Fifteen years after the 2008 financial crisis, the SEC is finally fulfilling a congressional mandate to increase transparency around short selling. The much-delayed move follows a direction from Congress to the SEC to enhance disclosure of short-selling activity by institutional investors.
The Dodd-Frank Act specifically required the SEC to create rules for investment managers to report their short positions on a monthly basis.
But with proponents having to wait over a decade—and six Congresses—it is yet another reason for those waiting for approval for the long list of spot Bitcoin ETFs to avoid holding their breath.
The industry has learned that things in Washington move a little slower than the crypto markets.
On October 13, 2022, SEC Chair Gary Gensler announced that the Commission has adopted these long-awaited rules. The new requirements will give regulators and the public more insight into short selling—betting that an asset’s price will fall—which was linked to volatility during the 2008 crisis.
Under the new rules, managers with large short positions in equity securities will be required to report those positions and related short-selling activity to the SEC within two weeks after the end of each month.
The reporting threshold is met when a manager’s short position in a particular stock is at least $10 million or 2.5% of total shares outstanding on average during the month.
The SEC will then publish aggregated, anonymous versions of the data, including managers’ gross short positions and daily net short selling activity, within four weeks after each month’s end.
The SEC introduced the securities lending disclosure rule in 2021, making changes in response to public comments.
The final rule now delays the publication of trade details to the following morning, and individual loan amounts to 20 business days after reporting.
Gensler explained that this fulfills Congress’s transparency mandate from over a decade ago.
He said the data will “promote greater transparency about short selling both to regulators and the public.” The SEC also hopes it will provide valuable information during times of market stress.
While the Financial Industry Regulatory Authority (FINRA) has published some short interest data before, Gensler noted this SEC rule covers more firms and requires daily activity disclosures.
He called it an important step toward addressing issues raised in the SEC’s GameStop report . A document published last year—so a little quicker than transparency over short positions
However, it’s not just its critics that have pointed out the SEC’s plodding pace. Hester Peirce, one of the five Commissioners that make up the regulator, has previously called its approach —with regard to crypto—“too slow, and too ambiguous.”
A sentiment echoed by the crypto industry, which has repeatedly called out the SEC for being too slow to provide clarity for businesses and investors.
In July 2022, Coinbase petitioned the SEC to propose rules for regulating digital assets. After receiving over 1,600 comments, the SEC had still not taken action 9 months later.
This led Coinbase to file a lawsuit in April 2023 accusing the SEC of egregious delay, but the regulator denied it, saying it had not yet made any decisions. In response, the regulator blamed the complexity of Coinbase’s proposals and its resource constraints for the wait.
“The SEC’s and its officials’ words and deeds outside this proceeding have only further confirmed that the agency has denied Coinbase’s petition in all but name,” the letter read.
Whilst the Coinbase case is materially different, it’s a reminder of the lack of urgency in the room when it comes to digital assets. If the industry gets a spot Bitcoin ETF approval this year, it will be because the courts left them “very little wiggle room,” according to one Bloomberg analyst.