SEC Reporting

Why Reporting to the SEC Makes Sense but Broader Requirements Would be Harmful

The SEC has the right to obtain and review confidential information about short positions for market surveillance purposes, but forcing public disclosure of individual positions of investment managers would have multiple serious consequences for the market.

Public disclosure will cause competitive harm. Institutional investment managers could suffer competitive harm if their short sale positions were disclosed to the public. Investment managers employing a fundamental short strategy seek to identify overvalued equities. They conduct rigorous, costly financial analyses that focus on whether an issuer has an unsustainable or operationally flawed business plan, has materially overstated earnings, or otherwise engaged in fraud. As a former chief economist for the Commission has noted, disclosure of short positions would allow some traders to be “free riders,” copying the positions of others, and benefiting themselves while reducing the gains that would otherwise accrue to those that actually performed the research.(106)

Public disclosure of short positions in equity securities could shift trading to less transparent markets and compromise strategies. Public disclosure could result in the transfer of short sale activity to less transparent markets, such as those for swaps, credit default swaps, and other derivative transactions.

Public disclosure exposes financial institutions to retaliation. Public disclosure of short positions would unfairly expose financial institutions to retaliation by companies and the risk of “short squeeze” campaigns. a squeeze can result in substantial losses for a financial institution holding a short position and lead to increased volatility.(107) Public disclosure would expose financial institutions to retaliation as issuers cut off communications with analysts at institutions who report short positions in the issuers’ securities.

Public disclosure may confuse investors. Short selling in a company’s stock can occur for a variety of reasons and not necessarily because the short seller has a negative view of a company’s outlook. For example, a financial institution may take a short position to lock in a spread or hedge an investment in convertible bonds by shorting the same company’s equity. Traders also buy options and/or futures on stock indices and then short the individual component equities in order to profit from arbitrage opportunities. In these instances, public disclosure of short sale positions may mislead investors, who may incorrectly assume that the institution has a negative view of the company whose stock is being shorted.

CPIC believes that the SEC should have the information that it needs in order to police the securities markets.(108) However, the SEC should consider alternatives to requiring public filing of such data. For example, short sellers could be required to retain and make available for SEC inspection detailed books and records relating to their short sale activity. This alternative would preserve confidentiality while providing the SEC with necessary data on short sale activities.