[Federal Register Volume 87, Number 51 (Wednesday, March 16, 2022)]
[Proposed Rules]
[Pages 14950-15020]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-04670]



[[Page 14949]]

Vol. 87

Wednesday,

No. 51

March 16, 2022

Part II





Securities and Exchange Commission





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





17 CFR Parts 240, 242, and 249





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

  Federal Register / Vol. 87 , No. 51 / Wednesday, March 16, 2022 / 
Proposed Rules  

[[Page 14950]]


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

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240, 242, and 249

[RELEASE NO. 34-94313; FILE NO. S7-08-22]
RIN 3235-AM34


Short Position and Short Activity Reporting by Institutional 
Investment Managers

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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

SUMMARY: The Securities and Exchange Commission (the ``Commission'') is 
proposing a new rule and related form pursuant to the Securities 
Exchange Act of 1934 (the ``Exchange Act''), including Section 
13(f)(2), which was added by Section 929X of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (``DFA''). The proposed 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 rule, institutional investment managers that 
meet or exceed a specified reporting threshold would be required to 
report, on a monthly basis using the proposed form, specified short 
position data and short activity data for equity securities. In 
addition, the Commission is proposing a new rule under the Exchange Act 
to prescribe a new ``buy to cover'' order marking requirement, and 
proposing to amend the national market system plan governing the 
consolidated audit trail (``CAT'') created pursuant to the Exchange Act 
to require the reporting of ``buy to cover'' order marking information 
and reliance on the bona fide market making exception in the 
Commission's short sale rules. The Commission is publishing the text of 
the proposed amendments to the CAT NMS Plan in a separate notice.

DATES: Comments should be received on or before April 26, 2022.

ADDRESSES: Comments should be submitted by any of the following 
methods:

Electronic Comments:

     Use the Commission's internet comment form (https://www.sec.gov/rules/submitcomments.htm); or
     Send an email to [email protected]. Please include 
File Number S7-08-22 on the subject line.

Paper Comments:

     Send paper comments to: Vanessa A. Countryman, Secretary, 
Securities and Exchange Commission, 100 F Street NE, Washington, DC 
20549-1090.

All submissions should refer to File Number S7-08-22. This file number 
should be included on the subject line if email is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's 
internet website (https://www.sec.gov/rules/proposed.shtml). Comments 
are also available for website viewing and printing in the Commission's 
Public Reference Room, 100 F Street NE, Washington, DC 20549, on 
official business days between the hours of 10:00 a.m. and 3:00 p.m. 
Operating conditions may limit access to the Commission's public 
reference room. All comments received will be posted without change. 
Persons submitting comments are cautioned that the Commission does not 
redact or edit personal identifying information from comment 
submissions. Commenters should submit only information that they wish 
to make available publicly.
    Studies, memoranda, or other substantive items may be added by the 
Commission or staff to the comment file during this rulemaking. A 
notification of the inclusion in the comment file of any such materials 
will be made available on the Commission's website. To ensure direct 
electronic receipt of such notifications, sign up through the ``Stay 
Connected'' option at https://www.sec.gov/ to receive notifications by 
email.

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

SUPPLEMENTARY INFORMATION: The Commission today is proposing for 
comment new rule 13f-2 (``Proposed Rule 13f-2'') (17 CFR 240.13f-2) and 
related form (``Proposed Form SHO'') (17 CFR 249.333) under the 
Exchange Act. Proposed Rule 13f-2 would require certain institutional 
investment managers to report, on a monthly basis on new Proposed Form 
SHO, certain short position data and short activity data for certain 
equity securities as prescribed in Proposed Rule 13f-2.
    The Commission is also proposing for comment a new rule prescribing 
a ``buy to cover'' order marking requirement under Regulation SHO 
(``Proposed Rule 205'') (17 CFR 242.205), and amendments to the 
national market system plan governing the CAT, pursuant to Rules 
608(a)(2) [17 CFR 242.608(a)(2)] and 608(b)(2) [17 CFR 242.608(b)(2)] 
of the Exchange Act (``Proposal to Amend CAT'') that enable the 
Commission to propose amendments to any effective national market 
system (``NMS'') plan. For the text of the proposed amendments to the 
CAT NMS Plan, please see the Notice of Proposed Amendments to the 
National Market System Plan Governing the Consolidated Audit Trail for 
Purposes of Short Sale-related Data Collection.\1\
---------------------------------------------------------------------------

    \1\ See Notice of the Text of the Proposed Amendments to the 
National Market System Plan Governing the Consolidated Audit Trail 
for Purposes of Short Sale-related Data Collection, Exchange Act 
Release No. 34-94314 (Feb. 25, 2022).
---------------------------------------------------------------------------

    Proposed Rule 13f-2, Proposed Form SHO, Proposed Rule 205, and the 
Proposal to Amend CAT are hereinafter collectively referred to as the 
``Proposals.''

Table of Contents

I. Introduction
II. Background
    A. Enhancing Short Sale Transparency
    B. Existing Short Sale Data
    C. Prior Nonpublic Short Sale Reporting by Certain Investment 
Managers to the Commission
    D. Petitions and Commentary Regarding Short Position Disclosure
III. Proposed Rule 13f-2 and Proposed Form SHO
    A. Proposed Form SHO Filing Requirement Through EDGAR
    B. Proposed Form SHO
    C. Publication of Information by the Commission
    D. Reporting Thresholds
    E. Supplementing Current Short Sale Data Available From FINRA 
and the Exchanges
    F. Request for Comments
IV. Potential Alternative Approach to Proposed Rule 13f-2 Regarding 
How the Information Reported on Proposed Form SHO Is Published by 
the Commission
V. Proposed Amendment to Regulation SHO To Aid Short Sale Data 
Collection
VI. Proposal to Amend CAT
    A. ``Buy to Cover'' Information
    B. Reliance on Bona Fide Market Making Exception
    C. Request for Comments
VII. Paperwork Reduction Act Analysis
    A. Background
    B. Burdens for Managers Under Proposed Rule 13f-2 and Proposed 
Form SHO
    C. Burdens for Broker-Dealers Under Proposed Rule 205
    D. Burdens and Costs Associated With the Proposal To Amend CAT
    E. Collection of Information Is Mandatory
    F. Confidentiality
    G. Request for Comments
VIII. Economic Analysis

[[Page 14951]]

    A. Introduction
    B. Economic Justification
    C. Baseline
    D. Economic Effects
    E. Efficiency, Competition and Capital Formation
    F. Reasonable Alternatives
    G. Request for Comments
IX. Regulatory Flexibility Act Certification
X. Consideration of Impact on the Economy
    Statutory Authority and Text of Proposed Rules 13f-2 and 205, 
and Form SHO

I. Introduction

    A short sale involves the 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\ Short selling has 
long been used in financial markets as a means to profit from an 
expected downward price movement, to provide liquidity in response to 
unanticipated demand,\3\ or to hedge the risk of a long position in the 
same security or a related security.\4\ Short selling has also been 
shown to improve pricing efficiency by providing information to the 
market.\5\ While short selling can serve useful market purposes, it 
also may be used to drive down the price of a security, to accelerate a 
declining market in a security, or to manipulate stock prices.\6\
---------------------------------------------------------------------------

    \2\ See 17 CFR 242.200(a).
    \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 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 at 11235 n.29 and 30. See generally discussion infra 
Part VIII.D.2.
    \6\ See, e.g., Division of Economic and Risk Analysis, Short 
Sale Position and Transaction Reporting 6-7 (June 5, 2014) (``DERA 
417(a)(2) Study''), available at https://www.sec.gov/files/short-sale-position-and-transaction-reporting%2C0.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 at 
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.D.1.
---------------------------------------------------------------------------

    The Commission has plenary authority under Section 10(a) of the 
Exchange Act to regulate short sales of securities registered on a 
national securities exchange, as necessary or appropriate in the public 
interest or for the protection of investors. Current regulatory 
requirements applicable to short sales of equity securities are 
generally found in Regulation SHO, which became effective on January 3, 
2005.\7\ Regulation SHO imposes four general requirements with respect 
to short sales of equity securities. It requires broker-dealers to 
properly mark sale orders as ``long,'' ``short,'' or ``short exempt;'' 
\8\ before effecting a short sale, to locate a source of shares that 
the seller reasonably believes can be timely delivered (commonly 
referred to as the ``locate'' requirement); \9\ and to close out 
failures to deliver that result from long or short sales.\10\ Further, 
Regulation SHO imposes a short sale price test circuit breaker.\11\ In 
addition, the Commission adopted an antifraud provision, Rule 10b-21, 
to address failures to deliver in securities that have been associated 
with ``naked'' short selling.\12\ As discussed below, Proposed Rule 
13f-2 would apply to equity securities that are subject to Regulation 
SHO in order to be consistent with those requirements.
---------------------------------------------------------------------------

    \7\ See Regulation SHO Adopting Release, supra note 4.
    \8\ 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 id. 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 OZ Mgmt., Exchange Act Release No. 75445 (July 14, 
2015) (settled) (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.
    \9\ See 17 CFR 242.203(b)(1) through (2).
    \10\ See 17 CFR 242.204.
    \11\ See 17 CFR 242.201.
    \12\ See Exchange Act Release No. 58774 (Oct. 14, 2008), 73 FR 
61666 (Oct. 17, 2008).
---------------------------------------------------------------------------

    DFA Section 929X added Section 13(f)(2) of the Exchange Act, titled 
``Reports by institutional investment managers,'' which requires the 
Commission to prescribe rules to make certain short sale data publicly 
available no less frequently than monthly.\13\ Specifically, Section 
13(f)(2) provides that the Commission shall prescribe rules providing 
for the public disclosure of the name of the issuer and the title, 
class, CUSIP 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.\14\
---------------------------------------------------------------------------

    \13\ Public Law 111-203, 929X, 124 Stat. 1376, 1870 (July 21, 
2010).
    \14\ 15 U.S.C. 78m(f)(2).
---------------------------------------------------------------------------

    Proposed Rule 13f-2 is designed to provide greater transparency 
through the publication of certain short sale related data to investors 
and other market participants by requiring certain institutional 
investment managers to report to the Commission, on a monthly basis on 
Proposed Form SHO, certain short position data and short activity data 
for certain equity securities. More information about the short sale 
activity and short positions of institutional investment managers 
(``Managers'') \15\ may promote greater risk management among market 
participants, and may facilitate capital formation to the extent that 
greater transparency bolsters confidence in the markets.
---------------------------------------------------------------------------

    \15\ 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. As such, the term ``institutional 
investment manager'' typically can include investment advisers, 
banks, insurance companies, broker-dealers, pension funds and 
corporations. See also Instructions to Form 13F.
---------------------------------------------------------------------------

    Proposed Rule 205 would establish a new ``buy to cover'' order 
marking requirement for certain purchase orders effected by a broker-
dealer for its own account or for the account of another person at the 
broker-dealer. The Proposal to Amend CAT would require CAT reporting 
firms to report short sale data not currently required that would 
enhance regulators' understanding of the lifecycle of a trade--from 
order origination, including an order's mark, through order execution 
and allocation.

[[Page 14952]]

Proposed Rule 205 and the Proposal to Amend CAT are intended to 
supplement the short sale data made available to the Commission in 
Proposed Form SHO filings by requiring the reporting to CAT of (i) 
``buy to cover'' order marking information and (ii) reliance on the 
bona fide market making exception in Regulation SHO. The Commission 
believes greater transparency of short sale activity and short position 
data would improve the Commission's oversight of financial markets and 
compliance with existing regulations, as well as facilitate regulators' 
ability to reconstruct significant market events, which may, in turn, 
improve the Commission's ability to respond to similar events in the 
future.\16\ This could, in turn, benefit the public and market 
participants by aiding the Commission in more effectively maintaining a 
fair and orderly market.
---------------------------------------------------------------------------

    \16\ See generally Part VIII.D.1 (discussing how the Commission 
could have used the data provided under the Proposals to address 
market events such as the recent market volatility associated with 
meme stocks, and how the data provided under the Proposals could 
have aided the Commission in examining that market event).
---------------------------------------------------------------------------

    The Commission believes that the short sale related information 
that would be collected under the Proposals, particularly the required 
disclosures of Proposed Form SHO and the aggregated data published 
pursuant to Proposed Rule 13f-2, would fill an information gap for 
market participants and regulators by providing insights into the 
lifecycle of a short sale. In contrast to data related to short sales 
that is currently collected and published by FINRA and most exchanges, 
the aggregated information derived from information reported on 
Proposed Form SHO and published pursuant to Proposed Rule 13f-2 would 
reflect the timing of increases and decreases in the reported short 
positions.\17\ Such aggregated information would help inform market 
participants regarding the overall short sale activity by reporting 
Managers. The information reported on Proposed Form SHO, along with the 
information gleaned through the operation of Proposed Rule 205 and the 
Proposal to Amend CAT would help the Commission and SROs to overcome 
current challenges in using data from CAT to estimate short positions 
and changes in short positions.\18\
---------------------------------------------------------------------------

    \17\ See generally infra Part VIII.C.4 (discussing existing 
short selling data).
    \18\ See generally infra Parts VIII.B and VIII.C.4.iv 
(discussing challenges of extracting short sale information--e.g., 
to estimate positions and to track how those positions change over 
time--from CAT).
---------------------------------------------------------------------------

    The Commission acknowledges that the Proposals would entail costs 
to some market participants--more specifically, compliance costs 
associated with determining whether the Manager is required to report 
on Proposed Form SHO and, if so, with filing Proposed Form SHO, 
pursuant to Proposed Rule 13f-2, and the costs associated with 
accommodating the additional order marks, pursuant to Proposed Rule 205 
and the Proposal to Amend CAT. Implementing Proposed Rule 13f-2 and 
Proposed Form SHO could also reduce certain industry participants' 
incentives to gather information about the marketplace and specific 
securities. For example, requiring disclosure of short positions could 
facilitate copycat trading that, in turn, could limit the profit an 
investor may earn using strategies developed in connection with its 
marketplace information gathering efforts.\19\ In addition, requiring 
disclosure of large short positions, even in an aggregated format, 
could make holders of such short positions more susceptible to short 
squeezes. To the extent that these circumstances could reduce the value 
of marketplace information gathered to develop a short selling 
strategy, they could discourage investors from making an effort to 
gather marketplace information. A reduction in information collection 
could harm price efficiency, which could, in turn, affect capital 
allocations and managerial decisions. Aggregating short sale activity 
and short position information across all reporting Managers for each 
reported equity security prior to publication and publishing such data 
on a delay would likely mitigate--though not fully eliminate--the 
potential negative economic effects of the reporting requirements and 
associated information disclosure of Proposed Rule 13f-2 and Proposed 
Form SHO.
---------------------------------------------------------------------------

    \19\ See generally infra Parts VIII.C.5 and VIII.F (discussing 
the impact of copycat trading strategies on competition).
---------------------------------------------------------------------------

    Proposed Rule 13f-2 and Proposed Form SHO are designed to address 
the requirements of Section 13(f)(2). In developing Proposed Rule 13f-
2, the Commission recognizes the need to consider the important role 
short selling plays in the market as well as the benefits of providing 
more disclosure about short selling. For reasons discussed more fully 
below, the Commission believes Proposed Rule 13f-2 represents an 
appropriate balance by offering increased transparency into the short 
selling activities of certain Managers with large short positions 
through the dissemination of aggregated information reported on new, 
stand-alone, Proposed Form SHO. The information reported on Proposed 
Form SHO would provide investors, market participants, and the 
Commission with short sale data that supplements what is currently 
available, free or on a fee basis, from FINRA and most exchanges.\20\ 
Proposed Rule 13f-2 and Proposed Form SHO would improve the utility of 
information regularly available to the Commission, and made available 
as appropriate to self-regulatory organizations (``SROs''), that could 
be used to examine market behavior and recreate significant market 
events. It would also increase information available to market 
participants and could assist in their understanding of the level of 
negative sentiment and the actions of short sellers collectively. While 
the primary focus of Proposed Rule 13f-2 and Proposed Form SHO is 
transparency, the Commission's regular access to the data reported on 
Proposed Form SHO would also bolster its oversight of short selling. In 
addition, Proposed Rule 205 and the Proposal to Amend CAT would enhance 
the information regularly available to the Commission and other 
regulators that could be used to oversee short selling and to 
reconstruct significant market events. In turn, the Commission's more 
accurate and timely reconstruction and response to market events could 
contribute to overall investor protections, particularly in times of 
increased market volatility.\21\
---------------------------------------------------------------------------

    \20\ See infra Parts II.B and VIII.C.4 (discussing short sale 
data that is currently available and how that compares to the data 
to be reported on Proposed Form SHO).
    \21\ See infra Part VIII.D.1.
---------------------------------------------------------------------------

II. Background

A. Enhancing Short Sale Transparency

    In recent years, market volatility associated with short selling 
has brought heightened attention to the difference in long and short 
position reporting requirements, and, more generally, the lack of 
transparency into the circumstances surrounding short sale 
transactions.\22\ The Commission has

[[Page 14953]]

received requests to increase transparency into short sale related 
activity through the adoption of reporting requirements similar to 
those currently required by holders of long positions above certain 
thresholds.\23\
---------------------------------------------------------------------------

    \22\ See, e.g., Letter from Elizabeth King, Corporate Secretary, 
NYSE Group, and James M. Cudahy, President and CEO, National 
Investor Relations Institute (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 [hereinafter ``NYSE Petition'']; 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 [hereinafter ``NASDAQ Petition'']. See also Letter 
from E. Carter Esham, Executive Vice President, Emerging Companies, 
Biotechnology Innovation Organization (BIO) (Mar. 11, 2016) 
(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, Laurence Fletcher, Madison Darbyshire, Eric Platt and 
Hannah Murphy, `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). See also Sharon Nunn and Adam Kulam, 
Short-Selling Restrictions During Covid-19 (Jan. 12, 2021), 
available at https://som.yale.edu/story/2021/short-selling-restrictions-during-covid-19 for a discussion of global short 
selling regulatory responses to the Covid-19 pandemic.
    \23\ See, e.g., NYSE Petition and NASDAQ Petition, supra note 
22. See also Final Report of the 2021 SEC Government-Business Forum 
on Small Business Capital Formation (May 2021), available at https://www.sec.gov/files/2021_OASB_Annual_Forum_Report_FINAL_508.pdf 
(requesting the Commission act to increase the transparency of short 
selling activities).
---------------------------------------------------------------------------

    As noted above, Section 13(f)(2) requires the Commission to 
prescribe rules to make certain short sale data publicly available no 
less frequently than monthly. After carefully considering the possible 
economic effects of various approaches, the Commission believes that 
publication of aggregated gross short position data of certain 
Managers, and certain related activity data, as discussed in more 
detail below, would provide valuable transparency to market 
participants and regulators.\24\ The Commission believes that the data 
resulting from Proposed Rule 13f-2 would help to provide valuable 
context to overall short position data currently available by 
distinguishing directional short selling of Managers from short sale 
activity effected pursuant to hedging as well as that of market makers 
and liquidity providers.\25\ In addition, the Commission believes that 
the data would provide regulators with a more complete picture of 
significant market events by shedding additional light on the potential 
role of short selling activity.\26\
---------------------------------------------------------------------------

    \24\ See infra Part VIII.D (stating that Proposed Rule 13f-2, in 
conjunction with Proposed Rule 205 and the Proposal to Amend CAT, 
could help to advance the policy goal of investor protection by 
deterring market manipulation, and aid regulators in reconstructing 
significant market events and observing systemic risks).
    \25\ See infra Part VIII.C, VIII.D.
    \26\ See infra Part VIII.D.1 (stating that ``because short 
positions often take some time to create, the Commission could have 
attempted to quickly identify individual short sellers with large 
short positions in the various meme stocks in January 2021 based on 
the most recent reports; then the Commission could have used the 
enhanced CAT data to understand how these short sellers traded 
during the heightened volatility.'').
---------------------------------------------------------------------------

    In determining the proposed reporting requirements under Proposed 
Rule 13f-2 and Proposed Form SHO, the Commission is mindful of concerns 
that certain short selling activity can be carried out pursuant to 
potentially abusive or manipulative schemes. For instance, market 
manipulators may seek to spread false information about an issuer whose 
stock they sold short in order to profit from a resulting decline in 
the stock's price.\27\ The Commission has previously noted various 
other forms of manipulation that can be advanced by short sellers to 
illegally manipulate stock prices, such as ``bear raids.'' \28\ As 
discussed below, greater transparency into the activities of Managers 
holding large short positions in a security could help regulators' 
oversight of short selling and deter these and other types of 
manipulative short selling campaigns potentially by alerting regulators 
to suspicious activity.\29\
---------------------------------------------------------------------------

    \27\ See infra Part VIII.D.1 (stating that ``[i]n `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''; stating further that ``[i]f 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.''). See also, 
John D. Finnerty, Short Selling, Death Spiral Convertibles, and the 
Profitability of Stock Manipulation, SSRN (2005) at n.8, available 
at https://www.sec.gov/comments/s7-08-08/s70808-318.pdf (stating 
that the posting of ``false notices on electronic bulletin boards in 
internet chat rooms is an example of the type of manipulative 
behavior that is difficult for regulators to monitor'').
    \28\ Proposed Rule: Short Sales, 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 (stating that ``[a]lthough 
short selling serves useful market purposes, it also may be used to 
illegally manipulate stock prices. One example is the `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. Further, unrestricted short selling can 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 price is 
falling for fundamental reasons.'').
    \29\ See Part VIII.D.1 (stating that ``if a short and distort 
campaign is suspected, then detecting this behavior via the activity 
and positions data in Proposed Form SHO would be easier than it 
would be using current data. Short and distort campaigns are more 
likely to occur in stocks with lower market capitalizations with 
less public information. Consequently, among these stocks it may 
not, in dollar terms, take a very large short position to reach the 
2.5% threshold in securities of smaller reporting issuers or the 
$500,000 threshold in securities of non-reporting issuers to report 
on Proposed Form SHO. As a result, it is likely that an entity 
engaging in such a practice would be required to report Proposed 
Form SHO data. Consequently, if short and distort type behavior were 
to be suspected, then the Commission would be more likely to 
identify individuals with large short positions and could thus 
quickly focus any inquiries on entities in an economic position to 
potentially profit from manipulation.'').
---------------------------------------------------------------------------

B. Existing Short Sale Data

    There are currently multiple sources of public and nonpublic data 
related to short sales.\30\ FINRA and most exchanges collect and 
publish daily aggregate short sale volume data, and on a one month 
delayed basis publish information regarding short sale 
transactions.\31\ However, the Commission understands that some 
exchanges only make certain data available for a fee. In addition, 
FINRA collects and aggregates short interest data \32\ from broker-
dealer member firms, by security, twice each month.\33\

[[Page 14954]]

FINRA provides this aggregated short interest data to the appropriate 
listing exchange for publication, some of which charge a fee for access 
to the data. For over-the-counter (``OTC'') securities, which are not 
listed on an exchange, FINRA publishes the aggregated short interest 
data itself.\34\ FINRA's aggregation of the short interest data for 
each security does not disclose the identity of reporting market 
participants or the size of any individual short position.
---------------------------------------------------------------------------

    \30\ Additionally, the Commission publishes on its website fail 
to deliver data, which can result from both long and short sales, 
twice per month for all equity securities. Securities and Exchange 
Commission, Fails-to-Deliver Data, available at https://www.sec.gov/data/foiadocsfailsdatahtm. Further, the CAT created pursuant to Rule 
613 of Regulation NMS gives regulators, including the Commission, 
access to comprehensive information regarding the lifecycle of a 
trade--from origination, including an order's mark (i.e., ``long,'' 
``short,'' or ``short exempt''), through execution and allocation. 
See Part VI. Notably, CAT is currently structured to collect 
information, but not to disseminate it.
    \31\ This data is transaction by transaction for each security 
without identification of the broker-dealer or short seller.
    \32\ 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 (stating that ```short interest' 
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. Short interest data is collected for all stocks--both those 
that are listed and traded on an exchange and those that are traded 
over-the-counter (OTC). FINRA and U.S. exchange rules require that 
brokerage firms report short interest data to FINRA on a per-
security basis for all customer and proprietary firm accounts twice 
a month, around the middle of the month and again at the end of each 
month.'').
    \33\ See infra Part VIII.C.4.i. FINRA recently sought comment on 
a variety of potential enhancements to its short interest position 
program. See FINRA Regulatory Notice 21-19 (June 2021), available at 
https://www.finra.org/rules-guidance/notices/21-19. Any such changes 
to FINRA rules would be filed with the Commission and published for 
notice and public comment, pursuant to Exchange Act Section 19(b) 
and Rule 19b-4 thereunder. See also FINRA Rule 4560. Short Interest 
Reporting, available at https://www.finra.org/rules-guidance/rulebooks/finra-rules/4560 (requiring FINRA member firms to maintain 
a record of total ``short'' positions in all customer and 
proprietary firm accounts and to regularly report such information 
to FINRA).
    \34\ For stocks traded OTC, FINRA collects and publishes equity 
short interest information free on its Over-the-Counter Equities 
page, available at https://otce.finra.org/otce/equityShortInterest.
---------------------------------------------------------------------------

C. Prior Nonpublic Short Sale Reporting by Certain Institutional 
Investment Managers to the Commission

    In October 2008, the Commission adopted interim temporary Rule 10a-
3T, which required certain institutional investment managers to file 
weekly nonpublic reports with the Commission on Form SH regarding their 
short sales and positions in Section 13(f) securities, other than 
options.\35\ 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. 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 and was specifically intended 
to provide the Commission with information to evaluate whether its 
short selling regulations were working as intended.\36\ Rule 10a-3T 
remained in effect through July 2009, at which time the Commission 
stated that it and its staff were working with several SROs to make 
publicly available certain information related to short sale activity, 
such as short sale volume and transaction data.\37\
---------------------------------------------------------------------------

    \35\ 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 September 18, 2008, September 21, 2008, and October 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 September 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 October 17, 
2008, and stating that the Forms SH filed under the Order would 
remain nonpublic to the extent permitted by law).
    \36\ See 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).
    \37\ Press Release, Securities and Exchange Commission, SEC 
Takes Steps to Curtail Abusive Short Sales and Increase Market 
Transparency (July 27, 2009), available at https://www.sec.gov/news/press/2009/2009-172.htm (stating that the Commission and its staff 
were working with several SROs to make certain short sale volume and 
transaction data available through SRO websites).
---------------------------------------------------------------------------

    Forms SH were nonpublic filings. The Commission's determination to 
maintain the confidentiality of the information disclosed on Form SH 
was based in part on the concern that requiring public disclosure may 
have had the unintended consequence of giving rise to imitative short 
selling, thereby exacerbating already extreme levels of market 
volatility observed during the 2008 financial crisis.\38\ The 
Commission also stated that implementing a nonpublic, rather than 
public, disclosure requirement would help to prevent the potential for 
sudden and excessive fluctuations of securities prices and disruption 
in the functioning of the securities markets that could threaten fair 
and orderly markets.\39\ Moreover, the Commission stated at the time 
that requiring nonpublic submission of the form may help prevent 
artificial volatility in securities as well as further downward swings 
that are caused by short selling while also providing the Commission 
with valuable information to combat market manipulation.\40\ Just 
before interim temporary Rule 10a-3T was set to expire in August 2009, 
the Commission stated that it would continue to examine whether 
additional measures are needed to further enhance market quality and 
transparency, as well as address short selling abuses.\41\
---------------------------------------------------------------------------

    \38\ 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).
    \39\ Id. at 58987.
    \40\ Id.
    \41\ See supra note 37.
---------------------------------------------------------------------------

D. Petitions and Commentary Regarding Short Position Disclosure

    NASDAQ, NYSE, and the National Investor Relations Institute, have 
previously petitioned the Commission requesting that, pursuant to DFA 
Section 929X, it require disclosure of individual short positions 
similar to the disclosures required under Section 13(f)(1) or 
Regulations 13D and 13G for long-position reporting.\42\ The petitions 
also request that ``short position'' or ``short interest'' be 
interpreted broadly to capture not only traditional short sales but 
also derivative and other transactions having the same economic impact. 
Among these petitioners' concerns is that the lack of public disclosure 
of individual short positions may facilitate accumulations of 
significant positions in an issuer's securities and potentially 
compromise investors' ability to accurately evaluate market movements 
in those securities.\43\ They further argue that the benefits 
associated with requiring individual, public disclosure of short 
selling would include allowing investors to more accurately evaluate 
market movements and make more informed investment decisions, reducing 
manipulative conduct, increasing investor confidence, and improving 
issuers' ability to engage with short sellers.
---------------------------------------------------------------------------

    \42\ See supra note 22.
    \43\ Id.
---------------------------------------------------------------------------

    While some market participants have noted instances when public 
announcements by short sellers have aided the market in ultimately 
discovering the truth behind fraudulent activity,\44\ critics of that 
position have countered with ways short sellers may unfairly harm 
issuers that are not engaged in fraudulent activity.\45\ Other such 
critics of short selling have posited that issuers may be unduly harmed 
\46\ even when short sellers suffer through normal market forces.\47\
---------------------------------------------------------------------------

    \44\ See, e.g., Jane Lewis, Jim Chanos: the short-seller who 
called Enron, MoneyWeek (Sept. 28, 2018), available at https://moneyweek.com/495688/jim-chanos-the-short-seller-who-called-enronarticle.
    \45\ See, e.g., Duncan Lamont, GameStop: the ethics of short 
sellers, Schroders (Jan. 29, 2021), available at https://www.schroders.com/en/insights/economics/are-short-sellers-ethical/; 
Ariel D. Multak, The Big Patent Short: Hedge Fund Challenges to 
Pharmaceutical Patents and the Need for Financial Regulation, 23 
Fordham J. Corp. & Fin. L. 301 (2017), available at https://news.law.fordham.edu/jcfl/wp-content/uploads/sites/5/2018/01/Multak-Note.pdf.
    \46\ See, e.g., Tom Brennan, How Short-Sellers Almost Destroyed 
U.S. Banking, CNBC (Aug. 5, 2010), available at https://www.cnbc.com/id/28239960.
    \47\ See, e.g., Alex Rosenberg, When shorting goes wrong: Zulily 
crushes the bears, CNBC (Aug. 18, 2015), available at https://www.cnbc.com/2015/08/17/when-shorting-goes-wrong-zulily-crushes-the-bears.html.
---------------------------------------------------------------------------

    In response to requests for comment on the short sale reporting 
study required by Section 417(a)(2) of DFA,\48\

[[Page 14955]]

one commenter stated that identification of a market participant that 
has engaged in a short sale may have the unintended consequence of 
exposing investors to the risk of short squeezes.\49\ This commenter 
also maintained that individual public disclosure could chill short 
selling and thereby deny the marketplace certain resulting benefits, 
such as market liquidity, and pricing efficiency.\50\
---------------------------------------------------------------------------

    \48\ Short Sale Reporting Study Required by Dodd-Frank Act 
Section 417(a)(2), Exchange Act Release No. 64383 (May 3, 2011), 76 
FR 26787 (May 9, 2011). See also DERA 417(a)(2) Study, supra note 6. 
The DERA 417(a)(2) Study was a study conducted by Commission staff 
in the Division of Economic and Risk Analysis analyzing the 
feasibility, costs, and benefits of real-time reporting of short 
positions in publicly listed securities.
    \49\ See Letter from Stuart J. Kaswell, Executive Vice President 
& Managing Director, General Counsel, Managed Funds Association 
(June 22, 2011) (``2011 MFA Letter''), available at https://www.sec.gov/comments/4-627/4627-137.pdf; see also Letter from 
Matthew Newell, Associate General Counsel, Managed Funds Association 
(Sept. 6, 2019), available at https://www.sec.gov/comments/s7-26-18/s72618-6082119-191807.pdf.
    \50\ In this regard, the commenter in the 2011 MFA Letter stated 
that individual public disclosure would cause potential short 
sellers to either refrain from or minimize engaging in short sale 
transactions, including hedging activity, to avoid triggering any 
threshold for requiring individual public disclosure. The commenter 
further stated that public disclosure of individual short positions 
could be misleading to investors (stating that investors frequently 
short a stock for portfolio risk management purposes) and could 
potentially enable market participants to reverse engineer a 
reporting firm's trading strategies. In addition, the commenter 
stated that individual public disclosure could expose market 
participants to the risk of a ``short squeeze,'' which may deter 
investors from engaging in short selling more generally. 2011 MFA 
Letter, supra note 49.
---------------------------------------------------------------------------

    Design of Proposals. As discussed more fully throughout the 
release, the Commission believes that Proposed Rule 13f-2 appropriately 
balances these competing interests. Proposed Rule 13f-2 would result in 
the publication of certain short sale related data, which would provide 
additional transparency to market participants, but data would be 
aggregated across all reporting Managers for each reported equity 
security prior to publication. The Commission believes that publicly 
disclosing the identity of individual reporting Managers may not 
currently 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. Further, by establishing minimum reporting 
thresholds, Proposed Rule 13f-2 would apply only to Managers with large 
gross short positions in a security, and would not generally apply to 
market participants that do not carry large overnight gross short 
positions in equity securities.
    Managers that meet a specified reporting threshold, as discussed 
below, would be required to file Proposed Form SHO with the Commission 
within 14 calendar days after the end of the calendar month. The 
Commission would then publish aggregated information derived from data 
reported on Proposed Form SHO. The Commission estimates 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. At this time, the Commission 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.\51\ The 
additional delay prior to publication of the aggregated data would also 
help to reduce the risk of imitative trading activity by market 
participants and help to protect reporting Managers' proprietary 
trading strategies.\52\
---------------------------------------------------------------------------

    \51\ See infra Part III.B.4 for a discussion of how technical 
errors are to be addressed in filing Proposed Form SHO with the 
Commission.
    \52\ See generally infra Parts VIII.C.5 and VIII.F (discussing 
``copycat trading'').
---------------------------------------------------------------------------

    As discussed throughout this release, the Commission believes that, 
by limiting the reporting requirements to positions exceeding a 
reporting threshold and by publishing data on an aggregated and delayed 
basis, the structure of Proposed Rule 13f-2 and the information 
required to be reported on Proposed Form SHO would likely mitigate many 
potential negative effects on the market.

III. Proposed Rule 13f-2 and Proposed Form SHO

A. Proposed Form SHO Filing Requirement Through EDGAR

    Proposed Rule 13f-2 is designed to provide greater transparency 
through the publication of certain short sale related data to investors 
and other market participants by requiring a Manager to file a report 
in a structured data language in two information tables on Proposed 
Form SHO, in accordance with the form's instructions (attached below). 
Managers would file Proposed Form SHO with the Commission via the 
Commission's Electronic Data Gathering, Analysis, and Retrieval system 
(``EDGAR'') in an eXtensible Markup Language (``XML'') specific to 
Proposed Form SHO (``custom XML,'' here ``Proposed Form SHO-specific 
XML''). Managers would have two ways to file Proposed Form SHO or any 
amended Proposed Form SHO with the Commission. A Manager could use a 
fillable web form the Commission would provide on EDGAR to input 
Proposed Form SHO disclosures, which EDGAR would convert to Proposed 
Form SHO-specific XML, or, alternatively, a Manager could use its own 
software tool to file Proposed Form SHO to EDGAR directly in Proposed 
Form SHO-specific XML.
    A Manager would be required to file Proposed Form SHO with the 
Commission within 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 person under the Manager's 
control) has investment discretion \53\ collectively meet or exceed a 
quantitative reporting threshold. Specifically, a Manager must file a 
Proposed Form SHO report:
---------------------------------------------------------------------------

    \53\ For purposes of Proposed Rule 13f-2, the term ``investment 
discretion'' has the same meaning as in Rule 13f-1(b) under the 
Exchange Act. 17 CFR 240.13f-1(b). Proposed Rule 13f-2(b)(2).
---------------------------------------------------------------------------

     With regard to any equity security of an issuer that is 
registered pursuant to section 12 of the Exchange Act \54\ or for which 
the issuer is required to file reports pursuant to section 15(d) of the 
Exchange Act \55\ (a ``reporting company issuer'') in which the Manager 
meets or exceeds either (1) a gross short position in the equity 
security with a US dollar value of $10 million or more at the close of 
regular trading hours \56\ on any settlement date during the calendar 
month, or (2) a monthly average gross short position \57\ as a 
percentage of shares outstanding in the equity security of 2.5% or more 
(``Threshold A''); and
---------------------------------------------------------------------------

    \54\ 15 U.S.C. 78l.
    \55\ 15 U.S.C. 78o(d).
    \56\ For purposes of Proposed Rule 13f-2 and Proposed Form SHO, 
the term ``regular trading hours'' would have the same meaning as in 
Rule 600(b)(77) under the Exchange Act. See, e.g., Proposed Rule 
13f-2(b)(5).
    \57\ For purposes of Proposed Rule 13f-2, the term ``gross short 
position'' means the number of shares of the reportable equity 
security that are held short, without inclusion of any offsetting 
economic positions (including shares of the reportable equity 
security or derivatives of such security). Proposed Rule 13f-
2(b)(4).
---------------------------------------------------------------------------

     with regard to any equity security of an issuer that is 
not a reporting company issuer as described above (a

[[Page 14956]]

``non-reporting company issuer'') in which the Manager meets or exceeds 
a gross short position in the equity security with a US dollar value of 
$500,000 or more at the close of regular trading hours on any 
settlement date during the calendar month (``Threshold B'').
    Threshold A and Threshold B are discussed further in Part III.D 
below and are referred to herein collectively as the ``Reporting 
Thresholds'' (each a ``Reporting Threshold''). For each equity security 
for which a Manager meets or exceeds a Reporting Threshold, such 
Manager, identifying itself using its name and active Legal Entity 
Identifier (``LEI''), if available,\58\ would be required to report 
information that is aggregated across accounts over which the Manager, 
or any person under the Manager's control, has investment discretion. 
If a Manager does not have an active LEI, such Manager would file 
Proposed Form SHO using only its name as registered with the Commission 
to identify itself.
---------------------------------------------------------------------------

    \58\ LEI is a unique global identifier for legal entities 
participating in financial transactions that is currently used in 
regulatory reporting to financial regulators, including the 
Commission.
---------------------------------------------------------------------------

    Managers that meet a Reporting Threshold would be required to file 
Proposed Form SHO with the Commission via EDGAR within 14 calendar days 
after the end of the calendar month. Section 13(f)(2) requires that 
public disclosure of certain short sale information at a minimum shall 
occur every month. The Commission believes that 14 calendar days after 
the end of each month provides sufficient time for Managers that meet a 
Reporting Threshold to assemble, review, and file the required 
information on Proposed Form SHO. Further, 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 would 
reduce the need for Managers to file amendments to Proposed Form SHO, 
as discussed below.
    Consistent with Regulation SHO, Proposed Rule 13f-2 would apply to 
equity securities.\59\ As such, the Commission believes that the short 
sale related data that would be published by the Commission under 
Proposed Rule 13f-2 would provide additional context to market 
participants regarding equity securities that are subject to the 
requirements of Regulation SHO.
---------------------------------------------------------------------------

    \59\ Regulation SHO applies to equity securities, both exchange-
listed and over-the-counter, as defined in Section 3(a)(11) of the 
Exchange Act and Rule 3a11-1 thereunder. See Regulation SHO Adopting 
Release, supra note 4.
---------------------------------------------------------------------------

    For purposes of Proposed Rule 13f-2, the term ``investment 
discretion'' has the same meaning as in Rule 13f-1(b) under the 
Exchange Act.\60\ 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 interim 
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,\61\ and is currently used for Form 13F ``long'' 
position reporting by certain Managers. Because Proposed Rule 13f-2 is 
designed to provide greater transparency to investors and other market 
participants through the publication of certain short sale related 
data, the Commission believes that using the same comprehensive 
definition of investment discretion for Manager reporting under 
Proposed Rule 13f-2 is likewise appropriate. In addition, Managers that 
would be filing reports on Proposed Form SHO are likely experienced 
with reporting on Form 13F using this same definition. As discussed 
above, Proposed Rule 13f-2 is designed to address the requirements of 
Section 13(f)(2) by offering increased transparency into the activities 
of certain Managers with large short positions. As such, information 
reported by a Manager should include all accounts over which such 
Manager has investment discretion.
---------------------------------------------------------------------------

    \60\ 17 CFR 240.13f-1(b). Rule 13f-1 is entitled ``Reporting by 
institutional investment managers of information with respect to 
accounts over which they exercise investment discretion.''
    \61\ See supra Part II.C.
---------------------------------------------------------------------------

    Proposed Rule 13f-2 would require that a Manager calculate its 
``gross short position'' in an equity security in determining whether 
it meets a Reporting Threshold. Under Proposed Rule 13f-2, ``gross 
short position'' would mean the number of shares of the equity security 
that are held short, without inclusion of any offsetting economic 
positions, including shares of the equity security or derivatives of 
such equity security. The Manager shall 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. A 
Manager's gross short position in a security is distinct from its net 
short position in such security, and the Commission believes that gross 
short position information provides a more complete view of a Manager's 
short exposure, especially if coupled with the hedging information that 
the Commission is proposing Managers report on Proposed Form SHO, as 
discussed below. Requiring reporting of gross short positions would 
also likely result in more consistent reporting among Managers. 
Specifically, the Commission is concerned that using net short 
positions could result in Managers using varying approaches in 
determining what ``long'' positions, including equivalent ``long'' 
positions through derivatives, are appropriate to offset against their 
gross short position in determining whether the Manager meets a 
Reporting Threshold in the first instance. Consequently, the Commission 
believes that using a net short position could result in different 
reporting results for otherwise similarly situated Managers in terms of 
a gross short position in the equity security.
    The Commission is proposing required Manager disclosures that are 
significantly different from currently available data and that would be 
useful to both market participants and regulators, with a focus on 
addressing data limitations exposed by the market volatility in January 
2021.

B. Proposed Form SHO

1. Filing Proposed Form SHO Reports
    Proposed Form SHO is entitled ``Information required of 
institutional investment managers pursuant to Section 13(f)(2) of the 
Securities Exchange Act of 1934 and rules thereunder.'' Managers would 
use Proposed Form SHO for reports to the Commission required by 
Proposed Rule 13f-2. A Manager 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.
    Pursuant to Proposed Rule 13f-2 and Proposed Form SHO, to determine 
whether the dollar value threshold described in the first prong of 
Threshold A--a gross short position in an equity security of a 
reporting company issuer (as described above) with a US dollar value of 
$10 million or more at the close of regular trading hours on any 
settlement date during the calendar month--is met, a Manager shall 
determine its end of day gross short position in the equity security on 
each settlement date during the calendar month and multiply that figure 
by the

[[Page 14957]]

closing price at the close of regular trading hours on the settlement 
date.
    To determine whether the second prong of Threshold A--2.5% or 
higher monthly average gross short position as a percentage of shares 
outstanding in the equity security--is met, the Manager shall (a) 
identify its gross short position (as defined in Proposed Rule 13f-2) 
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 of the 
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.
    To determine whether the dollar value threshold described in 
Threshold B--a gross short position in an equity security of a non-
reporting company issuer (as described above) with a US dollar value of 
$500,000 or more at the close of regular trading hours on any 
settlement date during the calendar month--is met, a Manager shall 
determine its end of day gross short position in the equity security 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. In circumstances where such closing price is not 
available, the Manager would be required to use the price at which it 
last purchased or sold any share of that security in determining 
whether Threshold B is met.
    The rules to prevent duplicative reporting of Proposed Form SHO are 
modeled after those in Form 13F.\62\ More specifically, if two or more 
Managers, each of which is required by Proposed Rule 13f-2 to file 
Proposed 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 Proposed Form SHO. If a 
Manager has information that is required to be reported on Proposed 
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 to the Proposed 
Form SHO instructions. Such information would be reported by Managers 
on the ``Cover Page,'' as discussed further below. Duplicative 
reporting could result in unnecessary costs to Managers, and could make 
the aggregated data published by the Commission less accurate.
---------------------------------------------------------------------------

    \62\ See ``Rules to Prevent Duplicative Reporting'' in the 
``General Instructions'' of Form 13F, available at https://www.sec.gov/pdf/form13f.pdf.
---------------------------------------------------------------------------

    The Commission believes 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. 
Proposed Rule 13f-2 and Proposed Form SHO would improve the quality and 
scope of the information regularly available for the Commission's use 
in examining market behavior and recreating significant market events. 
In addition, Proposed Rule 13f-2 and Proposed Form SHO would expand the 
scope of information available to market participants and could thereby 
assist in their understanding of the level of negative sentiment and 
the actions of short sellers collectively. While the primary focus of 
Proposed Rule 13f-2 and Proposed Form SHO is transparency, the 
Commission's regular access to the data reported on Proposed Form SHO 
would also bolster its oversight of short selling. The Commission's 
ability to more accurately and timely reconstruct and respond to market 
events could enhance investor protections, particularly in times of 
increased market volatility.\63\
---------------------------------------------------------------------------

    \63\ See infra Part VIII.D.1.
---------------------------------------------------------------------------

    Reporting via EDGAR would allow the Commission to download the 
Proposed Form SHO disclosures directly, facilitating efficient access, 
organization, and evaluation of the reported information, thereby 
allowing the Commission to more effectively examine market behavior, 
recreate significant market events, and further bolster its oversight 
of short selling activity.
    The Commission believes that requiring Proposed Form SHO to be 
filed in Proposed Form SHO-specific XML, a structured machine-readable 
data language, would 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.\64\
---------------------------------------------------------------------------

    \64\ See Form 13F, available at https://www.sec.gov/pdf/form13f.pdf.
---------------------------------------------------------------------------

2. Confidential Treatment
    The instructions to Proposed Form SHO expressly provide that all 
information that would reveal the identity of a Manager filing a 
Proposed Form SHO report with the Commission is deemed subject to a 
confidential treatment request under Rule 24b-2 (17 CFR 240.24b-2). The 
Commission currently plans to publish only aggregated data derived from 
information provided in Proposed Form SHO reports. Accordingly, 
Proposed Form SHO, by its terms, ensures that information reported on 
the form that could reveal the identity of the reporting Manager will 
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 FOIA, Section 13(f)(4)-(5), Rule 24b-2(b) under 
the Exchange Act, and any other applicable law.\65\ The Commission 
believes that, because the Commission currently plans to publish only 
aggregated data derived from information reported on Proposed Form SHO, 
it would be unlikely to grant requests for confidential treatment of 
the information from which the aggregated data is derived. While it is 
possible a person may be able to reverse engineer data in a situation 
where only one person was selling short, especially where the short 
seller has publicly disclosed that they have a short position in a 
specific security, the Commission anticipates that many potential 
negative effects on the market or that short seller would likely be 
mitigated by the delay in publication of the aggregated data. Further, 
the Commission believes that granting a request from a Manager that the 
data it provides on a Proposed Form SHO report be excluded from the 
aggregated data published by the Commission could affect the integrity 
of the data by limiting or possibly excluding relevant information. 
This likely would limit the usefulness of the information to the 
public. For these reasons, the Commission believes that, on balance, 
the public's need for the

[[Page 14958]]

aggregated data the Commission would publish likely would justify any 
potential harm that disclosing such aggregated disclosure would impose 
on the Manager requesting confidential treatment.
---------------------------------------------------------------------------

    \65\ Any requests for confidential treatment of the information 
reported on Proposed Form SHO should be made in accordance with Rule 
24b-2 under the Exchange Act (17 CFR 240.24b-2), should be filed 
electronically in accordance with proposed Rule 24b-2(i) and Rule 
101(d) of Regulation S-T (17 CFR 232.101(d)), and should provide 
enough factual support in the request to enable the Commission to 
make an informed judgment as to the merits of the request.
---------------------------------------------------------------------------

3. Proposed Form SHO Contents
    Proposed Form SHO consists of two parts: (1) The Cover Page, and 
(2) the Information Tables.
    On the Cover Page--
     The Manager shall report certain basic information, 
including its name, mailing address, business telephone and facsimile 
numbers, as well as the name, title, business telephone and facsimile 
numbers of the Manager's contact employee for the Proposed Form SHO 
report; and the date the report is filed. The Manager will also provide 
its active LEI, if it has one. The Commission believes that this basic 
information should be included to identify the reporting Manager and 
the calendar month for which the Manager is reporting.
     The Manager shall identify the calendar month (using the 
last settlement date of the calendar month) for which the Manager is 
reporting. The date should name the month, and express the day and year 
in Arabic numerals, with the year being a four-digit numeral (e.g., 
2022).
     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.''
     The reporting Manager shall designate the report type for 
the Proposed 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 the other Manager's active LEI is not available to the reporting 
Manager, the reporting Manager shall include only the name of the other 
Manager as registered with the Commission. This information will 
provide the Commission with a summary of the nature and scope of the 
information that the Manager is reporting for the calendar month, as 
well as identify other reporting Managers, if applicable.
    [cir] If all of the information that a Manager is required by 
Proposed Rule 13f-2 to report on Proposed 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.
    [cir] If all of the information that a Manager is required by 
Proposed Rule 13f-2 to report on Proposed Form SHO is reported in the 
report filed by the Manager, 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.
    [cir] If only a part of the information that a Manager is required 
by Proposed Rule 13f-2 to report on Proposed Form SHO is reported 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.
     If the Manager is filing the Proposed 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.\66\ Each amendment must include a complete Cover 
Page and Information Tables. Amendments must be filed sequentially. 
This information will provide the Commission with a summary of the 
nature and scope of the information that a Manager is reporting for the 
calendar month.
---------------------------------------------------------------------------

    \66\ See infra Part III.B.4.
---------------------------------------------------------------------------

    In reporting information required on Information Tables 1 and 2, as 
discussed below, a Manager also must account for and report 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. However, for purposes of Proposed Form SHO 
reporting, a Manager, in determining its gross short position in an 
equity security, would not be required to consider short positions that 
the ETF holds in individual underlying equity securities that are part 
of the ETF basket. Not requiring the Manager to consider these short 
positions in the underlying equity securities should limit the burden 
to reporting Managers in determining whether such Manager meets a 
Reporting Threshold in such underlying equity securities, while not 
materially affecting the reported gross short position and short 
activity data.
    Information Table 1: ``Manager's Gross Short Position 
Information''--The information being reported will include gross short 
position information regarding transactions that have settled during 
the calendar month being reported.
     In Column 1, a Manager shall enter the last day of the 
calendar month being reported by the Manager on which a trade settles 
(``settlement date''). This information will identify the month being 
reported by the Manager.
     In Column 2, a Manager shall 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 shall enter the issuer's active 
LEI, if the issuer has an active LEI. The LEI provides standardized 
information that will 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 
shall 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 
shall enter the nine (9) digit CUSIP number of the equity security for 
which information is being reported, if applicable.
     In Column 6, a Manager shall enter the twelve (12) 
character, alphanumeric Financial Instrument Global Identifier 
(``FIGI'') \67\ 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.
---------------------------------------------------------------------------

    \67\ FIGI is a randomly assigned 12 character, alphanumeric ID 
that provides a standardized unique unambiguous identification 
framework for financial instruments across all asset classes and 
jurisdictions. It is open sourced, freely available, and non-
proprietary.
---------------------------------------------------------------------------

     In Column 7, a Manager shall 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 shall enter the US dollar value of 
the shares reported in Column 7, rounded to the nearest dollar. A 
Manager shall report the corresponding dollar value of the

[[Page 14959]]

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. This additional information 
regarding the dollar value of the reported short position will provide 
additional transparency and context to market participants and 
regulators.
     In Column 9, a Manager shall 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. A 
Manager shall 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 \68\ (in which the Manager's reported gross short position is 
offset 1-for-1), or similar hedging strategies used by market 
participants. A Manager shall 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 sellers' view of the equity security. The Commission believes 
that hedging information also can assist with distinguishing position 
trading, which typically has corresponding hedging activity, from other 
strategies such as arbitrage.
---------------------------------------------------------------------------

    \68\ See Brandon Renfro, What is Delta Hedging?, The Balance 
(Nov. 4, 2021), available at https://www.thebalance.com/what-is-delta-hedging-5207735.
---------------------------------------------------------------------------

    Information Table 2: ``Daily Activity Affecting Manager's Gross 
Short Position During the Reporting Period''--The Manager shall report 
the information required by the Proposed Form SHO instructions for each 
date during the reporting period on which a trade settles (settlement 
date) during the calendar month. The Commission believes that 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; and 
other activity. The Commission believes that such activity data would 
also assist the Commission in assessing systemic risk and in 
reconstructing unusual market events, including instances of extreme 
volatility.
     In Column 1, a Manager shall enter the date during the 
reporting period on which a trade settles for the activity reported. 
This will identify the settlement date activity being reported.
     In Column 2, a Manager shall enter the name of the issuer, 
consistent with Section 13(f)(2), to identify the issuer of the 
security for which information is being reported.
     In Column 3, a Manager shall enter the issuer's active 
LEI, if the issuer has an active LEI. The LEI provides standardized 
information that will 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 
shall 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 
shall enter the nine (9) digit CUSIP number of the equity security for 
which information is being reported, if applicable.
     In Column 6, a Manager shall 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 shall 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 shall 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 will allow the Commission and 
other regulators to more quickly identify a potential ``short 
squeeze,'' which can be evidenced by short sellers closing out short 
positions by purchasing shares in the open market. If it appears 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 may deter some 
market participants seeking to orchestrate a short squeeze.\69\
---------------------------------------------------------------------------

    \69\ See infra Part VIII.D.1.
---------------------------------------------------------------------------

     In Column 9, for the settlement date set forth in Column 
1, a Manager shall 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 shall enter the number of shares of the security for which 
information is being reported that are sold in a put option exercise 
that creates or increases 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 shall enter the number of shares of the security for which 
information is being reported that are sold in a call option assignment 
that creates or increases 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 shall enter the number of shares of the security for which 
information is being reported that are acquired in a put option 
assignment that reduces or closes a short position on that security and

[[Page 14960]]

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 shall enter the number of shares of the security for which 
information is being reported that are acquired as a result of tendered 
conversions that reduce or close 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 shall 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.\70\ A secondary offering 
transaction, sometimes referred to as a ``seasoned'' offering, occurs 
when a company sells newly created shares to the market, at a time 
subsequent to the company's initial public offering, or ``IPO.'' 
Purchasing securities in a secondary offering can reduce or close a 
short position in the equity security.
---------------------------------------------------------------------------

    \70\ Regulation M Rule 105 makes it unlawful, in connection with 
an offering of certain equity securities, for any person to sell 
short a security that is the subject of an offering and purchase the 
offered securities from an underwriter or broker or dealer 
participating in the offering if such short sale was effected during 
the Rule 105 restricted period. See 17 CFR 242.105(a).
---------------------------------------------------------------------------

     In Column 15, for the settlement date set forth in Column 
1, a Manager shall 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 shall 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 believes that the information in Columns 9, 12, 13, 
14, and 16 is 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.
    The Commission believes that the information in Columns 10, 11, and 
15 is 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.
4. Procedures for Filing and Amending Proposed Form SHO
    Managers will have two ways to file Proposed Form SHO or any 
amended Proposed Form SHO to the Commission. A Manager can use a 
fillable web form provided by EDGAR to input Proposed Form SHO 
disclosures that EDGAR will convert to Proposed Form SHO-specific XML 
or, alternatively, use its own software tool to file Proposed Form SHO 
to EDGAR directly in Proposed Form SHO-specific XML.\71\ If a Manager 
uses the web-fillable Proposed Form SHO on EDGAR and encounters a 
technical error when filling out the form, such Manager will 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 will receive 
an error message that the filing has been suspended, and will be 
required to correct the identified technical error and re-file the 
Proposed Form SHO through EDGAR.\72\
---------------------------------------------------------------------------

    \71\ 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).
    \72\ The Commission's 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 submitted in Proposed Form SHO filings.
---------------------------------------------------------------------------

    A Manager that determines or is made aware that it has filed a 
Proposed Form SHO with errors that affect the accuracy of the 
information reported must file an amended Proposed Form SHO within ten 
(10) calendar days of discovery of the error. Filing an amended 
Proposed Form SHO within 10 calendar days of discovery of the error 
would provide Managers with a reasonable period of time to prepare the 
Proposed Form SHO amendment, while helping to ensure that accurate 
information is received by the Commission in a timely manner.
    To facilitate the Commission's process of aggregating the short 
sale related information reported on Proposed Form SHO for publication, 
amendments to Proposed Form SHO must restate the Proposed Form SHO in 
its entirety. To inform the Commission that the filing is an amendment 
of a previously filed Proposed Form SHO, a Manager must check the box 
on the Proposed Form SHO Cover Page to indicate that the filing is an 
``Amendment and Restatement.'' On the Cover Page of each Amendment and 
Restatement filed, 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 Proposed 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, 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. As discussed below, 
the Commission proposes to 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 proposes to limit 
the requirement to file amended Proposed Forms SHO to twelve months to 
reduce the burden and cost on Managers.
    If a revision reported in an Amendment and Restatement changes a 
data point reported in the Proposed Form SHO that is being amended by 
twenty-five percent (25%) or more, the Manager must notify the 
Commission staff via the Office of Interpretation and Guidance of the 
Division of Trading and Markets (``TM OIG'') at 
[email protected] within two (2) business days after filing the 
Amendment and Restatement. The Commission believes that a change of 25% 
or greater reflects a significant change, particularly for securities 
with few Managers reporting Proposed Form SHO data, which, as discussed 
below, should be highlighted in the updated aggregated data that will 
be published.
    Regardless of the scope of the revision being reported, if the data 
being reported in an Amendment and Restatement affects the data 
reported on

[[Page 14961]]

the Proposed Form SHO reports filed for multiple Proposed 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 with notice of such occurrence, and provide an explanation 
of the reason for the revision. Reporting discrepancies could harm the 
integrity of the data being reported on Proposed Form SHO through EDGAR 
(and published by the Commission on an aggregated basis as discussed 
herein), particularly if such reporting discrepancies go uncorrected. 
The Commission believes that requiring a Manager to notify Commission 
staff when reporting discrepancies have occurred, with a description of 
the revision being made and the reason for the revision, would help 
Commission staff determine whether there may be an ongoing or 
continuing issue with the integrity of the data being reported by that 
Manager.
    Each reporting period, the Commission plans to update prior months' 
aggregated Proposed 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 to correct 
a data point of 25% or greater to highlight for market participants 
that the published aggregated data includes significantly revised data. 
The Commission will publish the aggregated Proposed 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 Proposed Form SHO data will include a disclaimer that the 
Commission does not ensure the accuracy of the data being published.

C. Publication of Information by the Commission

    The Commission will publish through EDGAR aggregated information 
regarding each equity security reported by all Managers. The Commission 
estimates that it will publish such aggregated information within one 
month after the end of the reporting calendar month.\73\ The Commission 
will use the time following receipt of the monthly forms to aggregate 
the data received from the reporting Managers. The Commission does not 
plan to verify the accuracy of data elements reported by Managers, but 
may consider doing so in the future after assessing whether such 
verification would be beneficial. This delay prior to publication will 
also help protect reporting Managers' proprietary trading strategies, 
thereby reducing the risk of imitative trading activity by the 
market.\74\
---------------------------------------------------------------------------

    \73\ The Commission notes that publication of the aggregated 
information may be delayed for an initial period following 
effectiveness of Proposed Rule 13f-2 and Proposed Form SHO.
    \74\ See generally infra Parts VIII.C.5 and VIII.F (discussing 
``copycat trading'').
---------------------------------------------------------------------------

    Analysis of data filed under temporary Rule 10a-3T showed the mean 
duration that short positions were held after the end of the month 
ranged from nine (9) to thirteen (13) calendar days, increasing with 
higher threshold levels, and the median position was not held into the 
following month.\75\ At a Reporting Threshold of $10 million or 2.5% of 
shares outstanding, positions were held for a mean of 9.85 calendar 
days and a median of 0 calendar days. Therefore, the Commission 
believes Managers would close the majority of short positions prior to 
publication. Under Proposed Rule 13f-2, the requirement to file 
Proposed Form SHO within 14 calendar days after the end of each 
calendar month applies to Managers who meet or exceed either Reporting 
Threshold.
---------------------------------------------------------------------------

    \75\ See infra Parts III.D.2 and VIII.C.3.v for additional 
discussion of analysis of temporary Rule 10a-3T data.
---------------------------------------------------------------------------

    With regard to each individual equity security reported by Managers 
on Proposed Form SHO's Information Tables 1 and 2 (discussed above), 
the Commission will publish the issuer's name, and active LEI (if the 
issuer has an active LEI). The Commission will also publish the equity 
security's title of class, CUSIP, and FIGI (if a FIGI has been 
assigned). These data points will identify the equity security for 
which information is being reported.
    With regard to Proposed Form SHO's Information Table 1, entitled 
``Manager's Gross Short Position Information'' (discussed above), the 
Commission will publish, 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 US dollar value of this reported gross short position. 
The Commission will also publish a summary of the Managers' reported 
hedging information with regard to the reported equity security. 
Specifically, the Commission will identify the percentage of the 
aggregate gross short position for a reported equity security that is 
reported as being fully hedged, partially hedged, or not hedged.
    With regard to Proposed Form SHO's Information Table 2, entitled 
``Daily Activity Affecting Manager's Gross Short Position during the 
Reporting Period'' (discussed above), 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 net 
activity will be expressed by a single identified number of shares of 
the reported equity security, and will be determined by offsetting the 
purchase and sale activity that is reported by Managers in Columns 7 
through 16 of Information Table 2. A positive number of shares 
identified would indicate net purchase activity in the equity security 
on the specified settlement date, while a negative number of shares 
identified would indicate net sale activity.
    The aggregated information published would provide market 
participants with additional information beyond what is currently 
publicly available, specifically information regarding the scope of 
activity during the calendar month by reporting Managers as a group. 
Furthermore, by providing the aggregated security-level information 
through EDGAR in a structured, machine-readable data language, the 
Commission would allow investors and other public data users to 
download the aggregated information directly. In each case, the data 
could then be analyzed using various tools and applications, thus 
potentially removing the need to pay a third-party vendor to search 
for, extract, and structure the published information.

D. Reporting Thresholds

1. Threshold Structure
    Setting a reporting threshold level involves a tradeoff between the 
interests of gathering and disclosing data, such as short sale related 
data, and potential costs to reporting Managers.\76\ A reporting 
threshold that is set too low could impose substantial compliance costs 
on Managers that tend to have small short positions or are low volume 
short sellers, and may only provide incrementally meaningful short sale 
related data. A reporting threshold that is set too high might limit 
the amount of data provided to regulators and industry participants, 
and incentivize Managers to develop trading strategies

[[Page 14962]]

designed to avoid having to report their short sale related data 
altogether.\77\
---------------------------------------------------------------------------

    \76\ These costs to reporting Managers include, for example, 
compliance costs of reporting; costs associated with retaliation to 
short sellers, including an increased risk of short squeezes; and 
market participants reducing their short positions to avoid 
disclosure, which can have negative impacts on price discovery and 
market efficiency.
    \77\ With regard to reporting thresholds, research has shown 
that some short sellers in Europe, for example, avoid crossing the 
stated percentage reporting threshold of 0.5% of shares outstanding 
by keeping their short positions just under such reporting 
threshold. See Eur. Sec. and Mkts. Auth., ESMA Report on Trends, 
Risks and Vulnerabilities No. 1, 62-63 (2018), available at https://www.esma.europa.eu/sites/default/files/library/esma50-165-538_report_on_trends_risks_and_vulnerabilities_no.1_2018.pdf.
---------------------------------------------------------------------------

    The Reporting Thresholds are designed to require the filing of 
Proposed Form SHO by Managers with substantial gross short positions. 
The Reporting Thresholds are 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 Reporting Thresholds are based on a 
Manager's gross short position in the equity security itself, and do 
not include the calculation of derivative positions or long positions 
in the equity security. While the proposed rule does not include 
derivatives as part of the threshold calculation, the Commission is 
proposing to require 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. The 
Commission believes this proposed approach balances Managers' reporting 
costs with the utility such data provides to regulators.
    Threshold A. The Commission is proposing a two-pronged reporting 
threshold structure with regard to any equity security of an issuer 
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). Specifically, 
Threshold A, identified in Proposed Rule 13f-2(a), is focused on 
Managers that, with regard to each equity security of a reporting 
company issuer in which the Manager and all accounts over which the 
Manager or any person under the Manager's control has investment 
discretion, collectively have either (1) a gross short position in the 
equity security with a US 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 2.5% or higher monthly average gross short 
position as a percentage of shares outstanding in the equity security.
    This two-pronged approach measures the size of the short position 
in question relative to both a monetary dollar amount and the number of 
shares outstanding. This approach is 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. As noted above, the Reporting Thresholds 
are based on a Manager's gross short position in the equity security 
itself, and do not include the calculation of derivative positions or 
long positions in the equity security. The Commission believes that 
this is a simple and straight forward approach for Managers to 
determine whether they meet Threshold A that avoids any additional cost 
and complexity of including derivative or long positions.
    The Commission believes that requiring reporting of short positions 
with a US dollar value of $10 million or more would capture Managers 
with substantial short positions, even if such positions are relatively 
small compared to the market capitalization of the issuer. To determine 
whether this dollar threshold is met, a Manager will 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.
    The Commission believes that using end of day gross short position, 
rather than an intraday high gross short position, for example, would 
help to prevent Managers engaged in intraday market making strategies 
(who do not typically carry large overnight short positions) from 
triggering this $10 million threshold.\78\ The use of the end of day 
position on any settlement date as opposed to the last settlement date 
of the month is designed to prevent a scenario where, for example, a 
Manager engages in trading activity on the last day of the month to 
avoid reporting altogether.
---------------------------------------------------------------------------

    \78\ See, e.g., Albert J. Menkveld, High frequency trading and 
the new market makers, 16 J. Fin. Mkts., 712, 712-740 (2013).
---------------------------------------------------------------------------

    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. To 
determine whether this percentage threshold is met, a Manager shall (a) 
identify its gross short position in the equity security at the close 
of each settlement date during the calendar month, and divide that 
figure by the number of shares outstanding in such security at the 
close of that settlement date, and (b) add up the daily percentages 
during the calendar month as determined in (a) and divide that total by 
the number of settlement dates during the calendar month of the 
reporting period. The number of shares outstanding of the equity 
security shall be determined by reference to an issuer's most recent 
annual or quarterly report, and any subsequent update thereto, filed 
with the Commission.
    Threshold B. The Commission is separately proposing a single-
pronged reporting threshold structure with regard to any equity 
security of a non-reporting company issuer. Specifically, Threshold B, 
identified in Proposed Rule 13f-2(a), is focused on Managers that, with 
regard to each equity security of a non-reporting company issuer in 
which the Manager and all accounts over which the Manager or any person 
under the Manager's control has investment discretion, collectively 
have a gross short position in the security with a US dollar value of 
$500,000 or more at the close of regular trading hours on any 
settlement date during the calendar month.
    With regard to an equity security of a non-reporting company 
issuer, the Commission understands that the number of total shares 
outstanding may not be readily and consistently accessible to Managers. 
As such, the Commission has determined that a single-pronged reporting 
threshold based on a set dollar value is appropriate for equity 
securities of non-reporting company issuers. The Commission believes 
that this approach is an efficient way for Managers to determine 
whether they meet Threshold B that avoids the potential additional cost 
and complexity of locating total number of shares outstanding for a 
non-reporting company issuer that might be difficult, or impossible, to 
locate.
    Like Threshold A, Threshold B is based on a Manager's gross short 
position in the equity security itself, and does not include the 
calculation of derivative positions or long positions in the equity 
security. As noted above, the Commission believes that this is a simple 
and straight forward approach for Managers to determine whether they 
meet Threshold B that avoids any additional cost and complexity of 
including derivative or long positions.
    The Commission believes that requiring reporting of short positions 
with a US dollar value of $500,000 or

[[Page 14963]]

more 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. To determine whether this dollar threshold is met, a 
Manager will 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. In circumstances where such closing 
price is not available, 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, in determining whether Threshold B 
is met.
    The Commission believes that using end of day gross short position, 
rather than an intraday high gross short position, for example, would 
help to prevent market participants engaged in intraday market making 
strategies (who do not typically carry large overnight short positions) 
from triggering this $500,000 threshold. The use of the end of day 
position on any settlement date as opposed to the last settlement date 
of the month is designed to prevent a scenario where, for example, a 
Manager engages in trading activity on the last day of the month to 
avoid reporting altogether.
2. Determination of Reporting Threshold
    As discussed in this section, the Reporting Thresholds are based on 
comment letters and analysis of Form SH data collected under Rule 10a-
3T. 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 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.\79\
---------------------------------------------------------------------------

    \79\ 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.
---------------------------------------------------------------------------

    Threshold A. Based on analysis of Form SH data,\80\ the Commission 
believes that a two-pronged threshold of $10 million or 2.5% of shares 
outstanding would provide significant coverage of the dollar value of 
positions, while limiting the reporting burden on Managers. Panel A of 
Table I shows the Reporting Threshold would have captured 89% of the 
dollar value of the positions reported by Managers who were required to 
report Form SH; Panel B shows that it would have captured 346 
Managers.\81\ The reporting burden would not significantly increase 
compared to slightly higher threshold levels, while the value of the 
positions potentially collected would drop significantly for higher 
dollar threshold levels.
---------------------------------------------------------------------------

    \80\ To perform this analysis, Form SH data on daily short 
positions for November 2008 through February 2009 were filtered to 
remove duplicate and missing observations, weekend or holiday 
observations, and positions below the de minimis reporting 
threshold. They were matched to Center for Research in Security 
Prices, LLC for daily closing prices and Compustat for daily shares 
outstanding. The Commission recognizes that the results of an 
analysis of Form SH data may not fully reflect the status quo but 
that the analysis uses appropriate data currently available to the 
Commission for this use. The Form SH data covered a limited time 
period, may not be comparable because of subsequent market changes, 
and did not represent ``normal'' market conditions as the trading 
took place during and after the 2008 financial crisis. Additionally, 
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 report. 
Further, we believe that many aggregated short positions that we 
calculated using Form SH data likely overestimate the actual number 
of shares that were short. This is because in many instances the 
size of a short position calculated using Form SH data was greater 
than 100% of FINRA short interest for the same stock on the same 
date. This difference could potentially be explained if arranged 
financing, which is not included in the definition of FINRA short 
interest, was a large fraction of aggregated Form SH short 
positions. According to FINRA, ``arranged financing programs 
(sometimes called `enhanced lending' or `short arranging products') 
[describe an arrangement in] which a customer [ ] borrow[s] shares 
from [its broker's] domestic or foreign affiliate and [then] use[s] 
those shares to close out a short position in the customer's 
account.'' See FINRA Notice 21-19 available at https://www.finra.org/sites/default/files/2021-06/Regulatory-Notice-21-19.pdf. In addition, this difference could also be explained if 
affiliated Managers reported the same short positions on multiple 
Form SH filings. Despite the potential overestimate, the Commission 
believes that the analysis provides information informative for 
selecting the Reporting Threshold because it involves the same type 
of entities (Managers) and the same activity (short positions). 
Intraday short selling activity could not be examined because the 
data field for ``Number of Securities Sold Short'' was populated in 
only 7% of observations after filters were applied, likely because 
most short selling volumes were below the threshold.
    \81\ Although they were not required to, some Managers submitted 
data for positions below the 10a-3T reporting threshold. These were 
excluded from the analysis. See Part VIII.C.3.v for additional 
discussion. See also infra notes 365-66 and accompanying text.

                            Table I--Various Threshold Levels for Monthly Average Positions and Monthly Maximum Dollar Value
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             Greater than
              Greater than (%)               -----------------------------------------------------------------------------------------------------------
                                                  $0          $1M         $5M        $10M        $15M        $20M        $25M        $50M        $100M
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                      Panel A: Percentage of Position Dollar Value
--------------------------------------------------------------------------------------------------------------------------------------------------------
0.0.........................................         100         100         100         100         100         100         100         100         100
0.25........................................         100         100         100         100          98          96          94          88          82
0.5.........................................         100         100          98          95          92          88          85          76          68
1.0.........................................         100         100          96          91          85          81          77          65          54
1.5.........................................         100         100          96          90          83          78          74          60          48
2.0.........................................         100         100          95          90          83          77          72          58          45
2.5.........................................         100         100          95          89          82          77          72          56          43
3.0.........................................         100         100          95          89          82          76          71          55          42
4.0.........................................         100         100          95          89          82          76          71          54          40
5.0.........................................         100         100          95          89          82          76          71          54          39
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                       Panel B: Number of Managers by Position Percentage or Position Dollar Value
--------------------------------------------------------------------------------------------------------------------------------------------------------
0.0.........................................         442         442         442         442         442         442         442         442         442
0.25........................................         442         442         442         442         435         429         425         421         419
0.5.........................................         442         435         406         402         388         380         373         360         355
1.0.........................................         442         433         384         373         348         335         320         294         281
1.5.........................................         442         432         377         362         333         314         293         255         232

[[Page 14964]]

 
2.0.........................................         442         432         374         350         319         297         275         229         202
2.5.........................................         442         432         373         346         312         286         261         210         178
3.0.........................................         442         432         373         345         310         282         255         200         165
4.0.........................................         442         432         372         344         306         277         247         184         142
5.0.........................................         442         432         372         343         303         274         243         174         127
--------------------------------------------------------------------------------------------------------------------------------------------------------
This table reports the coverage of Managers reporting at different threshold levels. Data are from Form SH filings for a 4 month period from 2008 to
  2009. The ``Greater than'' levels are cumulative. Entries are calculated as a percentage of Manager/stock observations for the row or column criteria.
  Rows are monthly average positions as a percentage of shares outstanding and columns are monthly maximum unscaled dollar value of positions as
  determined by the daily closing price in Center for Research in Security Prices, LLC (CRSP). Values in Panel A are average percentages of total
  position dollar value. Values in Panel B are the average number of Managers reporting.

    Threshold B. Based on analysis of OTC Markets data,\82\ the 
Commission believes that a threshold of $500,000 would provide 
significant coverage of the dollar value of positions, while limiting 
the reporting burden on Managers. The $500,000 threshold is also 
similar to the median dollar value of 2.5% of the market capitalization 
of OTC stocks for which we were able to obtain total shares 
outstanding. The median for this set of stocks was approximately 
$460,000. The proposed threshold of $500,000 is the rounded median and 
is likely greater than 2.5% of the market capitalization of the equity 
securities of non-reporting company issuers, assuming such equities 
have lower market capitalization than that of reporting company 
issuers. The Commission believes that this level provides a reasonable 
estimate in the absence of data on the market capitalization for equity 
securities of non-reporting company issuers. Table II shows Threshold B 
would have captured over 99% of the dollar value of short positions and 
15% to 24% of Managers, assuming 1 to 3 Managers had equivalently-sized 
short positions in each stock.
---------------------------------------------------------------------------

    \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.

                                Table II--Various Threshold Levels for OTC Stocks
----------------------------------------------------------------------------------------------------------------
                                                                % of Short Positions (1  % of Short Positions (3
             Greater than               % of $ Short Interest      Manager per stock)      Managers per stock)
----------------------------------------------------------------------------------------------------------------
$50K.................................                    99.91                    48.08                    35.47
$100K................................                    99.82                    40.38                    27.56
$250K................................                    99.52                    29.70                    21.58
$500K................................                    99.17                    23.72                    15.60
$1M..................................                    98.65                    19.66                    13.03
$5M..................................                    95.30                    10.90                     6.84
$10M.................................                    92.66                     8.76                     3.63
----------------------------------------------------------------------------------------------------------------
This table reports the coverage of the short interest in the equities in non-reporting company issuers at
  different threshold levels. Data are from OTC Markets Group for September 30, 2020. The ``Greater than''
  levels are cumulative. ``% of $ Short Interest'' is the percentage of total dollar value of short interest.
  ``% of Short Positions'' is the percentage of short positions, assuming 1 or 3 Managers have short positions
  in each stock.

E. Supplementing Current Short Sale Data Available From FINRA and the 
Exchanges

    As noted above, certain short sale data is publicly disseminated 
currently by FINRA and most of the exchanges. Notably, however, FINRA 
or the exchanges, at their discretion, could modify, or eliminate, 
their collection or publication of such short sale data. Moreover, the 
Commission understands that some of the exchanges require payment of a 
fee to access the data, which may make it difficult for some investors 
to access. The Commission believes that the short sale data provided 
pursuant to Proposed Rule 13f-2 and Proposed Form SHO would supplement 
the short sale information that is currently publicly available from 
FINRA and the exchanges, with the benefit of having certain of the 
short sale data provided consolidated in a readily accessible location 
(i.e., EDGAR), with aggregated data free to all investors and other 
market participants. The short sale data collected pursuant to Proposed 
Rule 13f-2 and Proposed Form SHO, for example, would include certain 
activity related data that is not currently available from FINRA or the 
exchanges, including activity in related options. While FINRA's 
existing short interest data reports aggregate short positions on a bi-
monthly basis,\83\ they 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 collected pursuant to Proposed 
Rule 13f-2 and Proposed Form SHO would help to fill that gap. The 
Commission believes that publication of this additional information, 
aggregated as discussed above, could help to further inform market 
participants regarding overall short sale activity by reporting

[[Page 14965]]

Managers with substantial short positions.
---------------------------------------------------------------------------

    \83\ The short interest data reported reflects aggregate short 
positions as of the specified reporting dates.
---------------------------------------------------------------------------

F. Request for Comments

    While the Commission welcomes any public input on Proposed Rule 
13f-2 and Proposed Form SHO, the Commission asks commenters to consider 
the following questions.
     Q1: EDGAR: Managers that meet a Reporting Threshold would 
be required to report prescribed short sale related data on Proposed 
Form SHO through EDGAR.
    [cir] Are there are other reporting mechanisms for reporting 
Managers that would be more appropriate, including more efficient, than 
reporting through EDGAR? If so, please identify the alternative 
reporting mechanism, and provide the reasons why such alternative 
reporting mechanism would be more appropriate.
     Q2: Managers: Under Proposed Rule 13f-2, the Commission is 
proposing that the information reported by Managers be aggregated 
across all reporting Managers prior to publication.
    [cir] Please discuss any views on the reporting requirements of 
Proposed Rule 13f-2 and Proposed Form SHO.
    [cir] Please discuss any views regarding the Commission's proposed 
approach to aggregate the reported information across all reporting 
Managers prior to publication and address the pros and cons, as 
applicable, of the Commission's proposed approach.
    [cir] Proposed Rule 13f-2 would require that a Manager provide 
identifying information including its active LEI (if it has one) when 
filing Proposed Form SHO. If a Manager does not have an active LEI, 
should such Manager be required to obtain an LEI?
     Q3: Hedging Information: When reporting on Proposed Form 
SHO, Managers would be required to identify whether the gross short 
position reported is fully hedged, partially hedged, or not hedged.
    [cir] Please describe any views regarding the reporting of hedging 
information as proposed by the Commission and address the pros and 
cons, as applicable.
    [cir] Do Managers generally know whether a position is fully hedged 
or partially hedged?
    [cir] Is there a common understanding among Managers regarding what 
fully hedged or partially hedged means? Are those understandings 
different than the Commission's proposed instructions and discussion 
above? If there is a common understanding or definition, please 
describe it.
    [cir] Is the Commission's description of ``fully hedged'' or 
``partially hedged'' appropriate for purposes of reporting under 
Proposed Rule 13f-2? If so, describe why. If not, please describe what 
would be an appropriate definition of these terms for purposes of 
Manager reporting under Proposed Rule 13f-2.
    [cir] Would the required hedging information provide important 
information to assist in interpreting the reported gross short position 
information?
    [ssquf] If not, what other information might help to inform on the 
economic exposure of the reported gross short position?
     Q4: Publication of ``Activity'' Information by the 
Commission:
    [cir] Please discuss any views regarding the Commission's proposed 
approach with regard to the publication of aggregated ``net'' activity, 
as described above, and address the pros and cons, as applicable.
    [cir] Would aggregated ``net'' activity be more useful and 
informative if it was published by ``category'' of activity identified 
in Information Table 2, rather than consolidated across all 
``categories'' of activity identified in Information Table 2?
    [cir] Is there another manner in which aggregated ``activity'' 
information could be published that would be more useful and 
informative than is proposed by the Commission? If so, please describe.
     Q5: Reporting Thresholds: Under Proposed Rule 13f-2, only 
Managers that meet a stated Reporting Threshold would be required to 
report on Proposed Form SHO through EDGAR. This approach is intended to 
focus reporting by Managers with substantial gross short positions.
    [cir] Are the proposed Reporting Thresholds appropriate? If so, 
explain why. If not, explain why not and how the Reporting Thresholds 
should be modified.
    [cir] Do you believe that Managers would try to avoid triggering 
the proposed Reporting Thresholds? If so, please explain.
    [cir] In determining whether the dollar value threshold in 
Threshold A (U.S. dollar value of $10 million or more) is met, the 
Commission proposes that a Manager utilize the closing price at the 
close of regular trading hours on the settlement date. Should Managers 
be required to use a specific source of information in determining the 
closing price of the equity security? If yes, explain why, and describe 
the source(s) of information. Could there be circumstances in which a 
closing price is not available for equity securities subject to 
Threshold A? If yes, please describe those circumstances. In such 
circumstances, should a Manager be required to use a specific source of 
information in determining the closing price of the equity security?
    [cir] To determine whether the percentage threshold in Threshold A 
(2.5% or more) is met, the Commission proposes that a Manager utilize 
the number of outstanding shares of the security for which information 
is being reported as determined by reference to an issuer's most recent 
annual or quarterly report, and any subsequent update thereto, filed 
with the Commission. Are there circumstances in which Managers should 
not reference these reports filed with the Commission to determine the 
number of outstanding shares? If yes, please describe those 
circumstances. Should Managers be required or permitted to use a 
different source of information in determining the number of shares 
outstanding of the equity security? If yes, please explain why, and 
describe the source(s) of information.
    [cir] In determining whether the dollar value threshold in 
Threshold B (U.S. dollar value of $500,000 or more) is met, the 
Commission proposes that a Manager utilize the closing price at the 
close of regular trading hours on the settlement date. The Commission 
further proposes that in circumstances where such closing price is not 
available, a Manager would be required to utilize the price at which it 
last purchased or sold any share of that equity security in determining 
whether Threshold B is met. Should Managers be required to use a 
specific source of information in determining the closing price of such 
an equity security--for example, the closing price provided on an 
interdealer quotation system (``IDQS'') \84\ or an alternative trading 
system (``ATS'') \85\? Or alternatively, last available sale price of 
such equity security? If yes, explain why, and describe the source(s) 
of information.
---------------------------------------------------------------------------

    \84\ See 17 CFR 240.15c2-11(e)(3).
    \85\ See 17 CFR 242.300(a).
---------------------------------------------------------------------------

    [cir] Managers would be required to report their gross short 
positions in equity securities without offsetting such gross short 
positions with long shares of the equity security or with an equivalent 
long position through derivatives of the equity security. Are there any 
pros and cons of such a proposed approach, especially when compared to 
using a ``net'' short interest position calculation? If so, explain 
why, and describe any associated costs and benefits.
     Q6: Securities Covered: Under Proposed Rule 13f-2, 
Managers would be required to report to the Commission certain short 
sale related data, as

[[Page 14966]]

described above, for equity securities consistent with the Commission's 
short sale regulations (i.e., Regulation SHO).
    [cir] Should reporting Managers be required to report short sale 
related data for a different universe of securities than equity 
securities consistent with Regulation SHO? If so, please explain why 
and describe the universe of securities that would be more appropriate.
    [cir] Should fixed income securities be included under Proposed 
Rule 13f-2? If yes, explain why and describe what costs and benefits 
might be associated with such reporting.
    [cir] Should other securities be included under Proposed Rule 13f-
2? If yes, identify such securities, explain why, and describe what 
costs and benefits might be associated with such reporting.
    [cir] Should certain securities be excluded from Proposed Rule 13f-
2 reporting? If yes, identify the securities in question, and explain 
why.
    [cir] ETFs would be included under Proposed Rule 13f-2. Should ETFs 
be excluded from Proposed Rule 13f-2? If yes, describe why. If no, 
explain why not.
     Q7: Economic Short Positions: Proposed Rule 13f-2 requires 
that a Manager calculate its gross short position in the equity 
security in determining whether it meets the Reporting Thresholds.
    [cir] Should a Manager also be required to include short positions 
resulting from derivatives in determining whether it meets the 
Reporting Thresholds? If so, explain why, and describe any associated 
costs and benefits to doing so. If not, explain why not.
    [ssquf] Should only certain derivative positions be included? If 
so, which ones and why?
    [ssquf] Should certain derivative positions not be included? If so, 
which ones and why?
    [ssquf] Does excluding derivative positions create opportunities to 
avoid triggering the Reporting Thresholds through other economically 
equivalent instruments? If so, please explain.
     Q8: Short Position Information: Under Proposed Rule 13f-2, 
Managers that meet a Reporting Threshold are required to report their 
end of month gross short position in the equity security.
    [cir] Should a Manager also be required to separately report its 
end of month gross short position in derivatives, including, for 
example, options? Please explain.
    [cir] If yes, should only certain derivatives be reported? Please 
explain.
    [cir] If yes, should certain derivatives not be reported? Please 
explain.
    [cir] Please describe any views related to the pros or cons 
associated with reporting end of month gross short positions in 
derivatives.
    [cir] Proposed Form SHO requires Managers to report CUSIP and if 
assigned, FIGI, for a security for which information is being reported 
in both Instruction Tables 1 and 2. If a FIGI has been assigned, should 
a Manager be required to report CUSIP as well?
    [cir] Please describe any views related to the position data that a 
Manager would be required to report as described in Information Table 1 
of Proposed Form SHO.
     Q9: Short Sale ``Activity'' Information Reported by 
Managers: Under Proposed Rule 13f-2, Managers would be required to 
report on Proposed Form SHO all activity in the equity security on each 
settlement date during the calendar month.
    [cir] Please describe any views related to the ``categories'' of 
activity data that a Manager would be required to report as described 
in Information Table 2 of Proposed Form SHO.
    [cir] With regard to the reporting of ``other'' activity, are there 
certain types of ``other'' activity that should be reported? If yes, 
describe the other activity and describe why it should be reported.
    [cir] ETF creations and redemptions would be included under 
Proposed Rule 13f-2. Should ETF creations and redemptions be excluded 
from Proposed Rule 13f-2? If yes, describe why. If no, explain why not.
    [cir] Should other activity be included or excluded from Proposed 
Rule 13f-2? If yes, describe the other activity and describe why it 
should be included or excluded.
     Q10: Indirect Short Positions or Short Activities: 
Managers meeting a Reporting Threshold would be required to report a 
gross short position in an ETF, but would not be required to consider 
short positions that the ETF holds in individual underlying equity 
securities that are part of the ETF basket in determining whether the 
Manager meets a Reporting Threshold for such underlying equity 
securities that are part of the ETF basket.
    [cir] Should Managers be required to consider short positions that 
the ETF holds in individual underlying equity securities that are part 
of the ETF basket in determining whether the Manager meets a Reporting 
Threshold for such underlying equity securities that are part of the 
ETF basket? If yes, explain why. If no, explain why not.
    [cir] Are there other diversified portfolio products in addition to 
ETFs that should be included? If yes, describe the product. Describe 
why, or why not, a Manager should be required to consider short 
positions in individual underlying equity securities of the product's 
basket of assets.
     Q11: Frequency of Reporting: Under Proposed Rule 13f-2, a 
Manager that meets a Reporting Threshold must file Proposed Form SHO 
with the Commission within 14 calendar days after the end of each 
calendar month.
    [cir] Is monthly reporting by Managers appropriate? If so, explain 
why. If no, explain why not and describe an alternative frequency of 
reporting that is more appropriate.
    [cir] Does reporting within 14 calendar days of the end of the 
calendar month provide reporting Managers sufficient time to accurately 
report the short sale related information as described in Proposed Rule 
13f-2? If no, please explain why not and describe any suggested 
alternative timeline(s). Alternatively, is the 14 calendar days after 
the end of the calendar month reporting period for Managers too much 
time? If so, please explain why and describe any suggested alternative.
     Q12: Multiple Managers with Investment Discretion. As 
noted above, as is the case for Form 13F filers, under Proposed Rule 
13f-2, to prevent duplicative reporting of Proposed Form SHO if two or 
more Managers, each of which is required by Proposed Rule 13f-2 to file 
Proposed 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 Proposed Form SHO.
    [cir] Please describe any views related to the pros or cons 
associated with the Commission's proposed approach as described above.
    [cir] Will a Manager always be aware of instances in which there is 
another Manager(s) with investment discretion with respect to the same 
securities? If yes, how will that Manager be aware of the other 
Manager(s)? If yes, if there is more than one Manager that has 
investment discretion with respect to the same securities, how would 
each manager determine which Manager shall report short position and 
short position activity pursuant to Proposed Form SHO in order to avoid 
duplicative reporting?
    [cir] Should there be a mechanism that requires Managers to 
coordinate with one another to avoid duplicative reporting? If yes, 
please describe. In addition, please describe any alternative approach 
designed to prevent duplicative reporting by Managers.
     Q13: Amendments to Proposed Form SHO: A Manager that 
determines

[[Page 14967]]

that it has filed a Proposed Form SHO that includes inaccurate 
information must file an amended Proposed Form SHO within 10 calendar 
days of discovery of the error. Amendments to Proposed Form SHO must 
restate the Proposed Form SHO in its entirety and provide on the 
Proposed Form SHO Cover Page prescribed information about the revision 
being made--including the impact on prior Proposed Form SHO reporting 
periods. In prescribed circumstances, Managers must notify the 
Commission staff of the filing of an amended Proposed Form SHO.
    [cir] Please discuss any views regarding the Commission's proposed 
approach regarding filing amendments to Proposed Form SHO and address 
the pros and cons, as applicable, of the Commission's proposed 
approach. In particular:
    [ssquf] Should the Commission provide updated data on a rolling 
basis for more (or less than) 12 consecutive months?
    [ssquf] Should Managers notify Commission staff of errors for any 
data point of greater than, or less than, 25%? Should the Commission 
flag, with an asterisk or other indicator, updates to published data 
that are less than 25% of prior published data? Should the Commission 
use other types of indicators (e.g., asterisk for an update of 25% or 
greater, or other indicator for update of less than 25%, etc.)?
    [ssquf] In filing an amended Proposed Form SHO, should Managers be 
required to re-file the entire Proposed Form SHO, or should Managers 
have the opportunity to re-file only the data that is being corrected?
    [ssquf] The Commission is proposing to require Managers to notify 
Commission staff about multiple consecutive Amendments and Restatements 
to help Commission staff determine if there is a continuing issue with 
the integrity of that Manager's filings. Should Managers be required to 
notify Commission staff only if there are a specified number of months 
of consecutive Amendments and Restatements, e.g., three, four, or five 
consecutive months?
    [ssquf] The Commission is proposing that if a revision reported in 
an Amendment and Restatement changes a data point reported in the 
Proposed Form SHO by twenty-five percent (25%) or more, the Manager 
must notify the Commission staff via email within two (2) business days 
after filing the Amendment and Restatement. Does two (2) business days 
provide a Manager with sufficient time to notify the Commission? If no, 
please explain why not and describe any suggested alternative 
timeline(s).
    [ssquf] The Commission is proposing that, regardless of the scope 
of the revision being reported, if the data being reported in an 
Amendment and Restatement affects the data reported on the Proposed 
Form SHO reports filed for multiple Proposed Form SHO reporting 
periods, the Manager, within two (2) business days after filing the 
Amendment and Restatement, must provide the Commission staff via email 
with notice of such occurrence, and provide an explanation of the 
reason for the revision. Does two (2) business days provide a Manager 
with sufficient time notify the Commission? If no, please explain why 
not and describe any suggested alternative timeline(s).
    On November 18, 2021, the Commission proposed rule 10c-1 under the 
Exchange Act \86\--a rule designed to increase the transparency and 
efficiency of the securities lending market by requiring lenders of 
securities to provide the material terms of securities lending 
transactions to a registered national securities association, such as 
FINRA. On [insert date of vote], the Commission reopened the comment 
period for proposed Rule 10c-1.\87\ We encourage commenters to review 
the Reporting of Securities Loans Proposing Release to determine 
whether it might affect their comments on this proposing release and 
Proposed Rule 13f-2 and Proposed Form SHO.
---------------------------------------------------------------------------

    \86\ Reporting of Securities Loans, Exchange Act Release No. 
93613 (Nov. 18, 2021) (``Reporting of Securities Loans Proposing 
Release'').
    \87\ Reopening of Comment Period for Reporting of Securities 
Loans, Exchange Act Release No. 34-94315 (Feb. 25, 2022).
---------------------------------------------------------------------------

IV. Potential Alternative Approach to Proposed Rule 13f-2 Regarding How 
the Information Reported on Proposed Form SHO Is Published by the 
Commission

    As noted above, the Commission's Proposed Rule 13f-2 would require 
that a Manager provide identifying information including its name and 
active LEI, if the Manager has an active LEI, when filing Proposed Form 
SHO through EDGAR. The Commission would collect information from all 
reporting Managers and publish aggregated information across all 
Managers reporting in a particular equity security. The Commission, 
however, seeks comment on the following alternative approach regarding 
how the information reported on Proposed Form SHO by reporting Managers 
would be published by the Commission. Under this alternative approach, 
the Commission would not alter the proposed Reporting Thresholds or the 
information that would be reported by a reporting Manager on Proposed 
Form SHO, as described herein. However, under this alternative, the 
information reported by a Manager on Proposed Form SHO would be 
published as it is reported to the Commission, and would not be 
aggregated with information reported by other Managers. Reported 
information would therefore be published at the individual Manager 
level, rather than aggregated across all reporting Managers prior to 
publication. The reporting Manager's identifying information, including 
its name and active LEI, if the Manager has an active LEI, would be 
removed in an effort to anonymize the information published. In 
anonymizing the reporting Manager's information prior to publication, 
the Commission would be seeking to balance the above noted calls for 
additional short sale transparency with, among other things, the above 
noted concerns regarding potential issuer and investor retaliation 
against identified short sellers. The Commission remains concerned that 
such retaliation could result in a reduction in short selling, along 
with a reduction in the corresponding liquidity and price transparency 
benefits. The Commission further understands that despite measures 
designed to help anonymize published information, it may still be 
possible for market participants to identify certain reporting 
Managers. For example, it is not uncommon for there to be only one 
large short seller in an equity security, and under such circumstances, 
sophisticated traders may be able to link individual short sellers to 
their short positions reported on Proposed Form SHO through public 
statements, social media posts, or even rumors.\88\ Using Threshold A 
as described above, the Commission estimates that 32% of reportable 
equity securities would have only one reporting Manager.
---------------------------------------------------------------------------

    \88\ See generally infra Part VIII.D.2.
---------------------------------------------------------------------------

     Q14: Managers and the Potential Alternative Approach: 
Under the potential alternative approach presented, the reported 
information by a Manager would be published at the Manager level, 
without aggregation with other reporting Managers, with the reporting 
Manager's identifying information, including any active LEI, being 
removed prior to publication.
    [cir] Please discuss the Commission's potential alternative 
approach, and address the pros and cons, as applicable.

[[Page 14968]]

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

    The Commission is proposing new Rule 205 of Regulation SHO to 
facilitate its collection of more comprehensive data on the lifecycle 
of short sales. Proposed Rule 205 would establish a new ``buy to 
cover'' order marking requirement for certain purchase orders effected 
by a broker-dealer for its own account or the account of another person 
at the broker-dealer. Specifically, 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 time of order 
entry.\89\ If, for example, the purchaser has a gross short position of 
100 shares in security ABC in account number 123 at broker-dealer X, 
then purchases 50 shares of ABC through broker-dealer X in account 
number 123 (a purchase amount less than the purchaser's gross short 
position in the account at broker-dealer X), broker-dealer X would be 
required to mark the purchase order as ``buy to cover.'' If the 
purchase order was instead for 150 shares of ABC in account number 123 
(a purchase amount greater than the purchaser's gross short position in 
account number 123 at broker-dealer X), broker-dealer X would likewise 
be required to mark the purchase order as ``buy to cover.'' The 
proposed ``buy to cover'' marking requirement would not impact 
compliance with, or the operation of, other rules under Regulation SHO, 
including a broker-dealer's determination of whether to mark a sale 
order as ``long,'' ``short,'' or ``short exempt'' pursuant to Rule 200.
---------------------------------------------------------------------------

    \89\ Unlike the netting requirements under Rule 200 of 
Regulation SHO, the ``buy to cover'' order marking determination 
under Proposed Rule 205 will be made on a ``gross'' basis. The 
Commission believes that this approach would help minimize costs to 
broker-dealers because it would require them to determine only 
whether any short position is held by the account on whose behalf 
the purchase is being effected regardless of whether such short 
position is offset by any long position in the same security held by 
the purchaser in the same or any other account.
---------------------------------------------------------------------------

    There is presently no ``buy to cover'' order marking requirement, 
so the Commission does not currently have regular access to ``buy to 
cover'' order marking information. The Commission believes that having 
``buy to cover'' order marking information would provide additional 
context to the Commission and other regulators regarding the lifecycle 
of short sales by identifying the timing of purchases that close out, 
in whole or in part, open short positions in a security. The Commission 
believes this information would assist in reconstructing market events, 
and would be useful in identifying and investigating any potentially 
abusive trading practices including any potential manipulative short 
squeezes.\90\
---------------------------------------------------------------------------

    \90\ See infra Part VIII.D.1 for a discussion of how the 
Commission could have used this data to enhance our understanding 
and recreation of the `meme stock' phenomenon of January 2021.
---------------------------------------------------------------------------

    To reduce potential burdens and costs to broker-dealers, the 
proposed rule would require the broker-dealer to determine only whether 
a purchase is being made for an account at the broker-dealer that has a 
gross short position in that equity security in that account at the 
time of the purchase. The Commission believes that this simplified 
approach would help minimize costs to broker-dealers by allowing short 
positions held in any accounts other than the purchasing account, as 
well as offsetting long positions held by the purchaser in the 
purchasing account or any other account, to be excluded for purposes of 
the broker-dealer's ``buy to cover'' order marking determination. The 
Commission believes that the resulting data would provide the 
Commission with an indication of which purchases are potentially 
associated with a ``short squeeze,'' where short sellers are pressured 
to cover their open short positions by purchasing shares as a result of 
increases in the price of a stock or borrowing costs. Having access to 
``buy to cover'' information would help the Commission identify 
instances in which an increase in ``buy to cover'' orders in a 
particular equity security coincides with an increase in price and/or 
borrowing costs in the same equity security, and thus identify where 
``short squeezes'' may be occurring. As discussed further below, this 
data would aid the Commission in reconstructing significant market 
events related to short selling.
    The Commission alternatively considered proposing to require the 
broker-dealer to look across multiple accounts held by the customer 
within the broker-dealer itself, if applicable, and/or to its 
customer's account(s) held at other firms, if applicable, but 
determined that the costs and burdens to the broker-dealer would likely 
increase significantly under such an approach. With regard to other 
accounts held by the customer within the broker-dealer itself, the 
broker-dealer would incur additional costs and burdens in conducting 
such review. With regard to its customer's accounts held at other 
firms, the Commission understands that this information is not 
typically available to the broker-dealer and might be challenging to 
obtain. As a result, after considering the potential costs and burdens 
to broker-dealers, Proposed Rule 205 would require the broker-dealer to 
determine only whether a purchase is being made for an account at the 
broker-dealer that has an open short position in that equity security 
in that account.
    The proposed ``buy to cover'' requirement would likely create one-
time programming costs to broker-dealers as well as ongoing costs 
associated with order marking. The proposed ``buy to cover'' order mark 
determination would be distinct from that made by broker-dealers' 
existing order marking systems and processes designed to ensure 
compliance with Rule 200 of Regulation SHO. Thus, broker-dealers would 
be required to update their respective systems and processes to account 
for compliance with Proposed Rule 205 (i.e., broker-dealers would 
likely need to program systems to add an additional field for the ``buy 
to cover'' order mark).
    While the Commission welcomes any public input on Proposed Rule 
205, the Commission asks commenters to consider the following 
questions.
     Q15: Should Proposed Rule 205 also require the broker-
dealer to mark a purchase as ``buy to cover'' if the person is 
purchasing in an account that does not have a gross short position, but 
the person may have gross short positions in other accounts at the same 
and/or other broker-dealers? Would a purchase in a different account 
than an account with a gross short position in that security also be 
reflective of a person's intent to buy to cover a gross short position 
in that security? To what extent do short sellers buy to cover short 
positions by purchasing securities through accounts other than the 
account holding the short position? Would persons buy to cover 
securities at accounts at different broker-dealers? How often might 
such buy to cover orders occur in different accounts or at different 
broker-dealers? What would be the additional burdens or costs of such 
an additional requirement?
     Q16: Are there likely to be costs, other than those 
described in the

[[Page 14969]]

release, to broker-dealers resulting from the proposed ``buy to cover'' 
order marking requirement?
     Q17: Should Proposed Rule 205 require broker-dealers to 
make the ``buy to cover'' order marking determination based on the 
purchaser's net short position instead of gross short position? What 
are the costs and benefits associated with each approach?

VI. Proposal To Amend CAT

    In July 2012, the Commission adopted Rule 613 of Regulation NMS, 
which required national securities exchanges and national securities 
associations (the ``Participants'') \91\ to jointly develop and submit 
to the Commission a national market system plan to create, implement, 
and maintain a consolidated audit trail (the ``CAT'').\92\ The goal of 
Rule 613 was to create a modernized audit trail system that would 
provide 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 the CAT 
NMS Plan.\93\
---------------------------------------------------------------------------

    \91\ 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.
    \92\ See Exchange Act Release No. 67457 (July 18, 2012), 77 FR 
45722 (Aug. 1, 2012) (``Rule 613 Adopting Release'').
    \93\ 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 at 84943-85034. 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 August 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,\94\ must require Industry Members \95\ to 
record and electronically report certain information to the CAT Central 
Repository, which means that any broker-dealer that is a member of a 
national securities exchange or a member of a national securities 
association must report the lifecycle of an order from 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.\96\ This provides 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.
---------------------------------------------------------------------------

    \94\ ``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.
    \95\ 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.
    \96\ ``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.
---------------------------------------------------------------------------

    Broker-dealers, through the Compliance Rule adopted pursuant to the 
CAT NMS Plan, are required to report some short sale order data, 
including for sell orders, whether an order is long, short, or short 
exempt,\97\ 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 
of 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 now believes it is appropriate 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.
---------------------------------------------------------------------------

    \97\ 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. ``Buy to Cover'' Information

    First, the Commission proposes that Industry Members be required to 
report to the CAT ``buy to cover'' information, which would be 
collected pursuant to Regulation SHO through Proposed Rule 205 as 
discussed in Part IV above. Specifically, the Commission proposes to 
amend Section 6.4(d)(ii) of the CAT NMS Plan by adding new subparagraph 
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 Rule 205(a) of Regulation SHO (17 CFR 
242.205(a)).\98\ This provision would require Industry Members to 
identify ``buy to cover'' equity orders received or originated by 
Industry Members and Customers \99\ as ``buy to cover'' orders in order 
receipt and order origination reports submitted to the CAT Central 
Repository.
---------------------------------------------------------------------------

    \98\ 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)).
    \99\ 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 originally proposed CAT NMS Plan would have required all CAT 
Reporters (i.e., Participants and Industry Members) to report an 
``open/close indicator'' as a ``Material Term'' on all orders, as 
required by Rule 613.\100\ This open/close indicator could have been 
used to identify ``buy to cover'' equities orders, because it would 
have provided information on whether an order is to open or close an 
existing position in a security. However, when the Commission approved 
the CAT NMS Plan, it determined that it was appropriate to remove the 
proposed requirement that an open/close indicator be reported as part 
of the Material Terms of the Order for equities and Options Market 
Maker quotations.\101\ At the time, three commenters objected to the 
requirement that CAT Reporters report an open/close indicator for 
equities transactions. Among other things, commenters noted that an 
``open/close indicator'' is not used for equities, and believed that an 
additional or separate cost-benefit analysis should be done before it 
be required for equities.\102\ One of these commenters stated that 
including an ``open/close indicator'' for equities would require 
``significant process changes and involve parties other than CAT 
Reporters, such as buy-side clients, OMS/EMS vendors, and others.'' 
\103\ Ultimately, the Commission decided that limiting the open/close 
indicator to

[[Page 14970]]

listed options was ``reasonable,'' acknowledging concerns in other 
areas, ``including the lack of a clear definition of the term for 
equities transactions.'' \104\
---------------------------------------------------------------------------

    \100\ See 17 CFR 242.613(j)(7) (defining ``Material Terms of the 
Order'' to include ``open/close indicator''); Exchange Act Release 
No. 77724 (Apr. 27, 2016); 81 FR 30614, 30680 (May 17, 2016).
    \101\ See CAT NMS Plan Approval Order, 81 FR at 84747.
    \102\ See id.
    \103\ See id.
    \104\ See id. The Commission believes that the proposed 
reporting requirements here do not have the same issue regarding the 
lack of a clear definition because, unlike simply requiring an 
``open/close indicator,'' the proposed reporting requirements more 
clearly define when a ``buy to cover'' indicator would be required 
to be reported.
---------------------------------------------------------------------------

    The Commission believes it is now appropriate to require ``buy to 
cover'' CAT reporting by Industry Members. Unlike the ``open/close 
indicator'' requirement in Rule 613, which was included in the 
definition Material Terms of the Order, the Commission is proposing to 
only require reporting by Industry Members on a subset of CAT reports 
related to equity buy orders; specifically, order receipt and order 
origination reports. Pursuant to the CAT NMS Plan, Material Terms of 
the Order are required to be reported to the CAT for numerous other 
events in an order's lifecycle, including routing of an order, receipt 
of an order that has been routed, order modifications, order 
cancellations, and executions of orders, in whole or in part.\105\ In 
addition, the proposed provisions only require ``one-sided'' CAT 
reporting--that is, except in circumstances where an Industry Member 
originates a ``buy to cover'' order and submits it to another Industry 
Member as a Customer (requiring both Industry Members to report ``buy 
to cover'' information as part of order origination and order receipt 
reports, respectively), only one CAT Reporter is required to report 
that an order is a ``buy to cover'' order to the CAT. In addition, the 
``buy to cover'' information does not have the same definitional issues 
as an ``open/close indicator'' because ``buy to cover'' is being added 
to Regulation SHO, as discussed in Part IV above. ``Buy to cover'' is 
also a more narrow concept than an ``open/close indicator'' and would 
require only a change to CAT reporting for a subset of equity buy 
orders, and thus would not affect CAT reporting for a majority of 
equity orders, and would not change CAT reporting relating to options 
trading at all. Because of this, the costs associated with the 
reporting of ``buy to cover'' information to the CAT should be 
substantially less than the costs of reporting an ``open/close 
indicator'' would have been.
---------------------------------------------------------------------------

    \105\ See Section 6.3(d) and 6.4(d) of the CAT NMS Plan. Because 
``buy to cover'' information will only be available on order receipt 
and order origination reports, Commission staff and regulators will 
have to do more analysis to identify certain CAT records (e.g., 
order routes, modifications, cancellations, and executions) as 
associated with a ``buy to cover'' order since Industry Members 
would not be required to report ``buy to cover'' information on 
these CAT reports, but the Commission believes this inefficiency is 
justified by the reduction in burden of reporting for Industry 
Members.
---------------------------------------------------------------------------

    The Commission believes that requiring proposed reporting of ``buy 
to cover'' information to the CAT would provide valuable information 
for the Commission and other regulators in investigations and 
reconstruction of market events. The Commission and regulators 
currently do not have ready access to ``buy to cover'' information 
because they do not regularly receive Industry Member and customer 
position information, and it is only possible to identify ``buy to 
cover'' orders if the Commission or regulators independently obtain 
position information, such as by obtaining trade data and blotters from 
Industry Members. Even then, it is difficult to identify and track 
equity orders that are ``buy to cover.'' Ready access to ``buy to 
cover'' information in the CAT would allow regulators to more easily 
determine whether a purchase of an equity security increases the equity 
exposure of an Industry Member or Customer and whether the buy covers a 
short position. Ready access to information used to determine whether 
an order adds to an existing position or covers an existing short 
position would assist in detecting and investigating portfolio pumping, 
short selling abuses, short squeezes marking the close, potential 
manipulation, insider trading, or other rule violations, such as 
violations of Rule 105 of Regulation M, which generally governs when 
short sellers can participate in a follow-on offering.\106\ This 
information would also enhance the Commission staff's and regulators' 
analysis and interpretations of the impact short selling and ``buys to 
cover'' have on the market, by more accurately lining up trading 
activity data available in the CAT with security price changes to 
examine and study the impact of ``short squeezes'' on equity prices.
---------------------------------------------------------------------------

    \106\ 17 CFR 242.105.
---------------------------------------------------------------------------

B. Reliance on Bona Fide Market Making Exception

    The Commission also proposes 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 for the reported short 
sales. Specifically, the Commission proposes to amend Section 
6.4(d)(ii) of the CAT NMS Plan to add a new subparagraph (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 exception in 
Rule 203(b)(2)(iii) of Regulation SHO is claimed.\107\ The Commission 
believes that this information would provide valuable data to both the 
Commission and other regulators regarding the use of this exception by 
market participants, an exception which allows a broker-dealer (and 
consequently, a short seller) to avoid or delay certain requirements of 
Regulation SHO, including the locate and close out requirements.
---------------------------------------------------------------------------

    \107\ 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.\108\ 
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.\109\ 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.\110\ 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

[[Page 14971]]

delays associated with complying with such a requirement.\111\
---------------------------------------------------------------------------

    \108\ 17 CFR 242.203(b)(1).
    \109\ 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, supra note 4 
(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 61690, 61698-99 (Oct. 17, 
2004) (adopting amendments to Regulation SHO and providing 
additional guidance on what constitutes bona fide market making). 
Whether activity is considered bona fide market making activity for 
purposes of Regulation SHO will ``depend on the facts and 
circumstances of the particular activity'' in question, and only 
market makers 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 id. at 61699.
    \110\ See id. at 61699.
    \111\ See Regulation SHO Adopting Release, supra note 4, at 
48015 n.67.
---------------------------------------------------------------------------

    The Commission previously proposed to require a locate identifier 
for short sales to be reported to the CAT in Rule 613, but removed this 
requirement, among others, from the adopted rule text.\112\ At the 
time, the Commission believed that the CAT would still achieve 
significant benefits without requiring the routine recording and 
reporting of these specific data elements to the CAT, that the 
Commission could obtain information from a broker-dealer in a follow-up 
request if necessary, and that the benefits of having these specific 
data elements in the CAT would be minimal.\113\ However, with greater 
experience and access to CAT Data, the Commission now believes that it 
is important for regulatory and surveillance purposes to capture 
information regarding the use of the narrow bona fide market making 
exception to Regulation SHO and no longer believes that the benefits of 
having this specific data element in the CAT would be minimal. The 
Commission also believes that requiring this reporting would impact 
substantially fewer CAT Reporters than the original Rule 613 proposal, 
which would have required locate identifiers for all short sales.
---------------------------------------------------------------------------

    \112\ See Rule 613 Adopting Release, 77 FR at 45751.
    \113\ See id.
---------------------------------------------------------------------------

    There are a number of settled enforcement actions against firms in 
connection with their use of the exception.\114\ Firms are not 
permitted to use the bona fide market making exception for, among other 
things, speculative selling strategies or investment purposes of the 
broker-dealer that are disproportionate to the usual market making 
patterns or practices of the broker-dealer in that security.\115\ Firms 
that do not need to obtain a locate prior to effecting a short sale, on 
the basis of the bona fide market making exception, have a competitive 
advantage over firms that are required to obtain a locate because these 
firms can trade more quickly and more easily adjust to or take 
advantage of changing market conditions. Currently, the Commission must 
request information from a broker-dealer to determine which orders have 
been submitted pursuant to the bona fide market making exception. The 
Commission believes 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.\116\
---------------------------------------------------------------------------

    \114\ See, e.g., In the Matter of Wilson-Davis & Company, Inc., 
Respondent, Order Making Findings and Imposing Remedial Sanctions 
and a Cease-and-Desist Order Pursuant to Sections 15(b) and 21C of 
the Securities Exchange Act of 1934, Release No. 80533 (April 26, 
2017) (settled matter); In the Matter of Jeffrey A. Wolfson, Robert 
A. Wolfson, and Golden Anchor Trading II, LLC (n/k/a Barabino 
Trading, LLC), Respondents, Order Making Findings and Imposing 
Remedial Sanctions and Cease-and-Desist Order Pursuant to Sections 
15(b) and 21C of the Securities Exchange Act of 1934 as to Robert A. 
Wolfson and Golden Anchor Trading II, LLC (n/k/a Barabino Trading, 
LLC), Release No. 67450 (July 17, 2012) (settled matter).
    \115\ See Regulation SHO Adopting Release, supra note 4, at 
48015.
    \116\ Depending on the circumstances, the proposed requirement 
to report the use of the bona fide market making exception to 
Regulation SHO at order initiation could either reduce or increase 
compliance costs to market participants. In some cases, for example, 
examiners identifying market participants for examination of 
prolonged fails to deliver would be able to readily determine that 
such fails were due to bona fide market making activity, obviating 
the need to examine the particular market participant based on such 
fails alone. In other circumstances, by contrast, an indication of 
reliance on the bona fide market maker exception could be flagged 
for examination if it appears that the market participant is 
unlikely to be engaging in bona fide market making activities to the 
extent of the fails to deliver that have occurred--for instance, a 
market participant that does not post any quotes in the security for 
which the fails are occurring that has indicated it is relying on 
the bona fide market making exception in Regulation SHO. The 
Commission does not believe requiring the indicator will have a 
chilling effect on market making generally. Rather, the indicator 
will be used to identify whether a short sale for which a market 
participant is asserting the bona fide market making exception has 
been effected in connection with bona fide market making activities 
such that the narrow exception to a narrow exception to the locate 
requirement of Regulation SHO applies.
---------------------------------------------------------------------------

    While Regulation SHO does not require market maker firms to record 
whether they are relying upon the exception in Rule 203(b)(2)(iii) of 
Regulation SHO for bona fide market making activity, the Commission 
believes that market maker firms that engage in equity trading should 
be able to identify what trading activity qualifies for the exception 
so a firm can demonstrate its eligibility for the asserted exception. 
Thus, the Commission believes that this information should be easily 
reportable to the CAT by Industry Members that do rely upon this 
exception. As noted above, there is a narrow exception to Regulation 
SHO's locate requirement for bona fide market making in Rule 
203(b)(2)(iii), and a firm should know at the time that it submits a 
sell short order without performing a locate pursuant to the bona fide 
market making exception whether or not it qualifies for the exception.

C. Request for Comments

    While the Commission welcomes any public input on the Proposal to 
Amend CAT, the Commission asks commenters to consider the following 
questions.
     Q18: Proposal to Amend CAT: Under the Proposal to Amend 
CAT, Industry Members would be required to report certain additional 
short sale related data to the CAT, as described above.
    [cir] Are the proposed reporting requirements related to ``buy to 
cover'' and the bona fide market making exception sufficiently clear 
and understandable to allow Industry Members to collect and report the 
necessary information? Are the proposed requirements sufficiently clear 
for the Participants to implement the necessary changes to their 
Compliance Rules? Are the proposed requirements sufficiently clear for 
the CAT Plan Processor to implement necessary systems and technical 
changes and implement revised technical or other specifications 
required to facilitate and allow for the reporting of these new CAT 
data elements?
    [cir] Please describe any technical challenges or concerns relating 
to the reporting, capture and processing of the proposed new 
information.
    [cir] Are there concerns relating to the collection of ``buy to 
cover'' information by executing brokers to report to the CAT? What 
difficulties would Industry Members face in reporting their own 
proprietary ``buy to cover'' orders? Customer ``buy to cover'' orders? 
Are there other concerns relating to the reporting of ``buy to cover'' 
information to the CAT? If so, please describe those concerns and the 
specific issues or other burdens that should be considered by the 
Commission.
    [cir] Are there concerns relating to the collection of or reporting 
reliance on the bona fide market making exception of Regulation SHO to 
the CAT? Would it be difficult for market making firms to identify what 
orders are originated pursuant to the bona fide market making 
exception? If so, please describe those concerns and the specific 
issues or other burdens that should be considered by the Commission.
    [cir] The proposal would require broker-dealers to identify, at 
order origination, whether they are asserting use of the bona fide 
market making exception to the locate requirement. Should the 
Commission also require identification of purchases by broker-dealers 
to close out fails to deliver resulting from bona fide market making 
under Rule 204 of

[[Page 14972]]

Regulation SHO? \117\ If so, please describe the costs and benefits of 
such an approach.
---------------------------------------------------------------------------

    \117\ Rule 204 requires a participant of a registered clearing 
agency to deliver securities to a registered clearing agency for 
clearance and settlement on a long or short sale transaction in any 
equity security by settlement date, or to immediately close out a 
failure to deliver by borrowing or purchasing securities of like 
kind and quantity by the applicable close out date. For a short 
sale, a participant must close out a failure to deliver by no later 
than the beginning of regular trading hours on T+3. For a long sale, 
or for activity that is attributable to ``bona fide'' market making 
activities, a participant must close out a failure to deliver by no 
later than the beginning of regular trading hours on T+5.
---------------------------------------------------------------------------

    [cir] Is there any other short sale related data that should be 
reported to the CAT? If so, please describe the costs and benefits of 
reporting that data.
     Q19: Cost of Reporting: Under the Proposal to Amend CAT, 
Industry Members would be required to report certain additional short 
sale related data to the CAT, as described above.
    [cir] Please describe any views related to the anticipated costs or 
other burdens, as well as benefits, associated with reporting under the 
Proposal to Amend CAT, and identify the specific costs or other burdens 
that should be considered by the Commission.

VII. Paperwork Reduction Act Analysis

A. Background

    Certain provisions of Proposed Rule 13f-2, Proposed Form SHO, 
Proposed Rule 205, and the Proposal to Amend CAT contain new 
``collection of information'' requirements within the meaning of the 
Paperwork Reduction Act of 1995 (``PRA'').\118\ The Commission is 
submitting the proposed collection of information to the Office of 
Management and Budget (``OMB'') for review in accordance with the 
PRA.\119\ The title for the collection of information is: ``Proposal to 
Enhance Short Sale Data.'' OMB has not yet assigned a control number to 
the collection of information. An agency may not conduct or sponsor, 
and a person is not required to respond to, a collection of information 
unless it displays a currently valid OMB control number. The 
requirements of this collection of information are mandatory for 
Managers under Proposed Rule 13f-2 and Proposed Form SHO, for broker-
dealers under Proposed Rule 205, and Plan Participants and CAT 
reporting firms under the Proposal to Amend CAT.
---------------------------------------------------------------------------

    \118\ 44 U.S.C. 3501 et seq.
    \119\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

    As discussed above,\120\ Proposed Rule 13f-2 and related Proposed 
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 Proposed Form SHO, 
through EDGAR in Proposed Form SHO-specific XML, certain short position 
and activity data. Under Proposed Rule 13f-2 and Proposed Form SHO, 
only those Managers that meet a specified Reporting Threshold for an 
equity security would be required to file Proposed Form SHO.
---------------------------------------------------------------------------

    \120\ See supra Part III.A.
---------------------------------------------------------------------------

    Proposed Rule 205 would establish a new ``buy to cover'' order 
marking requirement for purchase orders effected by a broker-dealer 
that applies if, at the time of order entry, the account for which the 
purchase order is placed has a gross short position in the security 
being purchased.\121\ Such information would provide additional context 
to the Commission and other regulators regarding the lifecycle of short 
sales, would assist in reconstructing market events, and would be 
useful in identifying and investigating potentially abusive short 
selling practices. The Commission believes that many broker-dealers 
will have existing order marking systems and processes, and will be 
familiar with how to adapt and update them to accommodate new order 
marks.
---------------------------------------------------------------------------

    \121\ See supra Part V.
---------------------------------------------------------------------------

    The Proposal to Amend CAT is intended to supplement the short sale 
related data that would be reported by certain Managers to the 
Commission pursuant to Proposed Rule 13f-2 and Proposed Form SHO. As 
discussed above, the Commission proposes that CAT reporting firms be 
required to report ``buy-to-cover'' information to the CAT and believes 
that this information would allow Commission and SRO staff to review 
the life of a short sale, from creation to termination, which would 
assist in reconstructing unusual market events such as the market 
volatility in early 2021.\122\ In addition, the Commission proposes 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 for the ``locate'' requirement in Rule 203 under 
Regulation SHO for the reported short sales. The Commission believes 
that this information would provide valuable data to both the 
Commission and other regulators regarding the use of the bona fide 
market making exception by market participants. The Proposal to Amend 
CAT could potentially affect all CAT reporting firms, but the 
Commission believes that the proposal will primarily affect those CAT 
reporting firms that engage in short sale activity with subsequent 
purchases to cover such short positions.
---------------------------------------------------------------------------

    \122\ See supra Part VI.A.
---------------------------------------------------------------------------

    Given the differences in the information collections applicable to 
these parties, the burdens applicable to Managers, broker-dealers and 
CAT reporting firms are separated in the analysis below.

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

1. Applicable Respondents
    As discussed above, Proposed Rule 13f-2 and Proposed Form SHO would 
require Managers that trigger a Reporting Threshold to file monthly via 
EDGAR, on Proposed Form SHO, certain short position and activity data. 
Under Section 13(f)(6)(A) of the Exchange Act and for purposes of 
Proposed Rule 13f-2, Managers would 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.\123\ Thus, the requirements of Proposed 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. Of those, the Commission estimates that, 
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.\124\
---------------------------------------------------------------------------

    \123\ See also Instructions to Form 13F.
    \124\ This estimate is similar to the estimate provided in the 
Disclosure of Short Sales and Short Positions by Institutional 
Investment Managers, 73 FR at 61686. However, the number of 
estimated Proposed 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 346 Form SH filers would 
have been required to file had a threshold of 2.5% of shares 
outstanding or $10 million position dollar value been imposed during 
the analyzed time period. The estimate of 1,000 is higher than the 
346 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 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 issuers.
---------------------------------------------------------------------------

2. Burdens and Costs
    The Commission believes that the burden associated with Proposed 
Rule

[[Page 14973]]

13f-2 and the related Proposed Form SHO reporting in EDGAR would be 
similar to a Manager's reporting requirements for former Form SH. In 
October 2008, the Commission adopted interim 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.\125\ 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.\126\ In adopting interim temporary 
Rule 10a-3T, which required certain Managers to file weekly nonpublic 
reports via Form SH, the Commission believed that Managers would spend 
an estimated 20 hours to prepare and file each Form SH.\127\
---------------------------------------------------------------------------

    \125\ See supra note 35.
    \126\ Form SH was adopted in the wake of the 2008 financial 
crisis, and remained in effect until July 2009.
    \127\ See Disclosure of Short Sales and Short Positions by 
Institutional Investment Managers, 73 FR at 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.'').
---------------------------------------------------------------------------

    While recognizing that the information required under former Form 
SH differs from that required under Proposed Form SHO, the Commission 
believes that both forms require the reporting of short sale related 
data of similar depth and complexity.\128\ However, Proposed Rule 13f-2 
would require 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,\129\ which is 
anticipated to decrease the overall volume of reports required to be 
filed by Managers. Accordingly, the Commission believes that the burden 
associated with preparing and filing Proposed Form SHO in EDGAR would 
be approximately 20 hours per filing, consistent with that of former 
Form SH. The Commission further estimates that Managers would 
collectively spend approximately 240,000 hours per year to comply with 
the reporting requirements of Proposed Rule 13f-2.\130\ The Commission 
estimates that the hourly cost of internal expertise required for each 
filing would be $217.55, which includes a blended calculation of the 
estimated hourly rate for a compliance attorney, senior programmer, and 
in-house compliance clerk.\131\ Taken together the estimated burden 
hours and hourly rate for the filing of Proposed Form SHO result in an 
estimated annual cost to the industry of $52,212,000.\132\ The 
Commission, however, recognizes that advances in technology over time 
could result in Managers spending less time preparing and filing 
Proposed Form SHO than is estimated above.\133\
---------------------------------------------------------------------------

    \128\ 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 
opening 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. 
Exchange Act Release No. 58591 (Sept. 18, 2008), 73 FR 55175, 55176 
(Sept. 24, 2008).
    \129\ See id.
    \130\ 20 hours per filing x 1,000 filings by Managers each month 
x 12 months = 240,000 hours.
    \131\ The $217.55 wage rate reflects current estimates of the 
blended hourly rate for an in-house compliance attorney ($368), a 
senior programmer ($334) and in-house compliance clerk ($71). 
$217.55 is based on the following calculation: (($368) + ((($334 + 
$71) / 2) x 10)) / 11 = $217.55. The estimated proportion of 
compliance attorney (1/11th) to senior programmer and in-house 
compliance clerk (10/11ths) 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 
$368 per hour and $334 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 1800-hour work year and inflation, and 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits and overhead. The $71 per hour figure for a compliance 
clerk is based on salary information from the SIFMA Report, modified 
by Commission staff to account for an 1800-hour work-year and 
inflation, and multiplied by 2.93 to account for bonuses, firm size, 
employee benefits and overhead. See Exchange Act Release No. 89290 
(July 10, 2020), 85 FR 46016 (July 31, 2020) (``Proposed Reporting 
Threshold for Institutional Investment Managers'').
    \132\ 20 hours per filing x 1,000 filings by Managers each month 
x 12 months x $217.55 per hour = $52,212,000.
    \133\ See Electronic Submission of Applications for Orders, 86 
FR at 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.'').
---------------------------------------------------------------------------

    The Commission also anticipates that most Managers will file 
Proposed Form SHO directly in the structured XML-based data language 
for Proposed Form SHO,\134\ rather than using the fillable web form 
provided by EDGAR, resulting in some limited additional costs for each 
filing.\135\ The Commission believes that Managers that file Proposed 
Form SHO using a structured XML-based data language could incur an 
additional burden of 2 hours of work by a programmer,\136\ at an 
estimated cost of $540.\137\ The Commission further estimates that 
Managers would collectively spend up to approximately 24,000 hours and 
$6,480,000 per year to file Proposed Form SHO directly in a structured 
XML-based data language.\138\ The Commission also estimates that a 
similar, additional burden of 2 hours of work by a programmer per 
filing would apply to Managers filing an amended Form SHO directly in a 
structured XML-based data language.
---------------------------------------------------------------------------

    \134\ The Commission believes most Managers would 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. In order to achieve a 
conservative estimate of industry costs, the Commission estimates 
that all of the 1,000 Managers estimated to file Proposed Form SHO 
each month will do so directly using the structured XML-based data 
language rather than the fillable web form provided by EDGAR.
    \135\ See Investment Company Act Release No. 34441 (Dec. 15, 
2021) (proposing release) at 123-125, available at https://www.sec.gov/rules/proposed/2021/ic-34441.pdf (stating that, in the 
context of money market funds filing Form N-CR, the use of the XML-
based data language for that Form may result in ``some additional 
reporting costs related to adjusting their systems to a different 
data language'' but that such changes ``may reduce costs and 
introduce additional efficiencies for money market funds already 
accustomed to reporting using structured data and may reduce overall 
reporting costs in the longer term.'').
    \136\ 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 Investment Company Act Release No. 
34441 (Dec. 15, 2021) at 282 Table 10. See also, 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.'').
    \137\ Based on industry sources, Commission staff previously 
estimated that the average hourly rate for technology services in 
the securities industry (outside senior programmer or systems 
programmer) is $270. See Exchange Act Release No. 83062 (Apr. 18, 
2018), 83 FR 21574, 21653 n.493 (May 9, 2018) (``Regulation Best 
Interest Proposing Release'').
    \138\ 2 hours per filing x $270 per hour x 1,000 filings each 
month x 12 months = $6,480,000.
---------------------------------------------------------------------------

    The Commission estimates that approximately 3.5% of the Managers 
that file Proposed Form SHO each month would also file an amended 
Proposed Form SHO, resulting in an

[[Page 14974]]

additional burden and cost for an estimated 35 Managers each 
month.\139\ The additional burden could take up to the original 20 
hours to process and file, as it would require the filing of an 
entirely new Proposed Form SHO.\140\ The associated wage rate would 
also be consistent with the cost of expertise required to complete the 
original Proposed Form SHO, estimated to be $217.55 per hour.\141\ The 
Commission also estimates that each amended Proposed Form SHO would 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 Proposed Form SHO filing.
---------------------------------------------------------------------------

    \139\ The estimate of 3.5% of Regulation SHO filers that are 
anticipated to file an amended Proposed Form SHO is based on the 
frequency of recent filings of amended Form 13F. See Exchange Act 
Release No. 93518 (Nov. 4, 2021), 86 FR 64839, 64860-61 Table 5 
Notes 7, 8, and 10 (Nov. 19, 2021) (estimating a total of 5,466 Form 
13F-HR filings, 1,535 Form 13F-NT filings, and 244 Form 13F 
amendment filings (244 / 7,001 = 3.5%) and noting that ``[t]his 
estimate is based on the number of Form 13F amendments filed as of 
December 2019.'').
    \140\ See Form SHO, Special Instructions at 4.
    \141\ See supra note 131.

                               PRA Table 1--Estimated Manager Burden and Costs Associated With Proposed Form SHO Reporting
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                          Total industry
                                                                          Proposed Form   Hours needed   burden hours to
                                                            Managers       SHO reports   to process and    process and       Wage rate    Total industry
                                                            (monthly)     processed and   file Proposed   file Proposed       (Avg.)        cost burden
                                                                         filed (annual)     Form SHO         Form SHO                        (annual)
                                                                                             (avg.)          (annual)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Proposed Form SHO Filings..............................           1,000          12,000              20          240,000         $217.55     $52,212,000
Use of Structured XML-Based Data Language..............           1,000          12,000               2           24,000             270       6,480,000
Amended Proposed Form SHO Filings......................              35             420              20            8,400          217.55       1,827,420
Use of Structured XML-Based Data Language..............              35             420               2              840             270         226,800
                                                        ------------------------------------------------------------------------------------------------
    Total..............................................  ..............  ..............  ..............          273,240  ..............      60,746,220
--------------------------------------------------------------------------------------------------------------------------------------------------------

    In addition to the costs associated with the reporting burden, the 
Commission believes that Managers could incur an initial technology-
related burden of 325 hours, at an hourly estimated wage rate of 
$320.30,\142\ for an estimated total cost of $104,097.50 per 
Manager,\143\ to update their current systems to capture the required 
information, and automate and facilitate the completion and filing of 
Proposed Form SHO. The Commission generally believes that the type of 
Managers that would trigger a Reporting Threshold would likely have 
sophisticated technologies and would be able to implement systems to 
help automate the reporting requirements of Proposed Rule 13f-2. In 
particular, the estimate of 325 initial technology-related burden hours 
for Managers filing Proposed Form SHO is based on the estimated initial 
filing burden (325 hours) for large hedge fund advisers \144\ to 
fulfill proposed amendments to the reporting requirements for Form 
PF,\145\ 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).\146\ 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 Proposed Form SHO.
---------------------------------------------------------------------------

    \142\ 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 $316 per hour and a senior risk 
management specialist at a cost of $365 per hour. Of the work 
performed by programmers, we anticipate that it will be performed 
equally by a senior programmer at a cost of $334 per hour and a 
programmer analyst at a cost of $246 per hour. ((($316 per hour x 
0.5) + ($365 per hour x 0.5)) x 195 hours) + ((($334 per hour x 0.5) 
+ ($246 per hour x 0.5)) x 130 hours) / 325 = $320.30.
    \143\ 325 initial technology-related burden hours x $320.30 per 
hour = $104,097.50.
    \144\ See Amendments to Form PF to Require Current Reporting and 
Amend Reporting Requirements for Large Private Equity Advisers and 
Large Liquidity Fund Advisers, Investment Act Release No. 5950 (Jan. 
26, 2022), 87 FR 9106 (Feb. 17, 2022) (The Commission recognizes 
that Proposed Rule 13f-2 would 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 would be covered by Proposed Rule 13f-2.).
    \145\ See id. at 9140 Table 2.
    \146\ See Exchange Act Release No. 93784 (Dec. 15, 2021), 87 FR 
6652, 6678 (Feb. 4, 2022).

                      PRA Table 2--Estimated Manager Burden and Costs Associated With Proposed Form SHO Initial Technology Projects
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                     Managers with    Number of hours  Industry burden
                                                                     proposed Form      needed for        hours for
                                                                    SHO reportable        initial          initial         Wage rate      Total industry
                                                                    short interest      technology        technology         (avg.)        cost burden
                                                                       positions      projects (avg.)      projects
--------------------------------------------------------------------------------------------------------------------------------------------------------
Proposed Form SHO Initial Technology Projects....................            1,000               325          325,000          $320.30     $104,097,500
--------------------------------------------------------------------------------------------------------------------------------------------------------

    In making its estimates for the population of Managers that may be 
required to file a Proposed Form SHO, the Commission notes that its 
estimate may be over-inclusive of the number of Managers that can 
reasonably be expected to be covered. This is highlighted by the 
estimate that only 346 Form SH filers would have had to file a report 
if one of the proposed Reporting Thresholds for Proposed Form SHO--$10 
million or 2.5% of

[[Page 14975]]

outstanding shares--were to be applied.\147\ However, Form SH 
represented a narrower population of potential filers (e.g., only those 
that exercise investment discretion with respect to accounts holding 
Section 13(f) securities having an aggregate fair market value of at 
least $100 million) than prospective Proposed Form SHO filers. Form SH 
also applied to a narrower population of securities, 13(f) securities, 
than Proposed Form SHO, which is proposed to apply more broadly to all 
equity securities.\148\ Additionally, Proposed Rule 13f-2 will include 
a second Reporting Threshold (Threshold B) that applies to short 
positions in non-reporting company issuers, which could result in 
additional Managers having to file a Proposed Form SHO. The number of 
Managers with accounts containing short positions big enough to trigger 
either of the proposed threshold prongs for Proposed Form SHO may have 
increased in the thirteen years since Form SH was implemented, 
particularly if overall shorting activity has increased. The Commission 
also recognizes that technological innovation and automation can change 
quickly, providing for new opportunities to streamline processes and 
reduce both initial and ongoing burdens and costs. Thus, the Commission 
seeks specific comment as to whether the proposed burden estimates are 
appropriate or whether such estimates should be increased or reduced. 
The Commission invites comment on the estimated number of Managers 
anticipated to be required to file a Proposed Form SHO each month 
(1,000), the estimated time burden (20 hours) of preparing and filing 
each required Proposed Form SHO, and the estimated initial time burden 
(325 hours) for Managers to update their systems and technology to 
facilitate the filing of Proposed Form SHO. The Commission also invites 
comment on the estimated number of Managers that will file Proposed 
Form SHO each month directly in Proposed Form SHO-specific XML (1,000), 
the estimated associated additional burden (2 hours of work by a 
programmer) for each filing, and whether the burden is more accurately 
categorized as an ongoing per filing burden or an initial, one-time 
technological systems update burden. If those estimates or any other 
element of Proposed Rule 13f-2 and Proposed Form SHO burdens or costs 
should be increased or decreased, please address by how much and why.
---------------------------------------------------------------------------

    \147\ See supra Part III.D.2 Table I, Panel B.
    \148\ See supra Part III.A discussing equity securities subject 
to requirements of Regulation SHO.
---------------------------------------------------------------------------

C. Burdens for Broker-Dealers Under Proposed Rule 205

1. Applicable Respondents
    As discussed above, Proposed Rule 205 would add a new ``buy to 
cover'' marking requirement for a broker-dealer effecting a purchase 
order for its own account or on behalf of another person, wherein the 
account has a gross short position in the security being purchased. 
Proposed Rule 205 would require that, regardless of the size of such 
purchase for such account, the broker-dealer mark the purchase ``buy to 
cover.'' All broker-dealers whose accounts or whose customers' accounts 
at the broker-dealer could hold a short position are potentially 
subject to the requirements of Proposed Rule 205. As of December 31, 
2020, there were 3,551 broker-dealers registered with the 
Commission.\149\ The Commission estimates that of the 3,551 registered 
broker-dealers, 1,218 place orders that would require a ``buy to 
cover'' order mark.\150\
---------------------------------------------------------------------------

    \149\ This estimate is derived from broker-dealer FOCUS filings 
as of December 31, 2020.
    \150\ This estimate is derived from an analysis conducted by 
Commission staff of CAT data indicating that 1,218 broker-dealers 
would have been required to mark an order ``buy to cover'' in 
November 2021. The Commission further estimates that a month-long 
period is likely to capture all broker-dealers to which the marking 
requirement of Proposed Rule 205 would apply.
---------------------------------------------------------------------------

2. Burdens and Costs
    For purposes of the PRA, the Commission staff estimates that a 
total of approximately 62.25 billion ``buy to cover'' orders would be 
entered annually.\151\ This would make for an average of approximately 
51.1 million annual ``buy to cover'' order marks by each broker-dealer 
anticipated to require a ``buy to cover'' order mark.\152\ Each 
instance of marking an order ``buy to cover'' is estimated to take 
between approximately .00001158 and .000139 hours (.042 and .5 seconds) 
to complete.\153\ This estimate is based on a number of factors, 
including: previously estimated burdens for the current marking 
requirements of Rule 200(g) of Regulation SHO requiring broker-dealers 
to mark sell orders ``long,'' ``short,'' or ``short exempt''; broker-
dealers should already have the necessary mechanisms and procedures in 
place and already be familiar with processes and procedures to comply 
with the marking requirements of Rule 200(g) of Regulation SHO; broker-
dealers should be able to continue to use the same or similar 
mechanisms, processes and procedures to comply with Proposed Rule 205; 
and that computing speeds have significantly improved since the initial 
order marking burdens of Rule 200(g) of Regulation SHO were initially 
estimated.
---------------------------------------------------------------------------

    \151\ Our estimate of 62.25 billion annual ``buy to cover'' 
orders was calculated based on a staff review of short sale trades, 
comprised of trades marked ``short'' and ``short exempt'' during the 
five years from 2016 through 2020. Based on a review of Rule 605 
reports from the three largest market centers during August 2008, we 
have previously estimated a ratio of 14.4 orders to each completed 
trade. We gross up our 4.3 billion estimate of average annual short 
sale trades from 2016 to 2020 by 14.4, which yields 62.25 billion 
average annual short sale orders. A similar review of Rule 605 
reports from large market centers has not been performed since the 
August 2008 period. The ratio of short sale orders to completed 
trades may have increased or decreased since that time.
    \152\ This figure was calculated as follows: 62.25 billion ``buy 
to cover'' orders divided by 1,218 broker-dealers anticipated to 
place orders requiring the ``buy to cover'' order mark.
    \153\ The upper end of this estimate--.5 seconds--is based on 
the same time estimate for marking sell orders ``long'' or ``short'' 
under Rule 200(g) of Regulation SHO. See Regulation SHO Adopting 
Release, supra note 4, at 48023. See also, Exchange Act Release No. 
48709 (Oct. 28, 2003) 68 FR 62972, 63000 n. 232 (Nov. 6, 2003); 
Exchange Act Release No. 59748 (Apr. 10, 2009), 74 FR 18042, 18089 
(Apr. 20, 2009) (providing the same estimate--.5 seconds--for 
marking sell orders ``short exempt'' under Rule 200(g) of Regulation 
SHO). The lower end of this estimate--.042 seconds--is based on a 
Commission estimate that computing speeds are twelve times faster 
today than they were in 2007. See infra note 312.

                               PRA Table 3--Estimated Broker-Dealer Burden Associated With ``Buy to Cover'' Order Marking
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                Broker-Dealers                         Burden hours per
                                that may ``buy     Annual ``buy to     ``buy to cover''    Total annual industry burden      Annual burden per broker-
                                  to cover''        cover'' orders           order                    hours                           dealer
--------------------------------------------------------------------------------------------------------------------------------------------------------
``Buy to Cover''.............            1,218  62.25 billion........  .00001158 (.042   721,000 to 8,652,750...........  592 to 7,104.
Order Marking................                                           seconds) to
                                                                        .000139 (.5
                                                                        seconds).
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 14976]]

    In addition to the burden and costs associated with the marking of 
individual ``buy to cover'' orders, the Commission believes that 
broker-dealers required to mark ``buy to cover'' will incur initial, 
one-time technology project costs to update their existing order 
marking systems. The Commission believes that the implementation cost 
of the ``buy to cover'' marking requirement will likely be similar to 
the implementation cost of the ``short exempt'' order marking 
requirements of Rule 200(g) of Regulation SHO.\154\ The initial 
implementation cost of the ``short exempt'' order marking requirement 
was estimated to be approximately $115,000 to $145,000 per broker-
dealer. Taking the average of that range and updating it for inflation 
results in an approximate one-time cost of $170,000 per broker-
dealer,\155\ and a total initial combined implementation cost of 
approximately $207,060,000 for all broker-dealers that are estimated to 
``buy to cover.'' \156\
---------------------------------------------------------------------------

    \154\ See Exchange Act Release No. 61595 (Feb. 26, 2010), 75 FR 
11232, 11287 (Mar. 10, 2010), basing its cost estimates for the 
implementation of ``short exempt'' order marking on the estimates 
contained in Regulation SHO Adopting Release, supra note 4, at 
48023, which based its cost estimates on input from industry 
sources.
    \155\ The adjustment for inflation was calculated using 
information in the Consumer Price Index, U.S. Department of Labor, 
Bureau of Labor Statistics for February 2010 and November 2021.
    \156\ This figure was calculated as follows: $170,000 
implementation cost x 1,218 broker-dealers anticipated to mark ``buy 
to cover'' = $207,060,000 industry-wide implementation cost.

PRA Table 4--Estimated Broker-Dealer Costs Associated With Initial ``Buy to Cover'' Order Marking System Updates
----------------------------------------------------------------------------------------------------------------
                                                                  Estimated initial
                                             Broker-dealers      technology cost to      Total initial costs to
                                           that may ``buy to    update order marking       all broker-dealers
                                                cover''                systems
----------------------------------------------------------------------------------------------------------------
``Buy to Cover'' Initial System Updates..             1,218                  $170,000              $207,060,000
----------------------------------------------------------------------------------------------------------------

    In making its estimate of annual ``buy to cover'' orders, the 
Commission notes that its estimate may be over-inclusive of the total 
number of purchase orders that can be reasonably expected to be covered 
by Proposed Rule 205. As noted above, the estimate is based on the 
average annual orders marked ``short'' and ``short exempt'' over a five 
year period--2016 through 2020. Such data was used based on the 
assumption that, over the course of a year, for every short position 
created by a ``short'' or ``short exempt'' sale order, there will be an 
equal and opposite number of ``buy to cover'' purchase orders placed in 
order to cover, and ultimately close out, those short positions. 
However, the Commission recognizes that industry practices may differ 
in terms of how order marks are applied (e.g., whether orders marked 
``short'' are defaulted to in some instances where the seller may in 
fact be net long) and/or how short positions are created (e.g., 
potentially with multiple, smaller orders over time) and covered (e.g., 
potentially with fewer, larger orders). The Commission also requests 
comment on the 14.4 ratio of orders to trades used to calculate the 
total number of anticipated ``buy to cover'' orders. The Commission 
recognizes that the number of orders that result in a transaction may 
have materially changed since the August 2008 estimate based on a 
review of Rule 605 reports.\157\ The Commission also requests comment 
on the estimated range of .042 to .5 seconds (.00001158 to .000139 
hours) that it takes for a broker-dealer to properly mark a purchase 
order for an account that holds a gross short position in the security 
being purchased as ``buy to cover.'' The Commission also requests 
comment on the estimated cost of $170,000 per broker-dealer of 
initially adding the ``buy to cover'' mark to existing order marking 
systems, including whether having existing order marking systems, 
potentially having previously updated such systems to include a ``short 
exempt'' order mark, and significant advances in technology and 
automation may have reduced the estimated costs from those described in 
2003 and 2004.\158\ Thus, the Commission seeks specific comment as to 
whether the proposed burden estimates are appropriate or whether such 
estimates should be increased or reduced. Among the other factors of 
these estimates, the Commission invites comments on the estimated 
number of ``buy to cover'' orders anticipated to be placed by broker-
dealers each year (62.25 billion), the estimated ratio of orders per 
trade (14.4:1), the time required to accurately mark a purchase order 
``buy to cover'' (between .042 and .5 seconds), and the cost of 
updating existing order marking systems to accommodate the ``buy to 
cover'' order mark ($170,000). If those estimates or any other element 
of the estimated Proposed Rule 205 burdens should be increased or 
decreased, please address by how much and why.
---------------------------------------------------------------------------

    \157\ See supra note 151.
    \158\ See supra note 154 and accompanying text.
---------------------------------------------------------------------------

D. Burdens and Costs Associated With the Proposal To Amend CAT

1. Summary of Collections of Information
    The Proposal to Amend CAT would amend the CAT NMS Plan to require 
Participants to update their Compliance Rules to require reporting by 
Industry Members of the following information: (i) 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 Rule 205(a) of Regulation SHO (17 CFR 242.205(a)); 
and (ii) 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 exception Rule 203(b)(2)(iii) of Regulation SHO is 
claimed.\159\
---------------------------------------------------------------------------

    \159\ See supra Part VI; see also proposed CAT NMS Plan Sections 
6.4(d)(ii)(D) and 6.4(d)(ii)(E).
---------------------------------------------------------------------------

2. Proposed Use of Information
    The Commission believes that requiring proposed reporting of 
certain short sale information to the CAT would provide valuable 
information for the Commission and other regulators in investigations 
and reconstruction of market events. Ready access to ``buy to cover'' 
information in the CAT would allow regulators to determine whether a 
purchase or sale of an equity security increases or decreases equity 
exposure of an Industry Member or Customer, and whether the buy covers 
a short position. The ability to determine whether an order adds to an 
existing position or covers an existing short position would

[[Page 14977]]

be useful in detecting and investigating portfolio pumping, short 
selling abuses, short squeezes marking the close, potential 
manipulation, insider trading, or other rule violations. It would also 
assist Commission staff and regulatory staff analysis of the impact of 
``buys to cover'' on equity prices and price volatility, and determine 
the impact of ``short squeezes.'' The Commission believes that 
requiring Industry Members to identify short sales for which they are 
claiming the bona fide market making exception would 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 to certain proposed collections of information for 
the Proposal to Amend CAT would be the 25 Plan Participants (the 24 
national securities exchanges and one national securities association 
(FINRA)).\160\
---------------------------------------------------------------------------

    \160\ 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.
---------------------------------------------------------------------------

b. Members of National Securities Exchanges and National Securities 
Associations
    The respondents for certain information collection for the Proposal 
to Amend CAT are the Participants' broker-dealer members, that is, 
Industry Members. The Commission understands that there are currently 
3,551 broker-dealers; \161\ however, not all broker-dealers are 
expected to have new CAT reporting obligations under the Proposal to 
Amend CAT.\162\ Based on an analysis of CAT data from November 2021, 
conducted by Commission staff, the Commission estimates that 
approximately 1,218 broker-dealers will be affected by the Proposal to 
Amend CAT, including 1,218 broker-dealers that would be required to 
report ``buy-to-cover'' information on buy orders for equity securities 
and 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.
---------------------------------------------------------------------------

    \161\ See supra note 149.
    \162\ See also supra Part VI.B.2.
---------------------------------------------------------------------------

4. Total Initial and Annual Reporting and Recordkeeping Burdens
    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 
the 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.\163\ Put another way, pursuant to the proposed 
amendments 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.
---------------------------------------------------------------------------

    \163\ The Commission derives estimated costs associated with 
Plan Processor and Industry Member staff time based on per hour 
figures from SIFMA's Management & Professional Earnings in the 
Securities Industry 2013, modified by Commission staff to account 
for an 1800-hour work-year, and multiplied by 5.35 to account for 
bonuses, firm size, employee benefits and overhead, and adjusted for 
inflation based on Bureau of Labor Statistics data on CPI-U between 
January 2013 and January 2020 (a factor of 1.12). For example, the 
2020 inflation-adjusted effective hourly wage rate for attorneys is 
estimated at $426 ($380 x 1.12).
---------------------------------------------------------------------------

a. Participant Burdens
    The Proposal to Amend CAT would require the Participants to engage 
the Plan Processor to modify the Central Repository to accept and 
process the new short sale data elements on order receipt and 
origination reports. The Commission estimates that the Participants 
would incur an initial, one-time burden of 130 hours, or 5 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 external cost of $101,520, or a per Participant 
expense of approximately $4,060.80 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 a 
preliminary estimate that it would take 300 hours of Plan Processor 
staff time to implement these changes.\164\
---------------------------------------------------------------------------

    \164\ 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 $101,520 = 
(Senior Programmer for 200 hours at $339 an hour = $67,800) + 
(Senior Database Administrator for 40 hours at $349 an hour = 
$13,960) + (Senior Business Analyst for 40 hours at $281 an hour = 
$11,240) + (Attorney for 20 hours at $426 an hour = $8,520).
---------------------------------------------------------------------------

    The Commission believes that other Paperwork Reduction Act burdens 
that would 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.\165\ The 
Commission believes that 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.\166\ In addition, 
the Commission anticipates that each exchange and national securities 
association would 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

[[Page 14978]]

Paperwork Reduction Act Information Collection submission for Form 19b-
4.\167\ The Commission does not expect the baseline number of 19b-4 
filings to increase as a result of the Proposal to Amend CAT, nor does 
it believe that the incremental costs exceed those costs used to arrive 
at the average costs and/or burdens reflected in the Form 19b-4 PRA 
submission.
---------------------------------------------------------------------------

    \165\ See CAT NMS Plan Approval Order, 81 FR at 84911-43. See 
also OMB Control No. 3235-0671, 85 FR 37721 (June 23, 2020) (notice 
of submission of request for approval of extension).
    \166\ See CAT NMS Plan Approval Order, 81 FR at 84918.
    \167\ See OMB Control No. 3235-0045 (August 19, 2016), 81 FR 
57946 (August 24, 2016) (Request to OMB for Extension of Rule 19b-4 
and Form 19b-4 PRA).
---------------------------------------------------------------------------

b. Broker-Dealer Burdens
    The Commission believes that certain Industry Members will have 
initial, one-time burdens and costs relating to the Proposal to Amend 
CAT, to update systems and processes as necessary to capture and report 
the proposed data elements to CAT. The Commission has estimated these 
initial burdens and costs below.
    The Commission also believes that the Proposal to Amend CAT would 
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 
believes that the ongoing burden imposed by the Proposal to Amend 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.\168\ 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,\169\ 
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 comprising the broker-dealer's data 
collection and reporting responsibility.\170\ The Proposal to Amend CAT 
would 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 would 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.
---------------------------------------------------------------------------

    \168\ See CAT NMS Plan Approval Order, 81 FR at 84911-43.
    \169\ See, e.g., CAT NMS Plan Approval Order, 81 FR at 84930.
    \170\ See CAT NMS Plan Approval Order, 81 FR at 84930.
---------------------------------------------------------------------------

Buy to Cover Information on Orders
    With regard to the obligation to report ``buy to cover'' 
information on orders to the CAT, the Commission believes that it is 
appropriate to divide the 1,218 Industry Members that would be required 
to report buy to cover information to the CAT for the original receipt 
or origination of orders into two categories: (i) Industry Members that 
report directly to the CAT (``insourcing Industry Members''); and (ii) 
Industry Members that use third-party reporting agents such as service 
bureaus for CAT reporting (``outsourcing Industry Members''). For 
purposes of this Paperwork Reduction Act analysis, the Commission 
estimates that of the 1,218 Industry Members that would be required to 
report buy to cover information to the CAT for the original receipt or 
origination of orders, 126 would be insourcing Industry Members, and 
1,092 would be outsourcing Industry Members. This is based on the CAT 
NMS Approval Order, which based on an analysis of specific data 
provided by FINRA on how firms report OATS data estimated that there 
were 126 large OATS \171\ reporting broker-dealers, with all other 
broker-dealers either not reporting to CAT at the time or reporting to 
OATS through service bureaus.\172\ The Commission believes it is 
reasonable to estimate for purposes of this Paperwork Reduction Act 
analysis that the same number of broker-dealers that reported directly 
to OATS report directly to CAT, and that it unlikely that previously 
outsourcing broker-dealers and broker-dealers without an obligation to 
report to OATS developed the infrastructure necessary to report to the 
CAT.
---------------------------------------------------------------------------

    \171\ OATS was FINRA's Order Audit Trail System, which existed 
prior to the creation of the CAT and was an order audit trail system 
maintained by FINRA, was retired on September 1, 2021 because FINRA 
determined that the accuracy and reliability of the CAT met certain 
standards and thus OATS was duplicative in light of the 
implementation of CAT. See Exchange Act Notice No. 92239 (June 23, 
2021), 86 FR 34293 (June 29, 2021).
    \172\ See CAT NMS Plan Approval Order, 81 FR at 84860.
---------------------------------------------------------------------------

    The Commission estimates that the 126 insourcing Industry Members 
will incur an initial, aggregate, one-time burden of 32,760 hours, or 
that each of these insourcing Industry Members would incur an initial, 
average one-time burden of 260 hours, and that these 126 insourcing 
Industry Members will incur an initial, aggregate, one-time external 
expense of approximately $1,890,000 for software and hardware to 
facilitate reporting of the new data elements to CAT, or that each 
insourcing Industry Member would incur an initial, average one-time 
external expense of approximately $15,000 for hardware and software to 
facilitate reporting of the new data elements to CAT.\173\
---------------------------------------------------------------------------

    \173\ The Commission is basing this figure on the estimated 
internal burden for a broker-dealer that handles orders subject to 
customer specific disclosures required by Rule 606(b)(3) to both 
update its data capture systems in-house and format the report 
required by Rule 606. See Exchange Act Release No. 84528 (November 
2, 2018), 83 FR 58338, 58383 (November 19, 2018) (``Rule 606 
Adopting Release''). The Commission believes that this is a 
reasonable proxy for a preliminary estimation for 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, and, as discussed above, the Paperwork Reduction Act 
analysis for Rule 613 and the CAT NMS Plan did not attempt to 
quantify the burden hours or external cost estimates for each 
individual component comprising the broker-dealer's data collection 
and reporting responsibility. See supra note 169.
---------------------------------------------------------------------------

    The Commission estimates that the 1,092 outsourcing Industry 
Members will incur an initial, aggregate, one-time burden of 10,920 
hours, or that each of these outsourcing Industry Members would incur 
an initial, one-time burden of 10 hours on average, and that together 
these 1,092 outsourcing Industry Members will incur an initial, 
aggregate, one-time external expense of approximately $1,092,000 for 
software and hardware to facilitate reporting of the new data elements 
to CAT and for external expenses relating to fees paid to CAT reporting 
agents to update their systems or coding as necessary, or that each 
outsourcing Industry Member would incur an initial, average one-time 
external expense of approximately $1,000.\174\
---------------------------------------------------------------------------

    \174\ The Commission believes that the preliminary 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 would have to 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.

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

[[Page 14979]]

    As discussed above, the Commission does not believe that these CAT 
Reporters would have an ongoing PRA burden or external costs related to 
the reporting of the new information to CAT because the ongoing burden 
and external costs are 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.\175\
---------------------------------------------------------------------------

    \175\ See supra note 165.
---------------------------------------------------------------------------

Bona Fide Market Making Exception Information
    The Commission believes that this aspect of the Proposal to Amend 
CAT will only impose additional burdens on Industry Members that trade 
equity securities and rely upon or plan to rely upon the bona fide 
market making exception. Based on an analysis of data reported to the 
CAT in November 2021, 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), the Commission 
believes that approximately 104 CAT Reporters will be subject to the 
new reporting obligation. The Commission believes that 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, and thus for 
some broker-dealers this information could be more easily reportable 
than information not currently available to Industry Members, such as 
the ``buy to cover'' identification of equity buy orders.
    With regard to the obligation to report regarding bona fide market 
making exception information to the CAT, the Commission believes that 
it is appropriate to divide the 104 Industry Members that would 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 104 Industry Members that would be required to this information, 60 
Industry Members would be reporting this information directly to the 
CAT, and 44 Industry Members would be reporting this information 
through third-party reporting agents. The Commission believes this is a 
reasonable estimation because it believes that the majority of Industry 
Members that are identified as market makers in the CAT are large 
enough to have developed their own systems and technology to report 
directly to the CAT.
    The Commission estimates that the 60 insourcing Industry Members 
that report directly to the CAT will incur an initial, aggregate, one-
time burden of 15,600 hours, or that each of these CAT Reporters would 
incur an initial, average one-time burden of 260 hours, and that each 
of these 60 insourcing Industry Members will incur an initial, 
aggregate, one-time external expense of approximately $900,000 for 
software and hardware to facilitate reporting of the new data elements 
to CAT, or that each insourcing Industry Member would incur an initial, 
average one-time external expense of approximately $15,000.\176\
---------------------------------------------------------------------------

    \176\ 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 Rule 606 Adopting Release, 83 FR at 58383. 
The Commission believes that this is a reasonable proxy for a 
preliminary estimation for 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.
---------------------------------------------------------------------------

    The Commission estimates that the 44 outsourcing Industry Members 
that use third-party reporting agents to report to the CAT will incur 
an initial, aggregate, one-time burden of 440 hours, or that each of 
these outsourcing Industry Members would incur an initial, one-time 
burden of 10 hours on average, and that these 44 outsourcing Industry 
Members will incur an initial, aggregate, one-time external expense of 
approximately $44,000 for software and hardware to facilitate reporting 
of the new data elements to CAT, or that each outsourcing Industry 
Member would incur an initial, average one-time external expense of 
approximately $1,000.\177\
---------------------------------------------------------------------------

    \177\ The Commission believes that the preliminary 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 would have to 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.
---------------------------------------------------------------------------

    As discussed above, the Commission believes 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.\178\ Because this information is already collected and maintained 
by market makers that engage in equity trading and claim the exception 
pursuant to Rule 17a-3 of the Exchange Act, the Commission believes 
there is no new ongoing burden associated with collecting or recording 
the information necessary to effectuate CAT reporting of this new 
element.
---------------------------------------------------------------------------

    \178\ See supra note 165.
---------------------------------------------------------------------------

c. Summary of Initial One-Time Burdens Relating to Proposal To Amend 
CAT

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                             Number of     Initial one-   Aggregate one-
      Name of information collection               Type of burden            entities       time hourly     time hourly    Initial one-   Aggregate one-
                                                                             impacted         burden          burden         time cost       time cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
CAT: Central Repository--Short Sale Data..  Recordkeeping...............              25               5             130       $4,060.80        $101,520
CAT: Reporting of Buy to cover Information  Third Party Disclosure......             126             260          32,760          15,000       1,890,000
 for Orders--Insourcers.
CAT: Reporting of Buy to cover Information  Third Party Disclosure......           1,092              10          10,920           1,000       1,092,000
 for Orders--Outsourcers.
CAT: Reporting of Bona Fide Market Making   Third Party Disclosure......              60             260          15,600          15,000         900,000
 Exception--Insourcers.
CAT: Reporting of Bona Fide Market Making   Third Party Disclosure......              44              10             440           1,000          44,000
 Exception--Outsourcers.
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 14980]]

E. Collection of Information Is Mandatory

    The proposed information collections are required under Proposed 
Rule 13f-2 and Proposed Form SHO for Managers that meet one of the 
Reporting Thresholds, Proposed Rule 205 for broker-dealers that effect 
purchase orders for accounts with open short positions in the equity 
securities being purchased, and the Proposal to Amend CAT for Plan 
Participants to collect and process new CAT reportable information and 
for CAT Industry Members that engage in certain short sale activity.

F. Confidentiality

    As discussed above, Proposed Rule 13f-2 would require certain 
Managers to file monthly in EDGAR, on Proposed Form SHO, certain short 
sale volume data and short interest position data. However, the 
Commission is proposing that the information reported by Managers on 
Proposed Form SHO be aggregated prior to publication so as to protect 
the identity of reporting Managers.
    The Commission would not typically receive confidential information 
as a result of Proposed Rule 205. 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 Proposed Rule 205 that are 
not publicly available, such information would be kept confidential, 
subject to the provisions of applicable law.
    With respect to the Proposal to Amend CAT, Rule 613 and the CAT NMS 
Plan requires that the information to be collected and electronically 
provided to the Central Repository would 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 would receive confidential information pursuant to 
this collection of information, and such information will be kept 
confidential, subject to the provisions of applicable law.

G. Request for Comments

    The Commission requests comment on whether the estimates for burden 
hours and costs are reasonable. Pursuant to 44 U.S.C. 3506(c)(2)(B), 
the Commission solicits comments to (1) evaluate whether the proposed 
collections of information are necessary for the proper performance of 
the functions of the Commission, including whether the information 
would have practical utility; (2) evaluate the accuracy of the 
Commission's estimate of the burden of the proposed collections of 
information; (3) determine whether there are ways to enhance the 
quality, utility, and clarity of the information to be collected; and 
(4) determine whether there are ways to minimize the burden of the 
collections of information on those who are to respond, including 
through the use of automated collection techniques or other forms of 
information technology.
    While the Commission welcomes any public input on this topic, the 
Commission asks commenters to consider the following questions:
     Q20: Has the Commission accurately estimated the paperwork 
burdens and costs to Managers associated with fulfilling the reporting 
requirements of Proposed Rule 13f-2?
     Q21: Has the Commission accurately estimated the number of 
Managers (1,000) anticipated to be required to file Proposed Form SHO 
each month? If the estimate should be increased or decreased, please 
address by how much and why.
     Q22: Has the Commission accurately estimated the amount of 
time (325 hours) needed for Managers to complete initial technology 
projects to facilitate fulfillment of the reporting requirements of 
Proposed Rule 13f-2? If the estimate should be increased or decreased, 
please address by how much and why.
     Q23: Has the Commission accurately estimated the number of 
Managers each month (1,000) that will use a structured XML data 
language methodology, as opposed to the web-fillable Proposed Form SHO 
directly on EDGAR, to file Proposed Form SHO? Has the Commission 
accurately estimated the number for Managers each month (35) that will 
use a structured XML data language methodology to file an amended 
Proposed Form SHO?
     Q24: Has the Commission accurately estimated the 
additional paperwork burden (2 hours of work by a programmer) for 
Managers to file a Proposed Form SHO via the structured XML data 
language methodology? Is the additional burden (2 hours of work by a 
programmer) more accurately categorized as an ongoing per filing burden 
or an initial, one-time technological systems update burden?
     Q25: Has the Commission accurately estimated that 
approximately 3.5% of Proposed Form SHO filers would also file an 
amended Proposed Form SHO, resulting in additional burdens and costs 
for an estimated 35 Managers each month?
     Q26: Has the Commission accurately estimated the paperwork 
burdens and costs to broker-dealers associated with fulfilling the 
order marking requirements of Proposed Rule 205? Has the Commission 
accurately estimated the number of broker-dealers (1,218) that will be 
required to update their order marking systems to incorporate the ``buy 
to cover'' order mark?
     Q27: Has the Commission accurately estimated the total 
number of orders marked ``buy to cover'' by broker-dealers each year 
(62.25 billion)? If the estimate should be increased or decreased, 
please address by how much and why.
     Q28: Is the Commission's estimation that, over the course 
of a year, for every short position created by a ``short'' or ``short 
exempt'' sale order, there will be an equal and opposite number of 
``buy to cover'' purchase orders placed in order to cover, and 
ultimately close out, those short positions, an accurate projection of 
how frequently ``buy to cover'' order marks will be used? If there is a 
more accurate means of estimating the volume of anticipated annual 
``buy to cover'' order marks, please describe its structure and why it 
is more accurate.
     Q29: Has the Commission accurately estimated the ratio of 
orders to trades (14.4:1) used to calculate the total number of 
anticipated ``buy to cover'' orders? If the estimate should be 
increased or decreased, please address by how much and why.
     Q30: Has the Commission accurately estimated the time it 
takes (between .042 and .5 seconds) for a broker-dealer to properly 
mark a purchase order as ``buy to cover'' for an account that holds a 
gross short position in the security being purchased? If the estimate 
should be increased or decreased, or the range narrowed, please address 
by how much and why.
     Q31: Has the Commission accurately estimated the cost to 
broker-dealers ($170,000) to update their order marking systems, or is 
such a cost likely to have decreased for reasons including 
technological advances? If the estimate should be increased or 
decreased, please address by how much and why.
     Q32: Has the Commission accurately captured the market 
participants who would be subject to

[[Page 14981]]

the burdens and costs under the Proposal to Amend CAT?
     Q33: Has the Commission accurately estimated the number of 
Industry Members anticipated to be required to report new information 
to the CAT under the Proposal to Amend CAT?
     Q34: Has the Commission accurately estimated the paperwork 
burdens and costs to market participants associated with the Proposal 
to Amend CAT?
    Persons wishing to submit comments on the collection of information 
requirements should direct the comments to the Office of Management and 
Budget, Attention: Desk Officer for the Securities and Exchange 
Commission, Office of Information and Regulatory Affairs, Washington, 
DC 20503, and send a copy to Vanessa Countryman, Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090, 
with reference to File No. S7-08-22. OMB is required to make a decision 
concerning the collection of information between 30 and 60 days after 
publication of this release. Consequently, a comment to OMB is best 
assured of having its full effect if OMB receives it within 30 days of 
publication. Requests for materials submitted to OMB by the Commission 
with regard to these collections of information should be in writing, 
refer to File No. S7-08-22, and be submitted to the Securities and 
Exchange Commission, Office of FOIA Services, 100 F Street NE, 
Washington, DC 20549-2736.

VIII. Economic Analysis

A. Introduction

    The Commission is proposing new reporting requirements in 
connection with short sales. The Commission is mindful of the economic 
effects that may result from the proposed requirements, including the 
benefits, costs, and the effects on efficiency, competition, and 
capital formation.\179\ The Commission believes that, if adopted, 
Proposed Rule 13f-2 and Proposed Form SHO, Proposed Rule 205, and the 
Proposal to Amend CAT would result in improved regulatory oversight, as 
the data that would become available to regulators would close 
informational gaps in the currently available data, which would in turn 
benefit market participants and help foster fair and orderly markets. 
More specifically, the Proposals would increase transparency and 
improve regulators' examination of market behavior and recreation of 
significant market events. These improvements may, in turn, discourage 
abusive short selling.\180\ Proposed Rule 13f-2 would also increase 
transparency for market participants about short selling, which could 
help refine market participants' understanding of the level of negative 
sentiment and the actions of short sellers.
---------------------------------------------------------------------------

    \179\ 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).
    \180\ See infra Part VIII.D.1 (for additional discussion on 
potential abusive short selling practices).
---------------------------------------------------------------------------

    The Proposals may also lead to tradeoffs in market quality. A 
reduction in abusive short selling and improved regulatory oversight 
may have a positive impact on market quality. Furthermore, the 
Proposals would provide market participants improved transparency into 
short selling which could also improve price efficiency. However, 
Proposed Rule 13f-2 and Proposed Form SHO could chill short selling by 
increasing the costs and risks of implementing large short positions, 
which could reduce the positive effects of short selling on market 
quality. Furthermore, public disclosure of information resulting from 
Proposed Rule 13f-2 and Proposed Form SHO could facilitate short 
squeezes, which could reduce market quality for all.\181\
---------------------------------------------------------------------------

    \181\ See infra Part VIII.D.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.
---------------------------------------------------------------------------

    In addition to the indirect costs to market quality, Proposed Rule 
13f-2, Proposed Form SHO, Proposed Rule 205, and the Proposal to Amend 
CAT could impose significant compliance costs on market participants. 
The proposal to require Managers to report large positions and activity 
would likely impose significant initial and ongoing costs on Managers. 
Proposed Rule 205 and the Proposal to Amend CAT could impose large 
initial costs and ongoing compliance costs on broker-dealers.
    The Commission has considered the economic effects of the Proposals 
and wherever possible, the Commission has quantified the likely 
economic effects of the Proposals. The Commission is providing both a 
qualitative assessment and quantified estimates of the potential 
economic effects of the Proposals where feasible. The Commission has 
incorporated data and other information to assist it in the analysis of 
the economic effects of the Proposals. 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 less 
significant. The Commission requests that commenters provide relevant 
data and information to assist the Commission in quantifying the 
economic consequences of Proposed Rule 13f-2, Proposed Form SHO, 
Proposed Rule 205, and Proposal to Amend CAT.

B. Economic Justification

    The Commission is proposing the required Manager reporting and 
disclosures, in part, to implement the specific statutory mandate of 
Section 929X of the Dodd-Frank Act. Accordingly, many of the costs and 
benefits of Proposed Rule 13f-2 and Proposed Form SHO stem from the 
Commission's response to the statutory mandate. In addition, the 
Commission is exercising discretion in its design and implementation of 
Proposed Rule 13f-2 and Proposed Form SHO, and recognizes that this 
discretion has economic effects. Specifically, the Commission is using 
this discretion to ensure that the proposed disclosures are additive to 
currently available data and would be useful to both market 
participants and regulators, with a focus on addressing data 
limitations exposed by the market volatility in January 2021. Finally, 
Proposed Rule 205 and Proposal to Amend CAT address such data 
limitations outside of the context of the statutory mandate of Section 
929X.
    CAT data, as well as other currently available data, can be used by 
regulators for surveillance, examinations, investigations, and other 
enforcement

[[Page 14982]]

functions, for the analysis and reconstruction of market events, and 
for more general market analysis and research. At times, these 
activities would benefit from information on customer or market 
participant positions and how those positions change over time. CAT was 
not designed to track such positions, and 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 and also for informing members of the public and market 
participants. Specifically, current data (1) fails to distinguish 
economic short exposure from hedged positions or intraday trading, (2) 
fails to distinguish the type of trader short selling or identify 
individual short positions, even for regulatory use, and (3) fails to 
capture the various ways that short positions can change and the 
various ways to acquire short exposure. The Proposals are designed to 
address these data limitations.
    Existing data sources fail to accurately represent the economic 
short exposures of Managers due to several limitations. While existing 
data report aggregate short positions on a bi-monthly basis, they do 
not reflect the timing with which short positions expand or shrink in 
the two-week period between the two reporting dates.\182\ Some data 
sources report daily short sale volume \183\ without distinguishing 
short sale transactions that affect economic short exposures from those 
meant for purposes such as liquidity provision or hedging of long 
positions. As such, the existing short volume data may not be combined 
with the bi-monthly short interest data to construct aggregate daily 
short positions. Existing securities lending data that may be 
considered indirect measures of short interest are expensive, 
incomprehensive, and biased--in particular, security loans may serve 
purposes other than covering short positions, e.g., cover failure to 
deliver or borrowing cash by the lender. No existing data identify 
short positions by individual traders. Even though some regulatory data 
identify short transactions of individual traders, they may not be 
utilized to reconstruct short positions because economic short exposure 
may change in the absence of any short sale transactions.
---------------------------------------------------------------------------

    \182\ 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.
    \183\ 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.
---------------------------------------------------------------------------

    These data limitations inhibit regulators from performing functions 
such as market surveillance and market reconstruction. For example, the 
Commission would 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 cannot currently efficiently 
assess the risk that the positions impose on the market more broadly. 
Additionally, with existing data the Commission may have difficulty 
reconstructing significant market events--inhibiting the Commission in 
quickly understanding market events and providing efficient market 
oversight.
    The data limitations also prevent the market from more fulsome 
interpretations of existing short selling information. For example, 
existing data can show a short interest level, but little is known 
about how much of that short interest level is directional or hedged 
and the extent to which short positions change between short interest 
disclosures.

C. Baseline

1. Institutional Investment Managers
    The potential universe of persons who meet the definition of 
Manager is expansive. 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.'' \184\ 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.'' \185\ As a result, Managers exercising 
discretion over the accounts of others could include but are not 
limited to investment advisors 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; 
corporations, 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.\186\
---------------------------------------------------------------------------

    \184\ See also Exchange Act Section 3(a)(35) defining when a 
person exercises ``investment discretion'' with respect to an 
account.
    \185\ 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).
    \186\ To the extent that a natural person exercising discretion 
over the account of another person has a short position exceeding 
the proposed thresholds, that natural person would be subject to the 
costs associated with Proposed Rule 13f-2 and the Proposed Form SHO. 
We expect such a natural person would likely use the fillable web 
form provided by EDGAR to input Proposed Form SHO disclosures. The 
Commission believes that few Managers that are natural persons would 
be likely to have short positions large enough to exceed the 
threshold. See infra Section VIII.D.7 for more information on 
Managers' costs.
---------------------------------------------------------------------------

    Notwithstanding the broad statutory definition of Manager, it is 
the Commission's understanding that only a fraction of Managers of are 
believed to engage in short selling and fewer still engage in any 
significant short selling. Market makers, for example, engage in short 
selling but, with the exception of option market makers, generally do 
not hold large positions overnight. We are 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.\187\

[[Page 14983]]

Using actual investment strategies employed by registered investment 
companies \188\ 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% of all funds were allowed to engage in short 
selling, only 5% of all funds actually did so.'' \189\ As of September 
2021, there were 7,043 registered investment companies with total 
equity positions valued at approximately $17 trillion. Of those, 152 
funds had short positions with a total short position value of 
approximately $17.5 billion. Of the funds with short positions of 
approximately $17.5 billion, only 37 funds held positions equal to or 
greater than $10 million.\190\ Additionally, according to an analysis 
of publicly available Form PF data, a substantial minority of single-
strategy hedge funds employ strategies involving short selling.\191\
---------------------------------------------------------------------------

    \187\ Peter Molk and Frank Partnoy, Institutional Investors as 
Short Sellers?, 99 B.U. L. Rev. 837, 839 (2019), available at 
https://scholarship.law.ufl.edu/cgi/viewcontent.cgi?article=1980&context=facultypub. Molk and Partnoy's 
paper ``identif[ies] the regulatory and other barriers that keep key 
categories of institutions[, specifically, mutual funds, insurance 
companies, banks, sovereign wealth funds, endowments, and 
foundations,] from acquiring significant short positions.'' Id. at 
843.
    \188\ As of July 2021, there were 10,223 mutual funds (excluding 
money market funds) with approximately $18,588 billion in total net 
assets, 2,320 ETFs organized as an open-end fund or as a share-class 
of an open-end fund with approximately $6,447 billion in total net 
assets, 736 registered closed-end funds with approximately $314 
billion in total net assets, 722 unit investment trusts with 
approximately $2,456 billion in total net assets, and 13 variable 
annuity separate accounts registered as management investment 
companies on Form N-3 with $218 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, 2021. 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.
    \189\ 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.
    \190\ This is based on an analysis of data provided by 
registered investment companies to the Commission on Form N-PORT.
    \191\ As of 2021 Q2, there are 1,124 hedge funds out of 6,083 
Single-Strategy hedge funds (excluding fund-of-funds hedge funds) 
that employ short selling in an Equity Long/Short strategy (1,062), 
Equity Short-Biased strategy (18), or Fixed Income Convertible 
Arbitrage strategy (44). Assets under management (AUM) in these 
types of hedge funds total approximately $1.165 trillion. 2021 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 does 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 
2021 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), available at https://www.reuters.com/business/finance/global-hedge-fund-industry-assets-top-4-trillion-first-time-2022-01-20/.
---------------------------------------------------------------------------

    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 proposed 
rule's reporting requirement.\192\ The Commission believes one possible 
proxy for the number of Managers that could 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 over the proposed 
rule's thresholds. As of March 31, 2021, 7,550 Managers with investment 
discretion over approximately $39.79 trillion reported holdings on Form 
13F in Section 13(f) securities.\193\ The Commission also believes that 
registered investment advisers, particularly those managing hedge 
funds, are the primary Managers likely to be affected by the Proposed 
Rule. Though the Commission lacks data to quantify the number affected 
parties, the Commission estimates that the total number of Managers 
with reporting obligations will be between 346 and 1,000.\194\
---------------------------------------------------------------------------

    \192\ 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 187 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.
    \193\ See Enhanced Reporting of Proxy Votes by Registered 
Management Investment Companies; Reporting of Executive Compensation 
Votes by Institutional Investment Managers, Exchange Act Rel. No. 
93169, (Oct. 15, 2021) available at https://www.govinfo.gov/content/pkg/FR-2021-10-15/pdf/2021-21549.pdf.
    \194\ See supra section VII.B.2. for more information on the 
estimates of how many managers would have reporting obligations.
---------------------------------------------------------------------------

2. Short Selling
    Short selling is a widely used market practice, which allows 
investors to profit if an asset declines in value or to hedge risks. 
Market participants can build an economic short positions 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. This 
information is based on the current state of research using existing 
data.
i. 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.\195\ 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. 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 investor will 
make money.
---------------------------------------------------------------------------

    \195\ See Rule 200(a) of Regulation SHO, 17 CFR 242.200(a). See 
also Regulation SHO Adopting Release, supra note 4.

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

[[Page 14984]]

    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 detect 
temporary pricing anomalies. While short selling to trade on 
information or to hedge generally results in short positions that are 
held for some time, market makers 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.\196\
---------------------------------------------------------------------------

    \196\ See infra Part VIII.C.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%--including the 
proceeds of the short sale plus an additional 50% of the value of the 
short position.\197\ 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.
---------------------------------------------------------------------------

    \197\ Regulation T specifies that in most situations margin 
requirements for equity short sales must be 150%. See 12 CFR 220.12 
(1998), available at https://www.ecfr.gov/current/title-12/chapter-II/subchapter-A/part-220/section-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.\198\ Consequently, a short seller 
(or their 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 they are required to 
deliver the share to settle the stock market transaction.
---------------------------------------------------------------------------

    \198\ There have been recent efforts by industry members to 
shorten the settlement cycle to one business day. Furthermore, the 
Commission has proposed to shorten the settlement cycle. Shortening 
the Securities Transaction Settlement Cycle, Exch. Act Rel. No. 
94196 (Feb. 9, 2022) available at https://www.sec.gov/rules/proposed/2022/34-94196.pdf. See also SIFMA, ICI, DTCC and Deloitte, 
Accelerating the U.S. Securities Settlement Cycle to T+1 (Ver. 1.0) 
(Dec. 1, 2021), available at https://www.sifma.org/wp-content/uploads/2021/12/Accelerating-the-U.S.-Securities-Settlement-Cycle-to-T1-December-1-2021.pdf.
---------------------------------------------------------------------------

    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.
    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% of trading 
volume, while only about 2% of shares outstanding are held short in the 
U.S. equity markets.\199\ This average volume of short selling tends to 
be much higher than the typical changes in short interest,\200\ 
suggesting that a significant fraction of short selling volume is 
reversed very quickly. Such short selling may be more indicative of the 
fact that short selling is a key component of modern market making 
strategies and technical algorithmic trading.\201\
---------------------------------------------------------------------------

    \199\ See supra note 6, 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).
    \200\ 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 five percent of shares 
outstanding each week, with approximately half of all trades 
involving short sellers. Consequently, total short selling volume 
amounts to approximately five percent of shares outstanding every 
two weeks for a typical stock. In contrast, from 2015-2019, 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 bi-monthly 
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.
    \201\ See infra Part V.4.iii (for a more detailed discussion of 
short selling and liquidity provision).
---------------------------------------------------------------------------

BILLING CODE 8011-01-P

[[Page 14985]]

[GRAPHIC] [TIFF OMITTED] TP16MR22.034

BILLING CODE 8011-01-C
ii. 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. Confirming 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.\202\
---------------------------------------------------------------------------

    \202\ 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.
---------------------------------------------------------------------------

    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

[[Page 14986]]

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.\203\ 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 the 
its price.\204\ 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.\205\
---------------------------------------------------------------------------

    \203\ On September 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.
    \204\ On July 9, 2012, the Commission approved rules and 
definitions of Security based swaps. See 17 CFR 230, 240-241; 
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, available at https://www.sec.gov/rules/final/2012/33-9338.pdf.
    \205\ See, e.g., Regulation SBSR--Reporting and Dissemination of 
Security-Based Swap Information, Exchange Act Release No. 74244 
(Feb. 11, 2015), 80 FR 14563 (Mar. 19, 2015) (``2015 Regulation SBSR 
Adopting Release''); 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, 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
    Compliance with Regulation SHO began on January 3, 2005.\206\ The 
Commission adopted Regulation SHO 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.\207\
---------------------------------------------------------------------------

    \206\ See Regulation SHO Adopting Release, supra note 3.
    \207\ 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 \208\ and liquidity to 
the market.\209\ 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.
---------------------------------------------------------------------------

    \208\ 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 (October 
28, 2003), 68 FR 62972 (November 6, 2003), available at https://www.sec.gov/rules/proposed/34-48709.htm#P179_15857.
    \209\ 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 (October 28, 2003), 68 FR 62972 
(November 6, 2003), available at https://www.sec.gov/rules/proposed/34-48709.htm#P179_15857.
---------------------------------------------------------------------------

    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,\210\ strengthened those same 
close-out requirements by adopting Rule 204,\211\ and reintroduced a 
short sale price test restriction by adopting Rule 201.\212\ In 
addition, the Commission adopted a targeted antifraud rule, Rule 10b-
21, to further address failures to deliver in securities that have been 
associated with ``naked'' short selling.\213\
---------------------------------------------------------------------------

    \210\ 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.
    \211\ In 2008, the Commission adopted 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.
    \212\ 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.
    \213\ Rule 10b-21 is an antifraud provision intended to 
supplement existing antifraud rules, including Rule 10b-5, and to 
further evidence the liability of short sellers. This includes 
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 12, Exchange Act 
Release No. 58774, available at https://www.sec.gov/rules/final/2008/34-58774.pdf.

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

[[Page 14987]]

    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's four general requirements are summarized below:
     Rule 200--Marking Requirement. Rule 200(g) requires that a 
broker-dealer mark all sell orders of any 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 would be in the physical possession or control of the 
broker or dealer no later than the settlement of the transaction. The 
``short exempt'' marking requirement applies only with respect to the 
Rule 201 short sale price test circuit breaker noted below.
     Rule 203(b)(1) and (2)--``Locate'' Requirement. Rule 
203(b)(1) 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 has borrowed the security, entered into a bona-fide 
arrangement to borrow the security, or has reasonable grounds to 
believe that the security can be borrowed so that it can be delivered 
on the date delivery is due. Rule 203(b)(2) provides an exception to 
the locate requirement for short sales effected by a market maker in 
connection with ``bona-fide'' market making activities.
     Rule 204--Close out Requirement. Rule 204 requires a 
participant of a registered clearing agency (i.e., a clearing member) 
to deliver securities to a registered clearing agency for clearance and 
settlement on a long or short sale transaction in any equity security 
by settlement date, or to immediately close out a failure to deliver by 
borrowing or purchasing securities of like kind and quantity by the 
applicable close out date. For a short sale, a participant must close 
out a failure to deliver by no later than the beginning of regular 
trading hours on T+3. For a long sale, or for activity that is 
attributable to ``bona-fide'' market making activities, a participant 
must close out a failure to deliver by no later than the beginning of 
regular trading hours on T+5.
     Rule 201--Short Sale Price Test Circuit Breaker. Rule 201 
generally prevents short selling, including potentially manipulative or 
abusive short selling, from driving down further the price of a 
security that has already experienced a significant intraday price 
decline, and facilitates the ability of long sellers to sell first upon 
such a decline. Rule 201 contains a short sale circuit breaker that, 
when triggered by a price decline of 10% or more from a covered 
security's prior closing price, imposes a restriction on the price at 
which the covered security may be sold short (i.e., must be above the 
current national best bid). Once triggered, the price restriction would 
apply to short sale orders in that security for the remainder of the 
day and the following day, unless an exception applies.
    In addition, Rule 105 of Regulation M generally prohibits 
participation in secondary offerings by persons who have sold short 
during the restricted period before the offering.
    Regulation SHO imposes certain recordkeeping obligations on broker-
dealers. However, the Commission does not have any 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.\214\
---------------------------------------------------------------------------

    \214\ See supra Part VI.B (Reliance on Bona Fide Market Making 
Exception, for more information on the inefficiencies of not having 
a systematic way of capturing bona fide market making activities).
---------------------------------------------------------------------------

    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 exposure 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 estimating short positions using these data would 
be significantly inaccurate and inefficient.
i. Bi-Monthly Short Interest Data
    One of the primary data sources for aggregate short selling data is 
the bi-monthly short interest data collected by FINRA.\215\ FINRA 
collects aggregate short interest information in individual securities 
on a bi-monthly 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.\216\ 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.\217\ 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.\218\ 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.\219\ Member firms must report 
their short positions to FINRA regardless of position size.\220\ The 
process of gathering and validating short interest data takes 
approximately two weeks.\221\ Thus the data is available with 
approximately a two week lag.
---------------------------------------------------------------------------

    \215\ See supra note 6, DERA 417(a)(2) Study at 17-18.
    \216\ 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.
    \217\ 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.'').
    \218\ FINRA Rule 4560 excludes short sales in ``restricted 
equity securities,'' as defined in Securities Act Rule 144, from the 
reporting requirement.
    \219\ See FINRA Rule 4560(b)(1).
    \220\ 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.
    \221\ See supra note 6, DERA 417(a)(2) Study at 17-18.
---------------------------------------------------------------------------

    These short interest data are widely available and are used by 
academics and

[[Page 14988]]

other market participants.\222\ These short interest data are found to 
predict future stock and market returns over the monthly and annual 
horizons, suggesting that the bi-monthly short interest data capture 
the economic short selling based on fundamental research.\223\ However, 
these data face two major limitations.\224\ First, the information 
content 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 of the positions. Second, given that short interest is 
aggregated at the security-level, the aggregation prevents the 
Commission and the public from understanding certain aspects of the 
underlying short selling activity. For example, the data cannot inform 
on whether short sentiment is broadly or narrowly held or the extent to 
which existing short interest is hedging in nature or based on short 
sentiment.
---------------------------------------------------------------------------

    \222\ See supra note 182 (FINRA and the listing exchanges make 
these data publicly available with bi-weekly updates).
    \223\ See, e.g., Peter N. Dixon and Eric K. Kelley, Business 
Cycle Variation in Short Selling Strategies: Picking During 
Expansions and Timing During Recessions, J. of Fin. and Quantitative 
Analysis (Forthcoming); 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).
    \224\ See supra note 33.
---------------------------------------------------------------------------

ii. 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 \225\ and publication of short sale 
transaction information on no more than a two-month delay.\226\ Some 
SROs make the historical daily short volume data available to market 
participants for a fee.\227\ 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, FINRA provides 
intraday short sale transaction information for the orders that execute 
and information from FINRA's Trade Reporting Facility (``TRF'') and 
Alternative Display Facility (``ADF'') \228\ (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 bi-monthly short interest observations discussed earlier.
---------------------------------------------------------------------------

    \225\ 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 
183. 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.
    \226\ 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 183; 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 
(Jun. 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.
    \227\ 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://www.cboe.com/us/equities/market_statistics/short_sale/.
    \228\ 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, these existing short volume 
data provided by the SROs and FINRA have a number of limitations. 
First, the data does 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 and 
FINRA to separate trading volume associated with market makers, 
algorithmic traders, investment managers, or other trader types.
    Additionally, the data does not provide insight into activities 
that may reduce short exposure, thus using these data to estimate 
investor sentiment is fraught. For example, 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, convert bonds to stock, or redeem ETF shares 
containing the equity. As a result of this, 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 put out 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 is released with a one month 
lag--implying that some short selling transactions data are not 
available for two months.
    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.\229\ If a market participant is unclear whether their trade would 
meet all the requirements at settlement to be marked a long sale, then 
they 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.\230\
---------------------------------------------------------------------------

    \229\ See Rule 200(g) of Regulation SHO specifies when an order 
can be marked as long. See also Part III.B; note 4 Regulation SHO 
Adopting Release.
    \230\ 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.
---------------------------------------------------------------------------

iii. Securities Lending
    Securities lending data provides information on stock loan volume, 
lending costs, and the percentage of available stock out on loan, which 
some market participants use as measures of short selling.\231\ The 
securities lending

[[Page 14989]]

industry appears to use securities lending data widely, though it is 
generally available only by subscription.\232\
---------------------------------------------------------------------------

    \231\ Several commercial entities sell data on securities 
lending to clients. See, e.g., 2011 Letter from Data Explorers 
(``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 noted, stock lending facilitates short selling. See, e.g., 
Speech by Chester Spatt, former Chief Economist of the SEC (April 
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. This data offers indirect evidence of short 
selling, and 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.oliverwyman.com/our-expertise/insights/2010/feb/the-effects-of-short-selling-public-disclosure-regimes-on-equity.html.
    \232\ See supra note 6, DERA 417(a)(2) Study at 22-23.
---------------------------------------------------------------------------

    The use of security lending data as proxy for economic short 
interest is associated with at least two major setbacks. First, 
commercial vendors of the securities lending data often impose access 
restrictions via high nominal subscription fees or give-to-get models. 
In this setting, the entities contributing data are mindful of whether 
other entities can access to 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 the data collected by each vendor. The market for these 
data is dominated by three major vendors, making it difficult for a 
given market participants to obtain access to comprehensive security 
lending in formation from one source. To this end, the existing data 
accessible by an individual market participant may not accurately proxy 
short selling activity. Second, while securities lending may be 
correlated with short selling, it is not a perfect measure of short 
selling. In practice, securities lending may be used for purposes other 
than short sales such as to cover failure to deliver or to borrow cash. 
In addition, short selling that is covered within the trading day does 
not require any loans, and vendors of commercial securities lending 
data do not have complete information. For example, they have less than 
100% of the negotiated loans and no information on borrowing from 
margin accounts.\233\
---------------------------------------------------------------------------

    \233\ See supra note 6, DERA 417(a)(2) Study at 23. The 
Commission has recently proposed a new rule, Rule 10c-1, and if 
adopted as proposed, the Commission and market participants would 
have access to comprehensive securities lending data market data 
that would significantly improve current securities lending based 
short selling estimates. See Reporting of Securities Loans, Exchange 
Act Release No. 93613, available at https://www.sec.gov/rules/proposed/2021/34-93613.pdf.
---------------------------------------------------------------------------

iv. CAT Data
    Regulators can also extract short sale information from CAT data, 
which provides order lifecycle information for stocks and options.\234\ 
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' 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.
---------------------------------------------------------------------------

    \234\ 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 in several 
circumstances. First, CAT data do not include information on the long 
or short positions held in each account at the time that Industry 
Members started reporting, so 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. Additionally, 
until the Customer Account Information System (CAIS) system goes live, 
which is expected in July 2022, there is no easy way to match Firm 
Designated ID (FDIDs) in CAT to individual Managers. Thus it is not 
currently feasible to identify the subset of CAT data pertaining to 
Managers. However, once the CAIS system goes live it would be possible 
for regulators to identify individuals in CAT, even if those 
individuals use multiple broker-dealers.
    CAT is not designed to track positions. However, when focused on 
one or few accounts, estimating positions, though potentially 
inaccurate, can be manageable. 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 
tremendous 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.
    Finally, even though CAT data identifies short selling by market 
makers, the data do not provide information as to whether a broker-
dealer is claiming use of the Regulation SHO exceptions for bona fide 
market making.
    There are 24 national securities exchanges and one national 
securities association (FINRA) that are CAT Plan Participants. There 
are also 3,734 broker-dealers who have reporting obligations to CAT, as 
Industry Members. These Industry Members often us third-party reporting 
agents such as service bureaus for CAT reporting.
v. Exchange Act Form SH
    For a ten-month period in 2008 and 2009,\235\ the Commission 
required certain institutional investment managers to submit 
confidential weekly reports of their short positions in Section 13(f) 
securities, other than options, on Exchange Act Form SH, through 
Temporary Rule 10a3-T.\236\ De minimis short positions of less than 
0.25% of the class of shares with a fair market value of less than $10 
million were not required to be reported.\237\ Additionally, only 
Managers that

[[Page 14990]]

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,\238\ a 
more frequent disclosure interval than the quarterly public reporting 
of long positions required on Exchange Act Form 13F.\239\
---------------------------------------------------------------------------

    \235\ See supra note 6, DERA 417(a)(2) Study at 18.
    \236\ 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 10a3-T. 
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).
    \237\ See Exchange Act Release No. 58591 (Sept. 18, 2008), 73 FR 
55175 (Sept. 24, 2008).
    \238\ See Exchange Act Release No. 58785, 73 FR at 61678.
    \239\ 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 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, which make the data difficult to work with.\240\
---------------------------------------------------------------------------

    \240\ See supra note 80 (information on the methodology and 
caveats of using Form SH data).
---------------------------------------------------------------------------

5. Competition
    Many Managers operate in the investment management industry.\241\ 
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 don't in that a security owner can more 
cheaply trade on 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've 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.\242\
---------------------------------------------------------------------------

    \241\ See supra Part VIII.C.1.
    \242\ 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 
Proposed 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 try to mimic the Managers' strategy, 
potentially competing away the profitability of the strategy or other 
traders could anticipate when the Managers 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.\243\
---------------------------------------------------------------------------

    \243\ The securities lending market is large and complex. See 
Part VI.B. (the proposing release for proposed Rule 10c-1 for a more 
detailed description of this market and players), available at 
https://www.sec.gov/rules/proposed/2021/34-93613.pdf.
---------------------------------------------------------------------------

    Additionally, there are 3,734 broker-dealers. These broker-dealers 
also compete with each other for order flow. The broker-dealer industry 
is a highly competitive industry with reasonably low barriers to entry. 
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.\244\ 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.
---------------------------------------------------------------------------

    \244\ See CAT proposing release Part VII.A, available at https://www.sec.gov/rules/proposed/2010/34-62174.pdf.
---------------------------------------------------------------------------

D. Economic Effects \245\
---------------------------------------------------------------------------

    \245\ 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 Section VIII.C.1.
---------------------------------------------------------------------------

1. Investor Protection and Market Manipulation
    The Proposals could lead to better investor protection by improving 
regulators' reconstruction of significant market events. They may also 
assist regulators in identifying manipulative short selling strategies. 
Improved identification of manipulative short selling strategies may 
also serve as a deterrent to would be manipulators and thus may help 
prevent manipulation. They would also improve the Commission's 
observation of systemic risk. However, to the extent that Managers may 
still be holding their short positions when the data becomes public, 
the Commission believes that Proposed Rule 13f-2 and Proposed Form SHO 
also could in some cases facilitate potentially manipulative 
strategies, such as certain short squeezes. The Commission also 
believes that Proposed Rule 205 and the Proposal to Amend CAT would 
improve regulators' oversight of markets.
    The Commission believes that the Proposals would enhance the 
Commission's and SRO's 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 
the buy to cover information that would be provided by Proposed Rule 
205 and data from Proposed Form SHO to reconstruct market events and 
better understand the link between short sellers exiting their 
positions 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

[[Page 14991]]

period of heightened volatility it may have been the case that large 
short sellers were acting differently.
    The data that would be provided in Proposed Form SHO would have 
provided information the Commission could have used after the fact to 
examine separately short selling behavior of large short sellers. 
Additionally, because short positions often take some time to create, 
the Commission could have attempted to quickly identify individual 
short sellers with large short positions in the various meme stocks in 
January 2021 based on the most recent reports; then the Commission 
could have used the enhanced CAT data to understand how these short 
sellers traded during the heightened volatility.\246\
---------------------------------------------------------------------------

    \246\ It is currently not straightforward to map CAT 
transactions to individual traders as the Firm Designated ID (FDID) 
assigned to each account are broker-dealer specific. Thus to map a 
trade reported in CAT to an individual trader would require 
requesting the specific FDID for a given trader. This lack in 
functionality is expected to change when the CAIS becomes 
operational. This system would allow regulators to map individual 
traders to their FDID's and thus pull CAT information specifically 
for individual traders. Thus, while technically feasible, pulling 
data from CAT for specific traders is difficult, but will become 
much less so when the CAIS system becomes operational. The CAIS 
system is expected to go live in July 2022. See Timeline, 
Consolidated Audit Trail, available at https://www.catnmsplan.com/timeline. Additionally, 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.
---------------------------------------------------------------------------

    Additionally, the activity data provided in Proposed Form SHO would 
allow the Commission to observe how large short sellers responded to 
the heightened volatility, albeit with a time lag due to the filing 
deadline. Specifically, the Commission would be able to observe more 
precisely which days reporting short sellers were most actively 
increasing or decreasing their short positions and correlate that 
activity to market conditions on those days. The ``activity 
categories'' reported in Proposed Form SHO would allow regulators to 
identify the specific means by which large short sellers alter their 
economic short exposure on high volatility days. For example, economic 
short exposure may increase due to increased number of shared sold, 
issuing call options, exercising put options, as well as other 
activities that could raise the Manger's short position. In contrast, 
economic short exposure may decrease due to purchase of shares to cover 
short positions, exercising call options, issuing put options, 
obtaining shares through secondary offerings or tendered conversions, 
and other activities that reduce short exposure. Receiving data about 
each of these categories separately would facilitate more efficient 
oversight by regulators.
    Analysis of the data during periods of high volatility could help 
the Commission maintain fair and orderly markets by highlighting key 
economic channels and mechanisms through which short selling could 
affect periods of volatility or how periods of volatility affect short 
selling. This information can, in turn, allow the Commission to more 
specifically tailor responses to similar or related events in the 
future. While the CAT data provided by Proposed Rule 205 and the CAT 
amendment data would be provided relatively quickly, the Proposed Form 
SHO data would not be available for up to a one-month lag. 
Consequently, while the Proposed Form SHO data would be useful in 
recreating a significant market event after the fact, it would not 
provide the Commission tools to examine an immediate crisis.
    The ``bona fide market making'' information from the Proposal to 
Amend CAT would facilitate regulatory analysis of the use of the bona 
fide market making exceptions to Regulation SHO.\247\ The bona fide 
market making information from the Proposal to Amend CAT would provide 
regulators investigating potential Regulation SHO violations with more 
regular access to clearer evidence of whether a market maker was 
relying on a bona fide market making exception. This could save a 
significant amount of time during an investigation. Having regular 
access to these data would provide the Commission with insight into 
whether the exceptions for bona fide market making in Regulation SHO 
Rules 203 and 204 are being used appropriately, which should assist in 
assessing compliance with, and thus the benefits of, Regulation SHO.
---------------------------------------------------------------------------

    \247\ 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+5), rather than the settlement day following the settlement 
date (T+2). See 17 CFR 242.204(a)(3).
---------------------------------------------------------------------------

    The ``bona fide market making'' information and hedge information 
could 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 would 
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. Because such short 
selling is more likely to be in response to customer demand, the shorts 
are less likely to signify that the short seller anticipates a price 
decline than if the short seller was trading directionally. Likewise, 
the hedging information on Proposed Form SHO would provide information 
on whether a Manager's position is fully or partially hedged at the end 
of the month. From this, regulators could assess, for example, that the 
activity reported on Proposed Form SHO during the month was likely not 
related to hedging activity if the end of month position is not hedged, 
particularly if the previous month's position was not hedged.
    Additionally, the data provided by Proposed Rule 13f-2 and Proposal 
to Amend CAT would allow the Commission to detect certain types of 
fraud in a timelier manner. The data provided by Proposed Rule 13f-2 
would improve the timeliness of fraud detection because the Proposed 
Form SHO data would provide the Commission quick flags that may signal 
potential fraud. Additionally, the enhanced CAT data would 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.
    Improved detection of fraud may also help deter fraud, improving 
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.\248\ In

[[Page 14992]]

``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.\249\ If a ``short and distort'' campaign is suspected, 
then detecting this behavior via the activity and positions data in 
Proposed Form SHO would be easier than it would be using current data. 
Short and distort campaigns are more likely to occur in stocks with 
lower market capitalizations with less public information.\250\ 
Consequently, among these stocks it may not, in dollar terms, take a 
very large short position to reach the 2.5% threshold in securities of 
smaller reporting issuers or the $500,000 threshold in securities of 
non-reporting issuers to report Proposed Form SHO. \251\ As a result, 
it is likely that an entity engaging in such a practice would be 
required to report Proposed Form SHO data. Consequently, if ``short and 
distort'' type behavior were to be suspected, then the Commission would 
be more likely to identify individuals with large short positions and 
could thus quickly focus any inquiries on entities in an economic 
position to potentially profit from manipulation. Then regulators could 
match 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. Regulators could then use CAT data to 
investigate further the trading activity of the alleged manipulator.
---------------------------------------------------------------------------

    \248\ See, e.g., Comment letters submitted with regards to Short 
Sale Reporting Study Required by Dodd-Frank Act Section 417(a)(2); 
See letters from 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. (Jun. 10, 2011); Jeffrey D. Morgan, 
President and CEO, National Investor Relations Institute, at 3 (Jun. 
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). See all letters are available at 
https://www.sec.gov/comments/4-627/4-627.shtml.
    \249\ 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.
    \250\ 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.
    \251\ Academic research has found that the average short 
interest in stocks targeted by activist short sellers is about ten 
percent, while it is only four percent 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.
---------------------------------------------------------------------------

    There are other manipulations, which the data from the Proposals 
would help regulators identify. For example, one theoretical study 
suggests that if managers' decision-making is influenced by shifts in 
stock prices, then short sellers could potentially negatively affect 
managerial decisions by depressing stock prices when profitable 
projects are announced, which may lead managers to believe that their 
project is not good and to abandon it. \252\ Doing so may lead to worse 
managerial decision making and lower stock prices. Another theoretical 
study argues that due to high levels of leverage and interconnectedness 
in the finance industry, if short sellers are successful at causing 
even small declines in stock price, then this can ripple through the 
financial system with large effects. \253\ While the Commission notes 
that there is currently no empirical evidence that these types of 
manipulation occur or are widespread, should they be suspected, these 
types of manipulation could better be identified with the positions and 
activity data. The positions data would allow the Commission to quickly 
identify individuals with large short positions and then use the 
activity and CAT data to investigate their trading behavior to look for 
signs of manipulation. Improved detection capacity may also lead to 
decreased fraud as would be manipulators choose not to engage in 
manipulative behavior due to increased fear of detection.\254\
---------------------------------------------------------------------------

    \252\ See I. Goldstein and A. Guembel, Manipulation and the 
Allocational Role of Prices, 75 (1) The Rev. of Econ. Studies 133-
164 (2008).
    \253\ See Markus K. Brunnermeier and Martin Oehmke, Predatory 
Short Selling, 18 (6) Rev. of Fin. 2153-2195 (2014). Similarly, some 
have also asserted 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).
    \254\ 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 
harmful to short sellers, namely short squeezes, though the 
Commission's improved detection of such potential manipulation could 
help deter it. The Commission estimates that 32% of stocks reported on 
Proposed Form SHO would only have one Manager above the reporting 
Threshold A.\255\ If market participants can ascertain which positions 
belong to only one Manager,\256\ then market participants may seek to 
orchestrate a short squeeze targeting that particular manager. 
Mitigating this risk is the fact that the data provided by Proposed 
Rule 13f-2, Proposed Form SHO and the Proposal to Amend CAT, 
particularly the activity data provided in Proposed Form SHO may allow 
the Commission to more quickly determine if a short squeeze occurred. 
The Commission could correlate buy-to-cover activity in Proposed Form 
SHO with price increases to look for signs of a squeeze. If it appears 
that a short squeeze may have occurred, the Commission could perform 
further analysis using the information in the Proposal to Amend CAT to 
attempt to determine the market participants involved in the 
squeeze.\257\ Increased risk of detection may deter some market 
participants from seeking to orchestrate a short squeeze. The Reporting 
Threshold, aggregating the data by security prior to releasing it to 
the public, and the delay in releasing the data to the public are all 
designed to help mitigate this effect. Only Managers whose positions 
surpass the threshold would be required to report--limiting the number 
of Managers whose information would be aggregated and made public.
---------------------------------------------------------------------------

    \255\ Based on analysis of Form SH data. See supra note 80 (for 
information on the methodology and caveats of using Form SH data).
    \256\ In many cases identifying which publicly released reports 
had only one Manager reporting may not be difficult. For example, if 
the total short positions reported in security with a market 
capitalization greater than $400 Million (where the $10 Million 
dollar threshold is hit before the percent of shares outstanding 
threshold) are less than $20 million then market participants may be 
able to reasonably presume that there is only one Manager reporting 
a position.
    \257\ Identifying the market participants involved in fraud 
solely from CAT data is currently difficult, but would become less 
so when the CAIS system becomes fully operational.
---------------------------------------------------------------------------

    Despite not releasing Managers' identities to the public, the 
nature and the position size thresholds that underlie publicly released 
information may lead to the risk of Managers being identified by the 
public. Focusing on stocks in which market participants can ascertain 
that only one Manager filed, combined with a Manager's posts on social 
media, or other means, such as information discovered by a private 
investigator, market participants may be able to identify which Manager 
holds

[[Page 14993]]

the short position.\258\ As such, the limited number of reporters 
potentially risks shining a spotlight on the few managers with large 
short positions. However, the delay before publicly releasing the data 
means that the information would not be as fresh and thus may not as 
accurately reflect current short positions.\259\ Thus, if market 
participants sought to orchestrate a short squeeze based on the 
aggregated information made public based on the Proposed Form SHO data 
that the squeeze could fail if the short positions that are the target 
of the squeeze no longer exist. This may reduce the likelihood that 
market participants seek to orchestrate squeezes based on the publicly 
released Proposed Form SHO data which may help protect short sellers 
who maintain short positions for a longer horizon and thus may still 
hold the positions reported on the aggregated Proposed Form SHO data. 
Based on analysis using Form SH data, the Commission expects that most, 
but not all, of the short positions leading to reporting on Proposed 
Form SHO would be closed by the time that the aggregated Proposed Form 
SHO data is released.\260\
---------------------------------------------------------------------------

    \258\ 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 (August 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).
    \259\ 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 note 80 (for 
information on the methodology and caveats of using Form SH data).
    \260\ See infra note 265 (for a discussion on the Commission's 
estimates on how long Managers hold short positions). See also infra 
note 269 (for more information on short sellers that do hold their 
positions for long periods of time).
---------------------------------------------------------------------------

    Having detailed information about which Managers currently hold 
large and unhedged short positions may 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 a long transaction, short selling 
places an investor at risk of losing significantly more than their 
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 positon 
liquidations if capital requirements cannot be met.\261\ 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.
---------------------------------------------------------------------------

    \261\ 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 
(2) The J. of Fin. 551-584 (2002). See also, e.g., Andrei Shleifer 
and Robert W. Vishny, The Limits of Arbitrage, 52 (1) The J. of Fin. 
35-55 (1997) and Denis Gromb and Dimitri Vayanos, Limits of 
Arbitrage, 2 (1) Annu. Rev. Fin. Econ. 251-275 (2010) (citations 
therein).
---------------------------------------------------------------------------

    Manager level short position data of individuals with large short 
positions could allow the Commission to better observe these positions 
and more appropriately respond to any market events that arise. For 
example, in the context of the meme stock phenomenon in January 2021, 
if the Commission had the Proposed Form SHO data at the time 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 were at 
greatest risk of suffering significant harm from a short squeeze.
    All the effects, positive and negative, associated with the data 
collected by Proposed Rule 13f-2 discussed in this section would be 
limited by several factors. First, upon filing Proposed Form SHO would 
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 would reduce the utility of the data. 
However, the amendment process would require Managers to amend filings 
when they discover errors, thus promoting the accuracy of the 
information. The Commission also recognizes that there are limitations 
to Proposed Rule 205. For example, broker-dealers would be required to 
mark transactions as buy to cover based only on information that they 
currently have access to and they would not be required to net such 
activity across the same customer's accounts at that broker-dealer. 
This may miss some buy to cover trades that may occur if a Manager uses 
a broker to execute transactions and a prime broker (or prime brokers) 
to manage positions. In this case, the broker-dealer managing the 
purchase of shares would not necessarily know that the buy is actually 
a buy to cover and would thus not mark the trade as such. The current 
proposal may also miss transactions that may occur if a Manager uses 
multiple accounts at the same broker-dealer to trade.
2. Effects on Stock Price Efficiency
    The Commission believes that the Proposals may have uncertain 
effects on stock price efficiency.\262\ The uncertain effects on price 
efficiency come because increased transparency generally increases 
efficiency whereas increased transparency could also discourage 
investors from gathering information--which harms price efficiency. 
This section discusses both the concept of price efficiency and the 
positive and negative impacts that the Proposals may have on price 
efficiency.
---------------------------------------------------------------------------

    \262\ See infra Part VIII.E.1 (for additional discussion of the 
effect of the Proposals on efficiency).
---------------------------------------------------------------------------

    The publicly released aggregated data from Proposed Form SHO would 
provide new information to market participants about the aggregate 
activities of some short sellers--with a planned lag of approximately 
fourteen days from the end of the filing deadline.\263\ Existing short 
selling data, such as the FINRA short interest data, is timelier than 
the potential data from the Proposed Rule 13f-2 and Proposed Form SHO, 
and it includes short interest for all short sales known to clearing 
broker-dealers but does not provide the Commission or the public daily 
information about short sellers' activities.
---------------------------------------------------------------------------

    \263\ See supra Part III.C (for more information on the delay of 
public dissemination of Proposed Form SHO data).
---------------------------------------------------------------------------

    There is likely significant overlap between the information about 
stock fundamentals contained in FINRA short interest data and in the 
data that would be aggregated from Proposed Form SHO filings. However, 
the information in Proposed Form SHO filings focuses on Managers and 
indicates whether positions are fully or partially hedged, and provides 
daily net changes in positions. Thus, the Proposed Rule 13f-2 and 
Proposed Form SHO would increase the information available to investors 
about bearish sentiment in the market. For example, the information on 
the proportion of short interest made up of Managers with substantial 
positions, how much of those positions are fully or partially hedged, 
and the activity information would allow market

[[Page 14994]]

participants an enhanced view of short interest and provide insight on 
changes in short interest between short interest reports. Further, the 
use of the last settlement day of the month as the reference month for 
the Proposed Form SHO reports would allow for a direct comparison of 
the Proposed Form SHO data to the FINRA short interest data. With FINRA 
short interest as a reference point, the activity data may then provide 
insight to market participants about changes in total short interest 
from FINRA short interest report to FINRA short interest report. For 
example, market participants could potentially use the data on 
positions' changes to correlate periods of significant increases or 
decreases in short positions 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 final short interest tally 
at the end of the month.
    Increased information may increase price efficiency. As such, the 
proposed publication of the aggregated Proposed Form SHO data 
represents new information that market participants could use to value 
stocks--increasing stock price efficiency. Price efficiency (also known 
as market efficiency) refers to how accurately prices reflect available 
information relevant to the value of the asset.\264\ For example, this 
information may allow market participants to more effectively make 
trading decisions and manage risk--increasing price efficiency. 
Although, the majority of Managers' short positions would be closed by 
the time the aggregated data from Proposed Form SHO would be made 
public due to the lag in reporting and public dissemination, a portion 
of the short positions would still be open.\265\ While the market 
reacts to unexpected short interest changes,\266\ the ability to 
understand short interest and short interest changes should be additive 
information that would be reflected in prices upon publication. 
However, the increase in price efficiency from the publication of 
aggregated Proposed Form SHO data is likely to be limited due to the 
delay in publication.
---------------------------------------------------------------------------

    \264\ See, e.g., Eugene Fama, Efficient Capital Markets II, 
46(5) J. Fin. 1575-1617 (1991).
    \265\ 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 
positon is held above the threshold is 9.85 (suggesting that the 
majority of positions will be closed. Some are held longer than the 
delay in reporting).
    \266\ See, e.g., A. Senchack and L. Starks, Short-Sale 
Restrictions and Market Reaction to Short-Interest Announcements, J. 
of Fin. and Quantitative Analysis 177-194 (1993).
---------------------------------------------------------------------------

    The Proposals may also improve price efficiency if they mitigate 
fraud as discussed in Part VIII.D.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 Proposed Form SHO, the Proposed Rule 13f-2 would 
result in improved price efficiency.
    On the other hand, Proposed Rule 13f-2 may harm price efficiency by 
increasing the cost of short selling. 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 difficult, and because costly short selling dissuades 
investors from collecting information in the first place.\267\
---------------------------------------------------------------------------

    \267\ See, e.g., supra note 242. See Dixon (2021). See Edward 
Miller, Risk, Uncertainty, and Divergence of Opinion, 32 (4) The J. 
of Fin. (1977). See Robert F. Stambaugh, Jianfeng Yu, and Yu Yuan, 
The Short of It: Investor Sentiment and Anomalies, 104 (2) J. of 
Fin. Econ. 288-302 (2012).
---------------------------------------------------------------------------

    Proposed Rule 13f-2 affects the value of short selling in four 
ways: Compliance costs, revealing short sellers' information, 
potentially revealing short sellers trading strategies, and increasing 
the threat of retaliation. First, the compliance costs associated with 
reporting large short positions are a direct increase in the cost of 
short selling.\268\ As many Managers have underlying investors, these 
costs would likely be passed on to end consumers in the form of lower 
returns due to limiting the strategies that Managers could profitably 
employ.
---------------------------------------------------------------------------

    \268\ See infra Part VIII.E.2 (for a discussion of how these 
direct costs may affect investors in funds that employ short 
selling).
---------------------------------------------------------------------------

    Second, publicly releasing the aggregated Proposed Form SHO data 
has the potential to reveal some of the information that short sellers 
may have acquired through fundamental research. 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 the information and providing less incentive to produce 
fundamental research. Thus, the publication of Proposed Form SHO data 
represents an additional cost to short selling in the form of 
potentially lower profitability for trading on negative information. 
That the data is aggregated and released on a lag mitigates this cost 
somewhat but does not eliminate it. 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.\269\ 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.\270\ Additionally, the threshold may protect 
short sellers with smaller short positions from having the information 
in their trades revealed. In contrast, the Proposed Rule 13f-2 may 
highlight very large positions potentially increasing the likelihood 
that some of the information contained in the trades of large short 
sellers would be acted on by other market participants before the short 
seller could acquire their optimal position. Thus, the Commission 
expects that publication of aggregated Proposed Form SHO data would 
still represent a cost to short selling.\271\ Relatedly, Managers who 
build short positions that exceed the threshold may choose to

[[Page 14995]]

execute the positions that are beyond the threshold at a pace that is 
faster than what they would have done otherwise to attempt to build 
their optimal position before information is disclosed and copy-cat 
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.\272\ Additionally, trading faster than is optimal may harm 
price efficiency by leading prices to over-react to the aggressive 
trading.\273\
---------------------------------------------------------------------------

    \269\ 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''), available at 
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, 25% of positions were held 
above the proposed Threshold A for at least a month. See supra note 
80.
    \270\ See supra Part VIII.D.1 (for a discussion of how market 
participants may be able to uncover individual identities).
    \271\ 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.
    \272\ See supra note 269; see also Kyle (1985).
    \273\ See, e.g., Albert S. Kyle and Anna A. Obizhaeva, Large 
Bets and Stock Market Crashes (March 22, 2019), available at https://ssrn.com/abstract=2023776 or https://dx.doi.org/10.2139/ssrn.2023776.
---------------------------------------------------------------------------

    Third, the Proposed Form SHO data may provide information about the 
specific trading strategies of certain short sellers. For example, in 
the case where there is only one filer and market participants know 
this, then market participants could attempt to use the activity data 
to extract information about the specific trading strategies that short 
sellers use to implement their trades. Market participants could then 
try to identify similar patterns in the live 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. While the Commission 
acknowledges this risk, it believes that the proposed design of the 
published activity data would significantly limit this risk. In 
particular, the proposed netting of short selling activity across 
increases and decreases in short position along with showing only one 
number per day per security would mask much of the trading behavior of 
individual short sellers while still providing information about 
changes in bearish sentiment in the market. For example, Managers may 
build or reduce a short position using complex trading strategies 
potentially involving transactions on both sides of the market. By 
netting trading activity and aggregating across Form SHO filers, market 
participants viewing the publicly reported Form SHO data would still 
get a view of changes in bearish sentiment while keeping Manager 
specific trading strategies hidden.
    The public disclosure requirements may also expose Managers to 
retaliation by other market participants.\274\ Although aggregating the 
data before releasing it to the public on a delay would 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, one could 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. However, the Commission believes that on balance aggregating 
the data prior to publishing it provides appropriate protection of 
short sellers' identities and trading strategies.
---------------------------------------------------------------------------

    \274\ See 2011 MFA Letter, supra note 49; 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 (November 2021), available at https://ssrn.com/abstract=3849581 or http://dx.doi.org/10.2139/ssrn.3849581.
---------------------------------------------------------------------------

    If specific Managers are identified, 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.\275\ 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.\276\ 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.\277\ Some issuers have even been known to hire private 
investigators in an attempt to uncover the identities of individuals 
short selling their stock.\278\ Some short sellers have also expressed 
that they have experienced threats to their personal safety after their 
short positions were revealed.\279\
---------------------------------------------------------------------------

    \275\ 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.
    \276\ See supra note 274, Stice-Lawrence, Wong, and Zhao (2021) 
and Lamont (2021).
    \277\ See Owen A. Lamont, Go Down Fighting: Short Sellers vs. 
Firms, 2 (1) The Rev. of Asset Pricing Studies 1-30 (2012).
    \278\ Id.
    \279\ See Lamont (2012) supra note 258; Game Stopped Hearing, 
supra note 269 (CEO of Melvin Capital LP stated that after his short 
positions were made known, Reddit users made posts and sent personal 
text messages that were laced with anti-Semitic slurs and threats of 
physical harm to him and others.).
---------------------------------------------------------------------------

    Lastly, even if the identities of the individuals reporting short 
selling data remain unknown, publicly disclosing that Managers 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.D.1. 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.
    Because reporting information on Proposed Form SHO increases the 
costs of short selling, it is possible that short sellers may 
strategically select short positions to have an average short position 
just below the threshold that requires reporting. However, the risk of 
this is mitigated by the way in which the threshold is constructed, 
which could make trading around the threshold more costly. For example, 
because the threshold is not based on the position at the end of the 
month, Managers would not be able to simply reduce their positions at 
the end of the month to avoid reporting. Instead, Managers would need 
to maintain a position below the Reporting Thresholds throughout the 
month 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.\280\ Consequently, to the extent that Managers 
may choose to select otherwise sub-optimal short positions to avoid 
reaching the reporting threshold, Proposed Rule 13f-2 and Proposed Form 
SHO could 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.\281\
---------------------------------------------------------------------------

    \280\ See, e.g., supra note 269; Kyle (1985).
    \281\ See, e.g., supra note 267, Miller (1977); Letters on the 
Short Sale Reporting Study Required by Dodd-Frank Act Section 
417(a)(2) from Investment Company Institute (hereafter ``ICI 
Letter'') available at https://www.sec.gov/comments/4-627/4627-141.pdf; Data Explorers Letter; SIFMA Letter available at https://www.sec.gov/comments/4-627/4627-143.pdf (about transaction marking 
leading to less short selling). 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). The Commission does not believe that this 
effect is the 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. See also OTC 
Markets, Provable Markets, SIFMA, and Chester Spatt letters 
(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 that absent disagreement, costly short selling can help 
correct over-pricing by preventing the uninformed (but not informed 
traders) from transacting. This skews the distribution of traders in 
the market towards being more informed meaning that markets learn 
more from each trade and prices adjust more quickly when uninformed 
traders do not trade. See Douglas Diamond and Robert E. Verrecchia, 
Constraints On Short-Selling And Asset Price Adjustment To Private 
Information, 18 (2) J. of Fin. Econ. 277-311 (1987).

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

[[Page 14996]]

    For these reasons, the Commission believes that the Proposals may 
increase the costs of short selling and potentially dissuade investors 
from engaging in fundamental research and the total amount of short 
selling may decrease, though the Commission has designed the Proposals 
to mitigate these risks. To the extent that fundamental research 
decreases, price efficiency could be harmed as prices would not 
necessarily reflect all available relevant information, only that 
portion that had been discovered by investors performing fundamental 
research. Additionally, Proposed Rule 13f-2 could dissuade options 
market makers from holding large short positions and providing 
liquidity in options markets and, thus, could harm price efficiency in 
equity markets.\282\
---------------------------------------------------------------------------

    \282\ See infra Part VIII.D.3. Research has found a 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. See also David Easley, 
Maureen O'hara, and Pulle Subrahmanya Srinivas, Option Volume and 
Stock Prices: Evidence on Where Informed Traders Trade, 52 (2), THE 
JOURNAL OF FINANCE 431-465 (1998).
---------------------------------------------------------------------------

    As with the discussion in Part VIII.D.1, many of the economic 
effects articulated in this section relating to the reporting of 
Proposed Form SHO could be limited to the extent that the data reported 
in Proposed Form SHO contains factual errors. The EDGAR system would 
check the data for technical errors, however the accuracy of the data 
is dependent on accurate and complete data entry by filers. Thus, the 
data reported in Proposed Form SHO could 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 proposed delay in the 
publication of the data. Furthermore, the proposed data would only be 
available for those securities with Managers who have short positions 
over the threshold, which in some cases 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 Proposals on liquidity is uncertain. Part V.4.ii, 
discusses the possibility that Proposed Rule 13f-2 and Proposed Form 
SHO may harm price efficiency by dissuading investors from pursuing 
fundamental research and that Proposed Rule 13f-2 and Proposed Form SHO 
along with Proposed Rule 205 and the Proposal to Amend CAT may help 
price efficiency by increasing transparency with respect to the actions 
of large short sellers. To the extent that the Proposals improve price 
efficiency, this could also indirectly improve liquidity because market 
makers would be subject to less mispricing risk. However to the extent 
that Proposed Rule 13f-2 and Proposed Form SHO harm price efficiency, 
the opposite may be true. 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 if 
the rule harms price efficiency it may also harm liquidity. The 
opposite is also true. To the extent that the Proposals enhance market 
efficiency they may also enhance liquidity by mitigating mispricing 
risk.
    Additionally, in the event that an options market maker might have 
a short position close to the Reporting Thresholds, the Proposed Rule 
13f-2 could dissuade the option market maker from increasing their 
short position, which may harm their willingness to provide liquidity 
in options markets. Alternatively, Proposed Rule 13f-2 might not result 
in option market makers who exceed the Reporting Thresholds changing 
their positons, in which case the costs of filing Form 13f-2 (and other 
compliance costs) could result in wider spreads if the compliance costs 
are large enough.
4. Effect on Corporate Decision Making
    The Commission believes that Proposed Rule 13f-2 and Proposed Form 
SHO could have mixed effects on corporate decision making. On the one 
hand, research suggests that corporate managers learn from market 
reactions to announcements.\283\ Consequently, Proposed Rule 13f-2 and 
Proposed Form SHO may provide corporate managers with additional 
feedback on their decisions. For instance, projects often take some 
time to design and implement after announcement, consequently, even 
with the lag in the reporting time for the Proposed Form SHO data, a 
corporate manager could review the data around significant 
announcements to better understand how the market may view a particular 
project or announcement. If large short positions are built shortly 
after a corporate announcement, then this may give the signal to 
corporate management that the market views that announcement negatively 
which may help a manager modify or reverse poor decisions. From this 
perspective the Proposals may enhance corporate manager decision 
making.
---------------------------------------------------------------------------

    \283\ 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 contrast, 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 wrong-doing, 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, through doing research, uncovered 
fraudulent behavior.\284\ Academic research has also shown that even 
the threat of short

[[Page 14997]]

selling serves to discipline managers.\285\ As discussed in Parts V.4.i 
and V.4.ii, Proposed Rule 13f-2 may discourage Managers from performing 
fundamental research. If less fundamental research is performed by 
short sellers, then their role as monitors of the firm diminishes. Less 
monitoring could lead to higher incidences of fraud as managers feel 
that the likelihood of being caught goes down.\286\ Thus, to the extent 
that Proposed Rule 13f-2 and Proposed 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 
frauds that are discovered by investors.
---------------------------------------------------------------------------

    \284\ 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), available at https://www.wsj.com/articles/SB1004916006978550640, retrieved from Factiva database. Cf. Nessim 
Mezrahi, Stephen Sigrist, and Carolina Doherty, More Securities 
Class Actions May Rely on Short-Seller Data, Portfolio Media 
(January 10, 2022) (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.''), 
available at https://www.law360.com/articles/1453499/more-securities-class-actions-may-rely-on-short-seller-data.
    \285\ 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).
    \286\ 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 of Certain Electronic Filing and Dissemination Requirements
    Proposed Rule 13f-2 and Proposed Form SHO would 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 would require Proposed Form SHO to be 
filed on EDGAR in a custom XML-based data language specific to that 
Form (``custom XML,'' here ``Proposed Form SHO-specific XML''). The XML 
Schema for Proposed Form SHO-specific XML would incorporate validations 
of certain data fields on the Form to help ensure consistent formatting 
and completeness.\287\ While the field validations would act as an 
automated form completeness check when a Manager files a Proposed Form 
SHO, the field validations would not be designed to verify the accuracy 
of the information filed in Proposed Form SHO filings. EDGAR would 
subsequently aggregate the reported information at the equity security 
level and release the aggregated data to the public, either on EDGAR or 
on the Commission's website.
---------------------------------------------------------------------------

    \287\ See supra Part III.B.4. 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 
Proposed 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 Proposed Form SHO-specific XML). To complete the filing, the 
filer would need to correct the error and re-file.
---------------------------------------------------------------------------

    The Commission believes these requirements would incrementally 
augment the various effects of the short position and activity 
disclosures discussed herein by enhancing the accessibility, usability, 
and quality of the Proposed 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 
Proposed Form SHO, the Commission would be able to access and download 
large volumes of Proposed Form SHO disclosures in an efficient manner.
    Similarly, the provision of the aggregated security-level 
information at a centralized, publicly accessible location in a 
structured, machine-readable data language, would enable investors and 
other public data users to download the aggregated information 
directly, and the data could then be analyzed using various tools and 
applications. If the security-level information were not available at a 
centralized location in a structured, machine-readable language, 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.
    The Commission believes requiring the short position and activity 
disclosures to be filed in Proposed Form SHO-specific XML 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--which may also serve as a deterrent to would 
be manipulators and thus may help prevent manipulation--and observe 
systemic risk. The Commission believes that this outcome would benefit 
investors by facilitating the Commission's observation of short selling 
and would thus help protect investors and ensure the sufficiency of 
information related to short selling in the market.
    The proposed requirement for short sale disclosures to be filed on 
EDGAR in Proposed Form SHO-specific XML would result in additional 
incremental compliance costs on filing Managers. These direct 
compliance costs are detailed in a subsequent section.\288\ Moreover, 
to the extent these incremental compliance costs further chill the 
incidence of short-selling, the EDGAR and Proposed Form SHO-specific 
XML requirements would increase the likelihood of the indirect costs 
that are discussed elsewhere in this section.
---------------------------------------------------------------------------

    \288\ See infra Part VIII.D.7.
---------------------------------------------------------------------------

6. Effect on the Securities Lending Market
    As discussed in parts V.4.i and V.4 ii, the Proposals would 
increase the cost of short selling, particularly large short 
positions--potentially leading to less overall short selling. As 
discussed in Part V.3.i, short sellers must borrow shares to open a 
short position. When investors 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.\289\ Consequently, to the extent that the 
Proposals discourage short selling they may also lower overall 
portfolio returns, including for institutional investors that engage in 
securities lending.\290\
---------------------------------------------------------------------------

    \289\ See supra note 232.
    \290\ 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.
---------------------------------------------------------------------------

7. Direct Compliance Costs
    The Commission believes that there would be direct costs associated 
with Proposed Rule 13f-2, Proposed Form SHO, Proposed Rule 205, and the 
Proposal to Amend CAT. These costs include: Managers reporting position 
and activity data; broker-dealers updating CAT reporting processes; 
amendments to Regulation SHO; and the Commission processing and 
releasing the Manager reports through EDGAR.
    The Commission's estimates for Managers' collective direct 
compliance costs to capture and report the information required for 
Proposed Form SHO range from $54,083,087 to $156,309,500. This range 
reflects estimates for the number of managers that would be subject to 
the rule's reporting requirement, their data capture costs, and their 
reporting costs. The Commission estimates that between 346 and 1,000 
managers would be required to file Proposed Form SHO. We based our 
lower estimate on the number of Form SH filers above Threshold A. The 
actual number of reporting Managers would likely be higher than

[[Page 14998]]

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,\291\ and lower than our high estimate.\292\ Based on 
this estimated range, the Commission estimates that the collective cost 
for updating systems to capture the required information would be 
between $36,017,735 and $104,097,500 \293\ and the annual total cost 
for reporting managers would be between $18,065,352 and 
$52,212,000.\294\ Costs could 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 Proposed Form SHO on a monthly basis would still incur the 
initial costs. Furthermore, because Manager short positions are fluid, 
some Managers would not be required to file a report every month when 
they fall below 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 would also vary 
by Manager. And initial costs could also be higher for some Managers 
who do not currently report to EDGAR.
---------------------------------------------------------------------------

    \291\ See Table I. See also note 80 (for more information on the 
methodology and caveats of using Form SH data).
    \292\ Disclosure of Short Sales and Short Positions by 
Institutional Investment Managers, 73 FR at 61686. (This estimate is 
similar to the estimate provided). Proposed Form SHO filers filed 
weekly reports. As a result, each reporting manager would file fewer 
reports because Form SH would be filed monthly. See supra note 124 
(for more information on 1,000 Managers was estimated). However, 
fewer Managers actually filed Form SH.
    \293\ See supra PRA Table 2 and note 133. The lower range was 
calculated using 346 Managers. 20 hours per submission x 346 
submissions by Managers each month x 12 months x $217.55 = 
$18,065,352. The Commission estimates that 346 Managers would have 
been required to file Form SH had Form SH be subject to the same $10 
million and 2.5% threshold.
    \294\ See supra PRA Table 1 and note 143. The lower range was 
calculated using 346 Managers.
---------------------------------------------------------------------------

    The Commission believes that there could be costs in addition to 
the previously stated costs. The Commission estimates that filing 
amendments to Proposed Form SHO may take as long to file as the initial 
filing, therefore Managers could also incur additional costs up to 
$4,351 to file amendments to Proposed Form SHO.\295\ 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 Proposed Form SHO. As part of the filing of Proposed Form SHO, 
Managers would need to ensure that there is not duplicative 
reporting.\296\ The burden to ensure that there is not duplicative 
reporting would likely vary by Manager, as larger Managers with 
multiple accounts may be more likely to have duplication issues. As 
part of updating systems to comply with the reporting requirements of 
Proposed Rule 13f-2, Managers must calculate the market value of the 
trade using the official closing price as of the close of regular 
trading hours for the trade settlement date in question, which may not 
be the fair market value at the time in which the trade occurred.\297\ 
However, the Commission believes that in most cases this would be a 
small burden on Managers as the data needed for the calculation would 
be publicly available and the Commission believes that Managers may 
already track the end of day fair market value of short sales. 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 would 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 would be readily 
available to the Manager.
---------------------------------------------------------------------------

    \295\ Depending on what amendments are needed the Commission 
believes that each amendment could take up to the original 20 hours 
to complete, at a cost of $217.55 per hour = $4,351. Id. See also 
Form SHO, Special Instructions at 4.
    \296\ See Form SHO, Special Instructions at 6.
    \297\ See Form SHO, Special Instructions at 7. See also PRA 
Table 2 in Part VI (for an estimate of these burden hours).
---------------------------------------------------------------------------

    The Commission also believes that there would be costs associated 
with tracking short positions in relation to the threshold.\298\ 
Particularly, Managers must track their average short positions over 
the month to be aware if the maximum position exceeds $10 million as 
well as if it exceeds the 2.5% threshold, or in the case of equity 
securities of a non-reporting company issuer, if it exceeds the 
$500,000 threshold. However, the Commission believes that the proposed 
Reporting Thresholds would generally lower the burden on Managers as 
fewer Managers would be required to report than if the Commission did 
not propose a reporting threshold. For example, the Commission believes 
that certain types of Managers would not meet a Reporting 
Threshold.\299\ However, the Commission believes that the costs 
associated with Proposed Rule 13f-2 and Proposed Form SHO would not be 
dependent on the type of Manager, with the exception that Managers who 
do not currently report to EDGAR may have increased costs associated 
with complying with Rule 13f-2. Additionally, certain types of Managers 
may be less likely to trigger the threshold, resulting in lower overall 
costs for these Managers. Using Form SH data, the Commission estimates 
that an average of 442 Managers would have been required to file 
Proposed Form SHO each month under the threshold in place during 
temporary rule 10a-3T. However, only 346 Managers would be required to 
file under the proposed Threshold A.\300\
---------------------------------------------------------------------------

    \298\ 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 preliminary believe that only a 
small fraction of Managers would be likely to have monitoring 
responsibilities pursuant to the proposed rule and, given the 
proposed reporting thresholds, an even smaller fraction would be 
likely to have reporting obligations.
    \299\ See supra Section VIII.C.2 and supra note 185 (for a 
discussion on why certain types of managers are more likely to have 
reporting requirements).
    \300\ See supra Table I. See also supra note 77 (for more 
information on Form SH data).
---------------------------------------------------------------------------

    The Commission understands that the cost of tracking short 
positions could be higher for certain types of securities. For example, 
tracking the short position in an exchange traded fund as a percent of 
shares outstanding would 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 a the Manager traded even though the price may be 
stale. The Commission also believes that the cost to track and report 
activities information may vary across activity categories. Short 
selling and buy to cover activities would likely be the most common 
forms of reported activities and would therefore account for the 
majority of the costs. However, other categories of reportable 
activity, such as option exercises and assignments, tender conversions, 
and seasoned market purchases that reduce or close a short position 
would be reported less frequently and may require more attention to 
file as Managers would have less experience with reporting such 
activities.
    Requiring Proposed Form SHO to be filed on EDGAR in Proposed Form 
SHO-specific XML would not impose

[[Page 14999]]

significant incremental costs on Managers. We expect most Managers who 
would be required to file Proposed Form SHO would likely have 
experience filing EDGAR forms that use similar EDGAR Form-specific XML 
data languages, such as Form 13F. In that regard, we note the process 
for filing Proposed Form SHO, as well as the XML-based data language 
used for Proposed Form SHO, would be similar to the filing process and 
data language used for Form 13F.\301\ We expect that Managers with such 
experience that choose to file Proposed Form SHO directly in Proposed 
Form SHO-specific XML would incur some compliance costs associated with 
doing so.\302\
---------------------------------------------------------------------------

    \301\ See EDGAR Filer Manual (Volume II) version 60 (December 
2021), 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.
    \302\ See supra PRA Table 2 (estimating the ongoing burden for 
the Proposed Form SHO-specific XML requirement at two hours per 
Manager per filing and two hours per amended filing). Assuming 1,000 
Managers filing 12 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 $6,480,000 in 
industry costs for filings per year (24,000 hours * $270 per hour 
for a programmer = $6,480,000) attributable to the Proposed Form 
SHO-specific XML requirement. In addition, based on an estimate of 
420 amended filings per year, the total industry cost for the 
Proposed Form SHO-specific XML would be $226,800 for amended filings 
(420 amended filings x 2 hours per amended filing x $270 per hour = 
$226,800). As such, the total annual industry cost attributable to 
the Proposed Form SHO-specific XML requirement (including amended 
filings) is $6,706,800 ($6,480,000 for filings + $226,800 for 
amended filings = $6,706,800).
---------------------------------------------------------------------------

    In addition, Managers would be given the alternate option of filing 
Proposed Form SHO using a fillable web form that would render into 
Proposed Form SHO-specific XML in EDGAR, rather than filing directly in 
Proposed 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 would likely choose this option. In that regard, we note that 
Managers (i.e., certain ``institutional investment managers'' as 
defined by Section 13(f)(6)(A) of the Exchange Act, which may include 
entities such as investment advisers, banks, insurance companies, 
broker-dealers, corporations, and pension funds) 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.\303\ Of Managers that do not have experience 
filing Form 13F, only a subset are subject to other EDGAR Form-specific 
XML filing requirements.\304\ For any Managers that choose to file 
Proposed Form SHO using a fillable web form, whether or not they have 
prior experience with filing forms in EDGAR Form-specific XML, we do 
not believe the Proposed 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) would impose any 
additional compliance costs.\305\
---------------------------------------------------------------------------

    \303\ See 17 CFR 240.13f-1(a).
    \304\ For example, registered brokers or dealers that are 
subject to the reporting requirements set forth in 17 CFR 240.17h-2T 
must file Form 17H either electronically or in paper. Those that 
choose to file electronically must file Form 17H 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.
    \305\ 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).
---------------------------------------------------------------------------

    The Commission is cognizant of the burdens Managers experienced of 
submitting Form SH in compliance with temporary Rule 10a-3T and has 
designed Proposed Rule 13f-2 and Proposed Form SHO to attempt to reduce 
those burdens. First, commenters on the temporary Rule 10a-3T stated 
that the 0.25% threshold was too low.\306\ The two-pronged threshold in 
Proposed 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 41% of positions 
reported under Rule 10a-3T would be required to report given the higher 
threshold in Proposed Rule 13f-2 and Proposed Form SHO, while still 
collecting 89% of the dollar value.\307\ Additionally the proposed 
threshold could 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. 
Second, many commenters believed that weekly reporting was overly 
burdensome.\308\ The short selling information required by Proposed 
Rule 13f-2 and Proposed Form SHO would be reported less frequently 
(monthly rather than weekly) and would involve reporting end of month 
positions rather than daily positions. Third, Managers would have more 
time to compile and file the Proposed Form SHO reports than they had to 
compile Form SH.
---------------------------------------------------------------------------

    \306\ See Temporary Rule 10a3-T 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).
    \307\ See supra 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 end user when filed making the 
data hard to work with.
    \308\ See supra note 306 (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.
---------------------------------------------------------------------------

    Notwithstanding these cost-reducing differences, the Commission 
does recognize that other differences could offset some or all of these 
cost reductions. In particular, Proposed Rule 13f-2 and Proposed Form 
SHO would require reporting additional information such as information 
on buy-to-cover activity and other activity that changes short 
positions. In addition, Proposed Rule 13f-2 and Proposed Form SHO would 
require that the information on activity include daily records and not 
be subject to its own threshold.\309\ Also, unlike the Form SH required 
under Rule 10a-3T, the Proposed Form SHO that would be required by 
Proposed Rule 13f-2 would feature an XML Schema that would incorporate 
technical validations of certain data fields on the Form, and would 
flag technical errors and require the filer to correct the technical 
errors before successful submission on EDGAR. However, because the 
field validations contemplated by Proposed Rule 13f-2 and Proposed Form 
SHO would be limited to technical errors (e.g., letters

[[Page 15000]]

instead of numbers in a field requiring only numbers) that we believe 
would be straightforward to resolve, we do not believe such 
resubmission costs would be significant. Finally, the rule could 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.
---------------------------------------------------------------------------

    \309\ Rule 10a-3T required 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, 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 supra note 80 for 
more information on short volume in Form SH data.
---------------------------------------------------------------------------

    In connection with Proposed Rule 205, the Commission estimates that 
broker-dealers would have an initial technology cost to update order 
marking systems of $170,000 for each of the 1,218 broker-dealers with a 
total maximum initial cost to all broker-dealers of $207,060,000. This 
estimate likely significantly overstates the actual costs as many 
broker-dealers use third party order management systems.\310\ In this 
case the operator of the third party order manager system would update 
their system and then apply it to all customers reducing the cost 
significantly. The Commission estimates that all but 126 of the broker-
dealers use third party order management systems. In this case the 
direct compliance costs for these 126 broker-dealers would be 
$12,420,000. The remaining broker-dealers would likely incur costs in 
the form of higher fees from the third party order management firms to 
account for their additional costs. However, these would be 
significantly lower than the costs to adjust a system from scratch as 
the costs would be divided among all clients of the third party order 
management firm. Additionally, the Commission believes that that some 
broker-dealers already track their customer's buy to cover orders. 
Therefore, the initial cost from the rule are likely to be lower than 
the upper bound estimate.
---------------------------------------------------------------------------

    \310\ See supra PRA Table 4.
---------------------------------------------------------------------------

    Additionally, the Commission estimates an upper bound that each 
instance of marking an order ``buy to cover'' would take approximately 
0.5 seconds, assuming that this takes as long as a short sale mark took 
in 2003, which would lead to an ongoing annual burden of 7,107 hours 
per broker-dealer and a total burden of 8,652,750 hours.\311\ This 
figure is likely an overestimate in light of technological advancements 
since 2003. Therefore, the Commission estimates a lower bound for this 
burden of 721,000 hours or 592 hours per broker-dealer, assuming that 
computing speed has increased by at least 12 times since 2007.\312\ 
Further, to the extent that some broker-dealers already track their 
customer's buy to cover orders, the on-going costs of this requirement 
would be low.
---------------------------------------------------------------------------

    \311\ See supra PRA Table 3.
    \312\ According to an industry performance evaluations for 
server processors, computing speed has increased by at least 12 
times since 2007 (the earliest year in the data). The Commission 
believes that computing performance has increased by a greater 
amount since 2003. The Commission re-estimated the processing burden 
using a factor of 12 (as a conservative estimate of improvements in 
processing speed). Dividing the estimated burden per broker-dealer 
of 7,107 hours by 12 yields a burden per broker-dealer of 
approximately 592 hours per broker-dealer and a total burden of 
721,063 hours. See Year on Year Performance (for server processors), 
PassMark Software Pty. Ltd., available at https://www.cpubenchmark.net/year-on-year.html.
---------------------------------------------------------------------------

    The 25 Plan Participants would face costs associated with the 
Proposal to Amend CAT, as they would 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 $3,904 per 
participant or $101,520 total to compensate the Plan Processor for 
staff time required to make the initial necessary programming and 
systems changes.\313\ However, these initial costs could 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 
Proposal to Amend CAT would not impose additional ongoing cost to 
participants beyond those costs already accounted for in existing 
Paperwork Reduction Act estimates that apply for Rule 613 and the CAT 
NMS Plan approval order.\314\
---------------------------------------------------------------------------

    \313\ See supra note 143.
    \314\ See supra Part VII.D.4.a (for more information on costs 
for CAT Plan Participants).
---------------------------------------------------------------------------

    The Commission believes that the proposed Proposal to Amend CAT 
would impose a one-time cost to Industry Members.\315\ These costs 
would depend on whether implementing Proposed rules 6.4(d)(ii)(D) and 
(E) would involve creating additional fields in the order origination 
report, or if it is implemented within existing fields.
---------------------------------------------------------------------------

    \315\ See supra Part VII.C.1 (for a discussion of the PRA 
burdens associated with the Proposal to Amend CAT).
---------------------------------------------------------------------------

    The Commission recognizes that costs would 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,\316\ 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. The Commission estimates that the 126 insourcing 
Industry members would incur an aggregate one-time cost of $1,890,000 
or $15,000 individually to update software and hardware to facilitate 
reporting the new buy to cover elements to CAT.\317\ Additionally, 60 
insourcing Industry members would incur an aggregate cost of $900,000 
or $15,000 individually to update systems to facilitate reporting the 
new bona fide market making exception elements to CAT.\318\ However, 
these cost could be lower if the Commission is overestimating the 
number of insourcing industry members, in particular, the additional 
cost could drive some insourcing industry members to begin to 
outsource. The Commission believes that ongoing costs associated with 
reporting the newly required information to CAT would 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 would 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.
---------------------------------------------------------------------------

    \316\ See supra note 172.
    \317\ See supra Part VI.D.4.c (for a breakdown of PRA costs 
related to the Proposal to Amend CAT).
    \318\ Id.
---------------------------------------------------------------------------

    For Industry Members that outsource, the Commission believes that 
implementation costs would be far lower because the service bureaus 
that provide them with order handling systems and regulatory data 
reporting services would adapt those systems on their customers' 
behalf. The Commission estimates that the 1,092 outsourcing Industry 
Members would incur a onetime-aggregate expense of $1,092,000 or $1,000 
individually to update hardware and software to facilitate reporting 
the new buy to cover elements to CAT.\319\ Additionally, 44 outsourcing 
industry members would incur an aggregate one-time cost of $44,000 or 
$1,000 individually to update systems to facilitate reporting the new 
bona fide market making exception elements to CAT.\320\ However, these 
costs could be higher if some

[[Page 15001]]

current insourcing industry members begin to outsource as a result of 
the increased costs, which would 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 would 
be passed to their Industry Member customers.
---------------------------------------------------------------------------

    \319\ Id.
    \320\ Id.
---------------------------------------------------------------------------

    Although, the Proposed Rule 205 and the Proposal to Amend CAT to 
add buy to cover would impose costs on broker-dealers who are CAT 
Reporters, the Commission believes they would be less costly than 
previous related proposals, such as the ``open/close indicator'' in the 
original CAT NMS plan proposal.\321\ The originally proposed CAT NMS 
Plan would have included an ``open/close indicator,'' which could be 
used to identify orders buying to cover short positions. However, 
several commenters stated that an ``open/close indicator'' would be 
overly burdensome, with one commenter stating that such burdens would 
be, in part, the result of ``the lack of a clear definition of the term 
[open/close] for equity transactions,'' and the indicator was not 
adopted.\322\ By contrast, Proposed Rule 205 includes a clear 
definition of when a ``buy to cover'' indicator would be required to be 
reported.\323\ In addition, reporting buy to cover on some buy orders 
is a narrower requirement than reporting an ``open/close indicator'' on 
all buy and sell orders. Specifically, aside from focusing only on some 
buy orders, Proposed Rule 205 is designed to rely solely on information 
within the broker-dealer \324\ and the Proposal to Amend CAT would 
require reporting on order receipt and order origination reports only.
---------------------------------------------------------------------------

    \321\ See supra note 101. See also supra Parts VII.C, VII.D.4.b, 
and VII.4.c.
    \322\ See supra Part V.A (for more discussion on the original 
CAT NMS Plan proposal that would have included an ``open/close 
indicator'').
    \323\ See supra note 104.
    \324\ One commenter on the CAT NMS Plan Notice stated that 
including an ``open/close indicator'' indicator for equities would 
require ``involve parties other than CAT Reporters, such as buy-side 
clients, OMS/EMS vendors, and others.'' See supra note 101.
---------------------------------------------------------------------------

8. Risk of Circumvention Through Derivatives
    The Commission believes that the risk that Managers may attempt to 
circumvent the reporting requirement by trading derivatives may be 
high, particularly for stocks with liquid options.\325\ The risk may 
also increase if a robust single-stock futures market develops over 
time.\326\ Indeed, Proposed Rule 13f-2 and Proposed Form SHO could be a 
catalyst for growth in derivatives markets as short sellers look for 
new avenues to take the economic equivalent of short positions while 
avoiding these proposed disclosures.
---------------------------------------------------------------------------

    \325\ See supra note 202, R. Battalio, and P. Schultz, (2011), 
Grundy, Lim, and Verwijmeren (2012).
    \326\ See supra note 202, Jiang, Shimizu, and Strong (2019).
---------------------------------------------------------------------------

    The Reporting Thresholds in Proposed Rule 13f-2 are on a Manager's 
gross short position in the equity security itself, and does not 
included the calculation of derivative positions. Consequently a 
Manager seeking to build a large short position while avoiding 
reporting their positions on Proposed Form SHO could hold a short 
position just below a Reporting Threshold and use derivatives to take 
positions above that threshold.\327\ Using derivatives to circumvent 
the short selling reporting 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 Proposed Form SHO information articulated in Part V.4.i and 
V.4.ii 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 threat of 
circumvention through options may be minimal. However, academic 
research has shown that investors have used options to circumvent other 
short selling restrictions, thus there is a significant risk that there 
would be some attempt to circumvent the rule using derivatives, 
particularly in stocks with liquid options markets.\328\
---------------------------------------------------------------------------

    \327\ Recently proposed rule 10B-1 would require reporting of 
swap positions above a certain threshold. 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; available at https://www.sec.gov/rules/proposed/2021/34-93784.pdf. There is no reporting requirement for 
large options positions or other derivatives.
    \328\ See supra note 202.
---------------------------------------------------------------------------

E. 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.\329\ 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.\330\ 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 to profit from that information. As discussed in Part 
V.4.ii, more transparency in short selling would improve the amount of 
information that investors have to value a stock--increasing price 
efficiency. However, it could also disincentivize fundamental research 
which would harm price efficiency by limiting the amount of total 
information has been discovered. Overall the impact of the Proposals on 
price efficiency is uncertain.
---------------------------------------------------------------------------

    \329\ See Eugene F. Fama, Efficient Capital Markets a Review of 
Theory and Empirical Work, The Fama Portfolio 76-121 (2021).
    \330\ See supra note 281.
---------------------------------------------------------------------------

    Additionally, Rule 205 and the CAT amendment would increase the 
efficiency with which the Commission accesses and performs analysis 
relating to bona-fide market making data or buy to cover data for 
regulatory or enforcement purposes. Currently, the Commission does not 
have an efficient means to determine buy to cover transactions. The 
Commission could, in theory, estimate buy to cover information using 
existing CAT data. However, constructing positions for a broad set of 
traders from CAT is inefficient and due to CAT lacking all information 
relative to an investor's position--e.g., options assignments--could 
result in incomplete results.\331\ Additionally, the amendment to CAT 
would 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.\332\
---------------------------------------------------------------------------

    \331\ See supra Parts VIII.C.5.iv and VIII.F.1.i (for further 
analysis of the use of CAT data to estimate buy to cover 
transactions).
    \332\ See supra Parts V.B and Part VIII.C.4 (for a further 
discussion of the inefficiencies of existing data with regards to 
oversight and enforcement of rules relating to bona fide market 
making).
---------------------------------------------------------------------------

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, then investors owning the asset have an 
advantage in gathering information due to the reduced cost of acting on 
whatever information that

[[Page 15002]]

they gather.\333\ By increasing the cost of short selling for managers 
above the Reporting thresholds, as discussed in Part VIII.D.1 and 
VIII.D.2, the rule may increase the advantage that investors who own 
the asset have over those who do not in terms of gathering information 
with the overall result being that investors not owning the asset may 
experience lower returns relative to those owning the asset due to 
increased cost of acting on negative information.
---------------------------------------------------------------------------

    \333\ See Dixon (2021), supra note 242.
---------------------------------------------------------------------------

    Relatedly, fund performance is a key determinate of investor flows. 
The Commission believes that the proposal could harm competition for 
fund flows among 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. Thus Managers 
specializing in uncovering overpriced stocks may find themselves at a 
competitive disadvantage relative to managers who do not use short 
selling in terms of their ability to compete for fund flows.
    The Commission believes that Proposed Rule 205 and the Proposal to 
Amend CAT would not alter significantly the competitive landscape for 
broker-dealer services. For smaller broker-dealers the direct costs 
associated with complying with Rule 205 and the CAT amendment would 
likely be borne by the larger entity that they contract with for the 
relevant services. Since many of the compliance costs are fixed, the 
increased expense to any one smaller broker-dealer would likely be 
relatively small and come in the form if increased costs for services 
from the entity that they contract with.\334\ Because larger broker-
dealers enjoy economies of scale, they should be able to absorb the 
costs associated with compliance more easily. Consequently, the 
Commission believes that the effect of Rule 205 and the CAT amendment 
would have minor impacts on broker-dealer competition.\335\
---------------------------------------------------------------------------

    \334\ See supra Part VIII.D.7 (for a discussion of direct 
compliance costs).
    \335\ See also supra note 244, CAT Proposing Release (where the 
Commission discusses the implementation of CAT and its effect on 
broker-dealer competition).
---------------------------------------------------------------------------

3. Capital Formation
    One of the primary roles of the securities markets is to allocate 
capital (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.\336\ 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 ensures an 
optimal allocation of capital across firms. Thus, to the extent that 
the Proposals discourage short selling, as discussed in Part VIII.D.1 
and VIII.D.2, it may lead to the overpricing of some stocks and the 
underpricing of others.\337\ 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.
---------------------------------------------------------------------------

    \336\ A firm's external cost of finance is known as the weighted 
average cost of capital (WACC). It is simply the weighted average of 
the firm's cost of equity and the firm's cost of debt. Cost of 
equity (COE) is simply the return required by investors to assume 
the risks of owning the stock, computed as COE = (dividends per 
share/market cap) plus dividend growth rate. In this computation, 
market cap is simply the number of shares outstanding multiplied by 
the current stock price. If the stock price decreases, then 
mechanically the firm's COE would go up. See, e.g., R.A. Brealey, 
S.C. Myers, F. Allen, and P. Mohanty, Principles of Corporate 
Finance, Tata McGraw-Hill Education (2012).
    \337\ See supra note 267, 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.\338\ 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 proposed capital 
investments--particularly low value projects as the Proposals my dampen 
the market's ability to respond to negative information.
---------------------------------------------------------------------------

    \338\ 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 Proposed Form SHO along with the negative 
economic effects detailed in Part VIII.D.1, VIII.D.2, and VIII.D.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 13f-2.\339\ Thus, to the extent that the costs associated with 
Proposed 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.
---------------------------------------------------------------------------

    \339\ 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, the Proposals may have a positive influence on capital 
formation if they limit short selling based fraud. Specifically, in one 
type of fraud, investors holding convertible debt would short sell a 
stock in an attempt to drive down the price and then convert their debt 
to equity to cover their short positions at the 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 would engage in this sort of fraud.
    Proposed Rule 13f-2 may also affect capital formation through 
investor confidence. Some Commenters have suggested that short selling, 
and in particular a lack of short selling disclosure leads some 
investors to have less confidence in financial markets,\340\ although 
the results may be mixed. The Commission believes that improving short 
selling transparency would strengthen investor confidence which could 
help make investors more willing to invest, resulting in the promotion 
of capital formation.\341\
---------------------------------------------------------------------------

    \340\ See NASDAQ, OTC Markets, and CFA Institute letters (in 
response to FINRA's short selling proposal) available at https://www.finra.org/rules-guidance/notices/21-19#comments.
    \341\ See Exchange Act Release No. 61595 (Feb. 26, 2010), 75 FR 
11232, at 297 (Mar. 10, 2010), available at http://www.sec.gov/rules/final/2010/34-61595fr.pdf.

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

[[Page 15003]]

F. Reasonable Alternatives

1. Alternative Approaches
i. Releasing Aggregated CAT Data
    As an alternative to collecting, aggregating, and publishing 
Proposed Form SHO, the Commission could amend the CAT NMS Plan to 
collect additional information so that the Commission or the Plan 
Processor could aggregate and publish CAT Data.\342\ Specifically, the 
Commission could retain proposed Rule 205 and the amendment to the CAT 
NMS plan requiring the reporting of bona fide market making and buy to 
cover information to CAT and then use CAT data to have either the 
Commission or the Plan Processor provide short selling information to 
the public. This alternative would effectively eliminate the thresholds 
for reporting. This alternative could not be implemented until the CAIS 
system in CAT is fully operational. Currently it would be extremely 
difficult to map Firm Designated IDs ``FDIDs''--which are currently 
broker-dealer specific--to individual Managers on a large scale. 
However this functionality is anticipated once the CAIS system is fully 
operational.
---------------------------------------------------------------------------

    \342\ This alternative presumes that the Customer and Account 
Information System ``CAIS'' system in CAT is operational, thus 
allowing the Commission to track trades of individual traders.
---------------------------------------------------------------------------

    CAT data currently contains a short sale mark and also provides the 
identities of the individuals transacting. Consequently the Commission 
or the Plan Processor could aggregate information on the number of 
short sales that Managers engage in from CAT 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 positions, such 
as purchasing a put option, or writing a call option.\343\ 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 exercises and assignments. This inaccuracy could also result 
in the market-wide short position estimate being less accurate than 
current short interest data.\344\
---------------------------------------------------------------------------

    \343\ In this alternative, however, CAT would not contain the 
information on option expirations or assignments.
    \344\ FINRA's process of gathering and validating short interest 
data takes approximately two weeks. See supra note 221.
---------------------------------------------------------------------------

    The alternative would result in lower benefits than Proposed Rule 
13f-2 and Proposed Form SHO. For each trading day, the alternative 
would involve publishing the net change in short sale positions engaged 
in by Managers.\345\ The data published under this alternative would 
have significant overlap with the data that would be published under 
Proposed Rule 13f-2 and Proposed Form SHO. One difference between this 
alternative and the current data proposed to be collected in Proposed 
Form SHO and published by the Commission is that 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,\346\ 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. In addition, the 
alternative would not permit the publication of information on the 
percentage of positions that are fully or partially hedged. 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 
Proposed Rule 13f-2 and Proposed Form SHO.
---------------------------------------------------------------------------

    \345\ This contrasts with the Proposed Rule 13f-2 which requires 
reporting based on the settlement date which is normally two 
business days after the transaction day.
    \346\ 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. 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 would be less additive than under Proposed Rule 13f-2 and 
Proposed Form SHO.
    This alternative would also mitigate some of the concerns 
associated with Managers being exposed to increased risk of short 
squeezes or other retaliation as discussed in Part VIII.D.1 and 
VIII.D.2. This reduced risk would come because 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 the proposal with regard to less overall short selling or 
fundamental research that are described in Part VIII.D.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. While it would result in the same costs for 
Industry Member reporting as those associated with Proposed Rule 205 
and the Proposal to Amend CAT, 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.
    As previously stated, the drawback to this alternative relative to 
the existing proposal is that 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 lack

[[Page 15004]]

transactions outside of the purview of CAT that may affect short 
positions. Thus the data provided by this rule would always be 
estimates of total short positions, which could be quite 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.
    The Commission could also consider two variations of this 
alternative. The first, which can be referred to as the minimalist 
approach, would not include Proposed Rule 205 and the Proposal to Amend 
CAT and instead would provide Manager short selling statistics based on 
existing CAT data.\347\ The advantage to this variation is that it 
would provide additional information about the short selling activity 
and positions of Managers, compared to what is currently available, 
while requiring no additional resources from Industry Members except, 
perhaps, those passed on from an increase in resources for the Plan 
Processor to build out processing capacity--if the Plan Processor is 
chosen to aggregate reports and if it currently lacks such capacity. An 
additional drawback to this variation relative to the alternative above 
is that it would further limit the data that regulators have access to. 
Thus the benefits to having bona fide market making and buy to cover 
information described throughout Part VIII.D would not occur.
---------------------------------------------------------------------------

    \347\ Once again, this variation and the following variation 
presume that the CAIS system is fully operational.
---------------------------------------------------------------------------

    Lastly, a larger expansion of CAT could achieve at least the same 
data value as in Proposed Rule 13f-2 and Proposed Form SHO. For 
example, CAT could expand to require the reporting of all the 
information currently proposed to be collected in Proposed Form SHO. 
Specifically, the Commission could expand CAT to include data on 
account positions, including short selling positions as well as hedging 
information associated with those positions. In addition, CAT could be 
expanded to capture information on changes in those positions, options 
assignments, options exercises, secondary offering purchases, 
conversions, and other position changes. Under this approach, 
regulators would have access to the same data as if Managers filed 
Proposed Form SHO but for all short sellers, not only the subset of 
Managers reporting on Proposed Form SHO. This approach would also 
result in additional information available to regulators not collected 
in the Proposed 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 lot of new information on CAT report types that 
don't exist today and for Participants who would have to implement 
changes and work out technical specifications for new types of CAT 
reports. Further, more Industry Members would report this information 
to CAT compared to Managers require to report information on Proposed 
Form SHO. It would be a major undertaking for both the Plan Processor 
as well as for 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 Proposed Rule 13f-2 and Proposed Form SHO.
    Further, if the Commission were to expand CAT to collect additional 
information beyond what would be captured by the Proposal to Amend CAT 
and Proposed Rule 205, such as position information, then these 
additional expansions would incur significant direct costs.
ii. 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 their existing process to ensure that in 
continues in perpetuity. This alternative would have no additional 
costs to market participants, but would substitute a Commission mandate 
for the publication of the short interest data.
    Similarly, the Commission could require FINRA to publish a version 
of their short interest information that specifically identifies the 
aggregate short interest of Managers--separate from other short 
interest. To accomplish this, reporting broker-dealers would separately 
report in their reports to FINRA the short positions that originate 
from Managers. FINRA would then compile both total short interest, as 
they currently do, 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 may be less expensive than the 
existing proposal as it would only require a modification of an 
existing process. This alternative would not provide the Commission 
with the positions of any identified Managers or any Manager-specific 
activity data, nor would it provide information on which positions are 
fully or partially hedged, thus the benefits and risks associated with 
these data articulated throughout Part VIII.D would decline.
    The Commission also expects that data on Manager short interest in 
addition to total short interest would likely not provide 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.\348\ Thus, while the alternative 
that requires FINRA to produce separate short interest data for 
Managers would reduce costs to market participants relative to the 
existing proposal, it also may not provide the market or regulators a 
significant incremental benefit relative to existing short selling 
data.
---------------------------------------------------------------------------

    \348\ 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.
---------------------------------------------------------------------------

iii. Broker-Dealer Reporting to EDGAR on Behalf of Managers
    The Commission could modify the existing proposal to allow broker-
dealers to file Proposed Form SHO reports with the Commission on behalf 
of Managers. This alternative may reduce costs as it could concentrate 
reporting with broker-dealers that have significant experience 
collecting and providing such information--increasing operational 
efficiency.\349\ 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 prime broker would either need to report 
based on its limited information, which may lead to less complete data, 
or to gather additional information from the Manager about potential 
activity associated with another prime broker.\350\ Reporting only 
information known by one prime broker could also result in less 
information if a Manager that

[[Page 15005]]

otherwise would have exceeded the threshold for reporting does not 
exceed the threshold at one or more prime brokers. Requiring additional 
data collection may increase complexity and costs as Managers and 
broker-dealers would need to develop systems by which a Manager 
provides information about their activity with other prime brokers to 
their reporting broker. Or, the Commission could allow 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.
---------------------------------------------------------------------------

    \349\ See MFA Letter, supra note 306 (p. 3 for 10a-3T).
    \350\ 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.
---------------------------------------------------------------------------

iv. Harmonization With European Disclosure Requirements
    The Commission could also explicitly craft Proposed Rule 13f-2 and 
Proposed Form SHO to be consistent with European disclosure 
requirements. 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.\351\ 
Under the SSR, the trading entity reports to the regulator when their 
net short position reaches the initial threshold of 0.2% of the share 
capital of the company, and in 0.1% up and down increments 
thereafter.\352\ The threshold for reporting to the regulator recently 
was lowered to 0.1%.\353\ Net short positions are computed taking into 
account relevant derivative positions such as options. If the net short 
position reaches 0.5% of the share capital of the company, then the 
reported short position is made public with the identity of the short 
seller revealed. New filings are required to be made whenever the short 
position increases or decreases by 0.1% of the share capital of the 
firm. In the EU, trading entities must submit their data to the 
regulator by 3:30 p.m. on the following trading day.\354\ Trading 
entities accomplish public disclosure via a central website operated or 
supervised by the relevant competent authority.\355\
---------------------------------------------------------------------------

    \351\ See European Parliament and the Council of the European 
Union, Regulation No. 236/2012 (Mar. 24, 2012), available at https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2012:086:0001:0024:en:PDF (The SSR was 
adopted by the European Parliament and the Council of the European 
Union on March 14, 2012 and became effective on November 1, 2012.).
    \352\ Id. (at Article 5(2)).
    \353\ The threshold was temporarily lowered in March 2020 in 
response to the COVID-19 pandemic. In October 2021, the change 
became permanent. See European Union, Commission Delegated 
Regulation No. 236/2012, Register of Commission Documents, available 
at https://ec.europa.eu/transparency/documents-register/detail?ref=C(2021)6815⟨=en&utm_source=Cleverreach&utm_medium=emai
l&utm_campaign=Update%20Shareholder%20Activism&utm_content=Mailing_13
052681.
    \354\ Id. (at Article 9(2)).
    \355\ 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, when short sale information is 
made public, and when new reports have been issued. The advantage to 
this alternative would be that managers who engage in short selling in 
both the United States and in Europe would face similar regulations in 
both places--which may decrease the cost of compliance with both 
regulations.\356\
---------------------------------------------------------------------------

    \356\ 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.
---------------------------------------------------------------------------

    The EU structure whereby individual short sellers' names are made 
public may raise the risk that investors may gather less fundamental 
information relative to the existing proposal as the risk of 
retaliation towards short individual sellers may increase, as well as 
the ability for market participants to engage in copy-cat strategies 
that decrease the profitability of gathering information.\357\
---------------------------------------------------------------------------

    \357\ 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).
---------------------------------------------------------------------------

    The EU data is more timely than what is considered in this proposal 
as the forms are posted publicly immediately after receipt by the 
regulator, potentially facilitating greater price discovery but at the 
cost of lowering the value of gathering information. Further, the EU 
guidelines do not provide activity data. Thus, market participants 
could not learn from an analysis of how short selling positions change 
over time. For instance, firm managers could only see the size of net 
short positions and thus may be hindered in their ability to learn from 
when short sellers built their positions and whether the building of a 
short position was in response to a specific manager action or firm 
announcement.
2. Data Modifications
i. Release Proposed Form SHO Data in Alternative Formats
    The Commission could release the information included in Proposed 
Form SHO in a different manner. This alternative could take one of 
several forms. For example, the Commission could release each Proposed 
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 stripped. 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 Proposed Form SHO 
report, such as, for example, publish the number of entities underlying 
the aggregated data, publish aggregations of the various categories of 
changes in short positions, or publish increases in short positions 
separate from decreases.
    In the first alternative, the Commission could release Proposed 
Form SHO as filed, allowing all market participants to know the 
identities of short sellers--similar to the EU regulation discussed 
above. This would increase the information that market participants 
have to evaluate sentiment in the market. For example, 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.\358\ In addition, all the 
detailed information on daily short activities across the various 
activity categories could reveal trading strategies, particularly if 
the Manager is identified. This information would also allow market 
participants to better manage risk by allowing them to manage their 
exposure to Managers with large short positions. Additionally, 
releasing the names of large short sellers would further increase the 
likelihood that the short seller would be the victim of a short 
squeezes or other retaliatory actions as described in Part VIII.D.1.
---------------------------------------------------------------------------

    \358\ See supra Part VIII.F.1.iv (discussion in section).
---------------------------------------------------------------------------

    Similarly, the Commission could publicly release individual 
Proposed Form SHO filings with identification information stripped from 
the released data. This alternative would allow market participants a 
clearer view into the activities of large short sellers, potentially 
improving their ability to learn from the actions of large short

[[Page 15006]]

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 Proposed Rule 
13f-2, improving price efficiency.
    However, the indirect costs of this alternative would be greater 
than for Proposed Rule 13f-2 and Proposed 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 may increase the 
risk of copycat trading which eats into the profits of acquiring 
information. It may 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 thus increasing this risk to short sellers. 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 the current proposal, 
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.\359\ If market participants were able 
to back out the identities of individual short sellers, then the risk 
of retaliation or short squeezes would increase relative to Proposed 
Rule 13f-2 and Proposed Form SHO.
---------------------------------------------------------------------------

    \359\ 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 258. 
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 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 
Proposed 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. 
Adding this information may also increase the risk of short squeezes or 
other retaliatory actions in the case where there were very few 
reporters of Proposed Form SHO. In the Form SH data collected under 
Temporary Rule 10a-3T, 32% of stocks had only one Manager reporting a 
position per month.\360\ 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 squeeze.
---------------------------------------------------------------------------

    \360\ See supra note 80 (for more information on methodologies 
and caveats for using Form SH data).
---------------------------------------------------------------------------

    The Commission could collect Proposed Form SHO data as proposed but 
in the data made public, the Commission could aggregate at the issuer 
level as opposed to the security level. Aggregating at the issuer level 
would allow users of the data a simpler view into overall short selling 
for the whole firm. However, computing this aggregation introduces 
complexity, as different share issues sometimes have different prices 
or voting rights, thus it may not make economic sense to aggregate all 
short selling data across all share classes for the same issuer. This 
effect would decrease the information content of the data with respect 
to bearish sentiment, which decreases what market participants could 
learn from the data, but also would make it more difficult for market 
participants to copycat short selling strategies.
    As another alternative, the Commission could release statistics on 
the Proposed Form SHO filings aggregated across Managers but not netted 
across the various activity categories. This would allow market 
participants to not only see the extent of the position changes of 
large short sellers but also how they achieve their position changes, 
including whether they create or cover positions in the equities market 
or by options exercises, for example. The Commission believes that such 
information could risk revealing trading strategies, even if aggregated 
across Managers, particular if Managers have correlated strategies. As 
a result, this would be more costly to Managers than Proposed Rule 13f-
2 and would dissuade fundamental research more. On the other hand, 
while such information is of more regulatory value, by publicly 
releasing more detailed activity data, some market participants may 
benefit from learning the various ways that short sellers change their 
positions.
    Similarly, the Commission could collect Proposed Form SHO data as 
proposed but publicly release the daily aggregate increases in short 
positions separately from the daily aggregate decreases in short 
positions as opposed to daily net changes to short positions as 
currently proposed. 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.
ii. 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 Proposed 
Form SHO to also disclose their derivatives positions on underlying 
equity securities in derivatives such as options and total-return swaps 
as an alternative to the existing proposal which does not directly 
collect information on derivatives.
    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. Consequently, the information would aid market participants 
in gauging bearish sentiment in a security relative to Proposed Rule 
13f-2 and Proposed Form SHO. 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 Proposed Form SHO would 
increase the compliance costs to Managers of reporting on Proposed Form 
SHO. 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.

[[Page 15007]]

    Requiring derivative position information may also be duplicative 
of other derivatives reporting requirements. For instance, recently 
proposed Rule 10B-1 requires individuals, or groups of individuals, who 
own security-based swaps that exceed a certain threshold to report 
certain information to the SEC, which information would be made 
publicly available.\361\
---------------------------------------------------------------------------

    \361\ See Exchange Act Release No. 93784 (Dec. 15, 2021), 
available at https://www.sec.gov/rules/proposed/2021/34-93784.pdf.
---------------------------------------------------------------------------

iii. Report Net Short Positions Instead of the Gross Position With 
Hedging Information
    The Commission could require managers reporting Proposed Form SHO 
data to report net short positions instead of gross short positions. 
Net short positions would take into account any hedging the Manager 
engages in. For instance, a Manager that has a large long position in 
options that is largely hedged using short sales in equities is not 
taking an economically significant short position in the security. 
Fully hedged short positions are less likely to be manipulative in 
nature, or to pose systemic risk. Consequently, the Commission could 
limit reporting to only Managers whose economic short positions surpass 
the thresholds. Doing so would limit the amount of data collected by 
the Commission and would thus reduce the cost of the alternative 
relative to Proposed Rule 13f-2 but also reduce somewhat the value of 
the data in terms of using it to reconstruct 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 may have previously appeared to have been 
hedged, and thus low risk, may no longer be as hedged as previously 
supposed, and in this case, large short positions that were initially 
hedged may become systemically important as the hedge breaks down due 
to unforeseen extreme market events. In this case, it would be useful 
for the Commission to have information on large hedged short positions 
largely to aid in reconstruction of market events. This alternative 
would limit what the public and the Commission could learn from large 
hedged positions relative to the Proposed Rule 13f-2 and Proposed Form 
SHO. For instance, the alternative would preclude a comparison of total 
short interest with reported large hedged short positions, which may 
provide additional information to the market about the activities of 
large, though perhaps non-information based, traders.
    Additionally, the Commission could require Managers to report the 
delta value of their hedged positions rather than providing an 
indicator for whether a position is fully or partially hedged.\362\ 
This alternative could have some of the same advantages as the other 
alternatives in this section. If the Commission published this 
information aggregated across Managers, then market participants would 
have a clearer view into economic--i.e. unhedged--short positions than 
is provided by the Proposed Rule 13f-2 and Proposed Form SHO. The cost 
of this alternative is an increased reporting burden for Managers as 
they would be required to compute for the report delta value of their 
hedge. However, knowing information about the delta of short seller's 
hedge can provide information about how vulnerable a short seller, or 
short sellers, may be to a short squeeze. If this information was not 
made public by the Commission, however, it would allow the Commission 
an improved view into individual short sellers with potentially risky 
short positions without raising those concerns.
---------------------------------------------------------------------------

    \362\ Delta is a ratio that measures the change in the value of 
short position when the value of the long position changes. For 
example, a delta of one means that a $1 increase in value of the 
short position results in a $1 decline in value of the long 
position.
---------------------------------------------------------------------------

3. Threshold Modifications
    As an alternative to Threshold A's two-pronged threshold, the 
Commission could require reporting Proposed Form SHO at either higher 
or lower thresholds--or no threshold. When soliciting comments for 
Temporary Rule 10a3-T, commenters suggested thresholds ranging from 1% 
to 5%.\363\ When selecting thresholds, the fundamental economic 
tradeoff is the value of the data versus the cost of collecting the 
data.
---------------------------------------------------------------------------

    \363\ See supra note 79 (for links to specific comment letters).
---------------------------------------------------------------------------

    Alternative thresholds that are lower than Threshold A or Threshold 
B specified in Proposed Rule 13f-2 or an alternative that would not 
contain a threshold would produce more data as more entities would be 
required to report. In the Form SH data collected under Temporary Rule 
10a-3T, the threshold of $10 million or 2.5% would collect 89% of the 
dollar value of the short positions required to be reported.\364\ 
Therefore, the increase in coverage from a lower threshold would be low 
relative to the coverage in the proposed Threshold A. Notwithstanding 
the low potential for an increase in coverage, the Commission 
recognizes that this increased coverage could increase benefits. For 
example, this additional data from the alternative would enhance the 
benefits to the Proposed Form SHO data articulated above relative to 
Proposed Rule 13f-2 and Proposed Form SHO. Specifically, it would 
provide market participants with a clearer view of Manager bearish 
sentiment than the current proposal provides for as more managers would 
be required to report the data, making the data more comprehensive. A 
lower threshold would also allow the Commission to more easily 
reconstruct significant market events where short selling is involved 
and enhance Commission oversight of short selling--again because the 
data would be more comprehensive.
---------------------------------------------------------------------------

    \364\ See supra Table I. See also supra note 81.
---------------------------------------------------------------------------

    A lower or no threshold would increase the cost of reporting 
Proposed Form SHO data in terms of direct costs associated with 
Managers compiling and submitting the required data thorough EDGAR and 
in the indirect costs associated with revealing short sellers' 
information. In the Form SH data collected under temporary Rule 10a-3T, 
the number of reporting Managers for the de minimis threshold of 0.25% 
of shares outstanding or $10 million was 442, compared to 346 for the 
$10 million or 2.5% threshold in Threshold A of the proposed rule.\365\ 
Additionally, Managers would likely be required to file reports for 
more securities, which would also increase compliance costs. Indirect 
costs include increased risk of copycat short selling strategies, which 
lead to herding and increased volatility, and short sellers engaging in 
strategic behavior to short sell just underneath Threshold A, which 
leads to lower price efficiency.\366\ In some cases a lower threshold 
would decrease the indirect costs associated with the proposed rule 
because it would be harder to identify individual short positions from 
aggregate reporting if there are many entities reporting, thus lowering 
the chances that a given security would only have one Manager reporting 
a short position.\367\ This effect may not be universally true, 
however. In particular, at thresholds just lower than proposed 
Threshold A, the number of securities where only one entity

[[Page 15008]]

reported Form SH increases.\368\ This result implies that there are a 
number of securities for which only one short seller held a significant 
short position at a level lower than the current cutoff. In these 
cases, lowering the threshold may increase the risk of identifying 
individual short sellers.
---------------------------------------------------------------------------

    \365\ Id.
    \366\ See supra notes 271 and 353 (for research documenting this 
behavior in Europe).
    \367\ See supra notes 257 and 278 (with accompanying text for 
more information on risks of identifying individual short sellers).
    \368\ According to Form SH data, 32% of securities would have 
only one Manager reporting at or above the currently proposed 
threshold of $10 Million and 2.5%. If the percent threshold was 
reduced to 1% along with the $10 million threshold the number of 
securities with only one Manager reporting would increase to 35%. 
See also supra note 81.
---------------------------------------------------------------------------

    Conversely, raising the proposed Threshold A lowers many of the 
costs associated with providing Proposed Form SHO data as fewer 
entities would be required to report. It also limits somewhat the value 
of the data--again as the reported data would reflect a smaller portion 
of overall short positions. For example, in the Form SH data, a 
threshold of 5% or $25 million suggested in comment letters reduce the 
coverage to 71% of dollar value of short positions compared to 89% in 
the proposed rule.\369\ Higher thresholds may 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 for 
Form SH data 41% of reported securities would reflect one Manager with 
a short position at a threshold of $25 million and 5% compared to 24% 
of reported securities for the proposed Threshold A.\370\
---------------------------------------------------------------------------

    \369\ See SIFMA letter (discussing Temporary Rule 10a3-T). See 
also supra Table I. See also supra note 81.
    \370\ See note 80 (for more information on methodologies and 
caveats for using Form SH data).
---------------------------------------------------------------------------

    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 lower 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% to 8.76%.\371\ 
Similarly, under the same assumptions, lowering the threshold to 
$50,000 would increase the number of short positions captured to 
48.08%.
---------------------------------------------------------------------------

    \371\ See supra Table II (analysis within table).
---------------------------------------------------------------------------

    As another alternative to the proposed Threshold A, the Commission 
could establish a threshold based on one of the thresholds in Proposed 
Rule 13f-2--short position as a percent of shares outstanding or the 
dollar value of the short position. The advantage of this alternative 
is that it may reduce compliance costs by simplifying reporting 
requirements. Additionally it would lower overall compliance costs due 
to fewer entities being required to report as entities that may meet 
one threshold may not meet another and thus may not be required to 
report. An alternative including only the 2.5% threshold would have a 
bigger impact than an alternative including only the $10 million 
threshold. Commission analysis based on Form SH data suggests that 342 
Managers would meet the $10 million threshold and 160 Managers would 
meet the 2.5% threshold, compared to 346 in Proposed Rule 13f-2.
    The alternative of requiring a threshold based only on short 
positions as a percent of shares outstanding would largely eliminate 
reporting in larger securities. Short sellers will hit the 2.5% 
threshold in stocks with market capitalization below $400 million 
before they hit the $10 million dollar threshold. For stocks with 
market capitalization above $400 million, short sellers will hit a $10 
million dollar threshold before hitting the 2.5% threshold. 
Consequently, if the Commission required reporting based only on the 
percent of shares outstanding, then there would be fewer reports of 
Proposed Form SHO 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, generally because larger market 
capitalization stocks tend to be more well-established and harder to 
manipulate.\372\ Conversely, if the Commission required reporting based 
only on the dollar threshold, then there would be fewer reports among 
stocks with lower market capitalizations. Smaller market capitalization 
stocks tend to be easier to manipulate and less stable. Thus, less 
visibility into the actions of short sellers among smaller market 
capitalization stocks may mitigate somewhat the benefits of reduced 
manipulative behavior among these stocks articulated in Part VIII.D.1.
---------------------------------------------------------------------------

    \372\ See, e.g., Carole Comerton-Forde, T[amacr]lis J. 
Putni[ncedil][scaron], Stock Price Manipulation: Prevalence and 
Determinants, 18 (1) Rev. of Fin. January 2014, Pages 23-66, 
available at https://doi.org/10.1093/rof/rfs040 (for evidence on 
small and less liquid stocks higher exposure to manipulative 
behavior by investors).
---------------------------------------------------------------------------

    As another alternative, the Commission could structure the 
Reporting Thresholds to include the nominal economic value of short 
derivative positions. Specifically, reporting on Proposed 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. 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 Proposed Form SHO.\373\ Making it more difficult to 
circumvent the reporting requirements using derivatives may also 
decrease strategic, and sub-optimal, trading around the Reporting 
Thresholds which leads to lower price efficiency.\374\ However, 
increasing the amount of information that is provided in Proposed Form 
SHO may increase copycat activity that leads to herding and increased 
volatility. Conversely, increasing the reports may dilute the 
information and reduce the amount of herding. This alternative could 
also result in some 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.\375\ 
Additionally, while valuing short positions in most equities is fairly 
straight forward, 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 Managers short exposure in derivatives would be 
significantly more

[[Page 15009]]

complicated than Proposed Rule 13f-2 and Proposed Form SHO.
---------------------------------------------------------------------------

    \373\ See supra Part VIII.D.8.
    \374\ See supra Part VIII.D.1 (for further discussion on 
strategic trading around the threshold and how the rule is designed 
to reduce it).
    \375\ Industry practices may change with regard to security-
based swaps in the case of the adoption of proposed Rule 10B-1, 
which would require persons with large positions in security-based 
swaps to track all related securities. See Exchange Act Release No. 
93784 at 23 (stating that ``proposed Rule 10B-1 would require public 
reporting of, among other things: (1) Certain large positions in 
security-based swaps; (2) positions in any security or loan 
underlying the security-based swap position; and (3) positions in 
any other instrument relating to the underlying security or loan or 
group or index of securities or loans'') available at https://www.sec.gov/rules/proposed/2021/34-93784.pdf.
---------------------------------------------------------------------------

    An alternative could also involve requiring the thresholds to be 
based on activity and not just positions. 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 may 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 may 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 
may be concentrated enough in time to not trigger a Reporting Threshold 
based on average position over the prior month as is currently 
stipulated in the proposal. While this activity information may be 
helpful in flagging unusual short selling activity as the Commission 
could conceivably build reports based on existing CAT data that would 
be more effective at detecting such behavior and Proposed Rule 13f-2 
would identify these activities if the market participant exceeds the 
Reporting Thresholds.
    The Commission could measure the thresholds as of the last 
settlement day of the month rather than on any day of the month, as in 
the $10 million prong, or as the average position over the month, as in 
the 2.5% prong for Threshold A and the $500,000 threshold in Threshold 
B. This alternative would have the advantage of simplifying compliance 
with Proposed Rule 13f-2 and Proposed Form SHO and thus may reduce 
compliance costs. In the Form SH data, end of month thresholds reduced 
the number of reporting Managers for the $10 million threshold from 342 
to 247, and for the 2.5% threshold from 160 to 127.\376\ It would also 
line the Reporting Thresholds up with the positions reported in 
Proposed Form SHO whereas a Manager's reported information on Proposed 
Form SHO under Proposed Rule 13f-2 could be below the Reporting 
Thresholds.\377\ This alternative may also invite more strategic 
trading around the end of the month than the proposal, which is 
structured to prevent trading around the threshold. For 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.
---------------------------------------------------------------------------

    \376\ See supra Table I.
    \377\ For example, a Manager's position could exceed the $10 
million threshold on the 7th of the month but be below $10 million 
and 2.5% on the last settlement day of the month.
---------------------------------------------------------------------------

    Instead of Threshold B, the Commission could require the two prong, 
$10 million maximum position or 2.5% average position, reporting 
threshold for short positions in an equity security of a non-reporting 
company issuer that is required for equity securities of reporting 
company issuers. This approach may 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 
to the size of the issue to ensure capturing positions that are 
relatively large whereas the proposed Threshold B imposes a flat 
threshold that could result in some relatively large positions not 
being filed on Proposed Form SHO.
    However, this alternative would increase the burden for Managers as 
information for non-reporting issuers can be hard to find, making 
threshold calculations difficult. In particular, information for the 
number of shares outstanding can be difficult to obtain for non-
reporting issuers and when it is available it is often stale and 
inaccurate. This could lead to problems with the calculations for the 
2.5% threshold. Because the alterative would require knowing shares 
outstanding of such securities each day, this alternative would 
effectively impose new recordkeeping costs on Managers as Managers 
would need to track daily changes in shares outstanding in order to 
assess the 2.5% threshold. Further, there are multiple sources from 
which Managers can obtain shares outstanding for securities in 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.
    Additionally, the Commission could enhance record keeping 
requirements associated with the alternative where Threshold A applies 
to all securities to require Managers to record and report on Form SHO 
the source of data used to calculate shares outstanding in relation to 
determining compliance with Threshold A. This could improve the quality 
of the information reported in the Proposed 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 may 
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 impose 
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 proposed by the rule. 
Specifically, the Commission could require reporting at frequencies 
that are shorter than a month. For example, the Commission could 
require reporting daily, weekly, bi-weekly, 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

[[Page 15010]]

for the prior period (e.g. week, or two weeks). 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, but also 
improve price efficiency. An additional difference to the data may come 
from Managers who for a short time have short positions that are 
subject to Threshold A and are above the 2.5% threshold but below the 
$10 million threshold, but do not maintain an average short position 
over 2.5% over the month. These Managers may be required to report with 
more frequent disclosures.\378\
---------------------------------------------------------------------------

    \378\ Many Commenters on temporary Rule 10a-3T stated that 
weekly reporting was overly burdensome. See supra note 306.
---------------------------------------------------------------------------

    The Commission could also consider different reporting windows for 
Managers who meet the threshold short positions to report Proposed Form 
SHO. The current proposal requires Managers to report Proposed 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 submit the data on Proposed Form SHO and may need to build 
costlier procedures to ensure compliance with the reporting 
requirement.\379\ A mitigating factor is 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.
---------------------------------------------------------------------------

    \379\ See Seward & Kissel LLP letter (discussing Temporary Rule 
10a3-T) 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. 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. 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. 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.
b. Requiring Information From Customers for Proposed Rule 205
    To enhance the value of the buy to cover mark in CAT, the 
Commission could also modify components of Regulation SHO whereby 
broker-dealers would be required to gather information from customers 
regarding whether a purchase meets the definition of buy to cover. In 
Proposed Rule 205, broker-dealers would be required to mark 
transactions a buy to cover based only on information to which they 
currently have access and they would not be required to net such 
activity across the same customer's accounts at that broker-dealer. 
This may miss some buy to cover trades that may occur if a Manager uses 
a broker to execute short sales and a prime broker (or prime brokers) 
for other long positions. In this case, the broker-dealer managing the 
purchase of shares would not know that the buy is actually a buy to 
cover and would thus not mark the trade as such. The current proposal 
may also miss some transactions that may occur if a Manager uses 
multiple accounts at the same broker-dealer to trade.
    To close this gap in buy to cover data, the Commission could 
require broker-dealers to collect information from customers concerning 
whether a given buy trade is a buy to cover trade, when considering 
positions held at other broker-dealers. This alternative would increase 
the accuracy of the buy to cover information collected via Proposed 
Rule 205, which would enhance the benefits discussed in Part VIII.D. 
However, this alternative would impose significant costs on broker-
dealers that do not already collect such information relative to the 
current proposal as it would require broker-dealers to alter their 
systems to collect this additional information from customers. It would 
also impose costs on customers who would likewise need to alter their 
own systems and to report such information to their broker-dealer. The 
number of customers incurring those costs would be limited to the 
number of customers employing multiple broker-dealers to execute trades 
and maintain positions. For customers with only one broker-dealer, this 
alternative would not impose any additional costs as in this case their 
only broker-dealer would have a comprehensive view of the customer's 
positions from which to determine whether a trade was buy to cover or 
not.
    The Commission could also require broker-dealers to aggregate 
trades across all accounts by the same purchaser at the same broker-
dealer when determining buy to cover status of an order under Proposed 
Rule 205. This alternative would include short positions held in any 
account other than the purchasing account, as well as offsetting long 
positions held by the purchaser in the purchasing account or any other 
account for purposes of the broker-dealer's ``buy to cover'' order 
marking determination. This alternative could create more comprehensive 
buy to cover marks in CAT but would also come with additional 
compliance costs for broker-dealers as they would need to build out 
systems to track the net positions of customers across all accounts in 
real time to determine whether a given order qualified as a buy to 
cover transaction.
c. Report Proposed Form SHO in Inline XBRL
    The proposal would require Proposed Form SHO to be filed in 
Proposed Form SHO-specific XML, a structured, machine-readable data 
language. As an alternative, the Commission might require Proposed 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. Compared to the proposal, the Inline XBRL alternative for 
Proposed 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 Proposed 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 proposal, this alternative would impose 
greater initial implementation costs (e.g., licensing Inline XBRL 
filing preparation software) upon reporting persons that have no prior 
experience

[[Page 15011]]

structuring data in Inline XBRL.\380\ By contrast, because many 
Managers that would be Proposed Form SHO filers would likely have 
experience structuring filings in a similar EDGAR Form-specific XML 
data language, such as in the context of submitting Form 13F, the 
Proposed Form SHO-specific XML requirement would likely impose lower 
implementation compliance costs on Proposed Form SHO filers than an 
Inline XBRL requirement would impose.
---------------------------------------------------------------------------

    \380\ 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).
---------------------------------------------------------------------------

G. Request for Comments

    The Commission requests comment on all aspects of this Economic 
Analysis, including whether the analysis has: (1) Identified all 
benefits and costs, including all effects on efficiency, competition, 
and capital formation; (2) given due consideration to each benefit and 
cost, including each effect on efficiency, competition, and capital 
formation; and (3) identified and considered reasonable alternatives to 
the proposed new rules and rule amendments. We request and encourage 
any interested person to submit comments regarding the proposed rules, 
our analysis of the potential effects of the proposed rules and 
proposed amendments, and other matters that may have an effect on the 
proposed rules. We request that commenters identify sources of data and 
information as well as provide data and information to assist us in 
analyzing the economic consequences of the proposed rules and proposed 
amendments. We also are interested in comments on the qualitative 
benefits and costs we have identified and any benefits and costs we may 
have overlooked. In addition to our general request for comments on the 
Economic Analysis associated with the proposed rules and proposed 
amendments, we request specific comment on certain aspect of the 
proposal:
     Q35: Short Selling Data. The Economic Analysis discusses 
several existing sources of short selling data and the limitations of 
each.
    [cir] Are the Commission's descriptions of existing short selling 
data accurate? Why or why not? Please explain. Are there other relevant 
existing data sources that the Commission should consider as a part of 
the baseline? If so, please describe them.
    [cir] Are the Commission's descriptions of the various limitations 
in existing short selling data accurate? Please explain. Are there 
limitations that the Commission has not discussed? If so, please 
describe these limitations.
     Q36: Additive Information in Proposed Rule 13f-2 and 
Proposed Form SHO, Proposed Rule 205, and the Proposal to Amend CAT. 
These Proposed Rules would require the reporting of short sale 
information to EDGAR or to CAT.
    [cir] Would Proposed Rule 13f-2 and Proposed Form SHO provide 
information to the public that is additive to what the public can 
already access? Would these proposals solve some or all of the data 
limitations discussed in the Economic Analysis? Why or why not?
    [cir] Would Proposed Rule 205 and the Proposal to Amend CAT solve 
the data limitations discussed in the Economic Analysis? Why or why 
not? Are there significant limitations, beyond those discussed above, 
in the design of the data for the public in Proposed Rule 13f-2 and 
Proposed Form SHO that limits the utility of the data to the public?
    [cir] Are there significant limitations, beyond those discussed 
above, in the design of the data available to regulators in Proposed 
Rule 13f-2 and Proposed Form SHO, Proposed Rule 205, and the Proposal 
to Amend CAT?
     Q37: Market Oversight and Investor Protection. The 
Economic Analysis describes how the information from the Proposed Rules 
could be used to, for example, strengthen regulatory oversight of short 
selling and facilitate market reconstructions.
    [cir] Would the Proposed Rule 13f-2 and Proposed Form SHO help to 
strengthen regulatory oversight and facilitate market reconstructions? 
Please explain. What would the role of each of the components of 
Proposed Form SHO to these regulatory activities? Are there any other 
regulatory activities facilitated by these proposed rules? If so, 
please describe.
    [cir] Would Proposed Rule 205 and the Proposal to Amend CAT help to 
strengthen regulatory oversight and facilitate market reconstructions? 
Please explain. Are there any other regulatory activities facilitated 
by these proposed rules? If so, please describe.
    [cir] Would the additional regulatory oversight of short selling 
from the Proposed Rules help deter manipulative short selling behavior? 
Why or why not? What are some other potential benefits to investors of 
the regulatory activities facilitated by the Proposed Rules?
     Q38: Market Quality. The Economic Analysis describes both 
potential improvements to market quality and potential harms to market 
quality that could result from the published data from Proposed Rule 
13f-2 and Proposed Form SHO. In addition, the Economic Analysis 
describes potential improvements to market quality that could result 
from Proposed Rule 205 and Proposed Amendments to CAT.
    [cir] Overall, would the Proposed Rules, on net, improve or harm 
market quality? Please explain. Please discuss the extent, if any, to 
which each proposed rule contributes to the overall effect on market 
quality.
    [cir] Would the information published from Proposed Rule 13f-2 and 
Proposed Form SHO be useful to market participants and provide 
information that is not already reflected in prices? Please explain. 
For example, would the published data help market participants better 
understand existing short interest information by lining up the 
position information with a short interest settlement date, by 
identifying the aggregate positions held by reporting Managers, by 
identifying the extent to which reporting Manager positions are fully 
or partially hedged, or by revealing the daily changes in reporting 
Manager short positions? Please explain. As a result, would such 
information improve price efficiency and market liquidity? Please 
explain.
    [cir] Would the regulatory activities facilitated by Proposed Rule 
13f-2 and Proposed Form SHO, Proposed Rule 205, and the Proposal to 
Amend CAT improve price efficiency and market liquidity? Please 
explain.
    [cir] Would the compliance costs associated with Proposed Rule 13f-
2 and Proposed Form SHO lead to a reduction in shorting significant 
enough to negatively affect price efficiency and/or market liquidity? 
Why or why not?
    [cir] Would the published data from Proposed Rule 13f-2 and 
Proposed Form SHO result in short selling Managers being more 
vulnerable to fundamental information leakage, the revelation of 
trading strategies, or short squeezes and other forms of retaliation? 
Please explain. Would any of these effects be significant enough to 
negatively affect price efficiency and/or market liquidity? Why or why 
not? For example, would these effects significantly reduce the 
incentive of Managers to engage in fundamental research? Please explain 
and identify the particular part of elements of the published data that 
would result in such effects.
    [cir] Would Managers seek to reduce their short positions to avoid 
exceeding

[[Page 15012]]

a Reporting Threshold or to report a lower short position than the 
Manager typical holds? Please explain. What would be the effect of such 
behavior on price efficiency and market liquidity? Please explain.
    [cir] To what degree does the structure of the data, such as the 
level of aggregation, threshold structure and delayed publication help 
to mitigate any potential negative effects of Proposed Rule 13f-2 and 
Proposed Form SHO? Please explain.
    [cir] Despite these mitigating factors, could market participants 
identify the particular Managers and their reported positions and 
activity? If so, what are the additional risks and costs faced by such 
Managers? Please explain.
    [cir] Are option market makers likely to exceed the Reporting 
Thresholds? If so, what would be the effect on price efficiency and 
market liquidity of such inclusion? Please explain.
     Q39: XML Requirement.
    [cir] Would requiring the proposed short sale disclosures to be 
filed on EDGAR in Proposed Form SHO-specific XML increase the economic 
effects of the disclosure requirement by making the reported data more 
useful to users? Why or why not?
    [cir] How would the costs and benefits of an Inline XBRL 
requirement compare to the Proposed Form SHO-specific XML requirement 
for the proposed short sale disclosures?
    [cir] Would requiring short sale disclosures be filed in Proposed 
Form SHO-specific XML facilitate more efficient review and analysis of 
the reported short sale disclosures by the Commission? Why or why not?
    [cir] Would the costs of the XML requirement vary by the type of 
Manager likely to file Proposed Form SHO? If so, please explain which 
Managers would incur higher or lower costs.
     Q40: Compliance Costs.
    [cir] Has the Commission appropriately evaluated the compliance 
costs associated with the Proposed Rules? Please explain. What are the 
primary cost drivers of the Proposed Rules?
    [cir] Would Proposed Rule 13f-2 and Proposed Form SHO have lower 
compliance costs than former Rule 10a3-T? Please explain.
    [cir] Would the Proposed to Amend CAT to add information on buy to 
cover and bona fide market making require an additional field or fields 
to CAT? If so, what would the estimated cost be to add said fields?
    [cir] Would Proposed Rule 205 and Proposal to Amend CAT to include 
buy-to-cover information be less costly than the ``open/close'' 
indicator that was not included the CAT NMS Plan? Please explain.
    [cir] Would the Reporting Thresholds impose a significant burden on 
Managers who do not meet the threshold but must track their positions 
to know if they at some point exceed the threshold? Please Explain.
    [cir] Would the compliance costs associated with the Proposals vary 
by the various type of Manager? Would the costs of the XML requirement 
vary by the type of Manager likely to file Proposed Form SHO? If so, 
please explain which Managers would incur higher or lower costs.
    [cir] Do Managers other than registered investment advisers and 
option market makers hold large short positions such that they would 
exceed the Reporting Thresholds in Proposed Rule 13f-2? If so, which 
types of Managers are likely to hold such short positions? Would the 
effects of including such Managers in Proposed Rule 13f-2 be any 
different than those described herein? Please explain.
     Q41: Other Economic Effects.
    [cir] Has the Commission appropriately evaluated the potential 
impact of the Proposals on corporate managerial decision making? Why or 
why not?
    [cir] Would the Proposals result in less securities lending and 
potentially lower returns for investors in mutual funds, pension plans, 
and other securities lenders?
    [cir] Please discuss whether and how the adoption of the Proposals 
would impact securities lending market.
    [cir] Are there any economic effects not discussed in the Economic 
Analysis? If so, please describe them.
     Q42: Potential Circumvention.
    [cir] Has the Commission accurately characterized economic short 
disclosure in equity versus in derivatives markets? Why or why not?
    [cir] Would market participants circumvent reporting requirements 
by trading derivatives? Why or why not?
    [cir] How costly would it be to include reporting regarding 
securities other than equities, such as options and security based 
swaps, in Proposed Form SHO?
    [cir] What additional benefit would there be to requiring reporting 
in Proposed Form SHO of short positions arising from securities other 
than equities, such as options and security based swaps, in Proposed 
Form SHO?
     Q43: Efficiency, Competition, and Capital Formation.
    [cir] Has the Commission appropriately evaluated the potential 
impact of the Proposals on efficiency, competition, and capital 
formation? Please explain.
    [cir] Would the Proposed Rules have any effect on efficiency other 
than the potential effects on price efficiency?
    [cir] Would Proposed Rule 13f-2 and Proposed Form SHO alter the 
competitive landscape in the market to attract investor flows by 
disadvantaging Managers who sell short relative to Managers who do not 
sell short? Please explain.
    [cir] Would the overall effect on price efficiency of the Proposed 
Rules be significant enough to affect capital formation? Please 
explain. Would additional information on short selling help corporate 
managers make better investment decisions, thereby improving capital 
formation? Please explain. Would the Proposed Rules reduce capital 
formation by discouraging investment in convertible securities by 
raising the cost to hedge? Please explain. Would the Proposed Rules 
promote capital formation through enhanced investor confidence? Please 
explain.
     Q44: Alternatives, Generally.
    [cir] Are the Commission's descriptions and analyses of potential 
alternatives to the Proposed Rules accurate? Why or why not? Are there 
any other alternatives? If so, please describe the alternative(s) 
including how the benefits and costs of the alternative(s) compare to 
the benefits and costs of the Proposed Rules.
     Q45: Alternative Approaches.
    [cir] Has the Commission appropriately evaluated the alternative 
whereby short selling information would be collected using CAT, 
including bona fide market making and buy to cover information, then 
aggregated and published? Why or why not? Would this alternative raise 
any security issues associated with CAT, either in the collection of 
such new information or in the publication of aggregated CAT data? 
Please explain.
    [cir] Has the Commission appropriately evaluated the alternative 
whereby the bi-monthly short interest collected by FINRA would be 
codified, FINRA would be required to publish a version of its short 
interest information that specifically identifies the aggregate short 
interest of Managers, and/or non-FINRA Managers would be required to 
report to FINRA? Why or why not?
    [cir] Has the Commission appropriately evaluated the alternative 
whereby broker-dealers would file Proposed Form SHO reports with the 
Commission on behalf of Managers? Why or why not?
    [cir] Has the Commission appropriately evaluated the alternative 
whereby Proposed Rule 13f-2 and Proposed Form SHO would be explicitly 
crafted to be consistent with European disclosure requirements, 
including reporting thresholds? Why or why not?

[[Page 15013]]

     Q46: Data Modification Alternatives.
    [cir] Has the Commission appropriately evaluated the alternative 
whereby the information included in Proposed Form SHO would be released 
in a different manner, including releasing Proposed Form SHO reports 
exactly as they are filed, identifying the Managers, releasing Proposed 
Form SHO as filed but stripped of Manager identities, releasing the 
number of entities whose Proposed Form SHO reports were filed, 
aggregating at the issuer level as opposed to the security level, 
releasing aggregations of the various categories of changes in short 
positions, and/or releasing the daily aggregate increases in short 
positions separately from the daily aggregate decreases in short 
positions? Why or why not?
    [cir] Has the Commission appropriately evaluated the alternative 
whereby Managers who report Proposed Form SHO would also be required to 
disclose their derivatives positions on underlying equity securities? 
Why or why not?
    [cir] Has the Commission appropriately evaluated the alternative 
whereby Managers would report net short positions instead of gross 
short positions, taking into account any hedging that the Manager 
engages in, and/or the delta value of their hedged positions? Why or 
why not?
    [cir] Has the Commission appropriately evaluated the alternative 
whereby Managers would report data sources on Proposed Form SHO? Why or 
why not?
     Q47: Threshold Modifications.
    [cir] Has the Commission appropriately evaluated the alternative 
whereby the Reporting Thresholds would be modified compared to 
Thresholds A and B in Proposed Rule 13f-2, including a higher or lower 
or no threshold, a threshold based on short position as a percent of 
shares outstanding or dollar value of the short positions, including 
the nominal economic value of short derivative positions, a threshold 
based on activity, and/or measuring the threshold as of the last 
settlement day of the month? Why or why not?
    [cir] Would decreasing the threshold to include more Managers 
improve the quality of the data provided? Would increasing or 
decreasing the threshold increase the risk of copycat trading 
strategies? Would increasing or decreasing the threshold to include 
more Managers' positions in the aggregated reports reduce the risk of 
identifying individual investment Managers? Please explain.
    [cir] Would including the nominal economic value of short 
derivative positions as a consideration for the threshold increase, 
decrease or have no impact on the risk copycat trading? Please explain. 
Including the nominal economic value of short derivative positions as a 
consideration for the threshold may require some Managers to report 
short positions that are part of hedges of large long positions. Would 
this information be beneficial? Please explain.
    [cir] Has the Commission appropriately evaluated the alternative of 
including a threshold based on short selling activity? If not, please 
describe the costs or benefits of this alternative relative to the 
proposal. Would a short selling activity threshold provide additional 
beneficial information? Please explain. Would a short selling activity 
threshold be more burdensome on Managers? Please explain. If the 
Commission were to adopt a threshold based on short selling activity, 
what should the level of the threshold be?
    [cir] Has the Commission appropriately evaluated the alternative of 
calculating the threshold based on positions on the last day of the 
month? If not, please describe the costs or benefits of this 
alternative relative to the proposal. Would such a threshold provide 
data that is as beneficial as the current proposal? Would calculating 
the threshold based on the last day of month lead to Managers 
strategically lowering their short positions to avoid reporting? Please 
explain.
    [cir] Has the Commission appropriately evaluated the alternative of 
using the two prong threshold for short positions in an equity security 
of a non-reporting company issuer? If not, please describe the cost or 
benefits of this alternative relative to the proposal. Is reliable 
shares outstanding information available for non-reporting issuers? 
Please explain.
     Q48: Other Alternatives.
    [cir] Has the Commission appropriately evaluated the alternative 
whereby reporting would be required at a different frequency, a 
different reporting window, and/or releasing aggregated data at a 
different horizon than in Proposed Rule 13f-2? Why or why not?
    [cir] Has the Commission appropriately evaluated the alternative 
whereby Regulation SHO would be modified, including requiring broker-
dealers to collect information from customers concerning whether a 
given buy trade is a buy to cover trade when considering positions held 
at other broker-dealers, and/or requiring broker-dealers to aggregate 
all accounts at the same broker-dealer when determining buy to cover 
status of an order? Why or why not?
    [cir] How costly it would be to have Mangers who use prime brokers 
inform their introducing brokers when buying-to-cover?
    [cir] Has the Commission appropriately evaluated the alternative 
whereby Proposed Form SHO information would be submitted in Inline 
XBRL? Why or why not?

IX. Regulatory Flexibility Act Certification

    The Regulatory Flexibility Act (``RFA'') \381\ 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 regulatory flexibility analysis of all proposed rules, or 
proposed rule amendments, to determine the impact of such rulemaking on 
``small businesses'' unless the Commission certifies that the rule, if 
adopted, would not have a significant economic impact on a substantial 
number of ``small entities.''
---------------------------------------------------------------------------

    \381\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

    Certification for Proposed Rule 13f-2 and New Proposed 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 Rule 0-10 \382\ 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 Proposed Rule 13f-2 
and related Proposed Form SHO, therefore, the Commission has determined 
that the definition of the term ``small business'' found in Rule 0-7(a) 
\383\ under the Investment Advisers Act of 1940 \384\ is more 
appropriate to the functions of institutional managers such as the 
Managers with reporting obligations under Proposed Rule 13f-2. The 
Commission believes that the proposed definition would help ensure that 
all persons or entities that might be Managers subject to reporting 
requirements under Proposed Rule 13f-2 will be included within a 
category addressed by the Rule 0-7(a) definition. Therefore, for 
purposes of this rulemaking 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

[[Page 15014]]

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.\385\ The Commission requests 
comments on the use of this definition from Rule 0-7(a) under the 
Investment Advisers Act of 1940.
---------------------------------------------------------------------------

    \382\ 17 CFR 240.0-10 (``Rule 0-10'').
    \383\ 17 CFR 275.0-7(a) (``Rule 0-7(a)'').
    \384\ 15 U.S.C. 80b-1 et seq.
    \385\ Rule 0-7(a), supra note 384. 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 Proposed Rule 13f-2, Managers are not required to report on 
Proposed Form SHO unless they meet or exceed a specified Reporting 
Threshold. Managers with short interest positions in equity securities 
of a reporting company issuer would be subject to a two-pronged short 
reporting threshold structure--a short position in an equity security 
with a U.S. dollar value of $10M or more, or a monthly average short 
position as a percentage of shares outstanding of the equity security 
of at least 2.5% (Threshold A). Managers with short interest positions 
in equity securities of a non-reporting company issuer would be subject 
to a single-pronged short reporting threshold structure--a short 
position in an 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 Proposed Rule 13f-2 relate to the number and 
dollar value of shares of short positions, rather than assets under 
management, the Commission nevertheless believes that application of 
the Reporting Thresholds would result in Proposed 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, the $10M trigger 
would represent forty (40) 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% of their respective assets under management in 
a short position in a single security. Further, many types of 
institutional investment 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 would deter small 
entities (with less than $25M of assets under management) from 
investing over $10M (greater than 40%) of their assets in a single 
short position, and therefore prevent them from triggering the first 
prong of Threshold A.\386\
---------------------------------------------------------------------------

    \386\ See Molk and Partnoy, supra note 187 (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 derivative and similar transactions that create economically 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 Proposed Rule 13f-2 has been 
met.\387\ Further, the Commission estimates, based on an analysis of 
U.S. common stocks,\388\ that Managers that qualify as small entities 
under Rule 0-7(a) would not meet the 2.5% reporting threshold for 
securities representing over ninety-eight percent (98%) of the overall 
market value.\389\
---------------------------------------------------------------------------

    \387\ 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.'').
    \388\ A small entity, with less than $25M in assets under 
management, would not be 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 U.S. 
equities. See also Stock Market Size Categories (2021), available at 
https://stockmarketmba.com/sizecategories.php (calculating 
approximately three percent (3%) of the U.S. stock market consists 
of common stocks of companies with less than $2B in market 
capitalization (i.e., small-cap and micro-cap stocks) and noting 
that micro-cap companies are generally too small for even most large 
institutional investment managers to invest in).
    \389\ An analysis by Commission of the daily dataset of the 
Center for Research in Security Prices (``CRSP'') showed that for 
the month of October 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,\390\ less than twenty-five (25) percent have less than 
$50M in assets under management.\391\ 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.\392\
---------------------------------------------------------------------------

    \390\ See Molk and Partnoy, supra note 187, at 846.
    \391\ 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/.
    \392\ 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 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 requests written comments regarding this certification. 
The Commission requests that commenters describe the nature of any 
impact on small businesses and provide empirical data to support the 
extent of the impact.
    Certification for Proposed Rule 205. As discussed in the PRA 
section above, the Commission believes that all broker-dealers whose 
accounts or whose customers' accounts could hold a gross short position 
are potentially in scope for the requirements of Proposed Rule 
205.\393\ 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 Sec.  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.\394\
---------------------------------------------------------------------------

    \393\ See supra Part VII.C.2. While recognizing that not all 
broker-dealers will necessarily enter purchase orders in securities 
in a manner that will subject them to the marking requirements of 
Proposed Rule 205, the Commission estimates, for purposes of the 
PRA, that all of the 3,551 broker-dealers registered with the 
Commission as of December 31, 2020, will do so.
    \394\ Exchange Act Rule 0-10(c).
---------------------------------------------------------------------------

    Based on a review of data relating to the broker-dealers 
potentially in scope for Proposed Rule 205, the Commission does not 
believe that any of those broker-dealers would qualify as small 
entities under the above definition 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. It is possible that in the future a 
small entity may come within the scope of Proposed Rule 205. Based on 
experience with broker-dealers that engage in short selling, however, 
the Commission believes that this scenario will be unlikely because 
firms that enter that market are likely to exceed $500,000 in total 
capital or be

[[Page 15015]]

affiliated with a person that is not a small entity.
    For the foregoing reasons, the Commission certifies that Proposed 
Rule 205 would not have a significant economic impact on a substantial 
number of small entities for purposes of the RFA. The Commission 
encourages written comments regarding this certification, and requests 
that commenters describe the nature of any impact on small entities and 
provide empirical data to illustrate the extent of the impact.
    Certification for the Proposal to Amend CAT. The proposed 
amendments to the CAT NMS Plan would 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), broker-
dealers which are in scope for the requirements of Proposed Rule 205 
and have the obligation to report order receipt and origination reports 
to the CAT, 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 to the 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.\395\ None of the national 
securities exchanges registered under Section 6 of the Exchange Act 
that would be subject to the proposed amendments are ``small entities'' 
for purposes of the RFA. In addition, FINRA is not a ``small entity.'' 
\396\ With respect to broker-dealers which are in scope for the 
requirements of Proposed Rule 205 and have CAT reporting obligations, 
as discussed above, the Commission does not believe that any of those 
broker-dealers would qualify as small entities pursuant to Exchange Act 
Rule 0-10(c).\397\ Similarly, 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 exception pursuant to Rule 
203(b)(2)(iii) of Regulation SHO and reports to the CAT would 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. The Commission 
believes that it is possible, but unlikely, that in the future a small 
entity may come within scope of the Proposal to Amend CAT, because 
firms that enter either market are likely to exceed $500,000 in total 
capital or be affiliated with a person that is not a small entity.
---------------------------------------------------------------------------

    \395\ 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).
    \396\ See 13 CFR 121.201.
    \397\ See supra note 395, and accompanying text.
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission certifies that the 
Proposal to Amend CAT would not have a significant economic impact on a 
substantial number of small entities for purposes of the RFA. The 
Commission encourages written comments regarding this certification, 
and requests that commenters describe the nature of any impact on small 
entities and provide empirical data to illustrate the extent of the 
impact.

X. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, the Commission is also requesting information regarding 
the potential impact of Proposed Rule 13f-2, Proposed Rule 205, and the 
Proposal to Amend CAT on the economy on an annual basis. In particular, 
comments should address whether the proposals, if adopted, would have a 
$100,000,000 annual effect on the economy, cause a major increase in 
costs or prices, or have a significant adverse effect on competition, 
investment, or innovations. Commenters are requested to provide 
empirical data and other factual support for their views to the extent 
possible.

Statutory Authority and Text of Proposed Rules 13f-2 and 205, and Form 
SHO

List of Subjects

17 CFR Parts 240 and 249

    Reporting and recordkeeping requirements, Securities.

17 CFR Part 242

    Brokers, Reporting and recordkeeping requirements, securities.

Text of Proposed Rule Amendments

    In accordance with the foregoing, the Commission is proposing to 
amend 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 general authority citation for part 240 continues to read as 
follows, and the sectional authority for Sec.  240.13f-2(T) is removed.

    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, 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, and 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; 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 (cite to be added), 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 of an issuer 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 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 
collectively have either:
    (i) 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
    (ii) A monthly average gross short position as a percentage of 
shares outstanding in the equity security of 2.5% or more; and
    (2) Each equity security of an issuer 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 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 collectively have 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

[[Page 15016]]

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 Regulation S-T. 
Certain information regarding each 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.
    (b) For the purposes of this rule:
    (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 Rule 3a11-1 thereunder.
    (3) The term ``investment discretion'' has the same meaning as in 
Rule 13f-1(b) under the Exchange Act.
    (4) The term ``gross short position'' means the number of shares of 
the equity security that are held short, without inclusion of any 
offsetting economic positions, including shares of the equity security 
or derivatives of such equity security.
    (5) The term ``regular trading hours'' has the same meaning as in 
Rule 600(b)(77) under the Exchange Act.

PART 242--REGULATIONS M, SHO, ATS, AC, NMS AND SBSR AND CUSTOMER 
MARGIN REQUIREMENTS FOR SECURITY FUTURES

0
3. The authority citation for part 242 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78g(c)(2), 
78i(a), 78j, 78k-1(c), 78l, 78m, 78n, 78o(b), 78o(c), 78o(g), 
78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 78mm, 80a-23, 80a-29, and 
80a-37.

0
4. Add Sec.  242.205 to read as follows:


Sec.  242.205   Purchase Order Marking for Data Collection Purposes.

    (a) A broker-dealer must mark an order to purchase an equity 
security for an account as ``buy to cover'' if the person purchasing 
the equity security has any gross short position in the equity security 
in the same account. The ``buy to cover'' mark applies to purchases 
made by the broker-dealer for its own account, or to purchases made by 
the broker-dealer on behalf of another person through the person's 
account held at that broker-dealer.
    (b) Reserved

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

0
5. 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
6. Add Sec.  249.333 to read as follows:


Sec.  249.333   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 Rule 13f-2 
thereunder (Sec.  240.13f-2 of this chapter)).

    Note:  The text of Form SHO will not appear in the Code of 
Federal Regulations.


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 
of an issuer 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 over which the Manager and all 
accounts over which the Manager (or any person under the Manager's 
control) has investment discretion collectively have either (A) 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 (B) a monthly average gross short 
position as a percentage of shares outstanding in the equity security 
of 2.5% or more; and (2) each equity security of an issuer 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 collectively have 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 that would reveal the identity of a Manager filing 
a Form SHO report with the Commission, or the identity of any Other 
Manager listed on the Cover Page of a Form SHO report, is deemed 
subject to a confidential treatment request under 17 CFR 240.24b-2. 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. Support for questions regarding non-technical 
issues related to Form SHO reporting is available through the Office of 
Interpretation and Guidance of the

[[Page 15017]]

Division of Trading and Markets (``TM OIG'') at 
[email protected].

Instructions for Calculating Reporting Threshold

    A Manager shall file a report on Form SHO:
     With regard to each equity security of an issuer 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 which the Manager 
meets or exceeds under 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, collectively have 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) the Manager, and all 
accounts over which the Manager, or any person under the Manager's 
control, has investment discretion, collectively have a monthly average 
gross short position as a percentage of shares outstanding in the 
equity security of 2.5% or more (``Threshold A'').
     With regard to any equity security 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'').
    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 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 settlement date.
    To determine whether the dollar value threshold described in 
Threshold B above is met, a Manager shall determine its end of day 
gross short position in the equity security 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) identify its gross 
short position (as defined in Rule 13f-2) 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, and 
(b) add up the daily percentages during the calendar month as 
determined in (a) and divide that total by the number of settlement 
dates during the calendar month of the 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., 2022).
    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 12 calendar months) is/are affected by the 
Amendment and Restatement. 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.
    b. If the 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 
[email protected], with notice of (1) this circumstance; and 
(2) an explanation of the reason for the revision.
    c. If a revision reported in an Amendment and Restatement changes a 
data point reported in the Form SHO being amended by twenty-five 
percent (25%) or more, the Manager must notify the Commission staff via 
TM OIG at [email protected] within two (2) business days after 
filing the Amendment and Restatement.
    4. 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 active Legal Entity Identifier 
(``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 active 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 Active 
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 active 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.

[[Page 15018]]

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 and report 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 Information:
    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 active 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 US 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.
    i. Column 9. Extent of Hedge for Short Position Identified in 
Column 7. Enter in Column 9 whether the identified position is fully 
hedged (``F''), partially hedged (``P''), or not hedged (``0''). A 
Manager shall 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. A Manager shall 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.
    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 active 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. Number of Shares Sold Short. For the settlement date 
set forth in Column 1, enter the number of shares of the security for 
which information is being reported that resulted from short sales and 
settled on that date.
    h. Column 8. Number of Shares Purchased to Cover an Existing Short 
Position. For the settlement date set forth in Column 1, 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 and settled on that date.
    i. Column 9. Number of Shares Purchased in Exercised Call Option 
Contracts. For the settlement date set forth in Column 1, 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.
    j. Column 10. Number of Shares Sold in Exercised Put Option 
Contracts. For the settlement date set forth in Column 1, enter the 
number of shares of the security for which information is being 
reported that are sold in a put option exercise that creates or 
increases a short position on that security and settled on that date.
    k. Column 11. Number of Shares Sold in Assigned Call Option 
Contracts. For the settlement date set forth in Column 1, enter the 
number of shares of the security for which information is being 
reported that are sold in a call option assignment that creates or 
increases a short position on that security and settled on that date.

[[Page 15019]]

    l. Column 12. Number of Shares Purchased in Assigned Put Option 
Contracts. For the settlement date set forth in Column 1, enter the 
number of shares of the security for which information is being 
reported that are acquired in a put option assignment that reduces or 
closes a short position on that security and settled on that date.
    m. Column 13. Number of Shares Resulting from Tendered Conversions. 
For the settlement date set forth in Column 1, enter the number of 
shares of the security for which information is being reported that are 
acquired as a result of the tendered conversions that reduces or closes 
a short position on that security and settled on that date.
    n. Column 14. Number of Shares Obtained through Secondary Offering 
Transactions. For the settlement date set forth in Column 1, 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.
    o. Column 15. Other Activity that Creates or Increases a Manager's 
Short Position. For the settlement date set forth in Column 1, enter 
the number of shares of the security for which information is being 
reported 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. Other activity to be reported includes, but 
is not limited to, shares resulting from ETF creation or redemption 
activity.
    p. Column 16. Other Activity that Reduces or Closes a Manager's 
Short Position. For the settlement date set forth in Column 1, enter 
the number of shares of the security for which information is being 
reported that resulted from other activity not previously reported on 
this form 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.

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.

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 and Facsimile Number:-------------------------------
Active Legal Entity Identifier (``LEI''):------------------------------

    Contact Employee:
Name and Title:--------------------------------------------------------
Telephone Number:------------------------------------------------------
Facsimile Number:------------------------------------------------------
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 Active LEI of each of the Other Manager(s) Reporting for 
this Manager: [If there are no entries in this list, omit this 
section.]

Name:------------------------------------------------------------------
Active LEI:------------------------------------------------------------

[Repeat as necessary.]

                                                                 Information Table 1--Manager's Gross Short Position Information
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
            Column 1                   Column 2            Column 3            Column 4            Column 5            Column 6            Column 7            Column 8            Column 9
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Settlement Date (Month End).....  Issuer Name.......  Issuer LEI........  Title of Class....  CUSIP Number......  FIGI..............  End of Month Gross  End of Month Gross  Extent of Hedge
                                                                                                                                       Short Position      Short Position      for Position
                                                                                                                                       (Number of          (rounded to         Identified in
                                                                                                                                       Shares).            nearest USD).       Column 7.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
(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          Column 8          Column 9          Column 10
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Settlement Date...............  Issuer Name.....  Issuer LEI......  Title of Class..  CUSIP Number....  FIGI............  Number of Shares  Number of Shares  Number of Shares  Number of Shares
                                                                                                                           Sold Short.       Purchased to      Purchased in      Sold in
                                                                                                                                             Cover an          Exercised Call    Exercised Put
                                                                                                                                             Existing Short    Option            Option
                                                                                                                                             Position.         Contracts.        Contracts.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 15020]]


--------------------------------------------------------------------------------------------------------------------------------------------------------
             Column 11                      Column 12               Column 13              Column 14              Column 15              Column 16
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of Shares Sold in Assigned    Number of Shares        Number of Shares        Number of Shares       Other Activity that    Other Activity that
 Call Option Contracts.               Purchased in Assigned   Resulting from          Obtained Through       Creates or Increases   Reduces or Closes
                                      Put Option Contracts.   Tendered Conversions.   Secondary Offering     Manager's Short        Manager's Short
                                                                                      Transactions.          Position.              Position.
--------------------------------------------------------------------------------------------------------------------------------------------------------
(Repeat as Necessary).


    Dated: February 25, 2022.

    By the Commission.
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2022-04670 Filed 3-15-22; 8:45 am]
BILLING CODE 8011-01-P


