range of opinions on the thresholds, some of whom supported
increasing the thresholds and others decreasing the thresholds relative
to Proposed Form SHO.\782\ When selecting thresholds, the fundamental
economic tradeoff is the value of the data versus the cost of
collecting the data. Alternative thresholds that are lower than
Threshold A or Threshold B specified in Rule 13f-2 or an alternative
that would not contain a threshold would produce more data as more
entities would be required to report.
---------------------------------------------------------------------------

\781\ See Proposing Release, at 15007.
\782\ Furthermore, in response to a solicitation of comments on
Temporary Rule 10a-3T, commenters suggested thresholds generally
ranging from 1% to 5%. See Proposing Release, at 14963 n.79 for
links to specific comment letters.
---------------------------------------------------------------------------

Commission analysis of Form SH data collected under temporary Rule
10a-3T indicates that the gross short position thresholds in adopted
Form SHO for Threshold A, equal to daily averages of $10 million or 2.5
percent of shares outstanding, would have collected more than three-
quarters (78.5 percent) of the dollar value of short positions.\783\
Therefore, an alternative that lowers the threshold might lead to only
a minor increase in coverage relative to the adopted thresholds in Form
SHO. Nevertheless, the Commission recognizes that even a relatively
small increase in coverage could increase benefits. For example, such
an alternative would provide market participants with a clearer view of
Manager bearish sentiment compared to adopted rule and form, as more
Managers would be required to report the data, making the data more
comprehensive.
---------------------------------------------------------------------------

\783\ Commenters questioned the use of Form SH data in this and
other contexts. See supra Box 1: Use of Form SH Data for responses
to comments on the use of these data.
---------------------------------------------------------------------------

A lower threshold would also enhance Commission oversight of short
selling and allow the Commission to more easily reconstruct significant
market events involving short selling--again because the data would be
more comprehensive. One commenter stated that reducing or eliminating
the reporting thresholds to Form SHO would provide additional benefits,
since unknown, hidden short positions pose risks to investors and the
markets. Reducing or eliminating reporting thresholds would reveal the
identity of all holders of short sale positions, thereby reducing these
risks.\784\
---------------------------------------------------------------------------

\784\ See Better Markets Letter, at 12.
---------------------------------------------------------------------------

However, a lower or no threshold would increase the cost of
reporting Form SHO data in terms of compliance costs associated with
Managers compiling and filing the required data thorough EDGAR and in
the indirect costs associated with revealing short sellers'
information. Evidence of this increase in aggregate reporting costs can
be seen through an analysis of Form SH data. For example, if the
reporting thresholds of adopted Form SHO were reduced from average
daily gross position of 10 million or 2.5 percent of shares outstanding
to $5 million or 1 percent of shares outstanding, the number of
reporting Managers would rise from 252 to 314. Furthermore, the
increase in the share of gross short sale dollar volume covered by
reporting Managers would rise from 78.5 percent to 88.6 percent. In
addition, Managers would likely be required to file reports for more
securities, which would further increase compliance costs. Indirect
costs include increased risk of copycat short selling strategies, which
can lead to herding and increased volatility, and short sellers
engaging in strategic behavior to build short positions just underneath
the threshold, which would lead to lower price efficiency.\785\
---------------------------------------------------------------------------

\785\ See supra Part VIII.F.1.iv for discussion of this behavior
in Europe.
---------------------------------------------------------------------------

In some cases, a lower threshold would decrease the indirect costs
associated with adopted rule because it would be harder to identify
individual short positions from aggregate reporting if there are many
entities reporting.\786\ This effect may not be universally true,
however. In particular, at thresholds just below Threshold A, the
number of securities in which only one entity reported Form SH
increases.\787\ This result implies that there are a number of
securities for which only one short seller held a short position at a
level lower than the current cutoff. In these

[[Page 75180]]

cases, lowering the threshold might increase the risk of identifying
individual short sellers.
---------------------------------------------------------------------------

\786\ See supra Part VIII.C.1 and Part VIII.E.1 with
accompanying text for more information on risks of identifying
individual short sellers.
\787\ According to Form SH data, 39% of securities would have
only one Manager reporting at or above the threshold of $10 million
average daily and 2.5% average daily of shares outstanding. If the
percent threshold was reduced to 1% average daily of shares
outstanding along with the $10 million average daily threshold the
number of securities with only one Manager reporting would increase
to 41%.
---------------------------------------------------------------------------

In contrast, alternatives that would raise the reporting threshold
would lower many of the costs associated with providing Form SHO data,
since fewer entities would be required to report. It would also limit
somewhat the value of the data--again as the reported data would
reflect a smaller portion of overall short positions. One means of
increasing the threshold would be to require that both thresholds in
Threshold A (i.e., both daily averages of $10 million and 2.5 percent
of shares outstanding) be reached before a Manager is required to file,
instead of either threshold. Another alternative would be to increase
one or both of thresholds in Threshold A but continue to require only
one of them be reached before a Manager is required to file Form SHO.
This decline in aggregate reporting costs can be seen with an analysis
of Form SH data, which show that increasing the Form SHO daily average
thresholds from 2.5 percent and $10 million to 5 percent and $25
million would reduce the number of reporting Managers from 252 to 165.
In addition, it would reduce the percentage of short sale dollar volume
covered by reporting Managers from 78.5 percent to 58.4 percent.
Higher thresholds, however, might also come with increased risk of
identification and retaliation towards short sellers because at some
point the likelihood that more than one investor holds a very large
short position diminishes. For example, according to analysis of Form
SH data, if the Form SHO thresholds rose from an average daily position
of $10 million or 2.5 percent of share outstanding to $25 million or 5
percent of shares outstanding, the share of reported securities with
only one Manager would rise from 39.3 percent to 48.4 percent.\788\
---------------------------------------------------------------------------

\788\ See Proposing Release, at 14963 for more information on
methodologies and caveats for using Form SH data.
---------------------------------------------------------------------------

Another alternative would be to raise the percent threshold from
2.5 percent to 5 percent, as suggested by one commenter,\789\ without
altering the $10 million threshold. Commission analysis of Form SH data
indicates that this would only reduce the number of reporting Managers
from 252 to 247. However, further analysis reveals that there could be
a substantial loss of transparency into stocks with less than a $400
million market capitalization. Since stocks with market caps exceeding
$400 million will always trigger the $10 million threshold before the
2.5 percent trigger (2.5 percent of $400 million = $10 million),
raising the 2.5 percent to 5 percent will not impact the number of
large positions reported in stocks with market caps exceeding $400
million. However, stocks with market caps under $400 million will
always trigger the 2.5 percent threshold before the $10 million
threshold. Thus, raising the 2.5 percent threshold to 5 percent without
altering the $10 million threshold would result in fewer smaller stock
positions being reported. Furthermore, analysis of Form SH data
indicates that for stocks that are specifically sensitive to the 2.5
percent threshold (i.e., stocks in which all reportable short sale
positions are under $10 million and therefore only trigger the 2.5
percent threshold), raising the threshold to 5 percent would reduce the
number of reportable stocks from 131 to 30, a decline of about 77
percent. Thus, Form SH data analysis indicates that while raising the
threshold from 2.5 percent to 5 percent might only result in a small
reduction in the number of reporting Managers, it could nevertheless
lead to a significant loss of transparency in small stocks (stocks with
market capitalizations under $400 million).
---------------------------------------------------------------------------

\789\ See supra note 120 and associated discussion.
---------------------------------------------------------------------------

For securities subject to Threshold B, the economic impact of
either raising or lowering the dollar threshold would be similar.
Raising the threshold would lower compliance costs but also the quality
of the data, while lowering the threshold would do the opposite. For
example, if the Commission raised Threshold B from $500,000 to $10
million, then under the assumption of one manager short selling each
Threshold B security, the total number of short positions captured for
Threshold B securities would decrease from 23.72 percent to 8.76
percent.\790\ Similarly, under the same assumptions, lowering the
threshold to $50,000 would increase the number of short positions
captured to 48.08 percent.
---------------------------------------------------------------------------

\790\ See Proposing Release, at Table II (analysis within
table).
---------------------------------------------------------------------------

As another alternative to the proposed Threshold A, the Commission
could establish a threshold based on one rather than both of the
thresholds in Rule 13f-2, i.e., either the average daily dollar short
position or the percent of shares outstanding.\791\ The advantage of
this alternative is that it might reduce compliance costs by
simplifying reporting requirements. One commenter stated that the two-
prong threshold for reporting companies was, ``overly and unnecessarily
complex.'' \792\ In addition, the commenter said that using a
percentage-based threshold was more costly to Managers, in part because
it can be burdensome to obtain data on shares outstanding, which serves
as the denominator in the calculation of the percentage-based
threshold.\793\ Another commenter, however, stated that, relative to
percentage-based threshold, ``compliance with a dollar value threshold
typically requires significant manual processes and more difficult
system buildouts.'' \794\ The Commission acknowledges that a dollar-
value threshold might be somewhat less complicated for some Managers,
but nevertheless believes that data tracking the number of shares
outstanding are generally readily available, and that it is
straightforward to calculate an average daily gross short position as a
percentage of outstanding shares.
---------------------------------------------------------------------------

\791\ See Proposing Release, at 15008 for discussion of this
alternative with the $10 million threshold as proposed, not as
adopted.
\792\ See MFA Letter, at 13
\793\ See Proposing Release, at 15008.
\794\ See ICI Letter, at 9.
---------------------------------------------------------------------------

The Commission also acknowledges that using a single threshold for
Threshold A would lower compliance costs, primarily because fewer
entities would be required to report. However, choosing which of the
two thresholds to drop would impact which positions are more likely to
trigger the remaining threshold. For example, an alternative that
retained only the $10 million daily average threshold would decrease
the likelihood of small cap positions being reported, since these firms
reach the 2.5 percent threshold before the $10 million threshold.\795\
Smaller market capitalization stocks tend to be easier to manipulate
and less stable. Thus, an alternative that excludes the 2.5 percent
threshold would result in less visibility into the actions of short
sellers among smaller market capitalization stocks and may undermine
the ability of Rule 13f-2 to reduce manipulative behavior among these
stocks, as articulated in Part VIII.C.1.
---------------------------------------------------------------------------

\795\ Short positions in stocks with market capitalizations
below $400 million will trigger the 2.5% threshold before they
trigger the $10 million threshold.
---------------------------------------------------------------------------

Commission analysis of Form SH data suggest that an alternative
that includes only the 2.5 percent threshold would result in a
substantial reduction in the number of reporting Managers relative to
the two-prong threshold in adopted Rule 13f-2. More specifically,
switching from the adopted Form SHO thresholds of $10 million daily
average or 2.5 percent of shares outstanding to a single prong
threshold of 2.5 percent would cause the number of reporting Managers

[[Page 75181]]

under Form SH to fall from 252 to 115. Furthermore, it would
drastically reduce the share of covered short sale volume of reporting
Managers from 78.5 percent to 16 percent. One commenter stated that
excluding the dollar-based threshold and solely using a threshold of 5
percent or more, ``. . . would allow the Commission to achieve its
objectives without imposing unnecessary complexity on advisers and
other reporting Managers.'' \796\ Form SH data, however, indicate that
this would reduce the number of reporting Managers from 252 to 55 and
the share of covered short sale volume from 78.5 percent to 9 percent.
---------------------------------------------------------------------------

\796\ See ICI Letter at 9.
---------------------------------------------------------------------------

More generally, the alternative of requiring a threshold based only
on short positions as a percent of shares outstanding would largely
eliminate reporting in larger securities. Note that for stocks with
market capitalization above $400 million, short sellers reach the $10
million threshold before the 2.5 percent threshold. Furthermore, for
large cap stocks, generally defined as having a market capitalization
exceeding $10 billion, short position would have to be more than $250
million in order to trigger the 2.5 percent threshold. Consequently, an
alternative in which the Commission required reporting based only on
the percent of shares outstanding would result in fewer Form SHO
reports for stocks with larger market capitalizations. Less visibility
into the actions of short sellers in larger market capitalization
stocks would provide less information about bearish sentiment in the
economy. This is because larger market capitalization stocks, which are
more well-established than small cap stocks, are more likely to be
shorted due to general pessimism about the macroeconomy and less likely
to be targeted as part of manipulative strategy in comparison to small
cap stocks.\797\
---------------------------------------------------------------------------

\797\ See, e.g., Carole Comerton-Forde & T[amacr]lis J.
Putni[ncedil][scaron], Stock Price Manipulation: Prevalence and
Determinants, 18:1 Rev. of Fin. 23-66 (2014), available at https://doi.org/10.1093/rof/rfs040 (for evidence on small and less liquid
stocks higher exposure to manipulative behavior by investors). See
also discussion in supra Part VIII.C.1.
---------------------------------------------------------------------------

As another alternative, the Commission could structure the
Reporting Thresholds to include the nominal economic value of short
derivative positions. Specifically, reporting on Form SHO would be
required if a Manager's total short position in the stock and in
derivatives such as options and security-based swaps exceeded the
relevant Reporting Thresholds.\798\ This alternative would decrease the
likelihood that Managers seek to avoid the Reporting Thresholds by
transacting in derivatives and thus, may increase the benefits of the
data from Form SHO.\799\ Making it more difficult to circumvent the
reporting requirements using derivatives might also decrease strategic,
and sub-optimal, trading around the Reporting Thresholds which leads to
lower price efficiency.\800\ However, increasing the amount of
information that was disclosed on publicly released Form SHO may
increase copycat activity that leads to herding and increased
volatility. Conversely, incorporating derivatives in Form SHO reports
may dilute the information filed by Managers relative to the case where
only equity gross short positions are included, thereby reducing the
amount of herding. This alternative could also result in situations in
which Managers would have a reporting obligation despite having large
long positions in the equity over the entire month, which would
increase costs for the Managers and would provide less relevant
information. Additionally, including derivatives in the Reporting
Threshold computations would increase the complexity of the rule and
the cost of implementing the rule. For instance, Managers may need to
pull information from multiple systems to determine the total value of
their short position for reporting. Pulling information from multiple
systems can be costly. Additionally, while valuing short positions in
most equities is fairly straightforward, this is not true for
derivatives. There are often multiple methodologies used by different
market participants to value derivative contracts such as options.
Thus, an alternative including a threshold for a Manager's short
exposure in derivatives would be significantly more complicated than
Adopted Rule 13f-2 and Form SHO.
---------------------------------------------------------------------------

\798\ See Proposing Release, at 15008 (discussing this
alternative with the $10 million threshold as proposed, not as
adopted).
\799\ See supra Part VIII.C.8.
\800\ See supra Part VIII.C.1 for further discussion on
strategic trading around the threshold and how the rule is designed
to reduce it.
---------------------------------------------------------------------------

An additional alternative could also involve requiring reporting
thresholds to be based on activity and not just positions.\801\ This
alternative would increase the amount of information available to the
Commission regarding the activities of entities engaging in a high
volume of short selling. This alternative might provide additional
insight into Managers that sell short but do not hold short positions.
Specifically, entities with high volumes of short selling are likely to
be market makers who use short selling to maintain two sided quotes in
the absence of inventory and other high frequency traders. These
entities trade in large volumes but tend to end trading sessions fairly
flat on inventory in larger stocks. Consequently, requiring reporting
based on activity might not significantly improve the market's ability
to assess of bearish sentiment. However, one area where reporting based
on activity may be beneficial would be in identifying short selling
attacks that are relatively short lived. For example, an investor with
a convertible bond may seek to distort the stock price right around the
exercise date of their bond as such contracts stipulate that the holder
of the convertible bond receives more shares if the stock price is
lower. In this case, an attempted manipulator may seek to aggressively
short sell right around a convertible bond exercise date. Activity that
is concentrated enough in time might not trigger a reporting threshold
based on average position over the prior month under the final rule.
While this activity information may be helpful in flagging unusual
short selling activity, the Commission could conceivably build reports
based on existing CAT data \802\ that would be more effective at
detecting such behavior and Rule 13f-2 would identify these activities
if the market participant exceeds the Reporting Thresholds.
---------------------------------------------------------------------------

\801\ See Proposing Release, at 15009.
\802\ In particular, because such an analysis would not involve
estimating a position for the Manager, the limitations of CAT are
less important.
---------------------------------------------------------------------------

As an alternative, the Commission could measure the thresholds as
of the last settlement day of the month rather than using the $10
million average daily prong or 2.5 percent average daily prong for
Threshold A and the $500,000 threshold over any single day for
Threshold B.\803\ This alternative would have the advantage of
simplifying compliance with Rule 13f-2 and Form SHO and thus may reduce
compliance costs. Form SH data analysis indicates that using last
settlement day of the month instead of average daily thresholds for
Threshold A would only result in a marginal increase in the number of
reporting Managers, from 252 to 256. However, the Commission is
concerned that this alternative might also invite more strategic
trading around the end of the month than adopted Form SHO, which is
structured to prevent trading around the threshold. For

[[Page 75182]]

instance, Managers with short positions near the threshold may
temporarily reduce their positions to below a Reporting Threshold on
exactly the days that short positions are measured for compliance with
the threshold to avoid reporting. This inefficient trading may reduce
price efficiency right around the reporting days as trading to avoid
holding a position that would trigger reporting is not trading based on
economic considerations but rather trading based on regulatory
considerations and thus is inefficient and may harm price efficiency on
these days.
---------------------------------------------------------------------------

\803\ See Proposing Release, at 15009 (discussing this
alternative with the $10 million threshold as proposed, not as
adopted).
---------------------------------------------------------------------------

Instead of Threshold B, the Commission could require the same two
prong, $10 million or 2.5 percent daily average gross position
reporting threshold for short positions in equity securities of non-
reporting company issuers, as well as for equity securities of
reporting company issuers.\804\ This approach might be less complex as
all short positions would be subject to the same reporting threshold.
Further, it would retain a threshold that relates to the size of the
short position and to the size of the issuance to ensure capturing
positions that are relatively large whereas the Threshold B imposes a
flat threshold that could result in some relatively large positions, in
terms of daily average gross position of percentage of shares
outstanding, not being filed on Form SHO.
---------------------------------------------------------------------------

\804\ See Id.
---------------------------------------------------------------------------

However, this alternative would increase the burden for Managers as
information for non-reporting company issuers can be hard to find,
making threshold calculations difficult. In particular, information on
the number of shares outstanding can be difficult to obtain for non-
reporting company issuers and when it is available it is often stale
and inaccurate. This could lead to problems with the calculations for
the 2.5 percent threshold. One commenter stated that a single
percentage-based threshold level applied to both reporting and non-
reporting company issuers, ``. . . would mitigate unnecessary
operational and cost burdens on managers, including complexities from
monitoring and reporting with up to three separate thresholds.'' \805\
However, this alternative would require Managers to know the number of
shares outstanding in non-reporting companies for each trading day for
their short positions, and would therefore effectively impose new
recordkeeping costs on Managers. Further, there are multiple sources
from which Managers can obtain shares outstanding for securities of
non-reporting company issuers. At times these sources may report
different numbers for total shares outstanding. Consequently, Managers
could also feel the need to track the sources used to identify shares
outstanding each day and would incur costs to determine which sources
to trust for compliance. One concern is that Managers would try to game
different data sources in order to avoid having to report Form SHO.
---------------------------------------------------------------------------

\805\ See ICI Letter, at 9.
---------------------------------------------------------------------------

The Commission could enhance record keeping requirements associated
with this alternative by requiring Managers to record and report on
Form SHO the source of data used to calculate shares outstanding.\806\
This could improve the quality of the information reported in Form SHO
for securities of issuers who do not report with the Commission by
improving the quality of the data that Managers use when calculating
their positions. It might also help mitigate concerns that Managers may
try to game different data sources to avoid complying with the
regulation. For securities of reporting issuers, accurate shares
outstanding information is readily available, thus concerns about
gaming data sources or using low quality information is not as
relevant. However enhanced record keeping requirements would increase
the costs to Managers. While the Commission believes that most Managers
have ready access to this information, requiring that Managers record
and report the information would require Managers to further build out
systems, in conjunction with the systems already required to report
Form SHO, to also capture the source of information used.
---------------------------------------------------------------------------

\806\ See Proposing Release, at 15009.
---------------------------------------------------------------------------

4. Other Alternatives
a. Alternative Reporting Frequency or Additional Reporting Delay
As alternatives, the Commission could require reporting at
different frequencies than the monthly reporting mandated by the rule.
Specifically, the Commission could require gross short position
assessment and reporting (assuming at least one of the thresholds had
been crossed) at frequencies that are shorter than a month.\807\ For
example, the Commission could require reporting daily, weekly,\808\
biweekly, or whenever there is a significant change in short position
(as is currently the standard in the European Union), but at least
monthly. These alternatives could require reporting if the average
short position surpasses the threshold for the month prior to the
reporting period or if average positions surpass the threshold for the
prior period (e.g., one week, or two weeks). This could result in an
increase in the number of Managers that report, since it is likely that
some Managers hold short positions that cross a Form SHO threshold for
the alternative time frequencies (e.g., one week) but not for the
entire month. These Managers may be required to report with more
frequent disclosures relative to Adopted Form SHO.
---------------------------------------------------------------------------

\807\ See Proposing Release, at 15009. In this alternative, the
thresholds would conform to the reporting period, such that the 2.5%
and $10 million daily average thresholds would be calculated over
the alternative shortened time period.
\808\ Many commenters on temporary Rule 10a-3T stated that
weekly reporting was overly burdensome. See, e.g., Seward Kissel
LLP, available at https://www.sec.gov/comments/s7-31-08/s73108-43.pdf; Investment Adviser Association, available at https://www.sec.gov/comments/s7-31-08/s73108-38.pdf; and Securities Industry
and Financial Markets Association, available at https://www.sec.gov/comments/s7-31-08/s73108-52.pdf.
---------------------------------------------------------------------------

The fundamental tradeoff with such thresholds compares the
simplicity of the rule with the potential to game the threshold by
strategic trading. Such alternative frequencies face the fundamental
tradeoff of increased cost and increased transparency of the data. Put
simply, increasing the reporting frequency increases the number of
reports and thus increases the cost associated with reporting by a
similar factor.
Increased reporting frequency could also result in collecting more
information than the current proposal. The difference between the
information collected in the current proposal and this alternative
would mainly come from the frequency and timeliness of the reports. The
improved timeliness could increase the risk of copycat strategies and
short squeezes, but also improve price efficiency. One commenter stated
that a study of the EU's short sale disclosure policy, which requires,
``immediate public disclosure of large short positions,'' finds no
evidence of increased manipulation or short squeezes.\809\ However,
multiple studies have found evidence that the EU's policy has result in
short sellers seeking to avoid disclosure by accumulating positions
slightly under the threshold, which could result in a loss price
efficiency.\810\ Furthermore, one commenter stated that increasing the
disclosure delay to 45 days would help prevent copycat trading and
short squeezes.\811\ The Commission

[[Page 75183]]

recognizes that there are benefits and costs to more timely disclosure,
and believes that the two week delay incorporated in adopted Form SHO
effectively balances these costs and benefits.
---------------------------------------------------------------------------

\809\ See Better Markets Letter, at 13 and Charles M. Jones,
Adam V. Reed, and William Waller, Revealing Shorts an Examination of
Large Short. Position Disclosures, 29 Rev. of Fin. Studies 3278,
3282 (2016).
\810\ See supra note 770.
\811\ See MFA Letter at 4.
---------------------------------------------------------------------------

The Commission could also consider different reporting windows for
Managers who meet the threshold short positions to report on Form
SHO.\812\ The current proposal requires Managers to report on Form SHO
within 14 calendar days of the end of each month. Shorter time horizons
may increase the cost of reporting as Managers would have less time to
gather and file the data on Form SHO and may need to build costlier
procedures to ensure compliance with the reporting requirement.\813\ A
mitigating factor would be that most of this reporting is likely to be
done electronically, consequently it may not take the full 14 calendar
days for Managers to gather and file the required data to the
Commission.
---------------------------------------------------------------------------

\812\ See Proposing Release, at 15010.
\813\ See Seward & Kissel LLP Letter (discussing Temporary Rule
10a-3T) at 5, available at https://www.sec.gov/comments/s7-31-08/s73108-43.pdf.
---------------------------------------------------------------------------

Additionally, the Commission could adopt different horizons for
releasing the aggregated data after the reporting deadline.\814\ The
fundamental tradeoff in terms of the delay between reporting and when
the Commission releases the aggregated data is that a shorter delay
increases the relevance of the data, in terms of the bearish sentiment
it contains, which may improve managerial decision making, as well as
providing more timely information about bearish sentiment in the
market.\815\ At the same time a shorter delay increases the likelihood
of copycat behavior, which decreases the incentive that short sellers
have to gather information potentially leading to lower price
efficiency and greater volatility.\816\ The converse is true for longer
delays. Additionally, a shorter delay provides less time for the
Commission to aggregate the data and run checks on the aggregated data
to ensure the Commission's aggregation is error-free, and also provides
less time for amendments to be filed, both of which could harm the
quality of the data.
---------------------------------------------------------------------------

\814\ See Proposing Release, at 15010.
\815\ One commenter stated that the ``. . . proposed data
framework will not provide timely insight for the SEC to act given
that it is monthly data with 14 days delay after month end.'' See
SBAI Letter, at 2. The Commission recognizes that removing the 14-
day delay would increase its ability to monitor and respond more
rapidly to market events stemming from short sale activity. However,
as discussed elsewhere in this release, the delay is in part
necessary to review and validate the data, and may also serve to
reduce the likelihood of short squeeze and copycat behavior.
\816\ One commenter stated that the public dissemination of Rule
13f-2 data should be increased from 14 days to 45 days in order to
provide additional protection against exposure of trading
strategies, which could be used as part of a replication strategy or
to facilitate a short squeeze. See MFA Letter, at 4. More generally,
the commenter believes that since the amendments would provide only
``limited marginal benefits,'' reducing the cost of compliance,
including the risk of exposing the identities of investment managers
and their proprietary trading strategies, is warranted.
---------------------------------------------------------------------------

b. Report Form SHO in Inline XBRL
The adopted rule would require Form SHO to be filed in Form SHO-
specific XML, a structured, machine-readable data language. As an
alternative, the Commission might require Form SHO to be filed in
Inline eXtensible Business Reporting Language (``Inline XBRL''), a
separate data language that is designed for business reporting
information and is both machine-readable and human-readable.\817\
Compared to the adopted Form SHO, the Inline XBRL alternative for Form
SHO would provide more sophisticated validation, presentation, and
reference features for filers and data users. However, given the fixed
and constrained nature of the disclosures to be reported on Form SHO
(e.g., the information would be as of a single reporting date rather
than multiple reporting dates, and Managers would not be able to
customize the content or presentation of their reported data), the
benefits of these additional features would be muted. Compared to the
adopted Form SHO, this alternative would impose greater initial
implementation costs (e.g., licensing Inline XBRL filing preparation
software) upon reporting persons that have no prior experience
structuring data in Inline XBRL.\818\ By contrast, because many
Managers that would be Form SHO filers would likely have experience
structuring filings in a similar EDGAR Form-specific XML data language,
such as in the context of filing Form 13F, the Form SHO-specific XML
requirement will likely impose lower implementation compliance costs on
Form SHO filers than an Inline XBRL requirement would impose.
---------------------------------------------------------------------------

\817\ See Proposing Release, at 15010.
\818\ See Inline XBRL Filing of Tagged Data, Securities Act
Release No. 10514 (June 28, 2018), 83 FR 40846 at 40862, available
at https://www.sec.gov/rules/final/2018/33-10514.pdf (discussing
costs associated with Inline XBRL filing of operating company
financial statements and investment company risk/return summaries,
including software licensing costs).
---------------------------------------------------------------------------

IX. Regulatory Flexibility Act Certification

The Regulatory Flexibility Act (``RFA'') \819\ requires Federal
agencies, in promulgating rules, to consider the impact of those rules
on small businesses. Section 603(a) of the Administrative Procedure
Act, as amended by the RFA, generally requires the Commission to
undertake a final regulatory flexibility analysis of rules it is
adopting, to determine the impact of such rulemaking on ``small
businesses'' unless the Commission certifies that the rule would not
have a significant economic impact on a substantial number of ``small
entities.'' \820\
---------------------------------------------------------------------------

\819\ 5 U.S.C. 601 et seq.
\820\ In response to the Commission's request for comment,
commenters provided general predictions without empirical data to
support their assessments that Proposed Rule 13f-2, Proposed Form
SHO, and the Proposed CAT Amendments would have a significant
economic impact on a substantial number of ``small entities.'' See
supra note 324 and accompanying text.
---------------------------------------------------------------------------

Certification for Rule 13f-2 and Form SHO. Although section 601(b)
of the RFA defines the term ``small business,'' the statute permits
agencies to formulate their own definitions. The explanation of the
term ``small entities'' and the definition of the term ``small
business'' in 17 CFR 240.0-10 \821\ of the Exchange Act do not
explicitly reference Managers. Rule 0-10 does provide, however, that
the Commission may ``otherwise define'' small entities for purposes of
a particular rulemaking proceeding. For purposes of Rule 13f-2 and
related Form SHO, therefore, the Commission has determined that the
definition of the term ``small business'' found in 17 CFR 275.0-7(a)
\822\ under the Investment Advisers Act of 1940 \823\ is more
appropriate to the functions of institutional managers such as the
Managers with reporting obligations under Rule 13f-2. The definition
will help ensure that all persons or entities that might be Managers
subject to reporting requirements under Rule 13f-2 will be included
within a category addressed by the Rule 0-7(a) definition.
---------------------------------------------------------------------------

\821\ Rule 0-10.
\822\ Rule 0-7(a).
\823\ 15 U.S.C. 80b-1 et seq.
---------------------------------------------------------------------------

Therefore, for purposes of this rule and the RFA, a Manager is a
small entity if it: (i) has assets under management having a total
value of less than $25 million; (ii) did not have total assets of $5
million or more on the last day of its most recent fiscal year; and
(iii) does not control, is not controlled by, and is not under common
control with another investment adviser that has assets under
management of $25 million or more, or any person (other than a natural
person) that had total assets of $5 million or more on the last day of
its most recent fiscal year.\824\ The Commission did not

[[Page 75184]]

receive any comments on the certification as it related to entities
impacted by Rule 13f-2.
---------------------------------------------------------------------------

\824\ Rule 0-7(a), supra note 822. See generally, Reporting
Threshold for Institutional Investment Managers, Exchange Act
Release No. 89290 (July 10, 2020), 85 FR 46016, 46031 n.90 (July 31,
2020) (stating that ``[r]ecognizing the growth in assets under
management at investment advisers since Rule 0-7(a) was adopted, the
Commission plans to revisit the definition of a small entity in Rule
0-7(a).'').
---------------------------------------------------------------------------

Under Rule 13f-2, Managers are not required to report on Form SHO
unless they meet or exceed a specified Reporting Threshold. Managers
with a gross short interest position in an equity security of a
reporting company issuer will be subject to a two-pronged reporting
threshold structure: a monthly average gross short position in the
equity security with a U.S. dollar value of $10 million or more; or a
monthly average gross short position as a percentage of shares
outstanding in the equity security of 2.5 percent or more (Threshold
A). Managers with a gross short interest position in an equity security
of a non-reporting company issuer will be subject to a single-pronged
reporting threshold structure: a gross short position in the equity
security with a U.S. dollar value of $500,000 or more at the close of
regular trading hours on any settlement date during the calendar month
(Threshold B). While the parameters of the Reporting Thresholds under
Rule 13f-2 relate to the number and dollar value of shares of short
positions, rather than assets under management, the Commission
nevertheless anticipates that application of the Reporting Thresholds
will result in Rule 13f-2 not applying to a significant number of
``small businesses'' as defined under Rule 0-7(a).
With respect to the first prong of Threshold A, a monthly average
gross short position in the equity security with a U.S. dollar value of
$10 million or more for reporting company issuer securities represents
forty percent of the assets of an entity that qualifies as a ``small
entity'' under Rule 0-7(a). The Commission believes it is also unlikely
that a significant number of small entities would place 40 percent of
their respective assets under management in a short position in a
single security. Further, many types of Managers that could be small
entities, including bank trustees, endowments, and foundations, are
subject to fiduciary standards that prohibit them from investing in
large, concentrated short positions. Such restrictions deter small
entities (with less than $25M of assets under management) from
investing over $10M (greater than 40 percent) of their assets in a
single short position, and therefore prevent them from triggering the
first prong of Threshold A.\825\
---------------------------------------------------------------------------

\825\ See Molk and Partnoy, supra note 510, describing
impediments that have kept different types of institutional
investment managers from engaging in short selling.
---------------------------------------------------------------------------

With respect to the second prong of Threshold A, smaller Managers
(those with under $25M in assets under management) would likely try to
leverage their assets through a combination of traditional short sales
and derivatives and similar transactions that create economic short
exposure to a security. Such entities therefore, would likely engage in
strategies that do not lend themselves to a clear determination that
the second prong of Threshold A under Rule 13f-2 has been met.\826\
Further, the Commission estimates, based on an analysis of US common
stocks,\827\ that Managers that qualify as small entities under Rule 0-
7(a) would not meet the 2.5 percent monthly average reporting threshold
for securities representing over ninety-eight percent (98 percent) of
the overall market value.\828\
---------------------------------------------------------------------------

\826\ Id. at 839 (positing that ``institutions incorporate short
selling into their strategies, not necessarily by taking net-short
positions, but instead by combining leveraged long equity index
positions with smaller actively managed short portfolios.'').
\827\ A small entity, with less than $25M in assets under
management, is not able to hold a short position of at least 2.5% in
a company with a market capitalization above $1B. Such companies
represent over 98.5% of the overall market cap of US equities. See
also Stock Market Size Categories (2021), available at https://stockmarketmba.com/sizecategories.php (calculating approximately
three percent (3%) of the US stock market consists of common stocks
of companies with less than $2B in market capitalization (i.e.,
small-cap and micro-cap stocks) and stating that micro-cap companies
are generally too small for even most large institutional investment
managers to invest in).
\828\ An analysis by Commission of the daily dataset of the
Center for Research in Security Prices (``CRSP'') showed that for
the month of Oct. 2021, on average, the number of companies with
less than $1B in market capitalization (2,293) constituted 1.51% of
the overall market capitalization.
---------------------------------------------------------------------------

When it comes to meeting the dollar value limits of Threshold B and
the first prong of Threshold A, it is important to note that for the
subset of Managers that engage in the most short selling activity--
hedge funds \829\--less than twenty-five percent have less than $50M in
assets under management.\830\ Indeed, research shows that most hedge
funds have assets under management above the amount that would qualify
them as small entities under Rule 0-7(a), i.e., above $25M.\831\
Further, the Commission certified in the Proposing Release that
Proposed Rule 13f-2 would not have a significant economic impact on a
substantial number of small entities, as defined under Rule 0-10, for
purposes of the RFA. The Commission requested written comments
regarding this certification and did not receive any. Additionally, and
as described above, the adopted dollar-value based prong of Threshold A
for reporting company issuer securities is based on a monthly average
rather than a daily calculation, likely capturing fewer Managers than
would have been required to report under the proposed daily dollar-
value prong of Threshold A, so it is even less likely that small
entities will be required to report on Form SHO as adopted.
---------------------------------------------------------------------------

\829\ See Molk and Partnoy, supra note 510, at 846.
\830\ See David Goldin, Elephant in the room? Size and hedge
fund performance, Aurum (June 28, 2019), available at https://www.aurum.com/insight/elephant-in-the-room-size-and-hedge-fund-performance/.
\831\ See Daniel Barth et al., The Hedge Fund Industry is Bigger
(and Has Performed Better) Than You Think (Office of Fin. Research,
Working Paper No. 20-01, Feb. 25, 2020, Revised Mar. 8, 2021).
---------------------------------------------------------------------------

For these reasons, the Commission certifies that Rule 13f-2 will
not have a significant economic impact on a substantial number of small
entities, as defined under Rule 0-10, for purposes of the RFA.
Certification for the Amendment to CAT. The amendment to the CAT
NMS Plan will impose requirements on the CAT NMS Plan Participants (the
national securities exchanges registered with the Commission under
section 6 of the Exchange Act and FINRA), and broker-dealers that
effect short sales utilizing the bona fide market making exception
pursuant to Rule 203(b)(2)(iii) of Regulation SHO and report use of the
exception to CAT.
With respect to the national securities exchanges, the Commission's
definition of a small entity is an exchange that has been exempt from
the reporting requirements of Rule 601 of Regulation NMS, and is not
affiliated with any person (other than a natural person) that is not a
small business or small organization.\832\ None of the national
securities exchanges registered under section 6 of the Exchange Act
that will be subject to the amendments are ``small entities'' for
purposes of the RFA. In addition, FINRA is not a ``small entity.''
\833\ Based on Commission knowledge and experience with broker-dealers
that identify as market makers, the Commission does not believe that
any broker-dealer that effects short sales utilizing the bona fide
market making

[[Page 75185]]

exception pursuant to Rule 203(b)(2)(iii) of Regulation SHO and reports
to the CAT will qualify as a small entity pursuant to Exchange Act Rule
0-10(c), because they either exceed $500,000 in total capital or are
affiliated with a person that is not a small entity as defined in Rule
0-10. Given the above estimates it is possible, but unlikely, that in
the future a small entity may come within scope of the Amendment to
CAT, because such firms are likely to exceed $500,000 in total capital
or be affiliated with a person that is not a small entity.
---------------------------------------------------------------------------

\832\ See 17 CFR 240.0-10(e) (stating that a broker-dealer is a
small entity if it has total net capitalization (net worth plus
subordinated liabilities) of less than $500,000 on the date in the
prior fiscal year as of which its audited financial statements were
prepared pursuant to 17 CFR 240.17a-5(d), and it is not affiliated
with any person (other than a natural person) that is not a small
business or small organization).
\833\ See 13 CFR 121.201.
---------------------------------------------------------------------------

For the foregoing reasons, the Commission certifies that the
Amendment to CAT will not have a significant economic impact on a
substantial number of small entities for purposes of the RFA.

X. Other Matters

Pursuant to the Congressional Review Act,\834\ the Office of
Information and Regulatory Affairs has designated these rules as a
``major rule,'' as defined by 5 U.S.C. 804(2).
---------------------------------------------------------------------------

\834\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

If any of the provisions of these final rules, or the application
thereof to any person or circumstance, is held to be invalid, such
invalidity shall not affect other provisions or application of such
provisions to other persons or circumstances that can be given effect
without the invalid provision or application.

Statutory Authority

The Commission is adopting the rule and form contained in this
document under the authority set forth in the Exchange Act [15 U.S.C.
78a et seq.], particularly sections 3, 10(b), 12, 13(f), 15, (d),
23(a), 35A, 36 thereof [15 U.S.C. 78c, 78j(b), 78l, 78m(f), 78o(d),
78w(a), 78ll, and 78mm], and Public Law 111-203, 929X, 124 Stat. 1376
(2010). The Commission is amending the CAT NMS Plan pursuant to the
Exchange Act, particularly Sections 2, 3, 5, 6, 11A, 15, 15A, 17(a) and
(b), 19, and 23(a) thereof [15 U.S.C. 78b, 78c, 78e, 78f, 78k-1, 78o,
78o-3, 78q(a) and (b), 78s, and 78w(a)], and Rules 608(a)(2) and (b)(2)
thereunder.

List of Subjects in 17 CFR Parts 240 and 249

Reporting and recordkeeping requirements, Securities.

Text of Amendments

In accordance with the foregoing, the Commission is amending title
17, chapter II of the Code of the Federal Regulations as follows.

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934

0
1. The authority citation for part 240 is amended by removing the
sectional authority for Sec. 240.13f-2(T) to read in part as follows:

Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f,
78g, 78i, 78j, 78j-1, 78j-4, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o,
78o-4, 78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll,
78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et
seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C.
1350; and Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L.
112-106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise
noted.
* * * * *

0
2. Add Sec. 240.13f-2 to read as follows:

Sec. 240.13f-2 Reporting by institutional investment managers
regarding gross short position and activity information.

(a) An institutional investment manager shall file a report on Form
SHO (referenced in 17 CFR 249.332), in accordance with the form's
instructions, with the Commission within 14 calendar days after the end
of each calendar month with regard to:
(1) Each equity security that is of a class of securities that is
registered pursuant to section 12 of the Exchange Act or for which the
issuer of that class of securities is required to file reports pursuant
to section 15(d) of the Exchange Act over which the institutional
investment manager and all accounts over which the institutional
investment manager (or any person under the institutional investment
manager's control) has investment discretion with respect to either:
(i) A monthly average gross short position at the close of regular
trading hours in the equity security with a U.S. dollar value of $10
million or more; or
(ii) A monthly average gross short position at the close of regular
trading hours as a percentage of shares outstanding in the equity
security of 2.5 percent or more; and
(2) Each equity security that is of a class of securities that is
not registered pursuant to section 12 of the Exchange Act or for which
the issuer of that class of securities is not required to file reports
pursuant to section 15(d) of the Exchange Act over which the
institutional investment manager and all accounts over which the
institutional investment manager (or any person under the institutional
investment manager's control) has investment discretion with respect to
a gross short position in the equity security with a U.S. dollar value
of $500,000 or more at the close of regular trading hours on any
settlement date during the calendar month.
(3) Form SHO and any amendments thereto must be filed with the
Commission via the Commission's Electronic Data Gathering, Analysis,
and Retrieval system (``EDGAR''), in accordance with 17 CFR part 232
(Regulation S-T). The Commission will publish, on an aggregated basis,
certain information regarding each equity security reported by
institutional investment managers on Form SHO and filed with the
Commission via EDGAR.
(b) For the purposes of this section:
(1) The term institutional investment manager has the same meaning
as in section 13(f)(6)(A) of the Exchange Act.
(2) The term equity security has the same meaning as in section
3(a)(11) of the Exchange Act and Sec. 240.3a11-1 (Rule 3a11-1).
(3) The term investment discretion has the same meaning as in Sec.
240.13f-1(b) (Rule 13f-1(b)).
(4) The term gross short position means the number of shares of the
equity security that are held short as a result of short sales as
defined in 17 CFR 242.200(a) (Rule 200(a) of Regulation SHO), without
inclusion of any offsetting economic positions such as shares of the
equity security or derivatives of such equity security.
(5) The term regular trading hours has the same meaning as in 17
CFR 242.600(b)(77) (Rule 600(b)(77)).

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

0
3. The general authority citation for part 249 continues to read as
follows:

Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C.
5461 et seq.; 18 U.S.C. 1350; Sec. 953(b) Pub. L. 111-203, 124 Stat.
1904; Sec. 102(a)(3) Pub. L. 112-106, 126 Stat. 309 (2012), Sec. 107
Pub. L. 112-106, 126 Stat. 313 (2012), Sec. 72001 Pub. L. 114-94,
129 Stat. 1312 (2015), and secs. 2 and 3 Pub. L. 116-222, 134 Stat.
1063 (2020), unless otherwise noted.
* * * * *

0
4. Add Sec. 249.332 to read as follows:

Sec. 249.332 Form SHO, report of institutional investment managers
pursuant to section 13(f)(2) of the Securities Exchange Act of 1934.

This form shall be used by institutional investment managers that
are required to furnish reports pursuant to section 13(f)(2) of the
Securities Exchange Act of 1934 (15 U.S.C. 78m(f)(2)) and 17 CFR
240.13f-2 (Rule 13f-2).

0
5. Add Form SHO referenced in Sec. 249.332.

[[Page 75186]]

Note: Form SHO is attached as Appendix A to this document. Form
SHO will not appear in the Code of Federal Regulations.

By the Commission.

Dated: October 13, 2023.
J. Matthew DeLesDernier,
Deputy Secretary.

Note: The following appendix will not appear in the Code of
Federal Regulations.

Appendix A--Form SHO

OMB Number: XXXX-XXXX

FORM SHO

Information Required of Institutional Investment Managers Pursuant to
Section 13(f)(2) of the Securities Exchange Act of 1934 and Rules
Thereunder

General Instructions

Rule as to Use of Form SHO. Institutional investment managers
(``Managers'') must use Form SHO for reports to the Commission
required by Rule 13f-2 [17 CFR 240.13f-2] promulgated under section
13(f)(2) of the Securities Exchange Act of 1934 [15 U.S.C.
78m(f)(2)] (``Exchange Act''). A Manager shall file a report on Form
SHO in accordance with these instructions with the Commission within
14 calendar days after the end of each calendar month with regard
to: (1) each equity security that is of a class of securities that
is registered pursuant to section 12 of the Exchange Act or for
which the issuer of that class of securities is required to file
reports pursuant to section 15(d) of the Exchange Act over which the
Manager and all accounts over which the Manager (or any person under
the Manager's control) has investment discretion with respect to
either (A) a monthly average gross short position at the close of
regular trading hours in the equity security with a value of $10
million or more, or (B) a monthly average gross short position at
the close of regular trading hours as a percentage of shares
outstanding in the equity security of 2.5 percent or more; and (2)
each equity security that is of a class of securities that is not
registered pursuant to section 12 of the Exchange Act or for which
the issuer is not required to file reports pursuant to section 15(d)
of the Exchange Act over which the Manager and all accounts over
which the Manager (or any person under the Manager's control) has
investment discretion with respect to a gross short position in the
equity security with a U.S. dollar value of $500,000 or more at the
close of regular trading hours on any settlement date during the
calendar month. For purposes of Rule 13f-2 and Form SHO, ``regular
trading hours'' shall have the meaning ascribed in Rule 600(b)(77)
under the Exchange Act [17 CFR 242.600(b)(77)].
A Manager that determines that it has filed a Form SHO with
errors that affect the accuracy of the short sale data reported must
file an amended and restated Form SHO within ten (10) calendar days
of discovering the error.
Rules to Prevent Duplicative Reporting. If two or more Managers,
each of which is required by Rule 13f-2 to file Form SHO for the
reporting period, exercise investment discretion with respect to the
same securities, only one such Manager must report the information
in its report on Form SHO. If a Manager has information that is
required to be reported on Form SHO and such information is reported
by another Manager (or Managers), such Manager must identify the
Manager(s) reporting on its behalf in the manner described in
Special Instruction 5.
Filing of Form SHO. A reporting Manager must file Form SHO with
the Commission via the Commission's Electronic Data Gathering,
Analysis, and Retrieval system (``EDGAR''), in accordance with
Regulation S-T. The Commission plans to publish certain data from
the filings on an aggregated basis.
All information included in a Form SHO report is deemed subject
to a confidential treatment request under 17 CFR 200.83. The
Commission plans to publish only aggregated data derived from
information provided in Form SHO reports.
Technical filing errors may cause delays in the filing of Form
SHO. Technical support for making Form SHO reports is available
through EDGAR Filer Support.

Instructions for Calculating Reporting Threshold

A Manager shall file a report on Form SHO:
with regard to each equity security that is of a class
of securities that is registered pursuant to section 12 of the
Exchange Act or for which the issuer is required to file reports
pursuant to section 15(d) of the Exchange Act (a ``reporting company
issuer'') in either of the following circumstances: (1) the Manager
and all accounts over which the Manager or any person under the
Manager's control has investment discretion that are a monthly
average gross short position at the close of regular trading hours
in the equity security with a U.S. dollar value of $10 million or
more, or (2) the Manager and all accounts over which the Manager or
any person under the Manager's control has investment discretion
that are a monthly average gross short position at the close of
regular trading hours as a percentage of shares outstanding in the
equity security of 2.5 percent or more (``Threshold A'').
with regard to each equity security that is of a class
of securities of an issuer that is not a reporting company issuer as
described above (a ``non-reporting company issuer''), when the
Manager and all accounts over which the Manager or any person under
the Manager's control has investment discretion that are a gross
short position in the equity security with a U.S. dollar value of
$500,000 or more at the close of regular trading hours on any
settlement date during the calendar month (``Threshold B'').
With respect to each equity security to which the circumstances
described in Threshold A or Threshold B applies, the Manager shall
report the information, as described in the ``Special Instructions''
below, aggregated across accounts over which the Manager, or any
person under the Manager's control, has investment discretion.
To determine whether the dollar value threshold described in (1)
of Threshold A above is met, a Manager shall determine its gross
short position at the close of regular trading hours in the equity
security (as defined in Rule 13f-2) on each settlement date during
the calendar month and multiply that figure by the closing price at
the close of regular trading hours on the settlement date (``end of
day dollar value''). The Manager shall then add all end of day
dollar values during the calendar month and divide that sum by the
number of settlement dates in the month to arrive at a ``monthly
average'' for each equity security the Manager traded during that
calendar month reporting period.
To determine whether the dollar value threshold described in
Threshold B above is met, a Manager shall determine its gross short
position at the close of regular trading hours in the equity
security (as defined in Rule 13f-2) on each settlement date during
the calendar month and multiply that figure by the closing price at
the close of regular trading hours on the settlement date. If such
closing price is not available, a Manager shall use the price at
which it last purchased or sold any share of that security.
To determine whether the percentage threshold described in (2)
of Threshold A above is met, the Manager shall (a) determine its
gross short position at the close of regular trading hours in the
equity security (as defined in Rule 13f-2) on each settlement date
during the calendar month, and divide that figure by the number of
shares outstanding in such security at the close of regular trading
hours on the settlement date, and (b) add up the daily percentages
during the calendar month as determined in (a) and divide that sum
by the number of settlement dates in the month to arrive at a
``monthly average'' for each equity security the Manager traded
during that calendar month reporting period. The number of shares
outstanding of the security for which information is being reported
shall be determined by reference to an issuer's most recent annual
or quarterly report, and any subsequent update thereto, filed with
the Commission.

Special Instructions

1. This form consists of two parts: the Cover Page, and the
Information Tables.

Cover Page

2. The period end date used in the report (and in the EDGAR
submission header) is the last settlement day of the calendar month.
The date shall name the month, and express the day and year in
Arabic numerals, with the year being a four-digit numeral (e.g.,
2023).
3. Amendments to Form SHO must restate the Form SHO in its
entirety. If the Manager is filing the Form SHO report as an
amendment, then the Manager must check the ``Amendment and
Restatement'' box on the Cover Page; and enter the amendment number.
Each Amendment and Restatement must include a complete Cover Page
and Information Tables. Amendments must be filed sequentially.
a. In the space designated on the Cover of Page of each
Amendment and Restatement, a Manager shall (1) provide a written
description of the revision being made; (2) explain the reason for
the revision; and (3) indicate whether data from any additional Form
SHO reporting period(s) (up to the past

[[Page 75187]]

12 calendar months) is/are affected by the Amendment and
Restatement.
b. If (3) applies, a Manager shall complete and file a separate
Amendment and Restatement for each previous calendar month so
affected (up to the past 12 months) and provide a description of the
revision being made and explain the reason for the revision.
4. Present the Cover Page information in the format and order
provided in the form, including the non-lapsed Legal Entity
Identifier (``LEI''), if any, of the Manager filing the Form SHO
report. The Cover Page shall include only the required information.
Do not include any portions of the Information Tables on the Cover
Page.
5. Designate the Report Type for the Form SHO by checking the
appropriate box in the Report Type section of the Cover Page, and
include, where applicable, the Name and non-lapsed LEI (if
available) of each of the Other Managers Reporting for this Manager
on the Cover Page, and the Information Tables, as follows:
a. If all of the information that a Manager is required by Rule
13f-2 to report on Form SHO is reported by another Manager (or
Managers), check the box for Report Type ``FORM SHO NOTICE,''
include on the Cover Page the Name and non-lapsed LEI (if available)
of each of the Other Managers Reporting for this Manager, and omit
the Information Tables.
b. If all of the information that a Manager is required by Rule
13f-2 to report on Form SHO is reported in this report, check the
box for Report Type ``FORM SHO ENTRIES REPORT,'' omit the ``Name and
Non-Lapsed LEI (if available) of each of the Other Managers
Reporting for this Manager'' section of the Cover Page, and include
the Information Tables.
c. If only a part of the information that a Manager is required
by Rule 13f-2 to report on Form SHO is reported in this report,
check the box for Report Type ``FORM SHO COMBINATION REPORT,''
include on the Cover Page the name and non-lapsed LEI (if available)
of each of the Other Managers Reporting for this Manager, and
include the Information Tables.

Information Tables

6. Do not include any additional information in the Information
Tables. Do not include any portions of the Information Tables on the
Cover Page.
7. In reporting information required on Information Tables 1 and
2, Managers must account for a gross short position in an ETF, and
activity that results in the acquisition or sale of shares of the
ETF resulting from call options exercises or assignments; put
options exercises or assignments; tendered conversions; secondary
offering transactions; or other activity, as discussed further
below. In determining its gross short position in an equity
security, however, a Manager is not required to consider short
positions that the ETF holds in individual underlying equity
securities that are part of the ETF basket.
8. Instructions for Information Table 1--Manager's Gross Short
Position:
a. Column 1. Settlement Date. Enter in Column 1 the last day of
the calendar month of the reporting period on which a trade settles
(``settlement date'').
b. Column 2. Issuer Name. Enter in Column 2 the name of the
issuer of the security for which information is being reported.
Reasonable abbreviations are permitted.
c. Column 3. Issuer LEI. If the issuer has an LEI, enter the
issuer's LEI in Column 3.
d. Column 4. Title of Class. Enter in Column 4 the title of the
class of the security for which information is being reported.
Reasonable abbreviations are permitted.
e. Column 5. CUSIP Number. Enter in Column 5 the nine (9) digit
CUSIP number of the security for which information is being
reported, if applicable.
f. Column 6. FIGI. Enter in Column 6 the twelve (12) character,
alphanumeric Financial Instrument Global Identifier (``FIGI'') of
the security for which information is being reported, if a FIGI has
been assigned.
g. Column 7. End of Month Gross Short Position (Number of
Shares). Enter in Column 7 the number of shares that represent the
Manager's gross short position in the security for which information
is being reported at the close of regular trading hours on the last
settlement date of the calendar month of the reporting period. The
term ``gross short position'' means the number of shares of the
security for which information is being reported that are held
short, without inclusion of any offsetting economic positions--
including shares of the reportable equity security or derivatives of
such security.
h. Column 8. End of Month Gross Short Position (rounded to
nearest USD). Enter in Column 8 the U.S. dollar value of the shares
reported in Column 7, rounded to the nearest dollar. A Manager shall
report the corresponding dollar value of the reported gross short
position by multiplying the number of shares of the security for
which information is being reported by the closing price at the
close of regular trading hours on the last settlement date of the
calendar month. In circumstances where such closing price is not
available, the Manager shall use the price at which it last
purchased or sold any share of that security.
9. Instructions for Information Table 2--Daily Activity
Affecting Manager's Gross Short Position During the Reporting
Period:
a. Column 1. Settlement Date. Enter in Column 1 each date during
the reporting period on which a trade settles (settlement date). The
Manager shall report information for each settlement date during the
calendar month reporting period as described in these instructions.
b. Column 2. Issuer Name. Enter in Column 2 the name of the
issuer of the equity security for which information is being
reported. Reasonable abbreviations are permitted.
c. Column 3. Issuer LEI. If the issuer has an LEI, enter the
issuer's LEI in Column 3.
d. Column 4. Title of Class. Enter in Column 4 the title of the
class of the security for which information is being reported.
Reasonable abbreviations are permitted.
e. Column 5. CUSIP Number. Enter in Column 5 the nine (9) digit
CUSIP number of the security for which information is being
reported, if applicable.
f. Column 6. FIGI. Enter in Column 6 the twelve (12) character,
alphanumeric FIGI of the security for which information is being
reported, if a FIGI has been assigned.
g. Column 7. Net Change in Short Position (Number of Shares).
For the settlement date set forth in Column 1, enter the net change
in short position (represented as a number of shares) reflecting how
the reported gross short position in shares of the security for
which information is being reported are being closed out--or
increased--as a result of the acquisition or sale of shares of that
equity security, by taking into account:
(1) Short sales of the security that settled on that date.
(2) Shares of the security that were purchased to cover, in
whole or in part, an existing short position and settled on that
date.
(3) Shares of the security that were acquired in a call option
exercise that reduces or closes a short position on that security
and settled on that date.
(4) Shares of the security that were sold in a put option
exercise that creates or increases a short position on that security
and settled on that date.
(5) Shares of the security that were sold in a call option
assignment that creates or increases a short position on that
security and settled on that date.
(6) Shares of the security that were acquired in a put option
assignment that reduces or closes a short position on that security
and settled on that date.
(7) Shares of the security for which information is being
reported that were acquired as a result of the tendered conversions
that reduces or closes a short position on that security and settled
on that date.
(8) Shares of the security that were obtained through a
secondary offering transaction that reduces or closes a short
position on that security and settled on that date. Such secondary
offering purchases must be reported whether they occurred outside or
within the restricted period of Rule 105 of Regulation M, 17 CFR
242.105, which prohibits purchasing offering shares within the
restricted period after selling short.
(9) Shares of the security that resulted from other activity not
previously reported on this form that creates or increases a short
position on that security and settled on that date, or that reduces
or closes a short position on that security and settled on that
date.
(10) Activity other than (1) through (9) above that creates or
increases, or reduces or closes, a short position on that security,
including, but not limited to, shares resulting from ETF creation or
redemption activity.

Paperwork Reduction Act Information

Persons who are to respond to the collection of information
contained in this form are not required to respond to the collection
of information unless the form displays a currently valid Office of
Management and Budget (``OMB'') control number.

[[Page 75188]]

OMB Number: XXXX-XXXX

United States

Securities and Exchange Commission

Washington, DC 20549

FORM SHO

Form SHO Cover Page

Report for the Period Ended: [Month/Day/Year]
Check here if Amendment and Restatement [ ]; Amendment Number:
Description of the Amendment and Restatement, Reason for the
Amendment and Restatement, and Which Additional Form SHO Reporting
Period(s) (up to the past 12 calendar months), if any, is/are
affected by the Amendment and Restatement:
Institutional Investment Manager (``Manager'') Filing Report:

Name:------------------------------------------------------------------
Mailing Address:-------------------------------------------------------
Business Telephone Number:---------------------------------------------
Business Email:--------------------------------------------------------
Non-Lapsed Legal Entity Identifier
(``LEI''):------------------------------------------------------------
Contact Employee:------------------------------------------------------
Name and Title:--------------------------------------------------------
Business Telephone Number:---------------------------------------------
Business Email:--------------------------------------------------------
Date Filed:------------------------------------------------------------

The Manager filing this report hereby represents that all
information contained herein is true, correct and complete, and that
it is understood that all required items, statements, schedules,
lists, and tables, are considered integral parts of this form.
Report Type (Check only one):
[ ] FORM SHO ENTRIES REPORT. (Check here if all entries of this
reporting Manager are reported in this report.)
[ ] FORM SHO NOTICE. (Check here if no entries reported are in
this report, and all entries are reported by other reporting
Manager(s).)
[ ] FORM SHO COMBINATION REPORT. (Check here if a portion of the
entries for this reporting Manager is reported in this report and a
portion is reported by other reporting Manager(s).)
Name and Non-Lapsed LEI of each of the Other Manager(s)
Reporting for this Manager:
[If there are no entries in this list, omit this section.]

Name:------------------------------------------------------------------
Non-Lapsed LEI:--------------------------------------------------------

[Repeat as necessary.]

Information Table 1--Manager's Monthly Gross Short Position
--------------------------------------------------------------------------------------------------------------------------------------------------------
Column 1 Column 2 Column 3 Column 4 Column 5 Column 6 Column 7 Column 8
--------------------------------------------------------------------------------------------------------------------------------------------------------
Settlement Date (Month End).. Issuer Name..... Issuer LEI...... Title of Class.. CUSIP Number.... FIGI........... End of Month End of Month
Gross Short Gross Short
Position Position
(Number of (rounded to
Shares). nearest USD).
--------------------------------------------------------------------------------------------------------------------------------------------------------

(Repeat as Necessary)

Information Table 2--Daily Activity Affecting Manager's Gross Short Position During the Reporting Period
--------------------------------------------------------------------------------------------------------------------------------------------------------
Column 1 Column 2 Column 3 Column 4 Column 5 Column 6 Column 7
--------------------------------------------------------------------------------------------------------------------------------------------------------
Settlement Date................. Issuer Name....... Issuer LEI........ Title of Class.... CUSIP Number...... FIGI.............. Net Change in
Short Position
(Number of
Shares).
--------------------------------------------------------------------------------------------------------------------------------------------------------

(Repeat as Necessary)

[FR Doc. 2023-23050 Filed 10-31-23; 8:45 am]
BILLING CODE 8011-01-P

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