SEC adopts Dodd-Frank rule for short sale transparency

The final rule, announced Friday, is designed to increase the public availability of short sale-related data. The reporting requirements will be included in Form SHO filings.

Completing implementation of Dodd-Frank was one of the stated goals of SEC Chair Gary Gensler upon the start of his tenure. The agency has chipped away at the remaining provisions of the 2010 law over the last two years, including rules passed this summer to prohibit the manipulation of chief compliance officers at security-based swaps. Proposals on other areas of the law, including conflicts in securities trading, remain pending.

“This rule addresses Congress’s mandate and improves upon existing sources of short sale-related data in the equity markets,” said Gensler in a press release. “Given past market events, it’s important for the commission and the public to know more about short sale activity in the equity markets, especially in times of stress or volatility.”

The rule will require institutional investment managers that meet or exceed certain reporting thresholds to report on Form SHO certain short position and short activity data for equity securities, the SEC stated in a fact sheet. Filings must be made within 14 days of the end of a month regarding certain equity securities; institutional investment managers must also report their end-of-month gross short position and net activity in the equity security.

The SEC will then publish aggregated short sale-related information regarding each equity security reported via its EDGAR system.

The agency considered public comments in removing some elements of the rule from its original proposal in February 2022, including reducing how much daily short activity details must be reported and changing its $10 million short position threshold for reporting to be based upon the average during a month rather than on a given settlement day, noted Gensler in a statement.

The SEC’s two Republican commissioners, Hester Peirce and Mark Uyeda, did not support the rule, despite acknowledging the Congressional direction at play.

“Had the commission simply implemented the statute by requiring the specific reporting items enumerated by Congress in the Dodd-Frank Act, my views would be very different,” said Uyeda. “But the commission proceeds to go above and beyond what is required by law by relying on a broad grant of discretionary authority.”

The final rule will become effective 60 days after publication in the Federal Register. The compliance date for Form SHO reporting will be 12 months after the effective date, with public aggregated reporting to follow three months later.

Also Friday, the SEC adopted a related amendment to require consolidated audit trail reporting firms reporting short sales to indicate whether an order is a short sale affected by a market maker in connection with bona fide market making activities and a new rule designed to increase transparency and efficiency in the securities lending market.