By Katanga Johnson
WASHINGTON (Reuters) - The U.S. Securities and Exchange Commission (SEC) on Friday unveiled a pair of proposals that would broaden the data short sellers, who bet that stocks will fall, disclose to investors and the regulator in a bid to boost transparency around such trades.
The new rules would offer the public visibility into aggregated data around large short positions for individual equity securities, the SEC said.
The proposals would also impose a "buy-to-cover" mandate for brokers to identify sales as "long, short or short-exempt," said the SEC in its release, which added that the classifications would only be required if a purchaser has any short position in the same security at the time of order, and would further amend the national market system plan to include a report of such "buy-to-cover" information.
Friday's measures, which are subject to public consultation, comes after SEC chief Gary Gensler told Congress last year he would step up scrutiny and mandate expanded disclosures following the January 2021 GameStop (NYSE:GME) saga and the meltdown of Archegos Capital.
It also follows moves by the Financial Industry Regulatory Authority (FINRA) to change its short-interest reporting requirements and a probe by the U.S. Justice Department into suspected manipulative trading by short sellers and hedge funds.
Short sellers borrow shares from brokers and then sell them into the market, with the agreement that they will buy the shares back and return them to the lender at a later date. If the price has fallen, the short seller can buy the shares back at a lower price than they paid for them, locking in a profit.
The proposal by the Wall Street regulator would specifically apply to institutional investment managers with a short position of at least $10 million, or the equivalent of at least 2.5% of the total shares outstanding, the SEC said. It would also apply to those who hold a short position of at least $500,000 in an equity security of a nonreporting issuer.
The proposal is meant to force investment managers to exercise discretion over short positions and would provide more visibility into their behavior, said Gensler. The agency would take the raw data and analyze it to better understand the role short selling may play in market events before aggregating it for the public's eyes, he added.
"It's important for the public and the Commission to know more about this important market, especially in times of stress or volatility."