Alert May 17, 2011

SEC Seeks Public Comment on Short Sale Disclosure

The SEC published a request for public comment (the “Request”) with regard to studies on the disclosure and reporting of short sales that the SEC’s Division of Risk, Strategy, and Financial Innovation (the “Division”) is required to conduct under the Dodd-Frank Act and whose results the SEC is required to report to Congress by July 21, 2011. 

Currently Available Data and Existing Uses of Short Sales.  As a preliminary matter, the SEC is seeking public comment on both the existing uses of short selling in securities markets and the adequacy or inadequacy of currently available information.  The SEC is also seeking public comment on the current use of short selling by equity and option market makers, as well as the ways and extent to which, if any, short selling has been associated with abusive market practices.

Short Position Reporting.  Section 417(a)(2)(A) of the Dodd-Frank Act requires the Division to study real time reporting of short sale positions of publicly listed securities either to the public or, alternatively, only to the SEC and FINRA.  Noting the breadth of this charge, the SEC included 12 groups of questions on real time reporting of short positions in the Request.  Among other things, the SEC seeks public comment on the nature of “real time” reporting (e.g., whether it should consist of continuous updates made as soon as practicable or frequent “snapshots” throughout the trading day); the definition of a short “position” (e.g., whether short “positions” should include derivatives and index components); the effects of real time reporting on the behavior of short sellers and other investors (e.g., whether the availability of such data creates new opportunities for unfair or otherwise abusive market practices); which parties would be in a position to collect and disseminate short positions in real time; the efficacy of establishing a significant reporting threshold; and how experiences with short sale position reporting regimes in foreign jurisdictions should inform the analysis of feasibility, benefits and costs.

Transaction Reporting.  The Request also seeks public comment on the feasibility, benefits and costs of conducting a voluntary pilot program in which public companies would agree to have all sell portions of trades of their shares marked “long,” “short,” and/or “market maker short” and all buy portions of trades marked as “buy” and/or “buy to cover” and reported in real time through the Consolidated Tape.

Comments must be received on or before June 23, 2011.