Mark Uyeda "when these changes from the proposal are taken together, to what extent can the resulting information be used to estimate particular short selling positions & is that acceptable?"
Source: https://www.sec.gov/news/statement/uyeda-statement-securities-lending-101323
Thank you, Chair Gensler. Under Section 984(b) of the Dodd-Frank Act, the Commission is required to promulgate rules “designed to increase the transparency of information available to brokers, dealers, and investors with respect to the loan or borrowing of securities.”[1] Today, the Commission considers adopting final Rule 10c-1a to fulfill that obligation. This rule would require covered persons to provide to a registered national securities association—which is effectively FINRA—information concerning certain securities loans within specified time periods, and would require FINRA to make certain information publicly available. The final rule also contains requirements for FINRA on data retention and reasonable fees.
I have significant concerns with the rulemaking process on this proposal. The Commission issued for comment a proposed rule regarding the reporting of securities loans, which was published in the Federal Register on December 8, 2021.[2] Comments were due 30 days later on January 7, 2022, a period which spanned the first Christmas and New Year’s Day holidays in which people were able to travel after COVID restrictions were lifted.
Subsequent to the end of that comment period, the Commission proposed a rule on short sale reporting.[3] These two rules are significantly inter-related: one calls for position and activity reporting by persons who borrow securities to engage in short sales, and the other involves reporting of loans of securities, which is used to facilitate short sales. Thus, the Commission reopened the comment period for the proposal regarding the reporting of securities loans and briefly stated that it was “soliciting comment on any potential effects of the proposed … rule regarding short sale disclosure that the Commission should consider in determining whether to adopt the proposed … rule regarding the reporting of securities loans.”[4] It was published in the Federal Register on March 2, 2022 and comments were due 30 days later on April 1, 2022. While there were no holidays over this period, a 30 day comment period was far too short to expect thoughtful analysis from the public on the interaction of the two complicated proposals.
Now some might argue that given that 18 months have elapsed since the close of the reopened comment period, combined with the fact that the Commission has accepted late comments, those deadlines are rendered irrelevant. But that’s not the case. I have been involved in rulemaking at the SEC since 2006. It is my experience that interested parties have to decide early on whether to invest the resources necessary to prepare a comment letter. Short deadlines discourage interested persons and other stakeholders from even starting the effort to write a comment. Moreover, given the large volume of other proposals that were out for comment at the same time in 2022, stakeholders essentially needed to pick and choose the proposals for which it might be feasible to prepare a comprehensive and thoughtful comment letter. After all, writing comment letters is not a costless exercise.
Given the tight interrelation of the two rules, changes to each of them from the proposal stage to the final rule stage need to be considered in weighing the interactive effects on their costs and benefits. The potential interactive effects of these combined changes would have benefitted from additional public comment—and this time, with a comment period of sufficient length. There has not been an opportunity for the public to weigh in and comment on what is essentially a different regime being considered today.
Even taken in isolation, the changes from the proposal to final Rule 10c-1a on the reporting of securities loans are qualitatively of such a nature as to warrant a re-proposal, along with an updated economic analysis, so as to provide public feedback on this new set of regulatory and policy choices. The modifications from the proposed rule—admittedly made in response to comments and hopefully constituting improvements—nonetheless collectively render the final rule sufficiently different from the original proposal. The changes include modifications to the scope of persons required to report, the scope of securities for which loans must be reported, the type of loan transaction to which the final rule applies, the information required to be reported, and the timing of required reporting and responsibilities of the RNSA.
While some changes may not be large, some are substantial, and collectively they amount to a fundamentally different reporting regime. For example, the data reporting requirement to FINRA within 15 minutes after a loan is effected has been replaced by a requirement to report such elements by the end of that day. That is potentially up to a 32-fold difference in reporting time. But it raises reasonable questions: if at the end of the day, perhaps T+1 or later would make more sense. When considered alongside the changes in the short selling reporting rule, the argument for a re-proposal becomes even more compelling. Changes to the short sale reporting rule include streamlining Form SHO, adjusting reporting thresholds, dropping the “buy to cover” order mark, and modifying the rule text as well as the instructions to Form SHO. How do all of these changes work when taken together?
There are important trade-offs within the interaction of these two rules. For example, when these changes from the proposal are taken together, to what extent can the resulting information be used to estimate particular short selling positions and is that acceptable? Simply put, the public has not had the opportunity to comment on this very different regime than the one that was proposed and, for that reason, one could argue that this final rule is arbitrary and capricious. A re-proposal with an appropriate economic analysis and a proper comment period might have gone a long way to address my concerns. In light of those concerns, however, I cannot support the adoption of this rule. I thank the staff in the Divisions of Trading and Markets and Economic and Risk Analysis as well as the Office of General Counsel for their efforts.
[1] Pub. L. 111-203, sec. 984(b), 124 Stat. 1376 (2010).
[2] See Reporting of Securities Loans, Reporting Release No. 34–93613 (Nov. 18, 2021) [86 FR 69802 (Dec. 8, 2021)], available at https://www.sec.gov/files/rules/proposed/2021/34-93613.pdf.
[3] See Short Position and Short Activity Reporting by Institutional Investment Managers, Release No. 34-94313, (Feb. 25, 2022) [87 FR 14950 (March 16, 2022)], available at https://www.sec.gov/files/rules/proposed/2022/34-94313.pdf.
[4] See Reopening of Comment Period for Reporting of Securities Loans, Release No. 34-94315 (Feb 25, 2023) (underlining added) [87 FR 11659 (March 2, 2022)], available at https://www.sec.gov/files/rules/proposed/2022/34-94315.pdf.
What is Mark so upset about?
Fact Sheet
Press Release:
The Securities and Exchange Commission today adopted new Rule 13f-2 to provide greater transparency to investors and other market participants by increasing the public availability of short sale related data. Congress directed the SEC in Section 929X of the Dodd-Frank Act of 2010 to promulgate rules to make certain short sale data publicly available.
“In the wake of the 2008 financial crisis, Congress directed the SEC to enhance the transparency of short selling of equity securities,” said SEC Chair Gary Gensler. “Today’s adoption will promote greater transparency about short selling both to regulators and the public. This rule addresses Congress’s mandate and improves upon existing sources of short sale-related data in the equity markets. Given past market events, it’s important for the Commission and the public to know more about short sale activity in the equity markets, especially in times of stress or volatility.”
Specifically, Rule 13f-2 will require institutional investment managers that meet or exceed certain thresholds to report on Form SHO specified short position data and short activity data for equity securities. The Commission will aggregate the resulting data by security, thereby maintaining the confidentiality of the reporting managers, and publicly disseminate the aggregated data via EDGAR on a delayed basis. This new data will supplement the short sale data that is currently publicly available.
Relatedly, the Commission today also adopted an amendment to the National Market System Plan (NMS Plan) governing the consolidated audit trail (CAT). The amendment to the NMS Plan governing the CAT (CAT NMS Plan) will require each CAT reporting firm that is reporting short sales to indicate when it is asserting use of the bona fide market making exception in Rule 203(b)(2)(iii) of Regulation SHO.
The adopting release for Rule 13f-2 and related Form SHO, as well as the notice of the amendment to the CAT NMS Plan, will be published in the Federal Register. The final rule, Form SHO, and the amendment to the CAT NMS Plan will become effective 60 days after publication of the adopting release in the Federal Register. The compliance date for Rule 13f-2 and Form SHO will be 12 months after the effective date of the adopting release, with public aggregated reporting to follow three months later, and the compliance date for the amendment to the CAT NMS Plan will be 18 months after the effective date of the adopting release.
TLDRS:
- SEC Adopts Rule to Increase Transparency Into Short Selling and Amendment to CAT NMS Plan for Purposes of Short Sale Data Collection.
- Rule 13f-2 and Form SHO: Rule 13f-2 will require a Manager to file a Form SHO report via the Commission’s EDGAR system within 14 calendar days after the end of each calendar month with regard to:
- Each equity security that is of a class of securities that is registered pursuant to Section 12 of the Exchange Act or for which the issuer of that class of securities is required to file reports pursuant to Section 15(d) of the Exchange Act (“Reporting Company Issuer”) over which the Manager and all accounts over which the Manager (or any person under the Manager’s control) has investment discretion with respect to a monthly average gross short position that meets or exceeds a prescribed reporting threshold
- Each equity security that is of a class of securities of an issuer that is not a Reporting Company Issuer over which the Manager and all accounts over which the Manager (or any person under the Manager’s control) has investment discretion with respect to a gross short position that meets or exceeds a prescribed reporting threshold.
- SEC Commissioner Mark Uyeda "when these changes from the proposal are taken together, to what extent can the resulting information be used to estimate particular short selling positions & is that acceptable?"
- In light of those concerns, however, I cannot support the adoption of this rule.
For each reported equity security, a Manager will be required to report on Form SHO certain information, including:
- The Manager’s end-of-month gross short position in the equity security at the close of regular trading hours on the last settlement date of the calendar month
- For each individual settlement date during the calendar month, the Manager’s “net” activity in the reported equity security, which includes activity in derivatives, such as options.
- The Commission will then publish, through EDGAR, and on a slightly delayed basis, certain aggregated short sale related information regarding each equity security reported by Managers on Form SHO.
