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April 27, 2022

SEC Must Close Loopholes in Proposal to Ensure Short Selling Comes Out of the Shadows

WASHINGTON, D.C.—Legal Director and Securities Specialist Stephen Hall issued the following statement on the filing of Better Markets’ Comment Letter to the Securities and Exchange Commission (SEC) in response to the agency’s proposal to bring more transparency to short selling activity:

“To protect investors and markets, short selling transparency must be increased.  Disclosures must be expanded in terms of content, form, timing, and market participants.  Short selling involves the sale of stock that’s borrowed and it amounts to a bet that the stock price will go down, not up.  Done right and properly regulated, it has a legitimate role to play in our securities markets, but it also raises serious concerns because it can serve as a tool for abuse and manipulation while contributing to significant price volatility.  Those concerns materialized during the GameStop trading frenzy last year, yet reconstructing what fueled that episode has proven difficult in part because short selling remains largely hidden in the shadows.

“Regulators and market participants need more insight into levels of short selling activity, which is why the Dodd-Frank Act specifically directed the SEC to write such a rule.  This proposal is a step in the right direction because it will require institutional investment managers to report certain information about their short selling activity on a monthly basis, subject to thresholds.  And it will ensure the public dissemination of that information by the SEC in aggregate form.

“However, the proposal includes a major loophole, allowing investment managers to exclude derivatives positions that are functionally equivalent to short positions from the calculation of the reporting threshold.  That is what the Archegos hedge fund manager was arrested for just this morning. As we explain in our comment letter, if the SEC fails to close this loophole, many managers can be expected to shift their direct short positions into derivatives positions that pose the same risks and concerns but continue to be hidden from view – as Bill Hwang at Archegos is alleged to have done.  That would largely gut the rule.  We also urge the SEC to strengthen the proposal by reducing or eliminating the reporting thresholds to minimize the level of short selling activity that escapes the reporting requirements.”

Read our full comment letter here.

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Better Markets is a non-profit, non-partisan, and independent organization founded in the wake of the 2008 financial crisis to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again. Better Markets works with allies—including many in finance—to promote pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system that protects and promotes Americans’ jobs, savings, retirements and more. To learn more, visit www.bettermarkets.org.

Contact:  Contact: Anton Becker, Communications Director, at 202-618-6430 or abecker@Bettemarkets.org

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