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New SEC Proposal Calls for Short-Sale Reporting

March 7, 2022

Adding to the spate of substantive rulemakings flooding out of the SEC, a new proposal would require institutional investment managers that exercise discretion over client accounts – i.e., investment advisers required to file Form 13F – to report short positions that meet specified thresholds confidentially to the SEC on a monthly basis.

Managers will need to report if they have, in the aggregate, a gross short position of $10 million or more, or a monthly average gross short position of 2.5 percent or more, of the outstanding shares of an equity security of an issuer registered under Section 12 of the Exchange Act or required to file Section 15(d) reports. For equity securities that are not registered or reported under the Exchange Act, the manager will have to report if it has a gross short position in a security of at least $500,000 at the end of any trading day in a calendar month. Positions will need to be aggregated across all accounts over which the manager – or anyone under the manager’s control – exercises discretion.

Following the confidential monthly reports to the SEC, the SEC plans to make aggregated data public within one month following the reporting month. The SEC believes that a majority of the reported short positions would be closed out by then. The public report would not identify any of the reporting managers or the amount of their holdings.

This proposal follows a mandate under the Dodd-Frank Act for the SEC to adopt rules to require public disclosure of aggregate short positions at least every month, but it also responds to concerns that recent market volatility has highlighted the lack of transparency “into the circumstances surrounding short sale transactions.” The SEC recognizes that the proposal would entail additional compliance costs to determine whether a manager is required to submit a report, among others.

According to the SEC, the proposal tries to balance the important role that short selling plays in the market with the benefits of increased transparency. The SEC acknowledges that one of its goals is also to “bolster its oversight of short selling,” for example, to identify potentially abusive or manipulative schemes and also allow it to reconstruct significant market events.

The IAA is reviewing the proposal to determine whether we should comment. Like virtually all the proposals issued by the SEC so far this year, the SEC is providing an exceedingly short period of 30 days for comment. The deadline for this proposal is April 26.

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