[Federal Register Volume 88, Number 210 (Wednesday, November 1, 2023)]
[Rules and Regulations]
[Pages 75100-75188]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-23050]



[[Page 75099]]

Vol. 88

Wednesday,

No. 210

November 1, 2023

Part II





 Securities and Exchange Commission





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17 CFR Parts 240 and 249





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

Federal Register / Vol. 88 , No. 210 / Wednesday, November 1, 2023 / 
Rules and Regulations

[[Page 75100]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 249

[Release No. 34-98738; File No. S7-08-22]
RIN 3235-AM34


Short Position and Short Activity Reporting by Institutional 
Investment Managers

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
adopting a new rule and new Form SHO pursuant to the Securities 
Exchange Act of 1934 (``Exchange Act'') and the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (``DFA''). The new 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 new rule, institutional investment managers 
that meet or exceed certain specified reporting thresholds are required 
to report, on a monthly basis using the related form, specified short 
position data and short activity data for equity securities. In 
addition, the Commission is adopting an amendment to the national 
market system (``NMS'') plan governing the consolidated audit trail 
(``CAT'') created pursuant to the Exchange Act to require the reporting 
of reliance on the bona fide market making exception in the 
Commission's short sale rules. The Commission is publishing the text of 
the amendments to the NMS plan governing the CAT (``CAT NMS Plan'') in 
a separate notice.

DATES: 
    Effective date: January 2, 2024.
    Compliance date: The applicable compliance date is discussed in 
Part VI of this release.

FOR FURTHER INFORMATION CONTACT: Timothy M. Riley, Branch Chief; 
Patrice M. Pitts, Special Counsel; James R. Curley, Special Counsel; 
Jessica Kloss, Attorney Advisor; Brendan McLeod, Attorney Advisor; 
Roland Lindmayer, Attorney Advisor; Josephine J. Tao, Assistant 
Director, Office of Trading Practices; and Carol McGee, Associate 
Director, Office of Derivatives Policy and Trading Practices, Division 
of Trading and Markets, Securities and Exchange Commission, 100 F 
Street NE, Washington, DC 20549-8010, at (202) 551-5777.

SUPPLEMENTARY INFORMATION: The Commission is adopting new 17 CFR 
240.13f-2 (``Rule 13f-2'') and related form 17 CFR 249.332 (``Form 
SHO'') under the Exchange Act to require certain institutional 
investment managers to report, on a monthly basis on new Form SHO, 
certain short position data and short activity data for certain equity 
securities as prescribed in Rule 13f-2.
    The Commission is also adopting, in a separate notice published 
elsewhere in this issue of the Federal Register, an amendment to the 
CAT NMS Plan (``CAT Amendment''), pursuant to 17 CFR 242.608(a)(2) 
(``Rule 608(a)(2)'') and (b)(2) (``Rule 608(b)(2)''), that enables the 
Commission to adopt a rule to amend any effective NMS plan. For the 
text of the amendment to the CAT NMS Plan, please see the Notice of the 
Text of the Amendment to the National Market System Plan Governing the 
Consolidated Audit Trail for Purposes of Short Sale-Related Data 
Collection.\1\
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    \1\ Notice of the Text of the Amendment to the National Market 
System Plan Governing the Consolidated Audit Trail for Purposes of 
Short Sale-Related Data Collection, Exchange Act Release No. 34-
98739 (Oct. 13, 2023).
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Table of Contents

I. Overview
    A. Background
    B. The Proposals
    C. Overview of Proposed Rule 13f-2, Proposed Form SHO, Proposed 
Rule 205 and Proposed CAT Amendments
    1. Overview of Comments Received
    2. Final Rule 13f-2, Form SHO and CAT Amendment
II. Discussion of Final Rule 13f-2 and Form SHO
    A. Final Rule 13f-2
    1. Scope of Persons Covered by Final Rule 13f-2
    2. Scope of Reported Securities
    3. Reporting Thresholds
    4. Form SHO
    B. Data Aggregation and Publication of Information by the 
Commission
    1. Proposal
    2. Comments
    3. Final Rule
III. Proposed Amendment to Regulation SHO To Aid Short Sale Data 
Collection
    A. Proposed Rule 205
    B. Comments
IV. Amendments to CAT
    A. Proposal To Require ``Buy to Cover'' Order Marking
    B. Proposal To Require Reporting of Reliance on Bona Fide Market 
Maker Exception
V. Other Comments
VI. Compliance Date
VII. Paperwork Reduction Act Analysis
    A. Background
    B. Burdens for Managers Under Rule 13f-2 and Form SHO
    1. Applicable Respondents
    2. Burdens and Cost
    C. Burdens and Costs Associated With the Amendment to CAT
    1. Summary of Collections of Information
    2. Use of Information
    3. Respondents
    4. Total Initial and Annual Reporting and Record Keeping Burdens
    D. Collection of Information Is Mandatory
    E. Retention Period of Recordkeeping Requirement
    F. Confidentiality
VIII. Economic Analysis
    A. Introduction
    B. Baseline
    1. Institutional Investment Managers
    2. Short Selling
    3. Current Short Selling Regulations
    4. Existing Short Selling Data
    5. Competition
    C. Economic Effects
    1. Investor Protection and Market Manipulation
    2. Effects on Stock Price Efficiency
    3. Effect on Market Liquidity
    4. Effect on Corporate Decision Making
    5. Effect on the Securities Lending Market
    6. Compliance Cost
    7. Effect of Certain Electronic Filing and Dissemination 
Requirements
    8. Potential Increased Use of Derivatives
    D. Efficiency, Competition and Capital Formation
    1. Efficiency
    2. Competition
    3. Capital Formation
    E. Reasonable Alternatives
    1. Alternative Approaches
    2. Data Modifications
    3. Threshold Modifications
    4. Other Alternatives
IX. Regulatory Flexibility Act Certification
X. Other Matters
Statutory Authority

I. Overview

A. Background

    Short selling involves a 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\ In order to deliver 
the security to the purchaser, the short seller will generally borrow 
the security, usually from a broker-dealer or an institutional 
investor, and later close out the position by purchasing equivalent 
securities on the open market and returning the security to the lender.
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    \2\ See 17 CFR 242.200(a).
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    Short selling is generally used to profit from an expected downward 
price movement, to provide liquidity in response to unanticipated 
demand,\3\ or

[[Page 75101]]

to hedge the risk of a long position in the same security or a related 
security.\4\ Short selling provides the market with important benefits, 
such as providing market liquidity and pricing efficiency.\5\ While 
short selling can serve useful market purposes, such as facilitating 
price discovery, there are concerns that it could be used to drive down 
the price of a security, to accelerate a declining market in a 
security, or to manipulate stock prices.\6\
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    \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 in part 
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 11235 nn. 29 & 30. Historically, short sellers have, 
at times, through doing research, uncovered fraudulent behavior. See 
also generally discussion in infra Parts VIII.C.2 and VIII.C.4.
    \6\ See, e.g., Div. Econ. Risk Analysis, Short Sale Position and 
Transaction Reporting (June 5, 2014), at 6-7 (``DERA 417(a)(2) 
Study''), available at https://www.sec.gov/files/short-sale-position-and-transaction-reporting0.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 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.C.1.
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    The Commission has plenary authority under section 10(a) of the 
Exchange Act to regulate short sales of securities as necessary or 
appropriate in the public interest or for the protection of 
investors.\7\ Regulation SHO, which became effective on January 3, 
2005,\8\ imposes four general requirements with respect to short sales 
of equity securities. Under 17 CFR 242.200 (``Rule 200 of Regulation 
SHO''), broker-dealers must properly mark sale orders as ``long,'' 
``short,'' or ``short exempt.'' \9\ Under 17 CFR 242.203 (``Rule 203 of 
Regulation SHO''), a broker-dealer must locate a source of shares that 
the broker-dealer reasonably believes can be delivered in time for 
settlement (commonly referred to as the ``locate requirement'') before 
effecting a short sale.\10\ Under 17 CFR 242.204 (``Rule 204''), if the 
broker or dealer that is a member of a registered clearing agency fails 
to deliver the security to the registered clearing agency in time for 
settlement, the broker or dealer must take action to close out the 
failure to deliver if that failure results from a long or short 
sale.\11\ Separately, under 17 CFR 242.201 (``Rule 201''), trading 
centers \12\ must have policies and procedures in place to restrict 
short selling when a covered security has triggered a short sale price 
test circuit breaker.\13\ In addition, the Commission adopted an 
antifraud provision, 17 CFR 240.10b-21 (``Rule 10b-21''), to address 
failures to deliver in securities that have been associated with 
``naked'' short selling.\14\
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    \7\ 15 U.S.C. 78j(a).
    \8\ See Regulation SHO Adopting Release.
    \9\ 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 17 
CFR 242.200(g). 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 In re OZ Mgmt., Exchange Act Release 
No. 75445 (July 14, 2015) (settled) (discussing 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.
    \10\ See 17 CFR 242.203(b)(1) and (2). The Regulation SHO locate 
requirement provides that broker-dealers may not accept a short sale 
order in an equity security from another person, or effect a short 
sale in an equity security for its own account, unless the broker-
dealer has (i) borrowed the security, or entered into a bona-fide 
arrangement to borrow the security; or (ii) reasonable grounds to 
believe that the security can be borrowed so that it can be 
delivered on the date delivery is due; and (iii) documented 
compliance with this requirement (``locate requirement'').
    \11\ See 17 CFR 242.204. ``Failures to deliver,'' or ``fails,'' 
occur when a broker-dealer fails to deliver securities to the party 
on the other side of the transaction on the settlement date.
    \12\ Trading center in Regulation SHO means a national 
securities exchange or national securities association that operates 
an SRO trading facility, an alternative trading system, an exchange 
market maker, an OTC market maker, or any other broker or dealer 
that executes orders internally by trading as principal or crossing 
orders as agent. 17 CFR 242.200.
    \13\ See 17 CFR 242.201.
    \14\ See ``Naked'' Short Selling Antifraud Rule, Exchange Act 
Release No. 58774 (Oct. 14, 2008), 73 FR 61666, 61674 (Oct. 17, 
2008) (In a ``naked'' short sale, a seller does not borrow or 
arrange to borrow the necessary securities in time to deliver them 
to the buyer within the standard settlement period. Although abusive 
``naked'' short selling is not defined in the federal securities 
laws, it refers generally to selling short without having stock 
available for delivery and intentionally failing to deliver stock 
within the standard settlement period. In addition, a seller 
misrepresenting its short sale locate source or ownership of shares 
may intend to fail to deliver securities in time for settlement and, 
therefore, engage in abusive ``naked'' short selling.).
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    Section 929X of the DFA added section 13(f)(2) of the Exchange Act, 
entitled ``Reports by institutional investment managers,'' requiring 
the Commission to prescribe rules to make certain short sale data 
publicly available no less frequently than monthly.\15\ Specifically, 
section 13(f)(2) provides: ``[t]he Commission shall prescribe rules 
providing for the public disclosure of the name of the issuer and the 
title, class, CUSIP [Committee on Uniform Securities Identification 
Procedures] 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.'' \16\ In addition, the 
Commission has received multiple petitions to adopt reporting 
requirements for short sellers similar to those required for holders of 
long positions.\17\
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    \15\ Public Law 111-203, sec. 929X, 124 Stat. 1376, 1870 (July 
21, 2010).
    \16\ 15 U.S.C. 78m(f)(2).
    \17\ See, e.g., Letter from Elizabeth King, Corporate Secretary, 
NYSE Group, et al. (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; 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 (``NASDAQ Petition''); see also 
Letter from E. Carter Esham, Executive Vice President, Emerging 
Companies, Biotechnology Innovation Organization (BIO) (Mar. 11, 
2016) (``BIO Letter'') (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 et al., 
``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) (retrieved from Factiva database). See also Sharon Nunn & Adam 
Kulam, Short-Selling Restrictions During Covid-19, Yale Sch. of 
Mgmt., Program on Fin. Stability (Jan. 12, 2021), available at 
https://som.yale.edu/story/2021/short-selling-restrictions-during-covid-19 (discussing global short selling regulatory responses to 
the Covid-19 pandemic).

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[[Page 75102]]

B. The Proposals

    In February 2022, in an effort to increase transparency regarding 
short position and short activity data to both market participants and 
regulators, and to address the requirements of section 13(f)(2), the 
Commission proposed new rule 13f-2 (``Proposed Rule 13f-2'') and 
related form (``Proposed Form SHO'') under the Exchange Act.\18\ 
Proposed Rule 13f-2 would require certain institutional investment 
managers (``Managers'') with gross short positions that meet certain 
quantitative reporting thresholds to report, on a monthly basis on new 
Proposed Form SHO, certain short position data and short activity data 
for certain equity securities. Proposed Form SHO included two parts: 
Information Table 1-reports of information including, but not limited 
to, data elements explicitly referenced in section 13(f)(2), gross end-
of-month short positions in equity securities that meet the reporting 
thresholds, and whether such positions are fully hedged, partially 
hedged, or not hedged; and Information Table 2-reports of information 
including, but not limited to, certain daily activity data (including 
options assignments and exercises) that affect a Manager's gross short 
positions during the calendar month reporting period. Managers would 
file Proposed Form SHO with the Commission via the Commission's 
Electronic Data Gathering, Analysis, and Retrieval system (``EDGAR'') 
within 14 calendar days after the end of the calendar month. The 
Commission would then expect to publish on EDGAR aggregated information 
derived from the data reported on Proposed Form SHO within one month 
after the end of the reporting calendar month.
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    \18\ Short Position and Short Activity Reporting by 
Institutional Investment Managers, Exchange Act Release No. 34-94313 
(Feb. 25, 2022), 87 FR 14950 (Mar. 16, 2022) (``Proposing 
Release'').
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    In the Proposing Release, the Commission stated that the required 
short sale disclosures that would be collected under Proposed Form SHO 
and the aggregated data published pursuant to Proposed Rule 13f-2 would 
increase transparency and provide several important benefits to market 
participants and regulators. Such aggregated information would help 
inform market participants regarding the overall short sale activity by 
reporting Managers. More information about the short sale activity and 
gross short positions of reporting Managers may promote greater risk 
management among market participants and may facilitate capital 
formation to the extent that greater transparency bolsters confidence 
in the markets. As discussed in the Proposing Release, the Commission's 
regular access to Proposed Form SHO data would bolster the Commission's 
oversight of short selling, as Proposed Rule 13f-2 and Proposed Form 
SHO would improve the utility of information available to the 
Commission and other regulators.\19\
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    \19\ Proposing Release, at 14951.
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    Additionally, to supplement the short sale data made available to 
the Commission in Proposed Form SHO filings, the Commission proposed a 
new rule at 17 CFR 242.205 prescribing a ``buy to cover'' order marking 
requirement under Regulation SHO (``Proposed Rule 205'') for certain 
purchase orders effected by a broker-dealer for its own account or for 
the account of another person at the broker-dealer, if, at the time of 
order entry, the purchaser had a gross short position in such security 
in the account for which the purchase is being made. The Commission 
also proposed amendments to the NMS plan governing the CAT (``Proposed 
CAT Amendments'') to require the reporting of ``buy to cover'' order 
marking information and of reliance on the bona fide market making 
exception in Rule 203(b)(2)(iii) of Regulation SHO (``BFMM locate 
exception''). Proposed Rule 205 and the Proposed CAT Amendments were 
designed to fill an information gap for the Commission and other 
regulators by providing insights into the lifecycle of a short sale 
that are not available under existing data sources.\20\
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    \20\ Because data obtained through CAT are not made public, the 
``buy to cover'' and ``bona fide market making'' data reported 
pursuant to the Proposed CAT Amendments would not be made publicly 
available as a result of such reporting.
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C. Overview of Proposed Rule 13f-2, Proposed Form SHO, Proposed Rule 
205 and Proposed CAT Amendments

1. Overview of Comments Received
    The Commission received robust comment on Proposed Rule 13f-2, 
Proposed Form SHO, Proposed Rule 205, and the Proposed CAT Amendments 
(collectively, the ``Proposals''). Comments were submitted by 
individual investors as well as other market participants, such as 
trade associations, institutional investment managers, investment 
advisers, broker-dealers, non-profit organizations, and academicians. 
These comments, which are discussed in context below, included a 
variety of different viewpoints on various aspects of the 
Proposals.\21\ Many commenters were supportive of the Proposals as a 
step toward increasing transparency into short sale activity.\22\ Many 
commenters stated that short selling is a particularly opaque area of 
the market and that increasing transparency regarding short selling 
would be beneficial to market participants.\23\

[[Page 75103]]

Some of these commenters stated that the increased information 
regarding short sales would allow investors to be better informed and 
make better investment decisions.\24\ A number of these commenters 
urged the Commission to strengthen the proposed reporting requirements 
further by, for example, lowering or eliminating the thresholds 
triggering reporting obligations under Proposed Rule 13f-2.\25\
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    \21\ The comment letters on the Proposing Release (File No. S7-
08-22) are available at https://www.sec.gov/comments/s7-08-22/s70822.htm. Over 98% of the over 3,000 comments received were from 
individual investors, most of whom (over 1,900) submitted a 
variation of a template letter from ``We The Investors,'' an 
advocacy group for retail investors. The remaining comments were 
from trade associations, financial services firms--including 
institutional investment managers and investment management firms, 
broker-dealers--and their advisors, non-profit organizations, 
academicians, and entities other than individual investors. See 
Comment Letter from We the Investors, available at https://www.sec.gov/comments/s7-08-22/s70822-typea.pdf (``WTI Letter'').
    \22\ See, e.g., Comment from Samuel Hudock (Mar. 2, 2022), 
available at https://www.sec.gov/comments/s7-08-22/s70822-20118373-271244.htm; Comment from Michelle R. Bracke (Mar. 4, 2022) available 
at https://www.sec.gov/comments/s7-08-22/s70822-20118531-271417.htm; 
Comment from Joshua Barbee (Mar. 4, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20118530-271416.htm; Comment 
from Robert Ross (Mar. 14, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20119365-272251.htm; Comment from David 
Arkules (Feb. 28, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20118071-270876.htm; Comment from Gina Preziosi 
(Mar. 7, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20118726-271589.htm; Comment from Jessica Cooke (Mar. 9, 
2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20118963-271791.htm; Comment from Mauricio Gonzalez (Oct. 12, 2022), 
available at https://www.sec.gov/comments/s7-08-22/s70822-310835.htm; Comment from Liam Sutton (Oct. 19, 2022), available at 
https://www.sec.gov/comments/s7-08-22/s70822-311965.htm; Comment 
from Nicholas Graham (Oct. 19, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-312051.htm; Comment from 
Steffen Maier (Oct. 19, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-312049.htm; Comment from Zachary D'Elia 
(Oct. 19, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-312047.htm; Comment from Stephen Leachman (Oct. 19, 2022), 
available at https://www.sec.gov/comments/s7-08-22/s70822-312046.htm; Comment from Sergio Herrera (Oct. 19, 2022), available 
at https://www.sec.gov/comments/s7-08-22/s70822-312042.htm; Comment 
from David P. Miller Jr. (Oct. 19, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-312038.htm.
    \23\ See, e.g., Comment from William Bloxham (Oct. 21, 2022), 
available at https://www.sec.gov/comments/s7-08-22/s70822-313372.htm; Comment from Ricardo Gomez (Oct. 29, 2022), available at 
https://www.sec.gov/comments/s7-08-22/s70822-316604.htm; Comment 
from Victor Arriaza (Oct. 29, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-316625.htm; Comment from Kyle 
Byrd (Oct. 29, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-316701.htm; Comment from Tarek Elseweifi (Oct. 29, 
2022), available at https://www.sec.gov/comments/s7-08-22/s70822-316706.htm; Comment from Clay Wyant (Oct. 29, 2022), available at 
https://www.sec.gov/comments/s7-08-22/s70822-316708.htm; Comment 
from Yin Hung Lam (Oct. 29, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-316601.htm; Comment from Evan Anderson 
(Oct. 29, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-316580.htm; Comment from Connor Judson (Oct. 29, 2022), 
available at https://www.sec.gov/comments/s7-08-22/s70822-316599.htm; Comment from Nicky (Oct. 29, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-316638.htm.
    \24\ See, e.g., Comment from Eric Mills (April 27, 2022), 
available at https://www.sec.gov/comments/s7-08-22/s70822-20126810-287520.htm (``[T]he proposals will serve the mission of the SEC by 
increasing transparency regarding short selling activity. On-going 
efforts by the SEC to increase market transparency and relieve 
information asymmetries promote efficiency, order, fairness, capital 
formation, and public trust. The result is an enhancement of 
investor ability to assess the market and make more informed 
decisions.''); Comment from Stanley Little (Mar. 8, 2022), available 
at https://www.sec.gov/comments/s7-08-22/s70822-20118870-271692.htm 
(``The proposed rule is a[n] important missing link for investors. 
The ordinary person wishing to make money in the stock market should 
have all available information at their disposal to make informed 
decisions . . . The transparency rule is such a tool needed to make 
well informed decisions.''); Comment from Brendon Withers (Feb, 27, 
2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20118078-270936.htm (supported ``immediate implementation [of the 
proposals] to improve the US Stock Market and provide a more fair 
and free system in which market participants can have accurate 
information and make informed decisions based on CURRENT AND 
ACCURATE data.'').
    \25\ See, e.g., Letter from Stephen W. Hall, Legal Director and 
Securities Specialist, Better Markets, et al. (Apr. 26, 2022), at 
12, available at https://www.sec.gov/comments/s7-08-22/s70822-20126822-287528.pdf (``[T]the SEC should eliminate the proposed 
thresholds so as to reduce or eliminate the risk that unknown, 
hidden short positions could pose to investors and the markets.'') 
(``Better Markets Letter''); Comment from Matthew Sinex (Oct. 31, 
2022), available at https://www.sec.gov/comments/s7-08-22/s70822-317106.htm; Comment from Noah Tewahade (Oct. 30, 2022), available at 
https://www.sec.gov/comments/s7-08-22/s70822-317046.htm; Comment 
from Luke Dansie (Oct. 31, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-317081.htm; Comment from Mike Flowers (Oct. 
30, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-317245.htm; Comment Letter from Katherine Lander (Oct. 30, 
2022), available at https://www.sec.gov/comments/s7-08-22/s70822-317266.htm; Comment from Marco Alvarenga (Oct. 31, 2022), available 
at https://www.sec.gov/comments/s7-08-22/s70822-316992.htm; Comment 
Letter from Erikka Jehle (Oct. 31, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-316930.htm.
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    As discussed in further detail below, some commenters recommended 
changes to the Proposals in response to their concerns about: the scope 
of Proposed Rule 13f-2; the underlying approach and levels of the 
proposed thresholds that would trigger a reporting obligation under 
Proposed Rule 13f-2; the feasibility of operationalizing Proposed Rule 
205 in a manner that would result in the gathering of meaningful short 
sale-related data; and the necessity for the Proposed CAT Amendments.
    Some commenters stated that the Commission did not sufficiently 
articulate the benefits of, or regulatory justification for, the 
Proposals and did not accurately estimate or adequately justify the 
costs and impacts of the new reporting requirements.\26\ Some of these 
commenters expressed concern that the Proposing Release's Economic 
Analysis did not adequately estimate the costs and burdens of the 
Proposals.\27\
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    \26\ E.g., Comment Letter from Robert Toomey, Managing Director 
and Associate General Counsel, Securities Industry and Financial 
Markets Association, et al. (Apr. 26, 2022), at 3, available at 
https://www.sec.gov/comments/s7-08-22/s70822-20126803-287514.pdf 
(``SIFMA Letter'') (``SIFMA is concerned that such an expansive 
reporting regime would impose burdens and costs on reporting parties 
that would materially outweigh the benefit of the information they 
might yield, and that the SEC has not provided justification for why 
such information is necessary and/or cannot already be obtained 
through other means available to the SEC''); see also, Comment 
Letter from Thomas M. Merritt, Deputy General Counsel, Virtu 
Financial (Apr. 26, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20126856-287588.pdf (``Virtu Letter''); 
Comment Letter from Thomas Deinet, Executive Director, Standards 
Board for Alternative Investments (Apr. 26, 2022), available at 
https://www.sec.gov/comments/s7-08-22/s70822-20126850-287575.pdf 
(``SBAI Letter''); Comment Letter from Matthew B. Siano, Managing 
Director and General Counsel, Two Sigma (Apr. 26, 2022), available 
at https://www.sec.gov/comments/s7-08-22/s70822-20126808-287518.pdf 
(``Two Sigma Letter''); Comment Letter from Richard F. Kerr, 
Partner, K&L Gates LLP (Apr. 26, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20126848-287571.pdf (``K&L 
Gates Letter'').
    \27\ See, e.g., SIFMA Letter, at 6 n. 15 (``SIFMA is concerned 
that the SEC's economic analysis of the Proposed Rules does not 
adequately consider that the sum total of the proposed requirements 
may result in a burden that far exceeds the SEC's estimates with 
respect to each individual component . . .''); Comment Letter from 
Jennifer Han, Executive Vice President, Chief Counsel and Head of 
Regulatory Affairs, Managed Funds Association (Apr. 26, 2022), at 7, 
19, available at https://www.sec.gov/comments/s7-08-22/s70822-20126815-287523.pdf (``MFA Letter'') (``[T]he SEC's economic 
analysis and, specifically, the Proposal's estimated costs are 
materially understated.''); Comment Letter from Mark A. Steffensen, 
Senior Executive Vice President and General Counsel, HSBC North 
American Holdings Inc. and HSBC Bank USA, N.A. (Jan. 24, 2023), at 
15 n. 53, available at https://www.sec.gov/comments/s7-08-22/s70822-20155771-324031.pdf (``HSBC Letter'') (``We [ ] do not believe that 
the Commission's economic analysis adequately considers the costs of 
Proposed Rule 13f-2 to market makers.'').
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2. Final Rule 13f-2, Form SHO and CAT Amendment
    For the reasons discussed more fully in Parts II-IV below, and to 
balance implementation and compliance costs and burdens with the 
Commission's goal of enhancing transparency regarding short selling, 
the Commission is adopting Rule 13f-2 and related Form SHO with certain 
modifications in response to comments.\28\ The new reporting regime of 
Rule 13f-2 provides disclosures that supplement the short sale-related 
information that currently is publicly available or accessible for a 
fee from existing short sale reporting regimes provided by some 
registered national securities exchanges (``exchanges'') and registered 
national securities associations (``RNSAs'').\29\
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    \28\ Rule 13f-2 and Form SHO, as adopted, are responsive to the 
policy recommendations to increase transparency around short selling 
activities and improve short sale data of participants in the 
Government-Business Forums on Small Business Capital Formation held 
by the Commission in recent years. See, e.g., Report on the Report 
on the 41st Annual Small Business Forum, at 22, available at 2022 
OASB Annual Forum Report (sec.gov); Report on the Report on the 40th 
Annual Small Business Forum, at 25, available at https://www.sec.gov/files/2021_OASB_Annual_Forum_Report_FINAL_508.pdf.
    \29\ See infra Part II.A.4. See also Proposing Release, at 
14964-65.
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    Final Rule 13f-2 will require Managers (defined in section 
13(f)(6)(A) of the Exchange Act) to report to the Commission, on a 
monthly basis on related Form SHO, certain short position data and 
short activity data for certain equity securities. In particular:
    <bullet> On the Cover Page of Form SHO, Managers will be required 
to report certain basic information including its name, mailing 
address, business telephone number and business email, as well as the 
name, title, business telephone number and business email of the 
Manager's contact employee for the Form SHO report; and the date the 
report is filed. The Manager will also provide its non-lapsed Legal 
Entity Identifier (``LEI'') if it has one. If other Managers are 
required to be listed in the ``Other Manager(s) Reporting for this 
Manager'' section of the Cover Page, the Manager will also be required 
to include the name and non-lapsed LEI of each such ``Other Manager'' 
listed, if the LEI of such ``Other Manager(s)'' is available to the 
Manager filing the Form SHO report.
    <bullet> With regard to each individual equity security reported on 
by Managers

[[Page 75104]]

in the Information Tables of Form SHO, Managers will report: the 
issuer's name and LEI if it has one, and the equity security's title of 
class, CUSIP, and Financial Instrument Global Identifier (``FIGI'') (if 
any has been assigned).\30\
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    \30\ See infra nn. 36 & 218.
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    <bullet> With regard to Information Table 1 of Form SHO, the 
Manager will also report 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 reporting period, as 
well as the corresponding U.S. dollar value of this reported gross 
short position.
    <bullet> With regard to Information Table 2 of Form SHO, for each 
reported equity security, for each individual settlement date during 
the calendar month reporting period, a Manager will report ``net'' 
activity in the reported equity security. The net activity reported by 
a Manager will be expressed by a single identified number of shares of 
the reported equity security, and will reflect offsetting purchase and 
sale activity by Managers. A positive number of shares identified will 
indicate net purchase activity in the equity security on the specified 
settlement date, while a negative number of shares identified will 
indicate net sale activity in the equity security on the specified 
settlement date.
    Managers will report such information regarding each equity 
security if the following thresholds are met:
    <bullet> With respect to any equity security that is of a class of 
securities that is registered pursuant to Exchange Act section 12 \31\ 
or for which the issuer of that class of securities is required to file 
reports pursuant to Exchange Act section 15(d) \32\ (a ``reporting 
company issuer'') in which the Manager meets or exceeds either: (1) a 
monthly average of daily gross short positions at the close of regular 
trading hours in the equity security with a U.S. dollar value of $10 
million or more, or (2) a monthly average of daily gross short 
positions at the close of regular trading hours as a percentage of 
shares outstanding in the equity security of 2.5 percent or more 
(``Threshold A'').
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    \31\ 15 U.S.C. 78l.
    \32\ 15 U.S.C. 78o(d).
---------------------------------------------------------------------------

    <bullet> With respect to any equity security that is of a class of 
securities 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'').
    The Commission will then publish aggregate information as follows:
    <bullet> With regard to Information Table 1 of Form SHO, the 
Commission will publish, for each class of equity securities, 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 aggregated U.S. dollar 
value of this reported gross short position.
    <bullet> With regard to Information Table 2 of Form SHO, 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 Commission is also adopting, substantially as proposed, the 
amendment to the CAT NMS Plan to require broker-dealers with a 
reporting obligation to CAT, to report whether an original receipt or 
origination of an order to sell an equity security is a short sale for 
which a market maker is claiming the BFMM locate exception. However, 
for the reasons discussed below, the Commission is not adopting 
Proposed Rule 205 or the CAT ``buy to cover'' reporting requirements.
    Changes Made to the Proposals: In response to comments, and as 
discussed in more detail below, the Commission is modifying the 
proposal generally by:
    <bullet> Streamlining Form SHO reports by not adopting as proposed 
the requirement to report hedging classifications on Information Table 
1, and by requiring a lower level of granularity of reporting on 
Information Table 2; \33\
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    \33\ Because the proposed rule and form called for publication 
of only ``net'' activity based on the information reported in 
Information Table 2, this change in information reported on Form SHO 
as adopted does not affect the information published by the 
Commission from information derived from the Form SHO reports.
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    <bullet> Adjusting the calculation of the dollar value prong of the 
reporting threshold for equity securities of reporting company issuers 
(i.e., Threshold A) to be based on a monthly average of daily gross 
short positions rather than the proposed daily calculation;
    <bullet> Requiring in Rule 13f-2 and in the instructions to Form 
SHO that, for purposes of determining whether a Manager meets or 
exceeds a reporting threshold, a Manager shall determine its gross 
short position ``at the close of regular trading hours'' in the equity 
security, rather than at the ``end of day'' as was provided for in the 
instructions to Proposed Form SHO;
    <bullet> Not adopting Proposed Rule 205 and, consequently, not 
adopting the Proposed CAT Amendment requiring a ``buy to cover'' order 
mark in order receipts and order origination reports submitted to the 
CAT; and
    <bullet> Making modifications to the text of Rule 13f-2 and the 
instructions to Form SHO to provide context and enhance 
comprehensibility, such as--adding a reference in the definition of 
``gross short position'' to ``short sales'' as defined in Rule 200(a) 
of Regulation SHO and making minor adjustments to phrasing in the 
definition; \34\ adding language to the rule text to more precisely 
describe the equity securities for which information is reported in 
final Form SHO; \35\ deleting the superfluous word ``collectively'' 
from the rule text to enhance overall readability; replacing the term 
``active LEI'' on Proposed Form SHO with ``non-lapsed LEI'' \36\ on 
final Form SHO; updating the contact information to be provided on the 
final Form SHO cover page,\37\ and making corresponding modifications 
to conform the text of Rule 13f-2 and the instructions to Form SHO.
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    \34\ Specifically, we made a non-substantive revision to change 
the word ``including'' to ``such as'' and removed the amphibological 
comma.
    \35\ To affirm that the Rule 13f-2 requirements apply to each 
class of an equity security about which information is being 
reported on Form SHO, and to more accurately indicate that classes 
of securities, not issuers, are registered pursuant to section 12 of 
the Exchange Act, Rules 13(a)(1) and Rule 13(a)(2) have been revised 
to refer to ``each equity security that is of a class of 
securities'' rather than ``each equity security of an issuer . . . 
.'' This distinction by class of security is also consistent with 
CUSIP procedures, under which, we understand, different classes of 
stock have distinct identifying codes. Rule 13f-2 requires that 
Managers provide CUSIP numbers for equity securities for which 
information is reported on Form SHO.
    \36\ For greater precision in the terminology used in Form SHO 
as adopted, an LEI that is currently in effect is referred to as a 
``non-lapsed LEI,'' rather than an ``active LEI'' (the terminology 
used in Proposed Form SHO), of a Manager. A non-lapsed LEI is an LEI 
for which the Manager is current on its periodic renewal fees needed 
to maintain the LEI. Further, to avoid any suggestion that a Manager 
filing a Form SHO report has an obligation to monitor the status of 
an issuer's LEI, Instructions 8.c and 9.c of Form SHO--``Column 3. 
Issuer LEI. If the issuer has an LEI, enter the issuer's active 
LEI''--have been revised to remove the term ``active.''
    \37\ The required Form SHO Cover Page contact information for 
the reporting Manager and its ``Contact Employee'' has been updated 
to reflect the greater reliance on the communication technology of 
email rather than facsimile.
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    <bullet> Making non-substantive, technical changes to correct 
inadvertent

[[Page 75105]]

grammatical errors in the text of the adopted amendment to the CAT NMS 
Plan that requires a broker-dealer with a reporting obligation to CAT 
to indicate whether an order is a short sale effected by a market maker 
in connection with bona fide market making activities for which the 
BFMM locate exception is claimed.\38\
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    \38\ Specifically, the preposition ``for'' was added before ``a 
short sale'' to clarify that reporting is required for a short sale 
in which the bona fide market maker exception is claimed, the 
article ``the'' was added before ``exception,'' and the preposition 
``in'' was added before ``Rule 203(b)(2)(iii)'' to clarify that the 
BFMM locate exception is found in Rule 203(b)(2)(iii).
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II. Discussion of Final Rule 13f-2 and Form SHO

A. Final Rule 13f-2

1. Scope of Persons Covered by Final Rule 13f-2
a. Proposal
    Exchange Act section 13(f) pertains to ``Reports by Institutional 
Investment Managers.'' \39\ Proposed Rule 13f-2 would have required 
Managers to collect and file with the Commission via EDGAR certain 
short sale-related data on proposed Form SHO, within fourteen (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 other person under the Manager's control) has 
investment discretion \40\ that meet or exceed a quantitative reporting 
threshold (``Reporting Threshold'').
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    \39\ 15 U.S.C. 78m(f).
    \40\ See Proposed Rule 13f-2(b)(3).
---------------------------------------------------------------------------

    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.\41\ As such, the term ``institutional investment 
manager'' typically can include brokers and dealers, investment 
advisers, banks, insurance companies, pension funds and 
corporations.\42\
---------------------------------------------------------------------------

    \41\ See Proposed Rule 13f-2(b)(1).
    \42\ See also Instructions to Form 13F.
---------------------------------------------------------------------------

    Proposed Rule 13f-2(b)(3) states that ``investment discretion'' has 
the same meaning as in 17 CFR 240.13f-1(b) (``Rule 13f-1(b) under the 
Exchange Act''),\43\ and Rule 13f-1(b) states that ``investment 
discretion'' has the same meaning as in section 3(a)(35) of the 
Exchange Act. 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 17 CFR 
240.10a-3T (``interim final 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.\44\ In 
addition, the Rule 13f-1(b) definition of investment discretion is used 
for Form 13F ``long'' position reporting by certain Managers.\45\
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    \43\ See 17 CFR 240.13f-1(b).
    \44\ See infra discussion in Part II.A.3.a.
    \45\ See Form 13F (sec.gov), available at https://www.sec.gov/pdf/form13f.pdf.
---------------------------------------------------------------------------

b. Comments and Final Rule
    One commenter encouraged the Commission to expand the scope of 
market participants subject to reporting under Proposed Rule 13f-2 
``beyond just Managers.'' \46\ This commenter believed the Commission's 
determination ``to omit a large group of market participants from 
Proposed Rule 13f-2's scope will negatively affect the completeness and 
analytical sufficiency of the aggregated and disclosed short sale data, 
impeding the Commission's ability to accurately reconstruct significant 
or unusual market events.'' \47\ This commenter believed that omitting 
a large group of market participants would ``not provide the Commission 
with full visibility into the short sale market that it could otherwise 
achieve pursuant to Proposed Rule 13f-2'' and believed that an 
``artificially narrow scope will not further the Commission's stated 
goals of providing greater transparency and filling the information 
gaps for market participants and regulators.'' \48\ This commenter, 
however, did not identify what market participants were being omitted 
under the proposal and that should otherwise be included.
---------------------------------------------------------------------------

    \46\ See Comment Letter from the Alternative Investment 
Management Association Ltd (Apr. 26, 2022), at 10-11, available at 
https://www.sec.gov/comments/s7-08-22/s70822-20126829-287533.pdf 
(``AIMA Letter''); see also SBAI Letter, at 3 (stating that the 
proposed reporting only includes Managers, which would not provide a 
complete perspective of shorting activity). In raising concerns 
about reporting and monitoring burdens imposed by the reporting 
regime of Proposed Rule 13f-2, other commenters, however, did not 
question the application of the proposed rule to institutional 
investment managers.
    \47\ AIMA Letter, at 11.
    \48\ Id.
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    As a potential alternative to Proposed Rule 13f-2, however, this 
commenter suggested, in part, that the current FINRA short interest 
reporting regime could be enhanced, and subsequently codified, to 
address potential limitations in the currently available short sale-
related data. However, because FINRA's short interest reporting is 
applicable only to broker-dealers that are FINRA member firms, Managers 
represent a more diverse group of market participants than is required 
under FINRA reporting (as was suggested as a potential alternative by 
the commenter). As stated above, Managers typically can include various 
market participants, including brokers and dealers, as well as 
investment advisers, banks, insurance companies, pension funds and 
corporations. Accordingly, the Commission is adopting as proposed Rule 
13f-2(b)(1) to define institutional investment managers as having the 
same meaning as in Exchange Act section 13(f)(6)(A). Short sale-related 
data reported by Managers on Form SHO will provide additional context 
to, and otherwise supplement, currently available data by, for example, 
distinguishing directional short selling of Managers from short sale 
activity effected by market makers and liquidity providers. This 
approach should reduce the reporting of non-directional, ``transient'' 
short sales activity and provide market participants with more focused 
information on substantial short positions held by Managers.
    Another commenter suggested that the Commission consider an 
exemption for certain types of Managers that do not regularly utilize 
short positions or that only utilize short positions for passive 
investing purposes.\49\ By capturing short sale-related data from 
Managers who hold substantial gross short positions--regardless of the 
purpose for which they utilize short positions, the reporting regime of 
Rule 13f-2 will enhance transparency and provide useful information to 
market participants regarding overall short sale activity. Furthermore, 
having the reporting obligation under Rule 13f-2 triggered by a 
reporting threshold that is calculated based on a monthly average of 
daily gross short positions in certain equity securities, rather than 
the proposed

[[Page 75106]]

daily calculation,\50\ is designed in part to alleviate concerns for 
Managers who only occasionally meet or exceed the prescribed reporting 
thresholds.
---------------------------------------------------------------------------

    \49\ See Comment Letter from Valerie Dahiya, Partner, Perkins 
Coie LLP (Apr. 26, 2022), at 3, available at https://www.sec.gov/comments/s7-08-22/s70822-20126839-287549.pdf (``Perkins Coie 
Letter'') (stating that ``for institutional investment managers that 
only selectively utilize short positions, or who only do so 
passively, these additional compliance costs in relation to the 
institutional investment manager's usage of short positions could in 
turn impose untended risks to the manager's underlying investors if 
the institutional investment manager must divert additional time and 
resources for compliance and oversight'').
    \50\ See infra Part II.A.3 for more discussion of the reporting 
thresholds in Proposed Rule 13f-2 and Rule 13f-2 as adopted.
---------------------------------------------------------------------------

    In addition, the Commission did not receive any comments regarding 
the definition of ``investment discretion'' as proposed. The Commission 
is adopting Rule 13f-2(b)(3) as proposed to define the term 
``investment discretion'' as having the same meaning as in Rule 13f-
1(b) (which, among other things, incorporates the definition in section 
3(a)(35) of the Exchange Act). In addition, Managers that will file 
reports on adopted Form SHO likely have experience reporting on Form 
13F, for which this same definition is used.\51\
---------------------------------------------------------------------------

    \51\ See infra Part VIII.B.1. Registered investment advisers, 
particularly those managing hedge funds, are the primary Managers 
likely to be affected by Rule 13f-2.
---------------------------------------------------------------------------

2. Scope of Reported Securities
a. Proposal
    Under the proposed rule, a Manager would have had to file a Form 
SHO report with regard to:
    <bullet> Any equity security of an issuer that is registered 
pursuant to section 12 of the Exchange Act \52\ or for which the issuer 
is required to file reports pursuant to section 15(d) of the Exchange 
Act \53\ in which the Manager meets or exceeds either (1) 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) a monthly average gross short 
position as a percentage of shares outstanding in the equity security 
of 2.5 percent or more (Threshold A); and
---------------------------------------------------------------------------

    \52\ 15 U.S.C. 78l.
    \53\ 15 U.S.C. 78o(d).
---------------------------------------------------------------------------

    <bullet> Any equity security of an issuer that is not a reporting 
company issuer as described above 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).
    As proposed, the reporting thresholds in Rule 13f-2(a)(1) and (2) 
(each a ``Proposed Reporting Threshold'') applied to equity securities, 
as the term ``equity security'' is defined in section 3(a)(11) of the 
Exchange Act \54\ and 17 CFR 240.3a11-1 (``Rule 3a11-1'').\55\ This 
scope, which included both exchange-listed and over-the-counter 
securities, is consistent with the securities to which Rules 200, 203, 
and 204 of Regulation SHO apply.\56\ The proposed scope would have 
included exchange-traded fund (``ETF'') securities, but would not have 
required Managers, in calculating a Proposed Reporting Threshold or 
Form SHO data, to consider short positions the ETF held in individual 
underlying equity securities.\57\ And because the Proposed Reporting 
Thresholds were based on a Manager's gross short position in the 
underlying equity security itself, the proposed rule would not have 
required the Manager to account for derivative exposure as part of the 
threshold calculation for the underlying equity security, but would 
have required 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.\58\
---------------------------------------------------------------------------

    \54\ Section 3(a)(11) of the Exchange Act defines ``equity 
security'' as any stock or similar security or any security future 
on any such security; or any security convertible, with or without 
consideration, into such a security, or carrying any warrant or 
right to subscribe to or purchase such a security; or any such 
warrant or right; or any other security which the Commission shall 
deem to be of similar nature and consider necessary or appropriate, 
by such rules and regulations as it may prescribe in the public 
interest or for the protection of investors, to treat as an equity 
security. 15 U.S.C. 78c(a)(11).
    \55\ See Proposing Release, at 14956 n.59.
    \56\ See Regulation SHO Adopting Release, at 48012.
    \57\ Proposing Release, at 14958.
    \58\ As stated in the Proposing Release, the Commission believed 
this proposed approach balances Managers' reporting costs with the 
utility such data provides to regulators. See Proposing Release, at 
14962.
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b. Comments and Final Rule
    The Commission received several comments on Proposed Rule 13f-2's 
and Proposed Form SHO's proposed scope of securities, with commenters 
expressing a variety of views. Most commenters took an expansive view, 
exemplified by one such commenter's statement that ``all different 
securities and ETFs should be required to report all short sale data. 
The more information that is available to every investor and the 
Commission the better.'' \59\ As discussed below, other commenters, by 
contrast, recommended narrowing the universe of ``in scope'' securities 
by, for example, aligning with similar Commission reporting and public 
dissemination regimes, limiting the scope to securities of U.S. 
reporting companies, or excluding ETFs, options and warrants and other 
convertibles, and derivatives. Some commenters focused on the impact on 
implementation and compliance costs related to Proposed Rule 13f-2 
reporting requirements and recommended that derivatives, options, 
warrants and other convertibles, and ETFs be excluded from the scope of 
equity securities subject to Proposed Rule 13f-2 reporting 
requirements.\60\
---------------------------------------------------------------------------

    \59\ Comment from Samuel Meadows (Mar. 26, 2022), at 1, 
available at https://www.sec.gov/comments/s7-08-22/s70822-273456.htm 
(``Samuel Meadows Comment'').
    \60\ See, e.g., MFA Letter, at 11-12 (recommending that, to 
simplify compliance, provide clarity, and reduce costs, Commission 
should limit the reporting requirements to stocks of U.S. reporting 
company issuers, and exclude derivatives and ETFs); SIFMA Letter, at 
20 (recommending reduction of compliance costs by creating a list of 
equity securities that would be subject to Proposed Rule 13f-2 
reporting requirements that would exclude ``extraneous securities, 
such as options, warrants, convertibles, and ETFs''); Comment Letter 
from Frank Vivirito, Compliance Officer, XR Securities LLC (Apr. 25, 
2022), at 2 (``XR Securities Letter'') (stating ``I feel strongly 
that highly liquid, higher priced, active and efficient ETFs (and 
perhaps even some single name equities) with limited or no 
settlement issues'' should be excluded from Proposed Rule 13f-2 
reporting requirements).
---------------------------------------------------------------------------

Comments on the Scope of Covered Securities
    Most commenters supported the applicability of Proposed Rule 13f-2 
to short positions in ETFs, some expressing specific concerns about 
``improper'' use of ETFs to leverage short positions.\61\ However, one 
commenter advocating for the exclusion of ETFs from the universe of 
``in-scope'' securities stated that, in most circumstances, Managers 
short ETFs largely for hedging purposes and not for the same reasons 
that Managers short stocks of reporting company issuers; this commenter 
stated that such information ``will provide the public, and the SEC, 
very little in terms of useful information.'' \62\
---------------------------------------------------------------------------

    \61\ See, e.g., Comment Letter from Nick Dougherty (Mar. 27, 
2022), at 2, available at https://www.sec.gov/comments/s7-08-22/s70822-20121466-273451.pdf (``Nick Dougherty Letter''); Anonymously 
Submitted Comment (Mar. 21, 2022), at 1, available at https://www.sec.gov/comments/s7-08-22/s70822-20120739-272894.pdf. See 
generally, Anonymously Submitted Comment (Mar. 21, 2022), at 2, 
available at https://www.sec.gov/comments/s7-08-22/s70822-20122297-278355.htm (recommending that ``[a]ll securities, including ETFs, 
OTC stocks, swaps etc. should have their positions data recorded and 
submitted to the SEC daily''); Samuel Meadows Comment, at 1 (``I 
strongly believe that all different securities and ETFs should be 
required to report all short sale data.'').
    \62\ MFA Letter, at 12.
---------------------------------------------------------------------------

    The Commission disagrees with the commenter that reporting about 
gross short positions in ETFs will not provide useful information to 
the public and the Commission. Establishing short positions in an ETF 
can provide short exposure to a diverse set of equity securities or 
create a directional short strategy such as leveraged shorting. Because 
of their multipurpose nature, ETFs are a substantial piece of the 
short-

[[Page 75107]]

side market.\63\ ETFs are subject to the requirements of Regulation 
SHO, and there is a benefit to applying the Rule 13f-2 reporting 
requirements to the same universe of securities subject to the 
Commission's short sale rules. Further, short sale-related data 
regarding ETFs will provide important transparency to a significant 
segment of market activity to both the marketplace and regulators 
alike.\64\
---------------------------------------------------------------------------

    \63\ ETFs are a popular trading tool that can be used in various 
ways, including, for example, to hedge a long position, or to 
establish a directional short position. See Exchange-Traded Funds, 
Investment Company Act Release No. 33646 (Sept. 25, 2019), 84 FR 
57162 (Oct. 24, 2019) (``[ETFs] have become a popular trading tool, 
making up a significant portion of secondary market equities 
trading.''). See also Giovanny Moriano & Brian Baker, Best inverse 
and short ETFs--here's what to know before buying them, Bankrate 
(Feb. 16, 2023), available at https://www.bankrate.com/investing/best-inverse-etfs/ (describing traders' use of short ETFs to hedge 
against falling prices in other positions, to make directional bets 
on securities or indexes, or to magnify returns through leveraged 
short ETFs); The Renaissance of ETFs, Oliver Wyman (2023), available 
at https://www.oliverwyman.com/our-expertise/insights/2023/may/exchange-traded-funds-are-fueling-market-opportunities.html (stating 
``As of the end of December 2022, total ETF assets under management 
(AUM) have reached $6.7 trillion across the US and Europe, growing 
at approximately 15% compound annual growth rate (CAGR) since 2010. 
. . . We expect a significant part of this growth to come from 
active ETFs.''). Active ETFs can include inverse and short ETFs that 
seek to use short strategies or leverage.
    \64\ See Experiences of US Exchange-Traded Funds During the 
COVID-19 Crisis, Inv. Co. Inst. (Oct. 2020), available at https://www.sec.gov/comments/credit-market-interconnectedness/cll10-2.pdf 
(``Early in 2020, . . . ETF trading volume accounted for between 20 
and 30 percent of total stock market trading on a daily basis . . . 
.''); see also Richard B. Evans et al., ETF Short Interest and 
Failures-to-Deliver: Naked Short-Selling or Operational Shorting?, 
U. Pa. Wharton Sch. (Jan. 2018), available at https://jacobslevycenter.wharton.upenn.edu/wp-content/uploads/2018/08/ETF-Short-Interest-and-Failures-to-Deliver.pdf (stating that ETFs 
constitute roughly 10% of U.S. equity market capitalization but over 
20% of short interest, and that short interest for the ETF market 
has increased steadily over several years).
---------------------------------------------------------------------------

    Some commenters recommended that fixed-income securities be added 
to the proposed scope of securities.\65\ These commenters believed that 
all investment vehicles, including fixed income securities, should be 
included within the scope of securities subject to potential reporting. 
These commenters generally believed that short positions in fixed 
income securities would provide additional transparency to the 
marketplace. One of these commenters believed that fixed income 
securities should be included under the rule because ``bonds play a 
large role in market activities, along with the repo market'' and that 
``corporate bond borrowing data provides an unparalleled insight into 
short positioning at a security and issuer level.'' \66\
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    \65\ See, e.g., Nick Dougherty Letter (Mar. 27, 2022), at 3 
(stating that ``fixed income securities should be included under 
Proposed rule 13f-2''); Anonymously submitted Comment (Mar. 21, 
2022), at 1, available at https://www.sec.gov/comments/s7-08-22/s70822-20120739-272894.pdf.
    \66\ Anonymously submitted Comment (Mar. 21, 2022), at 1, 
available at https://www.sec.gov/comments/s7-08-22/s70822-20120739-272894.pdf.
---------------------------------------------------------------------------

    Fixed income securities are not subject to the Commission's short 
sale rules. Market participants, including Managers, are currently 
accustomed to complying with the short sale rules with regard to equity 
securities that meet the definition of short sales in Rule 200(a) of 
Regulation SHO.\67\ Further, the self-regulatory organizations 
(``SROs'') currently collect and provide data on short sales of equity 
securities as defined by Rule 200(a) of Regulation SHO. Consistent with 
the discussion in the Proposing Release, the aggregated short sale-
related data that will be published by the Commission under Rule 13f-2 
will provide additional context to market participants regarding equity 
securities that are subject to the requirements of Regulation SHO.\68\ 
For these reasons, the Commission is not including fixed income 
securities.
---------------------------------------------------------------------------

    \67\ See Proposing Release, at 14956 n.59.
    \68\ See id. at 14956.
---------------------------------------------------------------------------

    Some commenters also recommended excluding options, warrants, and 
other convertibles from the rule.\69\ Other commenters recommended that 
derivatives be included within the scope of Proposed Rule 13f-2 \70\-
including those not within the definition of equity security in section 
3(a)(11) of the Exchange Act and Rule 3a11-1 thereunder.\71\
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    \69\ SIFMA Letter, at 20.
    \70\ See, e.g., Better Markets Letter, at 9 (stating that ``[i]n 
order for the final rule to actually serve its purpose, it must 
require that institutional investment managers include their short 
interest that arises from derivatives positions''); WTI Letter, at 4 
(stating that not including derivatives contracts such as options 
and security-based swaps is a ``huge hole that must be remedied'' 
and ``will inevitably result in firms exploiting the loophole . . 
.''); Samuel Meadows Comment, at 1 (stating that ``[a]ny and all 
Short positions resulting from derivatives should be included in 
whether they meet a Reporting Threshold'').
    \71\ See supra nn. 54 & 55 and accompanying text; see generally 
Part II.A.2.a.
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    Certain derivatives, options, warrants, and convertibles are 
themselves equity securities for purposes of section 3(a)(11) of the 
Exchange Act and Rule 3a11-1 thereunder, and therefore for purposes of 
final Rule 13f-1.\72\ Derivatives and other securities that are not 
equity securities within the definitions of section 3(a)(11) of the 
Exchange Act and Rule 3a11-1 thereunder, are not within the scope of 
the rule. Managers are currently accustomed to complying with 
requirements for equity securities under Rule 200(a) of Regulation SHO. 
The Commission is not including derivatives and other securities that 
are not equity securities under the definitions of section 3(a)(11) of 
the Exchange Act and Rule 3a11-1 thereunder. Many commenters who 
requested that derivatives be included expressed concern that 
derivatives could be used to create substantial economic short 
positions, while avoiding Proposed Rule 13f-2's reporting 
requirements.\73\ The Commission recognizes, as it did in the Proposing 
Release, that there is a risk that Rule 13f-2 could be a catalyst for 
growth in markets of economic equivalents of underlying equity 
securities as short sellers look for new avenues to take the economic 
equivalent of short positions while avoiding these proposed reporting 
requirements.\74\ Managers do not have to account for economic exposure 
to an underlying equity security created through the use of equity 
derivatives when calculating the reporting thresholds for reporting 
short sales of that underlying equity security. However, once a Manager 
meets or exceeds a reporting threshold for an underlying equity 
security, the Manager will then be required to report certain short 
activity for each settlement date during the reporting calendar month, 
and that disclosure will take into account activity in options, 
tendered conversions, secondary offering transactions,\75\ and other 
equity derivatives or activity that might affect the reported short 
positions on Form SHO, as discussed further below.\76\ Managers must 
also report gross short positions of each equity security resulting 
from short sales as defined in Rule 200(a) of Regulation SHO to the 
extent the Manager's positions meet the relevant thresholds.\77\ 
Finally, large

[[Page 75108]]

positions in options are currently reportable under a separate 
requirement.\78\ In addition, there is a separate reporting regime for 
security-based swaps,\79\ which may also lessen the likelihood of 
Managers attempting to avoid the requirements of Rule 13f-2 by using 
these instruments.
---------------------------------------------------------------------------

    \72\ Id.
    \73\ See, e.g., Comment Letter from Oliver Davies, Apr. 20, 
2022, available at https://www.sec.gov/comments/s7-08-22/s70822-20124155-280554.htm (expressing concern that ``funds are using 
complex derivative positions like options and swaps to hide their 
true short positions''); Anonymously submitted Comment, Mar. 14, 
2022, available at https://www.sec.gov/comments/s7-08-22/s70822-20119368-272254.htm (positing that excluding derivative positions 
can create opportunities to avoid triggering the reporting 
thresholds through other economically equivalent instruments).
    \74\ See infra Part VIII.C.8; see also Proposing Release, at 
15001.
    \75\ See infra n. 285.
    \76\ See infra Part II.A.4.
    \77\ Option exercises or assignments can result in a short sale. 
See, e.g., Rule 201 Adopting Release, at 11263 n. 433 (explaining 
that short sales that result from option exercises or assignments 
are short sales but are not covered by the Rule 201 of Reg. SHO's 
price test because there is no national best bid).
    \78\ FINRA Rule 2360 requires FINRA member firms to report large 
options positions to the Large Options Positions Report (``LOPR''), 
which FINRA uses to surveil for potentially manipulative behavior, 
including attempts to corner the market in the underlying equity, 
leverage an option position to affect the price, or move the 
underlying equity to change the value of a large option position.
    \79\ See Regulation SBSR, 17 CFR 242.900 through 242.909.
---------------------------------------------------------------------------

Comments on Creating a List
    Some commenters recommended narrowing the universe of ``in-scope'' 
securities to lessen the burden on Managers and to help to ensure 
compliance with Proposed Rule 13f-2. Certain commenters recommended 
that the Commission create and publish a list of securities subject to 
Form SHO reporting, much like the Commission's Official List of Section 
13(f) Securities (``13F List'') required by statute to be made 
available to the public pursuant to section 13(f)(4) of the Exchange 
Act \80\ for use in the preparation of quarterly reports filed with the 
Commission for purposes of long position reporting under Rule 13f-1. 
One such commenter suggested that providing such a list would ``promote 
greater efficiency in validating reported short positions and 
consistency in reporting of those positions among managers.'' \81\ 
Another commenter recommended aligning Proposed Rule 13f-2 with the 
scope of other similar reporting and public dissemination regimes 
(e.g., Rule 13f-1, and prior Rule 10a-3T \82\) that are focused on a 
narrower set of securities, namely certain section 13(f) securities 
that are included on the 13F List.\83\
---------------------------------------------------------------------------

    \80\ 15 U.S.C. 78m(f)(4).
    \81\ Comment Letter from Sarah A. Bessin, Associate General 
Counsel & Nhan Nguyen, Assistant General Counsel, Investment Company 
Institute (Apr. 26, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20126820-287527.pdf (``ICI Letter'') at 9 
n.28; see also MFA Letter, at 13 (positing that having an ``official 
list'' of securities subject to Form SHO reporting would reduce the 
burden on Managers to make judgments about whether a particular 
security is in-scope for Form SHO reporting and would reduce 
inconsistencies among reporting Managers in making such judgments in 
the absence of such a list); see also SIFMA Letter, at 20 
(suggesting that the ``Form SHO List'' include securities that are 
included on the 13F List while excluding securities that should not 
be covered by Form SHO, as well as the total shares outstanding for 
each security).
    \82\ Rule 10a-3T and Form SH focused on certain section 13(f) 
securities and excluded options that are reportable on Form 13F.
    \83\ HSBC Letter, at 13-14 (recommending that Commission align 
the reporting requirements of Proposed Rule 13f-2 to a narrower set 
of securities--e.g., the securities prescribed in Rule 13f-1--rather 
than with securities that are ``in-scope'' with Regulation SHO).
---------------------------------------------------------------------------

    Narrowing the scope of securities to the 13F List would effectively 
exclude certain equity securities that are subject to the requirements 
of Regulation SHO, which the Commission continues to believe would be 
inconsistent with the Commission's objective to publish short sale-
related data under Rule 13f-2 that will provide additional context to 
market participants regarding securities that are subject to the 
Commission's current short sale rules.\84\ As stated above, market 
participants, including Managers, are currently accustomed to complying 
with the short sale rules with regard to equity securities generally, 
so narrowing the scope to the 13F List that periodically changes, or to 
a list created for purposes of Rule 13f-2 that is similar in concept to 
the 13F List, could result in reduced Rule 13f-2 reporting and, 
consequently, less transparency of short sale-related data. Narrowing 
the scope to securities that are included on the 13F List could also 
result in additional administrative costs and burdens to Managers to 
the extent that Managers have to perform additional monitoring to 
ensure that their Form SHO reports cover, and the calculations required 
to determine whether a reporting obligation under Rule 13f-2 has been 
triggered because a Reporting Threshold has been met, apply to, only 
the narrower scope of securities (a subset of the equity securities 
currently subject to the Commission's short sale rules). Such an 
outcome is inconsistent with the Commission's objective of enhancing 
transparency, while balancing the interests of gathering and disclosing 
data that provides additional context to market participants regarding 
securities that are subject to the requirements of Regulation SHO 
against the potential costs to reporting Managers.
---------------------------------------------------------------------------

    \84\ See Proposing Release, at 14956.
---------------------------------------------------------------------------

    Additionally, with respect to long position reporting, section 
13(f)(1) expressly provides that the Commission shall make available to 
the public a list of all equity securities that are subject to such 
reporting.\85\ However, section 13(f)(2) does not require publication 
of such a list. Further, existing short sale-related reporting to 
exchanges and RNSAs does not rely on a published list of securities. 
For these reasons, it is not necessary to compile and periodically 
provide a list of securities covered by Rule 13f-2.
---------------------------------------------------------------------------

    \85\ Section 13(f)(1) of the Exchange Act (15 U.S.C. 78m(f)(1)) 
requires any institutional investment manager exercising investment 
discretion over accounts holding at least $100 million in fair 
market value of certain equity securities to file reports on Form 
13F with the Commission at the times set forth in 17 CFR 240.13f-1 
(``Rule 13f-1''). The statute directs the Commission to make 
available to the public, for a reasonable fee, a list of all equity 
securities described in section 13(d)(1) of the Exchange Act and to 
disseminate to the public the information contained in the reports.
---------------------------------------------------------------------------

Comments To Limit Scope to Equity Securities of U.S. Reporting Company 
Issuers
    Some commenters recommended tailoring the scope of securities 
subject to Rule 13f-2 reporting to the equity securities of U.S. 
reporting company issuers.\86\ Many of these commenters raised concerns 
about the costs to Managers of developing new systems to capture 
trading of equity securities of non-reporting company issuers. Certain 
commenters focused on how a requirement to report short sales of equity 
securities of non-reporting company issuers would represent an 
expansion of reporting requirements beyond what is currently required 
under existing reporting regimes under Exchange Act sections 13(d), 
13(f)(1), 13(g), and 16.\87\ Other commenters believed that requiring 
Managers to report short position information in equity securities of 
non-reporting company issuers would be extremely costly and provide 
little public benefit.\88\ Another such commenter stated that because 
securities of non-reporting company issuers can be held

[[Page 75109]]

by only a small number of U.S. investors, cannot be traded on U.S. 
securities exchanges, and can often be subject to contractual 
restrictions on transfer, short sales in such securities are rare due 
to the limitations on the number of shares available to borrow.\89\ 
Another commenter stated that trading (including short selling) in 
securities of non-reporting company issuers is limited, which 
potentially makes Managers that file Form SHO reports with respect to 
such securities more susceptible to retaliatory and manipulative 
trading strategies.\90\ As stated above, the Commission is adopting 
Rule 13f-2 and Form SHO to help enhance transparency regarding short 
selling in equity securities--including both exchange-listed and over-
the-counter securities, and ETFs--that are already subject to 
Regulation SHO. Consistent with the discussion in the Proposing 
Release, through the publication of short sale-related data to 
investors and other market participants, the information published 
under Rule 13f-2 will provide additional context to market participants 
regarding equity securities that are subject to the requirements of 
Regulation SHO.\91\ To that end, the Commission continues to believe 
that transparency regarding short selling in over-the-counter (``OTC'') 
equity securities, many of which are non-reporting company issuers,\92\ 
is important to investors generally, including many retail investors. 
The Commission has previously stated that securities ``that trade in 
the OTC market are primarily owned by retail investors.'' \93\ 
Consistent with this view, it is important from a transparency 
perspective to include, as proposed, non-reporting issuers for purposes 
of reporting under Rule 13f-2. While the Commission is cognizant that 
information on non-reporting company issuers will be more difficult to 
obtain and more costly to report than information on reporting company 
issuers, the Commission disagrees there would be little benefit to the 
public from such information, particularly given the extent of trading 
in OTC market securities by retail investors.\94\ Furthermore, OTC 
securities typically have lower prices, lower trading volume, and are 
by definition not traded on exchanges, making them potentially more 
prone to fraud.\95\ In addition, as discussed further below, 
publication of aggregated data approximately one month following the 
reporting calendar month will alleviate concerns regarding potential 
retaliation against reporting Managers.
---------------------------------------------------------------------------

    \86\ See, e.g., MFA Letter, at 11-12; Letter from Leigh R. 
Fraser, Partner, Ropes & Gray LLP (Apr. 26, 2022), at 9, available 
at https://www.sec.gov/comments/s7-08-22/s70822-20126853-287579.pdf 
(``Ropes & Gray Letter''). Cf. SIFMA Letter, at 5 (recommending, 
rather than separate reporting thresholds for reporting company 
issuers and non-reporting company issuers, a single threshold apply 
to U.S. equity securities included in a ``Form SHO List'' akin to 
the 13F List that ``would include securities that are included on 
the 13F List, while also excluding certain extraneous securities, 
such as options, warrants, convertibles, and ETFs that should not be 
covered by Proposed Form SHO reporting'').
    \87\ See, e.g., Ropes & Gray Letter, at 9 (stating that a 
requirement to report short sale-related data regarding equity 
securities of U.S. private companies would represent a ``significant 
expansion'' of reporting requirements imposed in investors beyond 
what currently is required under existing reporting regimes under 
Exchange Act sections 13(d), 13(f)(1), 13(g), 13(h), and 16).
    \88\ See, e.g., MFA Letter, at 11-12 (stating that because non-
reporting company issuer securities are not publicly traded, 
information about transactions in such securities would not likely 
have an effect on price efficiency or market liquidity, but could 
have negative consequences for Managers--e.g., increasing the risk 
of exposing Managers, their short positions, and trading strategies, 
which could facilitate retaliatory and manipulative trading 
strategies).
    \89\ Ropes & Gray Letter, at 8-9.
    \90\ MFA Letter, at 11-12.
    \91\ See Proposing Release, at 14956.
    \92\ See, e.g., Publication or Submission of Quotations Without 
Specified Information, Exchange Act Release No. 89891 (Sept. 16, 
2020) (``Adopting Release for Amendments to Rule 15c2-11''), 85 FR 
68124, 68125 (Oct. 27, 2020) (``However, in other cases, there is no 
or limited current public information available about certain 
issuers of quoted OTC securities to allow investors or other market 
participants to make informed investment decisions.'').
    \93\ See, e.g., Publication or Submission of Quotations Without 
Specified Information, Exchange Act Release No. 89891 (Sept. 16, 
2020), 85 FR 68124, 68125 (Oct. 27, 2020) (citing to Andrew Ang, et 
al., Asset Pricing in the Dark: The Cross-Section of OTC Stocks, 26 
Rev. Fin. Studs. 2985-3028 (2013) (``Securities that trade in the 
OTC market are primarily owned by retail investors[,]''); see also 
Unraveling the Mystery of Over-the-Counter Trading, FINRA Inv'r 
Insights (Jan. 4, 2016), available at https://www.finra.org/investors/insights/unraveling-mystery-over-counter-trading (``OTC 
equities are largely owned by retail investors, according to a 2013 
study from Columbia University, who may be attracted to the low 
price of many OTC equities, including so-called ``penny stocks'' 
that trade at under $5 a share. That activity is typically very 
speculative.'').
    \94\ See id. See also infra Part VIII.C.6 for a discussion of 
costs related to tracking non-reporting companies, and infra Part 
II.A.3 for discussion of possible benefit.
    \95\ See, e.g., Adopting Release for Amendments to Rule 15c2-11, 
85 FR 68124, at 68185.
---------------------------------------------------------------------------

    Other commenters raised questions as to whether the Commission's 
jurisdiction extended to equity securities not traded in the U.S. One 
such commenter, highlighting the disparity between Proposed Rule 13f-2 
reporting and reporting of long positions in the same securities, 
questioned why it would be in the public interest to require more 
expansive disclosure with respect to short positions than long 
positions, and stated that the ``proposed scope of the rule would 
provide U.S. investors with information that is of limited value, 
particularly with respect to non-U.S. securities.'' \96\
---------------------------------------------------------------------------

    \96\ HSBC Letter, at 13-14 (recommending that the reporting 
requirements of Proposed Rule 13f-2 be limited to equity securities 
of reporting company issuers that are traded on a Commission-
registered trading platform).
---------------------------------------------------------------------------

    Exchange Act section 13(f)(2)'s cross-border reach is based on the 
territorial approach that the Commission has applied when crafting 
rules to implement other provisions of the Exchange Act.\97\ Consistent 
with that territorial approach (which is based on Supreme Court 
precedent, including Morrison v. National Australia Bank, Ltd. and its 
progeny) the Commission examines the relevant statutory provision to 
determine the domestic conduct that is covered by the provision.\98\ 
The Commission understands section 13(f)(2), by its terms, to apply to 
any institutional investment manager already subject to U.S. reporting 
requirements. This indicates that the relevant domestic conduct under 
section 13(f)(2) is being an institutional investment manager operating 
in the U.S. securities markets such that the investment manager is 
subject to filing reports with the Commission. Thus, when that relevant 
domestic conduct is present here in the United States, section 
13(f)(2)'s regulatory reporting obligation will generally apply.
---------------------------------------------------------------------------

    \97\ See, e.g., Regulation SBSR--Reporting and Dissemination of 
Security-Based Swap Information, Exchange Act Release No. 74244 
(Feb. 11, 2015), 80 FR 14563, 14649 (Mar. 19, 2015) (``2015 
Regulation SBSR Adopting Release'') (discussing the territorial 
approach to the cross-border application of Title VII requirements 
for regulatory reporting and public dissemination of security-based 
swap transactions).
    \98\ 561 U.S. 247. See, e.g., Abitron Austria GmbH v. Hetronix 
Int'l, Inc, 600 U.S. **, **, 2023 WL 4239255, at *4 (June 29, 2023) 
(stating that ``[the Supreme Court has] repeatedly and explicitly 
held that courts must ``identif[y] `the statute's ``focus'' ' and 
as[k] whether the conduct relevant to that focus occurred in United 
States territory'').
---------------------------------------------------------------------------

    The Commission is adopting Rule 13f-2 and Form SHO to help enhance 
transparency regarding short selling in equity securities--including 
both exchange-listed and over-the-counter securities, and ETFs. The 
Commission continues to believe that, through the publication of short 
sale-related data to investors and other market participants, the 
information reported by Managers will provide important additional 
context to market participants regarding short sale activity in these 
equity securities by Managers. The Commission disagrees that the 
reported information would be of ``limited value'' as was suggested by 
a commenter. Transparency regarding short selling by Managers of 
securities of U.S. and non-U.S. issuers is important regardless of 
where those sales occur.
Final Rule
    For the reasons discussed above, the Commission is adopting the 
scope of securities as originally proposed. Specifically, the final 
rule will cover equity securities as defined in section 3(a)(11) of the 
Exchange Act and Rule 3a11-1 thereunder. This scope of securities 
includes both exchange-listed and OTC equity securities, including, 
inter alia, ETFs, certain derivatives, and options, warrants and other 
convertibles, which is consistent with the equity securities to which 
Rules 200, 203, and 204 of Regulation SHO apply.\99\
---------------------------------------------------------------------------

    \99\ See Regulation SHO Adopting Release, at 48012.

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[[Page 75110]]

3. Reporting Thresholds
a. Proposal
    To balance the interests of gathering and disclosing data and the 
potential costs to reporting Managers, the Commission proposed separate 
thresholds for short positions in reporting company issuers, or 
Threshold A, and non-reporting company issuers, or Threshold B.\100\ 
Threshold A, in Proposed Rule 13f-2(a)(1), involved a two-pronged 
approach that would have required reporting by Managers that have, with 
regard to each equity security of a reporting company issuer, either 
(i) a gross short position 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 2.5 percent or higher monthly 
average gross short position as a percentage of shares 
outstanding.\101\ Threshold B, in Proposed Rule 13f-2(a)(2), involved a 
single-pronged approach that would have required reporting by Managers 
that have, with regard to each equity security of a non-reporting 
company issuer, 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.\102\ The Proposed Reporting Thresholds were based on comment 
letters and analysis of Form SH data collected under Rule 10a-3T, an 
interim temporary rule adopted by the Commission in October 2008, which 
required certain institutional investment managers to file weekly 
nonpublic reports with the Commission on Form SH regarding their short 
sales and short positions in certain section 13(f) securities, other 
than options.\103\ Rule 10a-3T required reporting of short positions 
that were either greater than 0.25 percent of shares outstanding or $10 
million in fair market value.\104\ 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.\105\ Proposed 
Threshold B was developed based on an analysis of OTC Markets 
data.\106\ The Proposed Reporting Thresholds were structured to make it 
more difficult for Managers with substantial gross short positions to 
avoid disclosure by trading below a Proposed Reporting Threshold, 
particularly with lower market capitalization securities.
---------------------------------------------------------------------------

    \100\ As discussed above, an issuer of a class of securities 
that is registered pursuant to Exchange Act section 12 or for which 
the issuer is required to file reports pursuant to Exchange Act 
section 15(d) is referred to herein as a reporting company issuer; 
issuers not meeting those criteria are referred to herein as non-
reporting company issuers.
    \101\ Proposed Rule 13f-2(a)(1). See Proposing Release, at 14962 
(describing in detail the design of Threshold A).
    \102\ Proposed Rule 13f-2(a)(2). See Proposing Release, at 14962 
(describing in detail the design of Threshold B).
    \103\ 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 Sept. 18, 2008, Sept. 21, 2008, and Oct. 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 Sept. 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 Oct. 17, 2008, and 
stating that the Forms SH filed under the Order would remain 
nonpublic to the extent permitted by law).
    \104\ See Proposing Release, at 14963-65 (discussing the 
analysis of Form SH data).
    \105\ Rule 10a-3T remained in effect through July 2009, at which 
time the Commission stated that it and its staff would be working 
with several SROs to make certain short sale volume and transaction 
data publicly available through SRO websites. See Proposing Release, 
at 14954 (providing background on Rule 10a-3T and related Form SH).
    \106\ See Proposing Release, at 14964 n.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.'').
---------------------------------------------------------------------------

    The approach to Threshold A, as described in the Proposing Release, 
was 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.\107\ For 
example, it would be difficult for a Manager to trigger only a dollar 
threshold in a given security if the market capitalization of the 
reporting company issuer is small; likewise, it would be difficult for 
a Manager to trigger only a percentage threshold in a given security if 
the market capitalization of the reporting company issuer is large. The 
Commission believed that this would help to ensure transparency into 
short sale-related activity that would be beneficial to both market 
participants and regulators. As stated above, the Proposed Reporting 
Thresholds were 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 proposed U.S. dollar value-based prong was designed to 
capture Managers with a substantial short position, even if the 
position was relatively small compared to the market capitalization of 
the issuer.\108\ The prong based on percentage of shares outstanding 
was designed to capture Managers with gross short positions that are 
large relative to the size of the issuer and, therefore, could have a 
significant impact on the issuer.\109\
---------------------------------------------------------------------------

    \107\ Id. at 14962.
    \108\ Id.
    \109\ Id.
---------------------------------------------------------------------------

    Regarding Threshold B, as discussed in the Proposing Release, a 
$500,000 or more threshold for non-reporting company issuer securities 
is similar to the median dollar value of a position of 2.5 percent of 
the market capitalization of OTC stocks for which the Commission was 
able to obtain information on total shares outstanding.\110\ The 
Commission believed that this approach with regard to non-reporting 
company issuers would help to ensure added transparency into short 
sale-related activity that would be beneficial to both market 
participants and regulators, because, as discussed in the Proposing 
Release, it 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.\111\ Rather than a two-pronged reporting threshold for 
equity securities of non-reporting company issuers, however, the 
Commission proposed a single-pronged, dollar value-based, reporting 
threshold for non-reporting company issuer securities given its 
understanding that the number of total shares outstanding for non-
reporting company issuers may not be readily and consistently 
accessible to Managers.\112\
---------------------------------------------------------------------------

    \110\ Id. at 14962-63.
    \111\ Proposing Release, at 14962-63.
    \112\ Id. at 14962.
---------------------------------------------------------------------------

    As discussed in the Proposing Release, to determine whether the 
proposed dollar value prong of Threshold A (Proposed Rule 13f-
2(a)(1)(i)) or Threshold B (Proposed

[[Page 75111]]

Rule 13f-2(a)(2)) is met, a Manager would 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.\113\ In 
circumstances where such closing price was not available in calculating 
Threshold B, 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.\114\
---------------------------------------------------------------------------

    \113\ Id. at 14957.
    \114\ Id.
---------------------------------------------------------------------------

    As discussed in the Proposing Release, to determine whether the 
second prong of Threshold A (Proposed Rule 13f-2(a)(1)(ii))--2.5 
percent or higher monthly average gross short position as a percentage 
of shares outstanding in the equity security--is met, the Manager would 
be required to (a) identify its gross short position 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 reporting period. The number 
of shares outstanding of the security for which information was being 
reported would have been determined by reference to an issuer's most 
recent annual or quarterly report, and any subsequent update thereto, 
filed with the Commission.\115\
---------------------------------------------------------------------------

    \115\ Id.
---------------------------------------------------------------------------

b. Comments and Final Rule
    As discussed below, the Commission received numerous comments 
regarding various aspects related to the Proposed Reporting Thresholds. 
Generally, these comments varied, with some commenters recommending, 
for example, that the Commission raise the thresholds (which would 
trigger less gross short position reporting) and others recommending 
the Commission lower or eliminate the thresholds (which would trigger 
additional gross short position reporting).\116\ Some commenters 
expressed general support for the Proposed Reporting Thresholds, or 
expressed support for certain aspects of those thresholds.\117\
---------------------------------------------------------------------------

    \116\ See, e.g., ICI Letter, at 9-10 (supporting a higher 
threshold, stating that ``a higher threshold would still provide the 
Commission with information on such large positions, while reducing 
the burdens on managers of reporting smaller positions that likely 
would have a lesser market impact''); K&L Gates Letter, at 4-5 
(supporting a higher threshold, and stating that ``[u]nless the 
Reporting Thresholds are modified, we anticipate that the Commission 
will be inundated with reports providing significant detail about 
positions that, in many cases, are not sufficiently sizable to 
impact the larger markets or raise the type of concerns that the 
Proposal was intended to address''); but see WTI Letter (stating 
that ``it is important to set the threshold as low as possible to 
mitigate any effects and impacts from firms attempting to game the 
threshold'').
    \117\ See, e.g., SIFMA Letter, at 20 (stating that ``while 
certain SIFMA members believe that the threshold should be higher, 
other SIFMA members did not object to the proposed threshold of 2.5 
percent of the issuer's TSO or $10 million fair market value''); 
Schulte Roth & Zabel LLP Letter (Apr. 26, 2022), at 3, available at 
https://www.sec.gov/comments/s7-08-22/s70822-20126845-287561.pdf 
(``Schulte Roth & Zabel Letter'') (stating that ``[w]e believe that 
the 2.5 percent threshold identifies those situations where a short 
position could lead to market manipulation'').
---------------------------------------------------------------------------

Comments To Raise Threshold A
    Some commenters recommended increasing the proposed Reporting 
Threshold A by, for example, doubling the percent of shares outstanding 
threshold from 2.5 percent to 5 percent so as to be consistent with the 
existing reporting requirements of 17 CFR 240.13d-1 (``Exchange Act 
Rule 13d-1'') \118\ and the proposed reporting requirements of 17 CFR 
240.10B-1 (``Exchange Act Rule 10B-1'') \119\ related to large 
positions in security-based swaps.\120\ Other commenters also 
recommended doubling that same percentage of shares outstanding 
threshold from 2.5 percent to 5 percent, because the commenters 
believed that the proposed 2.5 percent threshold was not sufficiently 
sizable to have a market impact.\121\ Additionally, one commenter 
believed that the lack of any reported instances of ``short-side'' 
manipulation did not justify a lower percentage threshold compared to 
Rule 13d-1 and proposed Rule 10B-1.\122\
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    \118\ Rule 13d-1 (requiring long-side equity securities holders 
to file a Schedule 13D or Schedule 13G if the security holder owns 
over 5% of an issuer's equity securities).
    \119\ See 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 
(Dec. 15, 2021), 87 FR 6652, 6678 (Feb. 4, 2022) (``Rule 10B-1 
Proposal''). See also Reopening of Comment Period for Position 
Reporting of Large Security-Based Swap Positions, Exchange Act 
Release No. 97762 (June 20, 2023), 88 FR 41338 (June 26, 2023) 
(proposing to require any person holding security-based swap 
positions to file a proposed Schedule 10B if they hold in excess of 
$300 million in equity security-based swap positions or if the 
notional value of those security-based swap positions is 5% of the 
outstanding number of shares of a class of equity securities, 
whichever is less).
    \120\ See, e.g., Ropes & Gray Letter, at 6 (recommending 
increasing the threshold to 5% in order to ``mitigate costs to 
investors and provide consistency with other reporting regimes''); 
K&L Gates Letter, at 5 (stating that 2.5% does not ``represent a 
significant portion of an issuer's outstanding equity securities,'' 
and recommending increasing the threshold to more than 5% of an 
issuer's voting equity securities in order to be consistent with the 
existing reporting requirements of Rule 13d-1); Perkins Coie Letter, 
at 6 (recommending alignment with requirements of Rule 13d-1(a) that 
require filing of Schedule 13D or 13G upon crossing a 5% threshold 
of ownership of any class of an equity security); ICI Letter, at 10 
(stating that Commission identified 5% as a threshold over which a 
position could have a meaningful market impact in ``recent'' Rule 
10B-1 proposal).
    \121\ K&L Gates Letter, at 5; see also ICI Letter, at 9-10 
(``However, we believe that a higher threshold would still provide 
the Commission with information on such large positions, while 
reducing the burdens on managers of reporting smaller positions that 
likely would have a lesser market impact.'').
    \122\ One commenter believed that the proposed Rule 13f-2 
reporting regime was overly expansive and ``asymmetric'' to existing 
or other proposed reporting regimes in multiples ways, such as the 
proposed percentage reporting threshold of 2.5% being lower than the 
5% threshold in Rules 13d-1 and 10B-1. See SIFMA Letter, at 3-4 
(stating that there is ``no empirical evidence'' that short selling 
requires an ``asymmetric'' reporting regime and that ``[t]his 
conclusion is consistent with the SEC's own reported enforcement 
actions, i.e., any reported instances of `short-side' manipulation 
(e.g., `short and distort' campaigns) are dwarfed by the instances 
of `long-side' manipulation (e.g., `pump and dumps'). There thus is 
simply no basis for such asymmetric regulation.'').
---------------------------------------------------------------------------

    Other commenters proposed that the U.S. dollar value-based 
threshold of Threshold A be raised.\123\ One commenter suggested that 
it be increased from the proposed $10 million to $100 million because a 
$100 million threshold would capture more substantial short positions 
and be consistent with the adjustment to the proposed percentage of 
shares outstanding threshold as compared to former Form SH (i.e., a 
tenfold increase from 0.25 percent under Form SH to 2.5 percent under 
Proposed Form SHO).\124\
---------------------------------------------------------------------------

    \123\ See, e.g., Virtu Letter, at 2 (positing that dollar value 
thresholds ``are significantly lower than is necessary''); Perkins 
Coie Letter, at 2 (finding the $10 million (USD) gross short 
position threshold of Threshold A too low); XR Securities Letter, at 
2 (citing circumstance illustrating that $10M prong of Threshold A 
may be too low).
    \124\ Schulte Roth & Zabel Letter, at 3.
---------------------------------------------------------------------------

    For reasons set forth below and discussed more fully in Part VIII, 
increasing the proposed Threshold A percentage-based threshold from 2.5 
percent or more of total shares outstanding to 5 percent (e.g., to be 
consistent with the existing 5 percent reporting threshold of Exchange 
Act Rule 13d-1 and the proposed reporting requirements of Exchange Act 
Rule 10B-1), as suggested by some commenters,\125\ is not warranted or 
appropriate. In this regard, because the rules are designed for 
different purposes and utilize different reporting thresholds to meet 
their respective

[[Page 75112]]

objectives, the Commission does not believe, as one commenter states, 
that comparing Rule 13f-2 with long-side Rule 13d-1, as well as 
comparing perceived instances of ``short-side'' and ``long-side'' 
manipulation, is an accurate assessment by which to determine Rule 13f-
2's Reporting Thresholds. Reporting under Exchange Act section 13(d) is 
intended to provide information to the public and the affected issuer 
about rapid accumulations of its equity securities in the hands of 
persons who have the potential to change or influence control of the 
issuer.\126\ Reporting under Rule 13f-2, in contrast, is intended to 
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, especially for issuers with a small market capitalization 
where the dollar-based threshold is less likely to be breached.\127\ An 
increase in the percentage-based prong of Threshold A, from 2.5 percent 
to 5 percent, would reduce transparency into short positions in smaller 
stocks. Specifically, increasing the percentage from 2.5 percent to 5 
percent would reduce transparency into stocks with less than a $400 
million market capitalization. This reduction could be meaningful given 
that, short and distort campaigns and other market manipulations are 
more likely to occur in stocks with lower market capitalizations and 
less public information.\128\ As a result, the appropriate threshold 
for Rule 13d-1 is not necessarily the appropriate threshold for Rule 
13f-2. Instead, the Commission continues to believe that a broader 
coverage of short position reporting (i.e., using a 2.5 percent 
reporting threshold) is more appropriate for Rule 13f-2, especially 
given that the reported data are aggregated and anonymized before 
public dissemination with a delay. Here, the Commission is designing a 
reporting threshold that is appropriate for the purposes of section 
13(f)(2). Based on analysis of Form SH, a 2.5 percent or higher monthly 
average gross short position is an appropriate threshold.\129\ For 
example, one exchange estimates that median short interest for small-
cap issuers is only about 3 percent,\130\ indicating that a single 
Manager breaching the 2.5 percent threshold would be significant for 
many issuers. Thus, a percentage-based Threshold A is appropriate to 
adopt as proposed.
---------------------------------------------------------------------------

    \125\ See supra nn. 121 & 122.
    \126\ See, e.g., Filing and Disclosure Requirements Relating to 
Beneficial Ownership, Release No. 34-14693 (Apr. 21, 1978), 43 FR 
18501, 18484 (Apr. 28, 1978) (stating that the ``legislative history 
[of Exchange Act section 13(d)] reveals that it was intended to 
provide information to the public and the affected issuer about 
rapid accumulations of its equity securities in the hands of persons 
who would then have the potential to change or influence control of 
the issuer'').
    \127\ See Proposing Release, at 14961-64.
    \128\ See infra Part VIII.C.1 (discussing market manipulations) 
and Part VIII.E.3 (discussing how thresholds are triggered at 
various dollar amounts).
    \129\ See infra Part VIII.E for discussion of different 
threshold options.
    \130\ See Short Interest in Decline, Nasdaq (Mar. 3, 2022), 
available at https://www.nasdaq.com/articles/short-interest-in-decline.
---------------------------------------------------------------------------

    Nor does the Commission believe that raising the dollar-based 
threshold of Threshold A from $10 million to $100 million to be 
consistent with the tenfold increase in percentage threshold is 
warranted or appropriate. Based on its analysis of Form SH data as 
discussed in the Proposing Release,\131\ as well as the need to balance 
costs with the rule's ultimate goal of transparency, $10 million 
strikes an appropriate balance of limiting costs of reporting to 
Managers, while increasing transparency into short positions, 
especially for equity securities of issuers with mid or large market 
capitalizations that may not be captured under the percentage 
threshold. While issuers with small market capitalizations may have 
only one or a few large short sellers, issuers with mid or large market 
capitalizations may have tens or even hundreds of large short sellers, 
which diffuses the percentage of short interest for each short seller. 
The Commission considered this when setting a dollar-based threshold of 
Threshold A such that large short sellers are captured for all equity 
issuers.
---------------------------------------------------------------------------

    \131\ As discussed in the Proposing Release, the Proposed 
Reporting Thresholds were based on comment letters and analysis of 
Form SH data collected under Rule 10a-3T. Proposing Release, at 
14963-64. 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 itself 
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. 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.
---------------------------------------------------------------------------

Comments To Lower or Eliminate Reporting Thresholds
    Other commenters recommended that the Proposed Reporting Thresholds 
be reduced or eliminated. Some of these commenters were concerned that 
the Proposed Reporting Thresholds could be too lenient and under-
inclusive,\132\ and some of those commenters supported removing the 
thresholds entirely because of the possibility of Managers 
intentionally maintaining short positions just below the thresholds to 
avoid reporting.\133\ One commenter stated that the final rule should 
``eliminate the proposed thresholds so as to reduce or eliminate the 
risk that unknown, hidden short positions could pose to investors and 
the markets.'' \134\ However, eliminating thresholds to capture all 
short sale data may result in the inclusion of ``transient'' short 
sales,\135\ such as short sales due to market making or customer 
facilitation activity rather than directional short sales. By providing 
a properly calibrated threshold this type of ``noise'' should be 
reduced and allow market participants to instead focus on substantial 
short sales that are more likely to be directional. The reduction of 
``noisy'' short position information also sets Rule 13f-2 apart from 
existing short sale data regimes, such as those provided by FINRA and 
the exchanges, which do not have thresholds. On the other hand, the 
threshold cannot be set so high that substantial short sales by 
Managers are out of scope. The Reporting Thresholds, as adopted, will 
help ensure added transparency into short sale-related activity that 
would be beneficial to both market participants and regulators, and 
will result in reporting by Managers with a substantial gross short 
position in both reporting and non-reporting company issuers.
---------------------------------------------------------------------------

    \132\ See, e.g., Comment from Peter Stauduhar (Mar. 6, 2022), 
available at https://www.sec.gov/comments/s7-08-22/s70822-20118728-271591.htm (stating that ``[t]he thresholds are a critical part of 
the success of this rule, and I urge the Commission to worry less 
about the burden the reporting will have on short sellers'').
    \133\ See, e.g., Comment from Travis Donovan (Mar. 14, 2022), 
available at https://www.sec.gov/comments/s7-08-22/s70822-272287.htm; Comment from Steve B. (Mar. 14, 2022), available at 
https://www.sec.gov/comments/s7-08-22/s70822-20119335-272221.htm 
(``SteveB.Comment''); Anonymously Submitted Letter (Apr. 2, 2022), 
available at https://www.sec.gov/comments/s7-08-22/s70822-20122297-278355.htm (``I believe that all short sales should be recorded and 
reported. The minimum threshold should be a single short sale.'').
    \134\ Better Markets Letter, at 12.
    \135\ See Virtu Letter, at 2-3.
---------------------------------------------------------------------------

Recommendations to Base Reporting Thresholds on a Single Metric
    Some commenters, often in conjunction with recommendations to 
increase the Proposed Reporting Thresholds, suggested applying a single 
threshold metric. One commenter proposed the Commission adopt a single 
U.S. dollar value-based threshold for all issuers in order to limit the 
impact of

[[Page 75113]]

any potential ambiguity around identifying the number of shares 
outstanding for non-reporting company issuers.\136\ Another commenter, 
however, recommended that the Commission adopt a single threshold based 
on percentage of shares outstanding, stating that it would ``mitigate 
unnecessary operational and cost burdens on Managers,'' as the 
commenter believed that a U.S. dollar value-based threshold would 
require more difficult system buildouts.\137\
---------------------------------------------------------------------------

    \136\ See MFA Letter, at 4 (stating that ``[a] dollar-based 
approach would be more simple and less costly for managers to 
employ'').
    \137\ See, e.g., ICI Letter, at 8-9 (stating ``we recommend that 
the Commission adopt a single reporting threshold level that is an 
average short position in an equity security based on a percentage 
of shares outstanding rather than on a dollar value''); see also K&L 
Gates Letter, at 5 (recommending a threshold triggered only by ``a 
position representing more than 5 percent of an issuer's voting 
equity'').
---------------------------------------------------------------------------

    The Reporting Thresholds are designed to require the filing of Form 
SHO by Managers with substantial gross short positions. The two-pronged 
approach of Threshold A measures the size of a Manager's short position 
relative to both dollar amount and number of shares. The dollar value-
based prong (Rule 13f-2(a)(1)(i)) captures Managers with substantial 
short positions, even if such positions are relatively small compared 
to the market cap of the issuer. The percentage of total shares 
outstanding-based prong (Rule 13f-2(a)(1)(ii)) captures Managers with 
gross short positions that are large relative to the size of the issuer 
and, therefore, could have a significant impact on the issuer. With 
respect to securities of non-reporting company issuers, however, the 
Commission understands that the number of total shares outstanding may 
not be readily and consistently accessible.\138\ For this reason, a 
single-pronged, dollar value-based Reporting Threshold is an efficient 
way for Managers to determine whether they trigger Threshold B (Rule 
13f-2(a)(2)) that avoids the additional cost and complexity of locating 
the number of total shares outstanding for the securities of a non-
reporting company issuer that may be difficult or impossible to 
locate.\139\
---------------------------------------------------------------------------

    \138\ Proposing Release, at 14962.
    \139\ Id.
---------------------------------------------------------------------------

Comments Recommending the Use of the Same Threshold for Reporting 
Company and Non-Reporting Company Issuers
    Another commenter recommended not having differing thresholds for 
reporting company issuers and non-reporting company issuers.\140\ This 
commenter believed having two different reporting thresholds ``would be 
unnecessarily complicated and burdensome.'' \141\ Furthermore, the 
commenter stated as an alternative the creation of a ``Form SHO List'' 
akin to the 13F List that would include total shares outstanding of 
each security to assist in threshold calculations.\142\ As a result of 
the potential difficulties in accessing the total shares outstanding 
for non-reporting company issuers discussed above, using a percent of 
total shares outstanding-based approach would not be appropriate for 
non-reporting company issuers. Requiring total shares outstanding for 
both thresholds would be operationally difficult, potentially 
inaccurate and therefore costly for Managers to determine for some non-
reporting companies. Requiring a dollar-based metric for both 
thresholds could be both under-inclusive and over-inclusive, as the 
markets for reporting and non-reporting companies differ. For example, 
a high dollar threshold (e.g., $10 million) for both thresholds would 
under-include many non-reporting companies while a low dollar threshold 
(e.g., $500,000) would over-include reporting companies. For these 
reasons, the Commission is adopting Threshold B as proposed.
---------------------------------------------------------------------------

    \140\ See SIFMA Letter, at 19-20 (stating that ``the proposed 
distinction between the thresholds that would apply to Reporting 
Company securities and Non-Reporting Company securities would be 
unnecessarily complicated and burdensome'').
    \141\ Id.
    \142\ SIFMA suggested that the ``Form SHO List'' include 
securities that are included on the 13F List, while excluding 
securities that should not be covered by Form SHO. Id. at 20. SIFMA 
further suggested that the ``Form SHO List'' include, for each 
security, the total shares outstanding.
---------------------------------------------------------------------------

    For similar reasons, and as discussed in the ``Scope of Reported 
Securities'' section above, the Commission will not be publishing a 
``Form SHO List'' with total shares outstanding to assist in Manager 
calculations, as one commenter suggested. The thresholds as adopted are 
designed to reduce operational burdens while capturing substantial 
short positions in both reporting and non-reporting company issuers. 
Adopting a much lower dollar threshold for non-reporting company 
issuers than that for reporting company issuers results in Managers not 
being required to determine percentages of total shares outstanding 
and, due to sparse data in non-reporting company issuer markets, 
Managers would avoid the difficulty of having to do so. A ``Form SHO 
List'' with total shares outstanding would not be necessary for 
Managers reporting positions in reporting company issuers because, 
unlike Rule 13f-1 securities, Rule 13f-2 covers equity securities as 
discussed above,\143\ rendering additional guidance on what securities 
qualify unnecessary. Additionally, as discussed above in the Scope of 
Reported Securities section, section 13(f)(1) expressly provides that 
the Commission shall make available to the public a list of all equity 
securities that are subject to such reporting,\144\ while section 
13(f)(2) does not require publication of such a list.
---------------------------------------------------------------------------

    \143\ See supra Part II.A.2.
    \144\ Section 13(f)(1) of the Exchange Act (15 U.S.C. 78m(f)(1)) 
requires any institutional investment manager exercising investment 
discretion over accounts holding at least $100 million in fair 
market value of certain equity securities to file reports on Form 
13F with the Commission at the times set forth in Rule 13f-1. The 
statute directs the Commission to make available to the public, for 
a reasonable fee, a list of all equity securities described in 
section 13(d)(1) of the Exchange Act and to disseminate to the 
public the information contained in the reports.
---------------------------------------------------------------------------

Comments Regarding Other Concerns Related to Thresholds
Implementation and Compliance Costs
    Some commenters stated that the Proposing Release did not 
adequately account for the burdens associated with monitoring for 
whether a Reporting Threshold is met, i.e., whether a Manager has a 
Form SHO reporting obligation.\145\ Specifically, these commenters 
stated that the Proposing Release did not address the costs of those 
Managers who would need to develop and implement reporting systems to 
monitor for whether a Reporting Threshold is met or exceeded, that may 
or may not ultimately result in a reportable gross short position.\146\ 
The

[[Page 75114]]

comments are addressed in the Economic Analysis, in Part VIII below.
---------------------------------------------------------------------------

    \145\ See, e.g., Virtu Letter, at 2 (``the dollar value 
thresholds referenced in the Proposal are significantly lower than 
is necessary''); MFA Letter, at 4 (recommending a single, dollar-
based threshold only); SIFMA Letter, at 5 (recommending elimination 
of different thresholds for reporting and non-reporting companies in 
favor of one uniform threshold for U.S. equity securities); ICI 
Letter, at 9 (recommending a single, percentage-based threshold for 
both reporting and non-reporting company issuers); Ropes & Gray 
Letter, at 2 (recommending that all thresholds ``be determined using 
average positions over a month rather than daily positions.'').
    \146\ See, e.g., MFA Letter, at 10-11; see also ICI Letter, at 5 
(stating that Proposed Rule 13f-2 would require a Manager to 
continuously monitor and record any activity that could potentially 
be subject to future reporting on Form SHO). While the costs would 
likely be higher if Managers choose to monitor daily, Rule 13f-2 
does not require daily monitoring, either for reporting or non-
reporting company issuers. Managers may choose to do this threshold 
calculation on a rolling basis, or to do the calculation after the 
month has ended. While some Managers may choose to incur the higher 
costs of daily tracking and calculation for purposes of compliance 
with Rule 13f-2, the final rule's Reporting Threshold for reporting 
company issuers is not based on a Manager's gross short position on 
a single trading date, reducing the need for daily tracking. See 
infra Part VIII.C.6.b.
---------------------------------------------------------------------------

``Gross'' Short Position versus ``Net'' Short Position
    Some commenters requested that the Reporting Thresholds be 
calculated based on ``net'' short position rather than ``gross'' short 
position as proposed. Multiple commenters expressed concern that using 
a gross short position calculation would not accurately reflect risk in 
the markets.\147\ However, other commenters supported the use of the 
proposed gross short position data either instead of or in conjunction 
with net short position data.\148\ One commenter proposed requiring net 
short position reporting by Managers that are solely reporting on Form 
SHO with regard to one issuer while requiring gross short position 
reporting for Managers with short positions in more than one 
issuer.\149\ One commenter proposed that, if a gross short position 
calculation is used, market makers should not be subject to adopted 
Rule 13f-2's reporting requirements.\150\ However, another commenter 
supported applying the rule's requirements to market makers.\151\ One 
commenter stated that, even though market makers do not typically carry 
overnight positions and would likely not trigger the Proposed Reporting 
Thresholds, market makers would still incur the costs of end-of-day 
calculations to determine whether they meet or exceed the Proposed 
Reporting Thresholds.\152\
---------------------------------------------------------------------------

    \147\ See, e.g., Virtu Letter, at 3 (stating that ``the 
requirement to report such positions on a gross rather than net 
basis would likely distort the actual degree of short positions as 
it will capture circumstances where a firm is net long but may have 
short positions among its accounts.''); Perkins Coie Letter, at 3-4, 
6. (recommending that ``[r]ather than set a low threshold and over 
capture short position information, the SEC should revise the 
requirement to $10 million net short position as opposed to 
gross.''); Schulte Roth & Zabel Letter, at 2 (stating that ``net 
short position data would more accurately reflect actual positions 
taken by institutional investment managers and provide useful 
transparency to the Commission and to the marketplace.''); ICI 
Letter, at 10 (recommending that ``the Commission streamline and 
simplify how managers account reflect hedging positions by adopting 
a net short position threshold and eliminating the required 
indication of whether a position is hedged or not in Form SHO.''); 
Comment Letter from Anonymous Fund Manager at 1-2, available at 
https://www.sec.gov/comments/s7-08-22/s70822-20126773-287490.pdf 
(``Anonymous Fund Manager Letter'') (recommending that the 
Commission ``modify the proposed threshold requirements to reference 
short positions on a net `delta-adjusted' basis as opposed to a 
gross basis or, in the alternative, exclude from the reporting 
obligations under the Proposed Rules `bona fide hedging activity' as 
such term would be defined in the final rules.'').
    \148\ See, e.g., Comment from Josh Allen (Mar. 14, 2022), 
available at https://www.sec.gov/comments/s7-08-22/s70822-272295.htm; Comment from An Investor (Apr. 4., 2022), available at 
https://www.sec.gov/comments/s7-08-22/s70822-20122297-278355.htm 
(supported including both net and gross short positions in 
reporting).
    \149\ Perkins Coie Letter, at 4 (stating that ``the SEC should 
consider amending its proposal to require net position reporting by 
certain types of managers that do not regularly utilize short 
positions. For instance, the SEC could require net short position 
reporting by filers that are solely reporting on Form SHO with 
regards to one issuer. For any filer reporting more than one issuer, 
the SEC could require gross short position reporting.'').
    \150\ HSBC Letter, at 16 (stating that ``[b]ecause Proposed Rule 
13f-2 requires disclosure of gross positions, market makers could be 
required to report large positions, even if a market makers' [sic] 
net position is close to zero (i.e., because such short positions 
are typically hedged via options or swaps). Subjecting market makers 
to Proposed Rule 13f-2 may, therefore, result in market participants 
receiving unhelpful and misleading information about the short sale 
market.'').
    \151\ See Samuel Meadows Comment, at 2 (stating that ``Market 
Makers should NOT be except [sic] from reporting for any reason. 
Market Makers should report short sales the same as everyone else 
should they pass the Reporting Threshold.'').
    \152\ See SIFMA Letter, at 11-12 (stating that ``[h]owever, as 
the Proposing Release notes, requiring Institutional Investment 
Managers to consider intraday short sale activity, which would not 
be captured in the `gross short position' as reflected on their 
trade date stock records, in determining whether the threshold has 
been exceeded, would be incredibly onerous--particularly, for 
example, for market makers that generally may not carry large 
overnight short positions.'').
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    As discussed in the Proposing Release, under the proposal, a 
Manager would 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.\153\ For example, if a 
Manager has investment discretion over multiple accounts, some of which 
have long positions in an equity security and some have short positions 
in the same equity security, only the total gross short position in the 
``short accounts'' is reported, without being offset by the long 
positions in the ``long accounts.'' Requiring a Manager to report its 
daily gross short position in a security will provide a more complete 
view of short positions held by Managers in a security, particularly 
once the data is aggregated for publication.\154\ Permitting Managers 
to ``net'' positions would dilute the usefulness of the data in 
providing market participants with a sense of substantial short 
positions. For example, requiring net short position reporting by 
Managers that are solely reporting on Form SHO with regard to one 
issuer, or for other types of Managers infrequently using short 
positions, as one commenter suggested, would provide minimal cost 
savings and create misleading data that could be difficult to aggregate 
and confusing to market participants. Further, the data collected and 
provided by FINRA \155\ and the exchanges is not netted.\156\ By 
providing aggregate gross positions reported by Manager in a security, 
the final rule will supplement such existing short sale information 
with additional context on substantial gross short sale positions.
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    \153\ Proposing Release, at 14956.
    \154\ In addition, commenters stated they would be uncertain how 
to ``offset'' positions when discussing the hedging indicator. See 
infra Part II.A.4.d.iii.(B). Netting would raise similar concerns.
    \155\ See, e.g., Short Interest--What It Is, What It Is Not, 
FINRA Inv'r Insights (Jan. 25, 2023), available at https://www.finra.org/investors/insights/short-interest (``The short 
interest data is just a snapshot that reflects short positions held 
by brokerage firms at a specific moment in time on two discrete days 
each month. The Short Sale Volume Daily File reflects the aggregate 
volume of trades within certain parameters executed as short sales 
on individual trade dates.'').
    \156\ See, e.g., Frequently Asked Questions (FAQ) about Short 
Interest Reporting, FINRA, available at https://www.finra.org/filing-reporting/regulatory-filing-systems/short-interest/faq (``Q1: 
Rule 4560 applies to short interest positions resulting from: (1) a 
``short sale,'' as defined by Regulation SHO Rule 200(a); or (2) 
where the transaction that caused the short position was marked 
``long,'' consistent with Regulation SHO Rule 200(g), due to the 
firm's or the customer's net long position at the time of the 
transaction. For example, a sale may be marked as ``long'' because 
the overall net position in the security within an aggregation unit 
is long at the time of the sale. If the execution results in a short 
position in a specific account (or subaccount) held within the 
aggregation unit, this position is reportable pursuant to Rule 
4560.''; Q11: ``Where, as part of a strategy, an account holds both 
a short and long position in the same security simultaneously, the 
short position is reportable as short interest pursuant to Rule 4560 
and must be reported in full, i.e., not netted against the long 
position.'').
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    In addition, the Commission is making additional modifications, 
discussed further below, that should alleviate burdens on market makers 
that may otherwise need to undertake the obligation of calculating 
reporting thresholds despite generally holding positions below such 
thresholds. Specifically, the Commission is modifying the threshold 
calculations to a monthly average of daily gross short positions rather 
than a single daily position, as discussed under the subheading ``When 
the Reporting Obligation is Triggered'' below. Further, as discussed in 
Part III below, the Commission is not adopting the proposed requirement 
to report ``buy to cover'' activity, which a commenter \157\ stated 
would be more difficult if gross positions are required to be reported. 
The Commission, in adopting Rule 13f-2, will require a Manager to 
report its ``gross'' monthly short position as

[[Page 75115]]

proposed under Proposed Rule 13f-2(b)(4).
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    \157\ SIFMA Letter, at 24.
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When the Reporting Obligation Is Triggered
    To ease reporting burdens and reduce costs, some commenters 
proposed decreasing the frequency of certain aspects of the U.S. dollar 
value-based aspects of the Reporting Thresholds by instead using 
monthly average positions, instead of the proposed ``close of regular 
trading hours on any settlement date'' frequency.\158\ Alternatively, 
one commenter suggested that the proposed monthly reporting requirement 
should only be triggered if a Manager holds a short position in excess 
of the Proposed Reporting Thresholds as of the last settlement day of 
the month.\159\ Commenters stated that by using average monthly 
positions rather than the proposed rule's use of any settlement date 
within the reporting period, the reporting burden required of Managers 
would be substantially lessened, since Managers may transiently cross 
the reporting thresholds through activities such as market making, 
hedging, and customer facilitation activity.\160\ Requiring reporting 
for Managers who temporarily cross these thresholds on an intraday 
basis through such activity, one commenter stated, would not adhere to 
the legislative intent of DFA section 929X.\161\ Commenters stated that 
transiently crossing these thresholds would not produce reported data 
that would be valuable to the Commission; for example, short-term 
market disruptions may trigger reporting under the proposed frequency 
for Managers that do not hold substantial short positions.\162\ For 
reasons discussed below, the Commission is modifying Proposed Rule 13f-
2(a)(1)(i) (the U.S. dollar value-based prong of Threshold A) to 
trigger reporting requirements when a Manager has a monthly average of 
daily gross short positions (``monthly average'') with a U.S. dollar 
value of $10 million or more at the end of the calendar month, rather 
than, as proposed, a $10 million or more gross short position at the 
close of regular trading hours on any settlement date during the 
calendar month.\163\
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    \158\ See, e.g., Virtu Letter, at 3 (stating that ``[w]e also 
object to the reporting requirement being triggered by the existence 
of a short position on any settlement date within a reporting 
period.''); Ropes & Gray Letter, at 2 (stating that ``[a]ll filing 
thresholds should be determined using average positions over a month 
rather than daily positions.'').
    \159\ SIFMA Letter, at 15 (advocating ``that the proposed 
monthly reporting under Information Table 1 of Proposed Form SHO 
should be triggered only if the Institutional Investment Manager 
holds a gross short position in an equity security, as of the last 
day of such month, in excess of the threshold(s) for reporting.'').
    \160\ See Virtu Letter, at 2.
    \161\ See SIFMA Letter, at 4.
    \162\ See Ropes & Gray Letter, at 6-7.
    \163\ This change to ``monthly average'' is responsive, in part, 
to commenters' concerns about certain aspects of the U.S. dollar 
value-based Reporting Thresholds. For reasons discussed below, 
however, the Commission is adopting Threshold B as proposed 
(Proposed Rule 13f-2(a)(2)), which employs an ``at the close of 
regular trading hours on any settlement during the calendar month'' 
approach. The Form SHO ``Instructions For Calculating Reporting 
Threshold,'' discussed below, explain in detail the method for 
determining whether the modified threshold is met.
---------------------------------------------------------------------------

    Threshold A, as adopted, will require reporting by Managers that 
have, for each equity security of a reporting company issuer, either 
(1) a monthly average gross short position at the close of regular 
trading hours in the equity security with a U.S. dollar value of $10 
million or more,\164\ or (2) a monthly average gross short position at 
the close of regular trading hours as a percentage of shares 
outstanding in the equity security of 2.5 percent or more.\165\ Using a 
``monthly average'' dollar value for reporting company issuers will 
result in Form SHO reporting by Managers that consistently carry large 
gross short positions during the reporting month. This approach should 
reduce the reporting of non-directional, ``transient'' short sales 
activity \166\ and provide market participants with more focused 
information on substantial short positions held by Managers. The 
modification should also reduce the burdens of certain Managers, 
specifically those Managers, including market makers, that periodically 
meet or exceed the $10 million or more threshold on a given settlement 
date during a calendar month, but that do not typically carry a large 
gross short position throughout the month that will meet or exceed the 
monthly average reporting threshold, by eliminating the need to 
calculate (and potentially trigger) the threshold on a daily basis. 
This will help the Commission to distinguish directional short selling 
of Managers from short sale activity effected by market makers and 
liquidity providers.\167\
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    \164\ To determine whether this Reporting Threshold has been 
met, a Manager shall determine its gross short position at the close 
of regular trading hours in the equity security (as defined in Rule 
13f-2) 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 (``end of day dollar value''). 
The Manager shall then add all end of day dollar values during the 
calendar month and divide that sum by the number of settlement dates 
in the month to arrive at a ``monthly average'' for each equity 
security the Manager traded during that calendar month reporting 
period.
    \165\ The methods of calculation of the Reporting Thresholds are 
prescribed in ``Instructions for Calculating Reporting Threshold'' 
in Form SHO. Rule 13f-2 and the instructions in Form SHO, require 
that for purposes of determining whether a Manager meets or exceeds 
a Reporting Threshold, a Manager shall determine its gross short 
position ``at the close of regular trading hours'' in the equity 
security, rather than at the ``end of day'' as was provided for in 
the instructions to Proposed Form SHO. Accordingly, the Commission 
is making a modification to the instructions for calculating 
Threshold A and replacing ``end of day gross short position'' with 
``gross short position at the close of regular trading hours.'' 
Addressing any potential ambiguity in terminology should facilitate 
more consistency in reporting by Managers and more comparability of 
the data reported on Form SHO. With this change, the calculation 
instructions for Threshold A provide that to determine whether the 
percentage threshold of Threshold A has been met, a Manager shall 
(a) determine its gross short position at the close of regular 
trading hours in the equity security (as defined in Rule 13f-2) on 
each settlement date during the calendar month, and divide that 
figure by the number of shares outstanding in such security at the 
close of regular trading hours on the settlement date, and (b) add 
up the daily percentages during the calendar month as determined in 
(a) and divide that sum by the number of settlement dates in the 
month to arrive at a ``monthly average'' for each equity security 
the Manager traded during that calendar month 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.
    \166\ See supra n. 135 and accompanying text.
    \167\ See Proposing Release, at 14953.
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    In addition, similar to the discussion in the Proposing Release 
regarding the use of a monthly average gross short position of 2.5 
percent or more of total shares outstanding,\168\ the Commission 
continues to believe that using a monthly average gross short position 
at the close of regular trading hours of $10 million or more, rather 
than an end of each settlement date calculation as was originally 
proposed, will reduce the risk that a Manager may time its short sales 
to avoid triggering the adopted reporting threshold.\169\
---------------------------------------------------------------------------

    \168\ Proposing Release, at 14962 (``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.'').
    \169\ In addition, the Commission is making a modification to 
specify in Rule 13f-2 and in the instructions in Form SHO that, for 
purposes of determining whether a Manager meets or exceeds Threshold 
A, a Manager shall determine its gross short position ``at the close 
of regular trading hours'' in the equity security, rather than at 
the ``end of day'' as was provided for in the instructions to 
Proposed Form SHO. Reducing any potential ambiguity in terminology 
should facilitate more consistency in reporting by Managers and more 
comparability of the data reported on Form SHO.

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[[Page 75116]]

    Threshold B, as proposed, and as adopted, will require reporting by 
Managers that have, for each equity security of a non-reporting company 
issuer, 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.\170\ A single, 
dollar-based prong approach (using the $500,000 or more on any 
settlement date metric) for securities of non-reporting company issuers 
(Rule 13f-2(a)(2)) will capture Managers with large gross short 
positions, even if such positions are relatively small compared to the 
market capitalization of the issuer. As discussed above, the markets 
for non-reporting company issuers are more opaque and could benefit 
more from transparency. Additionally, due to their lower liquidity, 
equity securities of non-reporting companies can be more sensitive to 
strategic trading than those of reporting companies.\171\ As a result, 
for those securities, a single dollar threshold that can be triggered 
on any day of a month is more appropriate than the two-prong threshold 
calculated as monthly averages for equity securities issued by 
reporting companies.
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    \170\ The methods of calculation of the Reporting Thresholds are 
prescribed in ``Instructions for Calculating Reporting Threshold'' 
in Form SHO. To determine the dollar value-based Reporting Threshold 
described in Threshold B has been met, a Manager shall determine its 
gross short position at the close of regular trading hours in the 
equity security (as defined in Rule 13f-2) 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.
    \171\ See infra Part VIII.E.3 (discussing difficulty in 
obtaining information on non-reporting company issuers, and that 
data is often stale and inaccurate).
---------------------------------------------------------------------------

Basing Reporting Thresholds on Form SH Data
    Some commenters maintained that the Commission should not have 
based the Proposed Reporting Thresholds on Form SH data, as the Form SH 
data was collected during ``a period of abnormal market conditions that 
does not reflect recent changes in the markets,'' and urged the 
Commission to more robustly support its rationale for selecting the 
Reporting Thresholds.\172\ These commenters essentially suggested that 
the use of Form SH data was unrealistic, and suggested that the 
Commission consider whether the Reporting Thresholds are appropriate 
based on more recent data and analysis.\173\ In the Proposing Release, 
the Commission stated that to perform the underlying Reporting 
Thresholds analysis, Form SH data on daily short positions for November 
2008 through February 2009 were filtered and matched to Center for 
Research in Security Prices, LLC for daily closing prices and Compustat 
for daily shares outstanding. The Commission recognized that the 
results of an analysis of Form SH data may not fully reflect the status 
quo but that the analysis used appropriate data because it involved the 
same type of entities (Managers) and the same activity (short 
positions).\174\ As discussed in the Proposing Release, the Commission 
believed that it struck a reasonable balance in proposing the Reporting 
Thresholds with regard to the fundamental economic tradeoff of the 
value of the data versus the cost of collecting the data.\175\
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    \172\ Comment Letter from Barbara Bliss, Associate Professor of 
Finance, et al. (Apr. 25, 2022), at 3, available at https://www.sec.gov/comments/s7-08-22/s70822-20126591-287247.pdf (``Law and 
Finance Professors Letter'') (``we believe the Commission could and 
should more robustly support its rationale for these thresholds 
before adopting any final rule.''); see also AIMA Letter, at 11-12 
(commenter was critical of Reporting Thresholds based on ``stale and 
limited'' data). For a discussion of Form SH applicability to the 
current period, see infra Part VIII.C.6.a.
    \173\ See, e.g., AIMA Letter, at 12 (stating that the Commission 
should ``review and analyze current short interest market data for 
reporting issuers to ensure that any final threshold based on a 
gross position's dollar value accounts for the latest and most 
complete data''); Law and Finance Professors Letter, at 3 (stating 
that the Commission should ``consider more carefully whether the 
stated disclosure thresholds are appropriate, based on more recent 
data and analysis, and whether there should be a mechanism that 
would permit these thresholds to change over time''); Two Sigma 
Letter, at 7 (stating that Form SH burden estimates are an 
``unrealistic benchmark'').
    \174\ Proposing Release, at 14963 n.80.
    \175\ Proposing Release, at 14963-64, 15007.
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    The Commission disagrees with one commenter that stated that Form 
SH data was ``stale and limited.'' \176\ The Commission continues to 
believe that Form SH data is highly relevant for determining the 
Reporting Thresholds. Form SH is the only existing data source of 
individual Manager-level short sale positions.\177\ Form SH data was 
collected from October 17, 2008, until August 1, 2009, and the 
Commission analyzed daily data submitted from November 2008 until 
February 2009 as representative of short positions held by Managers. By 
the time Form SH was in effect, the global financial crisis was winding 
down, and is considered by some to have calmed by approximately June 
2009.\178\ Thus, data was analyzed for several months during which the 
economy was returning to normalcy. Although the commenter suggested 
such data does not address ``recent changes in the financial markets,'' 
the commenter did not elaborate on what ``recent changes'' would have 
impacted an analysis of the Form SH data or the time period in which 
the data was analyzed. Markets undergo periods of volatility and 
stability and are constantly evolving over time. The data from Form SH 
involves the same type of entities (Managers) and the same activity 
(short positions) as Form SHO. The time period for which the Form SH 
data was studied is sufficiently informative to provide a reasonable 
assessment of appropriate reporting thresholds for purposes of Form 
SHO.\179\
---------------------------------------------------------------------------

    \176\ See AIMA Letter, at 11-12.
    \177\ While there are various limitations to be considered when 
using Form SH data, Form SH data are the most relevant and 
applicable source of data available for the purposes of estimating 
the costs of the design and analysis of Rule 13f-2. There are no 
other data sources, public or regulatory, which specifically track 
Managers' short position activities in the U.S. See infra Part 
VIII.C.6.a.
    \178\ The National Bureau of Economic Research considers the 
global financial crisis as having officially started Dec. 2007 and 
ended June 2009. See, e.g., Nat'l Bureau of Econ. Research, Business 
Cycle Dating, available at https://www.nber.org/research/business-cycle-dating.
    \179\ See discussion of Form SH in Part VIII.C.6.a.
---------------------------------------------------------------------------

4. Form SHO
a. Reporting via EDGAR
i. Proposal
    To enhance transparency of short sale-related data reported and 
published pursuant to Proposed Rule 13f-2, Proposed Rule 13f-2(a)(3) 
provided that Managers would file Form SHO (and any amendments thereto) 
with the Commission on EDGAR.\180\ The Commission believed that most 
Managers should be familiar with filing forms on EDGAR--for example, 
Form 13F \181\--and relying on EDGAR to access registration statements, 
periodic reports, and other filings with the Commission that are made 
publicly available.\182\ The Commission believed

[[Page 75117]]

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, and would allow the Commission to 
download disclosures from Form SHO directly, facilitating efficient 
access, organization, and evaluation of the reported information.\183\ 
The Commission further believed that the improved quality and scope of 
information available for the Commission's use in examining market 
behavior and recreating market events would bolster the Commission's 
oversight of short selling activity and enhance investor 
protections.\184\
---------------------------------------------------------------------------

    \180\ See Proposed Rule 13f-2(a)(3) (providing that ``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 such 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.'').
    \181\ EDGAR filing is mandatory for all public Form 13F 
submissions. See Rulemaking for EDGAR System, Exchange Act Release 
No. 34-40934 (Jan. 12, 1999), 64 FR 2843 (Jan. 19, 1999); see also 
Electronic Submission of Applications for Orders under the Advisers 
Act and the Investment Company Act, Confidential Treatment Requests 
for Filings on Form 13F, and Form ADV-NR; Amendments to Form 13F, 
Exchange Act Release No. 34-95148 (June 23, 2022), 87 FR 38943 (June 
30, 2022).
    \182\ See, e.g., About EDGAR, available at https://www.sec.gov/edgar/about; see also Important Information about EDGAR, available 
at https://www.sec.gov/edgar/searchedgar/
aboutedgar.htm#:~:text=EDGAR%2C%20the%20Electronic%20Data%20Gathering
,and%20Exchange%20Commission%20(SEC) (``The [EDGAR] system processes 
about 3,000 filings per day, serves up 3,000 terabytes of data to 
the public annually, and accommodates 40,000 new filers per year on 
average.'').
    \183\ Proposing Release, at 14957.
    \184\ Id.
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ii. Comments and Final Rule
    Several commenters raised concerns about how the confidentiality of 
the data reported on Form SHO via EDGAR would be preserved.\185\ Most 
of these commenters spoke of a need to establish robust data security 
protocols for the ``valuable and proprietary'' information that would 
be reported on Proposed Form SHO via EDGAR. Several such commenters 
expressed concerns about cyberattacks or other breaches of account 
information.\186\
---------------------------------------------------------------------------

    \185\ See, e.g., K&L Gates Letter, at 5-6 (any final rule or 
final Form SHO should ensure ``indefinitely'' the confidentiality of 
information that could reveal the identity of the reporting 
Manager).
    \186\ See, e.g., AIMA Letter, at 14 (stating that the Commission 
has not explained how it will protect the commercially sensitive 
data that will be reported on Proposed Form SHO or acknowledged that 
its systems are susceptible to data breaches); MFA Letter, at 8 
(positing that ``the risk of increased cyberattacks or other 
breaches of confidential account information far outweigh any 
incremental benefit associated with requiring [Managers] to 
individually report short position information''); Two Sigma Letter, 
at 3-5 (cautioning that information on Proposed Form SHO reports 
``will be private only so long as the Commission does not have its 
systems breached, its personnel do not misappropriate the 
information, the information is not unintentionally released, or 
policies do not change retroactively''); SIFMA Letter, at 22 n.60 
(citing cyber security, theft, and inadvertent data breach concerns 
as chief among the risks of providing sensitive and confidential 
information regarding short positions and short activity).
---------------------------------------------------------------------------

    While no technology system or infrastructure is impervious to 
cyberattack, the Commission employs an array of actions to safeguard 
and protect the confidentiality and security of all information 
reported to EDGAR, which will include data reported on Form SHO.\187\ 
The Commission has stated that it has ``engaged in a multi-year, multi-
phase effort to modernize the EDGAR system, including both internal and 
public-facing components. Security and modernization enhancements were 
deployed in June 2020, focusing on technology upgrades internal to the 
system.'' \188\ Moreover, as discussed in Part I.A.4.f.ii below, the 
Commission is adopting an approach to the confidential treatment of 
information provided on Form SHO reports that all such information will 
be deemed subject to a confidential treatment request under 17 CFR 
200.83 (``Rule 83''). Accordingly, the Commission is adopting Rule 13f-
2(a)(3) as proposed.
---------------------------------------------------------------------------

    \187\ See Annual Report on SEC website Modernization Pursuant to 
Section 3(d) of the 21st Century Integrated Digital Experience Act 
(Dec. 2022), available at https://www.sec.gov/files/21st-century-idea-act-report-2022-12.pdf.
    \188\ Id.
---------------------------------------------------------------------------

b. Filing Form SHO Reports
i. Proposal
    As described in the Proposing Release, Managers would use Proposed 
Form SHO for reports to the Commission required by Proposed Rule 13f-2. 
The Commission proposed that Managers 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.\189\ The Commission 
proposed that Managers would file the Form SHO with the Commission via 
the Commission's EDGAR system in an eXtensible Markup Language 
(``XML'') specific to Form SHO (``custom XML'' or ``Form SHO-specific 
XML''),\190\ a structured machine-readable data language. The 
Commission also proposed that Managers would either be able to file 
Form SHO using a fillable web form the Commission would provide on 
EDGAR to input Form SHO disclosures, or a Manager could use its own 
software tool to file Form SHO to EDGAR directly in Form SHO-specific 
XML.\191\ Reporting via EDGAR, as described in the Proposing Release, 
would facilitate efficient access, organization, and evaluation of 
reported information by the Commission.
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    \189\ Proposing Release, at 14956.
    \190\ Id. at 14955.
    \191\ See id. at 14955. 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).
---------------------------------------------------------------------------

    The Commission stated in the Proposing Release that requiring Form 
SHO to be filed in custom XML format, since it is a structured, 
machine-readable data language, 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.\192\ 
Furthermore, the Commission stated most Managers have experience filing 
EDGAR forms that use similar EDGAR Form-specific XML-based data 
languages, such as Form 13F and Form ATS-N.\193\
---------------------------------------------------------------------------

    \192\ See Proposing Release, at 14997 (``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.'').
    \193\ See, e.g., Proposing Release at 14960, 14999 (first citing 
Form 13F, available at https://www.sec.gov/pdf/form13f.pdf) (then 
citing Regulation of NMS Stock Alternative Trading Systems, Exchange 
Act Release No. 83663 (July 18, 2018), 83 FR 38768 (Aug. 7, 2018)) 
(requiring new EDGAR Form ATS-N to be filed in an XML-based language 
specific to that Form); see also Money Market Fund Reforms, 
Investment Company Act Release No. 34441 (Dec. 15, 2021), 87 FR 7248 
(Feb. 8, 2022) (Form N-CR); Securities Offering Reform for Closed-
End Investment Companies, Exchange Act Release No. 88606 (Apr. 8, 
2020), 85 FR 33290 (June 1, 2020) (Form 24F-2).
---------------------------------------------------------------------------

    As proposed, if a Manager uses the web-fillable Proposed Form SHO 
on EDGAR and encounters a technical error when filling out the form, 
such Manager would 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 would receive an error message that the filing has been 
suspended, and would be required to correct the identified technical 
error and re-file the Proposed Form SHO through EDGAR.\194\
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    \194\ The Commission stated in the proposing release that the 
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 filed in 
Proposed Form SHO filings. Proposing Release, at 14960 n.72.

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[[Page 75118]]

    As an alternative, the Commission also discussed whether Proposed 
Form SHO should be required to be filed in Inline eXtensible Business 
Reporting Language (``Inline XBRL'').\195\ The Commission stated that, 
compared to the proposal, the Inline XBRL alternative, which is both 
machine-readable and human-readable, would provide more sophisticated 
validation, presentation, and reference features for filers and data 
users.\196\ However, the Commission stated that given the fixed and 
constrained nature of the disclosures to be reported on Proposed Form 
SHO, the benefits of the Inline XBRL alternative would be muted, and 
therefore Managers would not be able to take advantage of customization 
and presentation features.\197\ Furthermore, the Commission stated in 
the Proposing Release that the alternative Inline XBRL approach would 
create greater initial implementation costs, such as licensing XBRL 
filing preparation software, because many Managers may not have prior 
experience structuring data in Inline XBRL.\198\
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    \195\ See Proposing Release, at 15010-11.
    \196\ See id.
    \197\ See id.
    \198\ See id.
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ii. Comments and Final Rule
    The Commission received some comments about the use of Form SHO-
specific XML in filing Form SHO. In response to Q39 in the Proposing 
Release,\199\ which asked whether the use of Form SHO-specific XML 
would make the reported data more useful to users, one commenter stated 
that data prepared in consistent, structured format would be 
``significantly more functional and useful.'' \200\ Regarding the costs 
and benefits of an Inline XBRL requirement as compared to Proposed Form 
SHO-specific XML, this commenter supported using XBRL in a comma-
separated value (``CSV'') format, which is a text file that uses 
delimiters such as commas to separate data fields.\201\ The commenter 
stated that this would be the most appropriate standard ``for capturing 
high volume, granular data in a compact format,'' and urged the 
Commission to adopt XBRL rather than custom XML.\202\ The commenter 
stated that XBRL-CSV has several advantages over the Commission's 
proposed use of a custom XML format, such as reducing preparation costs 
and processing costs, as well as improving validation.\203\ In 
addition, the commenter disagreed with the Commission's view in the 
Proposing Release that the benefits of the additional features of XBRL 
would be muted if used for Form SHO due to the fixed and constrained 
nature of the disclosures to be reported. The commenter stated that 
several other agencies, such as the FDIC and FERC, have recently 
adopted XBRL format over custom XML format. However, the commenter 
acknowledges that initial implementation costs will be higher and 
familiarization with the format will take longer for reporting 
entities. Alternatively, another commenter supported the use of Form 
SHO-specific XML, stating that ``XML is a widely used language and 
therefore implementation and maintenance would keep costs low and 
efficiency high,'' and thought it would allow for efficient review of 
the reported data.\204\
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    \199\ Proposing Release, at 15012.
    \200\ Comment Letter from Campbell Pryde, President and CEO, 
XBRL US (Apr. 26, 2022), at 1 (``XBRL Letter''), available at 
https://www.sec.gov/comments/s7-08-22/s70822-20126860-287597.pdf.
    \201\ See id. at 2.
    \202\ See id. at 2-5.
    \203\ See id.
    \204\ Comment from An Investor (Apr. 4, 2022), available at 
https://www.sec.gov/comments/s7-08-22/s70822-20122297-278355.htm.
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    The Commission is adopting the custom XML data reporting 
requirement as proposed. As explained in the Proposing Release, the 
filing options for Form SHO are consistent with other EDGAR filings 
that are filed in Form-specific XML-based languages.\205\ The 
Commission also continues to believe that because many Managers have 
been using custom XML-based languages through other releases, they are 
more familiar with this language than other languages, such as XBRL, so 
the use of XML will promote efficiency in filing and review of Form SHO 
reports. Familiarity with custom XML formats will reduce implementation 
and ongoing compliance costs when compared to introducing XBRL-based 
formats that may be unfamiliar to Managers. Managers' greater 
familiarity with custom XML formats should also reduce the possibility 
of data input errors when compared to XBRL formats. The above noted 
commenter likewise stated that XBRL formats would entail higher initial 
implementation costs and that familiarization with the XBRL formats 
would take longer for reporting entities. The costs of using XBRL 
formats in implementation and user retraining, along with the 
inconsistencies relative to other filings that use Form-specific XML-
based languages, do not justify the potential data formatting benefits 
of XBRL. Further, the commenter stated a preference for using XBRL 
specifically in CSV format. In addition to the above concerns about 
XBRL-based languages generally, the Commission believes that custom XML 
format is more appropriate than an XBRL-CSV format for the purposes of 
Form SHO because XML format is more human-readable than CSV format, and 
XML is more flexible when using more complex data.
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    \205\ 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 EDGAR Form ATS-N to be filed in an XML-
based language specific to that Form).
---------------------------------------------------------------------------

    Finally, the Commission's XML schema is designed to include 
validations for each data field on Form SHO to help ensure consistent 
formatting and completeness. The Commission continues to believe that 
requiring Form SHO to be filed via Form-SHO specific XML, a structured 
machine-readable data language, will 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.\206\
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    \206\ See Form 13F, available at https://www.sec.gov/pdf/form13f.pdf.
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c. Timing of Reporting by Managers and Publication by Commission
i. Proposal
    Under Proposed Rule 13f-2(a), a Manager would have been required to 
file the required information on Form SHO with the Commission within 14 
calendar days after the end of each calendar month. Proposed Rule 13f-
2(a)(3) provides that certain information reported on Proposed Form SHO 
would be published by the Commission on an aggregated basis. No time 
frame for publication by the Commission was provided in Proposed Rule 
13f-2. In the Proposing Release, however, the Commission estimated that 
it would publish the aggregated information within one month after the 
end of the calendar month.
ii. Comments and Final Rule
    Comments on the frequency of reporting and publication varied. Some 
commenters called for more frequent reporting by Managers and, by 
implication, more frequent publishing by the Commission of information 
from Form SHO reports. Several of these commenters suggested that 
technology permits more frequent--i.e., daily, if not

[[Page 75119]]

monthly--reporting.\207\ Several of these comments also expressed 
concern that the Commission's estimated month-long delay in publishing 
the aggregated information would produce stale data that would 
undermine the goal of greater transparency in the markets.\208\ The 
Commission acknowledges that the technology exists for frequent 
reporting of transactions and faster data processing. The Commission is 
concerned, however, about the accuracy of the data reported by Managers 
and the aggregated data published by the Commission pursuant to Rule 
13f-2 reporting requirements. The Commission believes that the data 
reported by Managers on Form SHO is more likely to be complete and 
accurate if Managers are afforded sufficient time to gather, assemble, 
and review the reported data.\209\ The Commission continues to believe 
that 14 calendar days after the end of each month provides a reasonable 
period of time for Managers to meet their Rule 13f-2 reporting 
requirements. The Commission is also concerned that increasing the 
frequency of Commission publication of aggregated data may increase the 
risk of short squeezes or other manipulative activities that could 
interfere with the price discovery function of equity markets. The 
timeframes as proposed and as adopted balance such concerns with some 
commenters' desire for faster transparency.
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    \207\ See, e.g., Comment from Regina Murrell (Mar. 25, 2023) 
available at https://www.sec.gov/comments/s7-08-22/s70822-20121170-273336.htm (suggesting that technology be used to report short 
positions daily); Anonymously Submitted Comment (Mar. 14, 2022) 
(calling for reporting to regulators within twenty-four hours); 
Anonymously Submitted Comment (Apr. 26, 2022) (calling for daily, if 
not intraday, Form SHO reporting rather than monthly reporting, as 
proposed); Anonymously Submitted Comment (Mar. 17, 2022) (stating 
that technology permits more frequent reporting and release of short 
sale-related data to the public in shorter timeframes); see also 
Better Markets Letter, at 13 (predicting that the Commission's 
``fairly significant delay'' in publishing the aggregated 
information derived from Form SHO reports will lead to published 
information that is ``less timely and less informative'').
    \208\ See, e.g., Comment of Estaban Oliveras (Mar. 14, 2022) 
available at https://www.sec.gov/comments/s7-08-22/s70822-20119372-272258.htm (commenting ``If data is neither accurate nor timely, 
then what is the point of collecting data?'').
    \209\ See Proposing Release, at 14956.
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    Commenters taking the opposite view recommended that additional 
time be given for Manager reporting and Commission publication. One 
such commenter recommended that the Commission align the proposed 
timelines for preparing and filing Form SHO reports with existing 
filing requirements for other Commission reports and forms, to allow 
for better coordination of the process of including short sale-related 
data in multiple reporting frameworks.\210\ Another such commenter 
suggested an initial filing period be extended to within 28 calendar 
days upon crossing the threshold and then 14 calendar days for any 
subsequent filing.\211\ Another commenter suggested that a minimum of 
45 days before publication of aggregated data by the Commission was 
necessary to protect Managers from the risk that their positions and 
strategies would be used in a ``short squeeze or other market-driven 
reaction'' or as part of a copycat strategy.\212\
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    \210\ ICI Letter, at 12 (stating that aligning Form SHO 
reporting requirements with those of Form N-Port, for example, would 
give Managers 30 days, rather than the proposed 14 days, after the 
end of a calendar to file a Form SHO).
    \211\ See Perkins Coie Letter, at 3 (stating a request to extend 
the initial filing period to within 28 calendar days upon crossing 
the threshold in order ``to reduce the monitoring and compliance 
burdens for infrequent short position users'').
    \212\ MFA Letter, at 18.
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    While adopting the proposed timeframes will delay the public 
dissemination of aggregate short positions by about a month, the 
Commission believes a longer delay such as 28 days for initial filings 
or 45 days for all filings is unnecessary. FINRA's current short 
interest reporting, for example, is published twice a month, resulting 
in a delay of about two weeks.\213\ The final rule here requires 
slightly more time than FINRA's current reporting regimes because 
Managers need additional time following determination of whether they 
meet a Reporting Threshold at the end of each calendar month to prepare 
and file the data on Form SHO through EDGAR. Additionally, 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 will reduce the need for Managers to file amendments 
to Form SHO. However, having an asymmetric filing deadline of 28 days 
for initial filing and 14 days thereafter, as one commenter suggested, 
would create negligible cost savings for Managers. Meanwhile, it may 
have detrimental effects on the timing of data aggregation and 
publication, which could unnecessarily affect the timing and quality of 
aggregated published data.
---------------------------------------------------------------------------

    \213\ See, e.g., FINRA, Short Interest Reporting, available at 
https://www.finra.org/filing-reporting/regulatory-filing-systems/short-interest (presenting ``due dates'' for reporting short 
interest to FINRA and publication of short interest data by FINRA). 
FINRA Rule 4560 requires FINRA member firms to report their short 
positions in exchange-listed and over-the-counter equity securities 
to FINRA twice each month. FINRA publishes the short interest 
reports it collects from member firms for all such equity 
securities.
---------------------------------------------------------------------------

Final Rule
    After considering comments, the Commission is adopting Rule 13f-
2(a) as proposed, and continues to estimate that it will publish 
aggregated data derived from Form SHO reports within one calendar month 
after the end of the reporting calendar month.\214\ For example, for 
data reported by Managers on Form SHO for the month of October, the 
Commission expects to publish aggregated information derived from such 
data no later than the last day of November. The Commission continues 
to believe that 14 calendar days after the end of each calendar month 
provides Managers with sufficient time for Managers that meet the 
Reporting Threshold to prepare and file Form SHO data.
---------------------------------------------------------------------------

    \214\ Publication of the aggregated information may be delayed 
for an initial period following effectiveness of Rule 13f-2 and Form 
SHO.
---------------------------------------------------------------------------

d. Contents of Form SHO
    Form SHO, as proposed, consists of two parts: Cover Page and 
Information Tables. As discussed more fully below:
    <bullet> The Cover Page presents certain identifying information 
about the Manager(s) filing the Form SHO report, the calendar month for 
which the Manager is reporting, the type of Form SHO report being made, 
and whether the Manager is filing the Form SHO report as an amendment; 
\215\
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    \215\ See infra Part II.A.4.d.ii.
---------------------------------------------------------------------------

    <bullet> Information Table 1 presents a Manager's monthly gross 
short position in the equity security on which information is being 
reported, as well as certain identifying information about that 
security and about the issuer of that security; \216\ and
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    \216\ See infra Part II.A.4.d.iii.
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    <bullet> Information Table 2 presents daily activity affecting a 
Manager's gross short position during a calendar month reporting 
period, as well as certain identifying information about that security 
and about the issuer of that security.\217\
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    \217\ See infra Part II.A.4.d.iv.
---------------------------------------------------------------------------

i. Financial Identifiers
(A) Proposal
    The Commission proposed that a Manager provide the active LEI, if 
any, of each Manager listed on the Cover Page. The Commission also 
proposed that a Manager report on each of the Proposed Form SHO 
Information Tables the FIGI and CUSIP number of each security on which 
information is being reported, and the active LEI, if any, of

[[Page 75120]]

the issuer of those securities. These items are discussed in Special 
Instructions 8.c, 8.e, and 8.f regarding Columns 3, 5, and 6 of 
Information Table 1, and in Special Instructions 9.c, 9.e, and 9.f 
regarding Columns 3, 5, and 6 of Information Table 2.
(B) Comments and Final Rule
    The Commission received only a few comments regarding the proposed 
requirement to report certain financial identifiers, including CUSIP 
and FIGI (which identify specific securities), and LEI (which 
identifies specific entities) on Form SHO.\218\ Two commenters stated 
that the Commission should only require that CUSIP be reported on Form 
SHO, and that the inclusion of additional financial identifiers could 
cause confusion.\219\ Another commenter stated that the LEI and the 
FIGI of issuers is ``not commonly provided'' in other holding reports 
and would therefore cause Managers to incur additional costs.\220\ 
Another commenter, citing ``substantial CUSIP licensing costs,'' 
expressed concern that requiring the reporting of CUSIP could create an 
``unnecessary financial burden'' on Managers.\221\ However, another 
commenter stated that the inclusion of multiple financial identifiers 
in addition to CUSIP, such as FIGI and LEI, could help foster 
competition that ultimately reduces costs and improves data 
quality.\222\
---------------------------------------------------------------------------

    \218\ FIGI and LEI each serve different functions. FIGIs 
identify securities, whereas LEIs identify entities. Thus, a single 
issuer's LEI could be associated with multiple FIGIs. Conversely, 
multiple FIGIs could be associated with the same issuer's LEI. 
Furthermore, identifying reporting Managers on Form SHO would 
require an entity identifier (LEI) rather than a security identifier 
(FIGI).
    \219\ See, e.g., Comment Letter from CUSIP Global Services (Apr. 
25, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20126577-287237.pdf (``CUSIP Letter''); Comment Letter from 
American Bankers Association (Apr. 26, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20126641-287311.pdf (``ABA 
Letter'').
    \220\ Jennifer Han, Executive Vice President, Chief Counsel and 
Head of Regulatory Affairs, Managed Funds Association (June 15, 
2023), at 9, available at https://www.sec.gov/comments/s7-08-22/s70822-206120-414822.pdf (``MFA Letter 2'').
    \221\ See Letter from Anonymous Fund Manager, at 9.
    \222\ See Comment Letter from Gregory Babyak, Glob. Head Regul. 
Affs., Bloomberg L.P., at 5 (May 2, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20127745-288932.pdf.
---------------------------------------------------------------------------

    In DFA section 929X, Congress specifically directed the Commission 
to include CUSIP in short sale disclosure rules.\223\ CUSIP is a 
universally recognized identifier that has been used for a wide array 
of financial instruments since 1964, allowing securities transactions 
to be easily identified, cleared, and settled, including short sales. 
Furthermore, market participants and investors are familiar with 
CUSIPs, which are widely and publicly available and used to identify 
most U.S. stocks.\224\ Many companies display their CUSIPs on their 
websites, and brokers and dealers often provide investors with search 
engines to look up stocks by CUSIPs.\225\ Accordingly, while the 
Commission recognizes that there are licensing costs associated with 
the CUSIP, the Commission is adopting, as proposed, the requirement 
that Managers report in Column 5 of each of the Form SHO Information 
Tables the CUSIP for the equity security for which information is 
reported to help facilitate market participants' understanding of the 
reported data.
---------------------------------------------------------------------------

    \223\ Public Law 111-203, sec. 929X, 124 Stat. 1376, 1870 (July 
21, 2010).
    \224\ See, e.g., Fast Answers: CUSIP Number, available at 
https://www.sec.gov/answers/cusip (referencing CUSIP Global 
Services).
    \225\ See, e.g., Chad Langager, How to Locate the CUSIP Number 
for a Stock, Investopedia (Apr. 6, 2022), available at https://www.investopedia.com/ask/answers/06/cusipforspecificstock.asp.
---------------------------------------------------------------------------

    The Commission will also adopt, as proposed, the requirement that 
Managers report in Column 6 of each of the Form SHO Information Tables 
the 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, and reporting a FIGI, if 
assigned, will provide additional identifying information that will 
provide additional clarity, not confusion, to market participants and 
the public. Unlike CUSIPs,\226\ however, FIGIs are provided for 
free.\227\
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    \226\ See, e.g., Fees for CUSIP Assignment, CUSIP Glob. Servs., 
available at https://www.cusip.com/pdf/FeesforCUSIPAssignment.pdf 
(``For an offering requiring a single CUSIP identifier, the 
assignment fee is $200.'').
    \227\ See, e.g., Unlock the Power of Efficiency with Open 
Symbology, OpenFIGI, available at https://www.openfigi.com/.
---------------------------------------------------------------------------

    To aid in the identification of the issuers referenced in Form SHO 
reports, the Commission is also adopting a requirement that Managers 
report in Column 3 of each Form SHO Information Table, the LEI, if any, 
of the issuer of the security about which information is reported on 
Form SHO.\228\
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    \228\ This practice is in keeping with current requirements of 
other Commission forms. For example, the registrant filing Form N-
PORT need not report LEIs for counterparties that do not have one. 
In addition, as noted above, to avoid any suggestion that a Manager 
filing a Form SHO report has an obligation to monitor the status of 
an issuer's LEI, Instructions 8.c and 9.c of Form SHO--``Column 3. 
Issuer LEI. If the issuer has an LEI, enter the issuer's active 
LEI--have been revised to remove the term ``active.'' See supra n. 
36.
---------------------------------------------------------------------------

    With respect to the proposed requirement that a Manager provide its 
own LEI, if it had one, and, if available to the Manager making the 
Proposed Form SHO filing, the active LEI of each Manager listed on the 
Form SHO Cover Page as an ``Other Manager Reporting for'' the Manager 
making the Proposed Form SHO filing, the Commission sought comment on 
whether it should require every Manager filing a Proposed Form SHO to 
obtain an LEI.\229\ One commenter supporting the requirement to report 
financial identifiers on Form SHO stated that all Managers should be 
required to obtain and maintain a non-lapsed LEI, as opposed to the 
proposal, which stated that Managers would be required to report their 
LEI, if any.\230\ Another commenter, however, expressed uncertainty 
regarding such a requirement, stating that registration or renewal of 
an LEI is ``not monetarily costless.'' \231\
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    \229\ See Proposing Release, at 14965. Because the Cover Page, 
as proposed, would also present the name and, if available to the 
Manager making the Proposed Form SHO filing, the active LEI of each 
Manager listed on the Form SHO Cover Page as an ``Other Manager 
Reporting for'' the Manager making the Proposed Form SHO filing, the 
query covered those Managers as well.
    \230\ Anonymously Submitted Comment (Apr. 4, 2022), available at 
https://www.sec.gov/comments/s7-08-22/s70822-20122297-278355.htm 
(``Every manager that has a part of trading any form of security or 
derivative on any market should be forced to have a Legal Entity 
Identifier (LEI). That way, specific bad actors can be easily 
identified.'').
    \231\ See Comment Letter from Aaron Franz, available at https://www.sec.gov/comments/s7-18-21/s71821-20120685-272855.pdf (``I'm 
uncertain that Managers should be required to obtain an LEI. 
Registration or renewal of an LEI is not monetarily costless. The 
same information can be submitted by Managers without a tracking 
number with a cost.'').
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    The Commission acknowledges that LEIs do provide a precise and 
consistent means of identification of legal entities. However, after 
considering the comments received, and because LEIs would supplement 
existing identifying information provided for Managers and issuers 
listed in Form SHO filings, the Commission is not requiring Managers 
subject to Rule 13f-2 to obtain (and maintain non-lapsed) LEIs to 
provide on the Cover Page of Form SHO reports and, when appropriate for 
the ``Other Manager(s) Reporting for this Manager'' section of the Form 
SHO Cover Page to be completed, to provide a non-lapsed LEI for each 
Manager listed in the ``Other Manager(s) Reporting for this Manager'' 
of the Form SHO Cover Page. However, the Commission may consider this 
issue in the future.
ii. Cover Page
(A) Proposal
    As proposed, and pursuant to Special Instructions 2-5 of Proposed 
Form SHO, a Manager would report on the Cover

[[Page 75121]]

Page: (i) certain basic information, including its name, mailing 
address, business telephone and facsimile numbers, and active LEI, if 
any, as well as the name, title, business telephone and facsimile 
numbers of the Manager's contact employee for the Form SHO report, and 
the date the report is filed; (ii) the period end date--i.e., the last 
settlement date of the calendar month for which the Manager is 
reporting; (iii) the type of Form SHO report being filed; \232\ and 
(iv) whether the Form SHO is being filed as an amendment.\233\ 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.'' \234\
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    \232\ The Commission proposed that the reporting Manager 
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 LEI of each other 
Manager reporting for this Manager. If all of the information that a 
Manager is required by proposed Rule 13f-2 to report on related 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. If all of the information that a Manager is required by 
proposed Rule 13f-2 to file on Form SHO is included in the report, 
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. If only a part of the information that a Manager 
is required by proposed Rule 13f-2 to file on Form SHO is included 
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. See Proposing Release, at 14958.
    \233\ 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 and 
Restatement number. Each amendment must include a complete Cover 
Page and Information Tables. Amendments must be filed sequentially. 
See Proposing Release, at 14960-61.
    \234\ See Proposing Release, at 14958.
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(B) Comments and Final Rule
    Other than with respect to financial identifiers as discussed 
above, the Commission did not receive any comments on the contents of 
the Cover Page. As a result, the Commission is adopting Special 
Instructions 2-5 of Form SHO as proposed, with minor technical 
modifications. For greater precision (but no change in the meaning) in 
the terminology used in Form SHO as adopted, an LEI that is currently 
in effect is referred to as a ``non-lapsed LEI'' rather than an 
``active LEI'' (the terminology used in Proposed Form SHO). Also, the 
Cover Page contact information for the reporting Manager and its 
``Contact Employee'' has been updated to require the use of email 
rather than facsimile.\235\
---------------------------------------------------------------------------

    \235\ See supra n. 37 and accompanying text.
---------------------------------------------------------------------------

iii. Information Table 1: ``Manager's Monthly Gross Short Position''
(A) Proposal
    Under Proposed Rule 13f-2, Managers meeting a Reporting Threshold 
would report certain information, including end of month gross short 
position information regarding transactions that have settled during 
the calendar month being reported, and certain hedging information that 
would help to indicate whether the reported gross short position is 
directional or non-directional in nature.\236\
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    \236\ Id. at 14959.
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    Specifically, as proposed, the Manager would report the following 
information on Information Table 1:
    <bullet> In Column 1, a Manager would enter the last day of the 
calendar month being reported by the Manager on which a trade settles. 
This information would identify the month being reported by the 
Manager.
    <bullet> In Column 2, a Manager would enter the name of the issuer 
to identify the issuer of the equity security for which information is 
being reported.
    <bullet> In Column 3, a Manager would enter the issuer's active 
LEI, if any. The LEI provides standardized information that would 
enable the Commission and market participants to more precisely 
identify the issuer of each equity security for which information is 
being reported.
    <bullet> In Column 4, consistent with section 13(f)(2), a Manager 
would enter the title of the class of the equity security for which 
information is being reported.
    <bullet> In Column 5, consistent with section 13(f)(2), a Manager 
would enter the nine (9) digit CUSIP number of the equity security for 
which information is being reported, if applicable.
    <bullet> In Column 6, a Manager would 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.
    <bullet> In Column 7, a Manager would 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).
    <bullet> In Column 8, a Manager would enter the U.S. dollar value 
of the shares reported in Column 7, rounded to the nearest dollar. A 
Manager would 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 would 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 would provide 
additional transparency and context to market participants and 
regulators.
    <bullet> In Column 9, a Manager would 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.\237\
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    \237\ As stated in the proposal, a Manager would 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 used by market participants. A 
Manager would 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 seller's view of the equity 
security. Hedging information also can assist with distinguishing 
position trading, which typically has corresponding hedging 
activity, from other strategies such as arbitrage.

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[[Page 75122]]

(B) Comments and Final Rule
    Comments regarding the contents of Information Table 1 raised 
concerns about the proposal to require hedging information in Column 9. 
As discussed below, the Commission is adopting Information Table 1, as 
proposed, except that the Commission will not require Managers to 
report hedging information as originally proposed in Column 9 of the 
table.
Comments Regarding Hedging Indicators
Implementation Challenges
    The proposal would have required Managers to report on Information 
Table 1 whether they were ``fully hedged'' or ``partially hedged'' 
based on whether a Manager held an offsetting position that completely 
or partially reduced the risk of price fluctuations for its position in 
that equity security, respectively.\238\ Further, the proposal required 
Managers to report on Information Table 1 that their short position was 
``not hedged'' if the Manager did not hold any offsetting 
positions.\239\ A number of commenters raised concerns about the costs 
to implement this proposed requirement.\240\ One such commenter 
expressed concerns that the requirement to report hedging status would 
be ``operationally difficult to implement,'' as the reporting would be 
produced by back-office systems that ``generally do not have any 
linkage information to allow them to match a hedge to a short 
position,'' necessitating the development of costly new systems.\241\ 
One industry group commenter expressed a concern about ``complications 
that can arise from the hedging classification,'' particularly for 
large portfolios for which it will not always be clear when a position 
is intended to be a hedge for another position, or clear or obvious 
whether a position acts as ``one-to-one offset'' of price risk for 
another position.\242\
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    \238\ Proposing Release, at 14959.
    \239\ Id.
    \240\ See, e.g., MFA Letter, at 4 (stating that inclusion of 
hedging classification on Form SHO would be costly and time 
consuming for reporting Managers to produce); Virtu Letter, at 3 
(advocating that requirement to report short positions as fully, 
partially, or not hedged would be ``operationally difficult to 
implement'' and should be eliminated).
    \241\ Virtu Letter, at 3.
    \242\ AIMA Letter, at 13.
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Non-Universal Terminology
    Some commenters expressed concerns about the meaning of ``fully 
hedged'' and ``partially hedged'' under the proposed rule. These 
commenters expressed the view that because there is no universal 
definition of hedging in the marketplace, or clear guidance on this 
matter from the Commission, Managers can reasonably come to different 
conclusions regarding the extent to which similar positions are 
hedged.\243\ Because the meanings of ``fully'' and ``partially'' hedged 
are subject to interpretation, these commenters believed that the 
reporting of hedging data would be inconsistent, imprecise, potentially 
misleading, and subject to misinterpretation. Several such commenters 
posited that due to what they described as the ambiguity of the hedging 
definitions, the proposed hedging reporting could result in inaccurate 
or misleading data--such as misleading market signals of Managers' 
sentiments--as Managers may interpret the hedging indicators 
differently.\244\ Similarly, a commenter stated that due to the lack of 
detail surrounding the ``partially hedged'' designation in particular, 
the data may be misleading as to the level of price risk associated 
with certain positions.\245\ A commenter stated that there is no 
universal definition of what constitutes a ``hedge'' and that the 
Commission's guidance in the Proposing Release and the instructions in 
Proposed Form SHO as to how a Manager determines whether or when a 
position is fully or partially hedged, or not hedged, are insufficient 
to create a universal understanding and consistent reporting.\246\ That 
commenter further stated that the Commission provided only one example 
(the use of delta hedging in a one-to-one offset between short and long 
positions), even though Managers use a variety of other hedging 
techniques, such as portfolio hedging, ETFs, baskets of securities, and 
securities that have historic trading correlations, among others.\247\ 
Under these circumstances, several commenters predicted, Managers would 
likely default to a ``partially hedged'' designation,\248\ resulting in 
data of limited utility.\249\ These commenters stated that due to what 
they viewed as the ambiguous and non-universal nature of the terms, 
many Managers may simply default to marking transactions as ``partially 
hedged'' when it is unclear to what extent the positions are hedged, 
due to the wide range of positions encompassed by the proposed 
partially hedged indicator.\250\ To mitigate this concern and to 
improve transparency, some commenters critical of the hedging 
indicators suggested reducing the qualitative nature of the proposed 
terms by dividing the ``partially hedged'' term into smaller, well-
defined units or even percentage increments.\251\ More specifically, 
these commenters expressed concern that the proposed hedging 
classifications could prove challenging to apply consistently across 
Managers and could result in significant

[[Page 75123]]

costs for data of limited value.\252\ One commenter stated that the act 
of market participants reporting the proposed hedging classification 
would create a chilling effect.\253\
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    \243\ See, e.g., ICI Letter, at 10; see also Comment Letter from 
Mehmet Kinak, Head of Equity Trading, T. Rowe Price, et al. (Apr. 
26, 2022), at 4, available at https://www.sec.gov/comments/s7-08-22/s70822-20126777-287493.pdf (``T. Rowe Price Letter'') (stating that 
hedging data may be ``especially vulnerable to lack of consistency 
in terms of how various managers apply the classification.''); AIMA 
Letter, at 13 (predicting that hedging classification will involve 
``level of subjectivity that is unlikely to be applied uniformly 
across Managers'' and that determining such classification will 
``prove even more complicated for a large quantitative portfolio'').
    \244\ See, e.g., AIMA Letter, at 13; MFA Letter, at 16.
    \245\ See ICI Letter, at 10.
    \246\ See MFA Letter, at 16-17.
    \247\ See id.
    \248\ See, e.g., MFA Letter, at 17. The MFA Letter suggested 
that ``almost all short positions held by a large manager will be 
partially hedged--for example, if a manager has discretion over one 
fund with a short position, and another unrelated fund with a long 
position, the manager would be required to report the short position 
as ``partially hedged'' when in fact, the short position is not 
hedged at all.'' Depending on the facts and circumstances, the 
commenter is correct that the positions in the two funds managed by 
the same Manager may have to be aggregated under Rule 200(c) of 
Regulation SHO for marking purposes.
    \249\ See, e.g., Ropes & Gray Letter, at 5 (stating that 
difficulty in defining ``fully,'' ``partially,'' or ``not,'' hedged 
would likely lead to inconsistent reporting that, in turn would 
limit the ``meaningfulness'' of the reported information to 
investors and the Commission); T. Rowe Price Letter, at 4 (raising 
concern that lack of consistency in how reporting Managers would 
apply the hedging classification could lead to ``weaknesses'' in the 
hedging data reported that would make the Commission's publication 
of aggregated hedging classifications across reporting Managers of 
little value to, and potentially misinterpreted by, the public); MFA 
Letter, at 4 (stating ``[b]ecause (i) there is no universal 
definition of ``hedging'' in the industry, and (ii) the reported 
gross short position must encompass short positions aggregated 
across funds, clients and affiliated managers, any hedging-related 
designation would be meaningless. Inclusion of this data would 
result in inconsistent reporting and would be costly and time 
consuming for managers to produce.''); SIFMA Letter at 21 (stating 
information reported in Column 9 of Proposed Form SHO would be 
``inherently inconsistent and precise and, therefore, of very little 
value to regulators in that it could be highly misleading''); see 
also AIMA Letter, at 13 (stating hedging classification will involve 
``level of subjectivity that is unlikely to be applied uniformly 
across Managers'').
    \250\ See, e.g., Ropes & Gray Letter (arguing that the possible 
exaggerated use of the partially hedged indicator is ``unlikely to 
elicit comparable reporting across managers'').
    \251\ See Comment from Peyton Bailey (Mar. 14, 2022) (``Peyton 
Bailey Comment''), available at https://www.sec.gov/comments/s7-08-22/s70822-272291.htm (proposing to use percentage points or 
``majority'' (<=50%) and ``minority'' (<=50%) hedging indicators 
instead of partially hedged); Nick Dougherty Letter (proposing to 
use percentage points); WTI Letter (proposing to use percentage 
points); Comment from Alex Fleming (Oct. 31, 2022), available at 
https://www.sec.gov/comments/s7-08-22/s70822-317348.htm (proposing 
to use numerical or percentage scale).
    \252\ See MFA Letter, at 4, 16-17.
    \253\ See Comment Letter from Joshua Russell (Oct. 26, 2022), 
available at https://www.sec.gov/comments/s7-08-22/s70822-20147825-314190.pdf.
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    Another commenter stated that although a change in hedging status 
may correspond with a change in manager sentiment, it is also possible 
that such a change may simply be the result of other unrelated 
objectives, such as rebalancing a portfolio.\254\ Similarly, another 
commenter agreed that the purpose of defensive tactics that hedging 
strategies often entail, such as hedging a long position, contrasts 
with the purpose of unhedged short strategies.\255\ That commenter 
expressed the view that such ``defensive'' hedging should not be 
included in the reporting as it would provide limited utility to the 
public. Some commenters took the position that reporting on ``bona 
fide'' hedging activity would not align with the goals in the Proposing 
Release and that such activity is unlikely to be abusive or 
manipulative.\256\
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    \254\ See T. Rowe Price Letter, at 4.
    \255\ See K&L Gates Letter, at 2.
    \256\ See K&L Gates Letter, at 2-3, T. Rowe Price Letter, at 2-
4, Anonymous Fund Manager Letter, at 1.
---------------------------------------------------------------------------

    Some commenters that supported requiring hedging indicators 
generally rejected complaints about the costs and burdens related to 
the proposed reporting of hedging status as part of Information Table 
1, stating that with modern technology, the requirements are ``easily 
automated and with minimal cost incurrence.'' \257\ Support for the 
collection of hedging information generally came from commenters 
favoring steps to enhance the transparency of short sale-related data 
to facilitate a better understanding of short selling dynamics.\258\ 
One commenter stated that the hedging classification, if made public, 
would illustrate market sentiment, and that it would help to uncover 
``short and distort'' campaigns, particularly in sectors that have 
higher than normal rates of short selling.\259\ The commenter further 
explained that under the status quo, it is unclear whether short 
positions are used for hedging long positions or whether they are being 
used to speculate on perceived overvaluation in the market in recent 
years.\260\ Another commenter stated that publishing hedging 
information regarding the actions of hedge funds and other large market 
participants would inform the decision making of retail investors.\261\ 
Other commenters posited that the proposed ``not hedged'' indicator 
would provide the most useful information to the market because 
unhedged short positions may be the most likely to be riskier or 
manipulated.\262\
---------------------------------------------------------------------------

    \257\ Letter from Andrew Patrick White, CEO & Founder, FundApps 
(Mar. 2, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20118368-271239.pdf.
    \258\ See, e.g., Comment Letter from Anonymous (March 14, 2022) 
(positing that managers should report whether, and to what extent, 
they are hedged, along with an explanation of what that means; such 
information is valuable in determining a manager's position with 
regard to the associated risks); see also Comment Letter from 
Biotechnology Innovation Organization (Apr. 25, 2022) at 3, 
available at https://www.sec.gov/comments/s7-08-22/s70822-20126539-287214.pdf (``BIO Letter'') (positing that transparency into hedging 
data would facilitate understanding of price and behavior dynamics).
    \259\ BIO Letter, at 7.
    \260\ Id. at 2.
    \261\ Peyton Bailey Comment.
    \262\ See Comment from Max Knaus (Oct. 30, 2022), available at 
https://www.sec.gov/comments/s7-08-22/s70822-316957.htm; Comment 
Letter from Brendan Casey (Oct. 30, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20149998-319181.pdf.
---------------------------------------------------------------------------

Final Rule
    After considering the comments received,\263\ the Commission is not 
adopting the hedging reporting requirement as proposed. Specifically, 
when filing Form SHO Information Table 1, a Manager will not be 
required to indicate whether the identified gross short position in 
Column 9 of Information Table 1 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; Column 9 
will be removed from Information Table 1 of Form SHO as adopted.
---------------------------------------------------------------------------

    \263\ One commenter stated that the proposed hedging requirement 
``fails to appreciate the difficulty--particularly for multi-service 
broker-dealers that use aggregation units and investment funds with 
multiple strategies--of calculating and determining such information 
for reporting purposes.'' SIFMA Letter, at 20. Under Regulation SHO, 
a person shall be deemed to own a security only to the extent it has 
a net long position in that security. See Rule 200(c). See also Rule 
200(g)(1) (an order shall be marked long only if the seller is 
deemed to own the security and the security is in the physical 
possession or control of the broker or dealer or it is reasonably 
expected that the security will be in the physical possession or 
control of the broker or dealer by settlement date). Under Rule 
200(f), a broker must aggregate all of its positions in a security 
to determine its net position, unless it qualifies for independent 
trading unit aggregation. If the broker or dealer qualifies for 
independent aggregation units, each independent trading unit shall 
aggregate all of its positions in a security to determine its net 
position. See Rule 200(f). Qualification requires that the 
independent aggregation unit meet four conditions. See Rule 
200(f)(1) through (4). For instance, all traders in an aggregation 
unit must pursue only the particular trading objective(s) or 
strategy(s) of that aggregation unit and may not coordinate that 
strategy with any other aggregation unit. See Rule 200(f)(3). In 
adopting Rule 200(f), the Commission stated that ``conditions are 
necessary to prevent potential abuses associated with establishing 
aggregation units within multi-service broker-dealers.'' Regulation 
SHO Adopting Release, at 48011. Thus, to be eligible for the 
aggregation unit exception, the broker or dealer's units must 
operate independently, with defined trading strategies, and one 
unit's trades or positions cannot be used to offset or hedge another 
unit's trades or positions. See, e.g., Rule 200(f)(3); see also 
Regulation SHO Adopting Release, at 48011 (each unit must be engaged 
in separate trading strategies). While information barriers between 
aggregation units may be useful, as the commenter suggests, such 
barriers alone are not sufficient for eligibility for Rule 200(f). 
See e.g., Rule 200(f)(3); see also Regulation SHO Adopting Release 
at 48011 (conditions are intended to limit potential for abuse 
associated with coordination among units and to maintain the 
independence of the units). Thus, a broker or dealer that has 
created multiple units with fungible trading strategies as a means 
of affecting order marking may not be eligible for aggregation unit 
treatment under Rule 200(f) of Regulation SHO. See e.g., In re 
Morgan Stanley & Co., LLC, 34-90046 (Sept. 30, 2020) (settled case), 
available at https://www.sec.gov/litigation/admin/2020/34-90046.pdf 
(long-only and short-only aggregation units were not independent and 
separate trading strategies, but were instead operated by the same 
employees, managed by the same manager, and consisted of the same 
trading strategies).
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    While the Commission laid out the rationale behind the hedging 
reporting requirement in the Proposing Release, comments received, as 
discussed above, persuaded the Commission that such reported data may 
not result in as consistent and accurate data as it originally 
envisioned. In addition to the definitional challenges discussed above, 
the Commission recognizes the challenges of applying the Rule 13f-2 
reporting requirements in the scenario when a Manager has investment 
discretion over multiple accounts. For example, purchases and sales in 
different accounts may not be intended to hedge one another, but the 
proposal would have required that the Manager indicate that it was 
``partially-hedged'' nonetheless. Such information would not be an 
accurate reflection of the Manager's hedging status, and thus would not 
be useful. As another example, a Manager that has purchased a few 
shares of a security (for example, 100 shares) for which it holds a 
substantial short position (for example, 1 million shares) would have 
had to report that it was ``partially hedged'' without regard for the 
scale of such purchases in relation to the position for which it would 
have had to report it was hedging. That said, the Commission continues 
to believe, as did some commenters favoring the proposed requirement, 
that if accurate data on hedging could be collected, such information 
would be useful to regulators.

[[Page 75124]]

    The Commission considered whether, as suggested by a commenter, the 
hedging indicator could be simplified so that Managers would be 
required only to report whether a position is not hedged.\264\ While 
short positions that are unhedged may involve greater risk, this 
alternative could be too easily circumvented by, for example, simply 
purchasing a nominal number of shares of the security and stating the 
position is therefore hedged (or partially hedged under the rule as 
proposed). The Commission also considered another commenter's 
suggestion that hedged short positions should be exempted from 
reporting.\265\ This alternative would create a similar circumvention 
scenario to the one mentioned above (i.e., using a nominal long 
position to create an exempt hedged position).
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    \264\ See Comment from Max Knaus (Oct. 30, 2022), available at 
https://www.sec.gov/comments/s7-08-22/s70822-316957.htm; Comment 
Letter from Brendan Casey (Oct. 30, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20149998-319181.pdf.
    \265\ Perkins Coie Letter, at 6 (stating that ``[o]r, 
alternatively, the SEC should consider exempting hedged short 
positions from reporting on Form SHO'').
---------------------------------------------------------------------------

    Accordingly, the Commission is not adopting the hedging reporting 
requirement as proposed.
iv. Information Table 2: ``Daily Activity Affecting Manager's Gross 
Short Position During the Reporting Period''
(A) Proposal
    As proposed, Information Table 2 of Form SHO captures daily 
activity that increases or decreases a Manager's short position for 
each settlement date during the calendar month reporting period. More 
specifically, on proposed Form SHO, a Manager would report the number 
of shares of the equity security that: (i) were sold short; (ii) were 
purchased to cover, in whole or in part, an existing short position in 
the security; (iii) were acquired through the exercise or assignment of 
an option, through a tendered conversion, or through a secondary 
offering transaction,\266\ that reduces or closes a short position on 
the (underlying) security; (iv) were sold through the exercise or 
assignment of an option that creates or increases a short position on 
the (underlying) security; (v) resulted from other activity not 
previously reported in the Information Table that reduces or closes, or 
creates or increases a Manager's short position on the security, 
including, but not limited to, ETF creation or redemption activity. 
Pursuant to Proposed Rule 13f-2, Managers would assemble, review, and 
file the required information with the Commission on new Form SHO 
within fourteen (14) calendar days after the end of the calendar month. 
As noted above, the Commission would then publish aggregated 
information derived from the data reported on new Form SHO, aggregated 
across all reporting Managers, within one month after the end of the 
reporting calendar month.
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    \266\ The term ``sale'' under the Securities Act includes 
contract of sale. See Securities Offering Reform, Exchange Act 
Release No. 52056 (July 19, 2005), 70 FR 44722, 44765 (Aug. 3, 
2005); Short Selling in Connection With a Public Offering, Exchange 
Act Release No. 56206 (Aug. 6, 2007), 72 FR 45094, 45102 (Aug. 10, 
2007). The Commission has previously stated that, in a short sale, 
the sale of securities occurs at the time the short position is 
established, rather than when shares are delivered to close out that 
short position, for purposes of section 5 of the Securities Act of 
1933 (``Securities Act''). See, e.g., Commission Guidance on the 
Application of Certain Provisions of the Securities Act of 1933, the 
Securities Exchange Act of 1934, and Rules Thereunder to Trading in 
Security Futures Products, Exchange Act Release No. 46101 (June 21, 
2022), 67 FR 43234, 43236 (June 27, 2002) (see Questions 3 and 5); 
Short Selling in Connection With a Public Offering, 72 FR 45094.
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    Specifically, as proposed, the Manager would report the following 
information on Information Table 2 for each date during the reporting 
period on which a trade settled (settlement date) during the calendar 
month.
    <bullet> In Column 1, a Manager would enter the date during the 
reporting period on which a trade settled for the activity reported. 
This would identify the settlement date activity being reported.
    <bullet> In Column 2, consistent with section 13(f)(2), a Manager 
would enter the name of the issuer, to identify the issuer of the 
security for which information is being reported.
    <bullet> In Column 3, a Manager would enter the issuer's active 
LEI, if the issuer had an active LEI. The LEI provides standardized 
information that would enable the Commission and market participants to 
more precisely identify the issuer of each equity security for which 
information is being reported.
    <bullet> In Column 4, consistent with section 13(f)(2), a Manager 
would enter the title of the class of the security for which 
information is being reported.
    <bullet> In Column 5, consistent with section 13(f)(2), a Manager 
would enter the nine (9) digit CUSIP number of the equity security for 
which information is being reported, if applicable.
    <bullet> In Column 6, a Manager would 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.
    <bullet> In Column 7, for the settlement date set forth in Column 
1, a Manager would 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.
    <bullet> In Column 8, for the settlement date set forth in Column 
1, a Manager would 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 would allow the Commission and 
other regulators to more quickly identify a potential ``short 
squeeze,'' which could be evidenced by short sellers closing out short 
positions by purchasing shares in the open market. If it appeared 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 could deter 
some market participants seeking to orchestrate a short squeeze.
    <bullet> In Column 9, for the settlement date set forth in Column 
1, a Manager would 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.
    <bullet> In Column 10, for the settlement date set forth in Column 
1, a Manager would enter the number of shares of the security for which 
information is being reported that were sold in a put option exercise 
that created or increased 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.
    <bullet> In Column 11, for the settlement date set forth in Column 
1, a Manager would enter the number of shares of the security for which 
information is being reported that were sold in a call option 
assignment that created or increased 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.
    <bullet> In Column 12, for the settlement date set forth in Column 
1, a Manager would enter the number of shares of the security for which 
information is being reported that were acquired in a put option 
assignment that reduced or

[[Page 75125]]

closed 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.
    <bullet> In Column 13, for the settlement date set forth in Column 
1, a Manager would enter the number of shares of the security for which 
information is being reported that are acquired as a result of tendered 
conversions that reduced or closed 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.
    <bullet> In Column 14, for the settlement date set forth in Column 
1, a Manager would 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. Purchasing securities in a secondary 
offering \267\ can reduce or close a short position in the equity 
security.
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    \267\ Such offering purchases must be reported whether they 
occurred outside or within the restricted period of 17 CFR 242.105, 
Rule 105 of Regulation M, which makes it unlawful for a person who 
sells short a security that is the subject of an offering to 
purchase in the offering if the short sale occurred during the 
restricted period. Rule 105 originally prohibited persons from 
covering short sales with offering purchases but was amended to 
prohibit any purchases of offering shares if the person sold short 
during the restricted period (with limited exceptions) ``to end the 
progression of schemes and structures engineered to camouflage 
prohibited covering.'' Short Selling in Connection with a Public 
Offering, Exchange Act Release No. 34-54888 (Dec. 6, 2006), 71 FR 
75002 at 75005 (Dec. 13, 2006). The amendment was designed to 
address a proliferation of trading strategies and structures 
attempting to accomplish the economic equivalent of the activity 
that the rule seeks to prevent, specifically, attempts to obfuscate 
the prohibited ``covering'' of the short sale. See, e.g., Short 
Selling in Connection with a Public Offering, Exchange Act Release 
No. 34-56206 (Aug. 6, 2007), 72 FR 45094 (Aug. 10, 2007).
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    <bullet> In Column 15, for the settlement date set forth in Column 
1, a Manager would 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.
    <bullet> In Column 16, for the settlement date set forth in Column 
1, a Manager would 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 stated in the Proposing Release that it believes 
that the information in Columns 9, 12, 13, 14, and 16 of proposed 
Information Table 2 would be 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.\268\ 
The Commission also stated that the information in Columns 10, 11, and 
15 would be 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.\269\
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    \268\ Proposing Release, at 14960.
    \269\ Id.
---------------------------------------------------------------------------

    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; 
\270\ and other activity. The Commission stated that it believed that 
such activity data would also assist the Commission in assessing 
systemic risk and in reconstructing unusual market events, including 
instances of extreme volatility.
---------------------------------------------------------------------------

    \270\ See supra n. 263.
---------------------------------------------------------------------------

(B) Comments and Final Rule
    The Commission solicited and received comment on the categories of 
short sale activity data that a Manager would be required to report on 
new Form SHO Information Table 2. Commenters differed on the 
appropriate level of transparency of the short sale-related data 
presented. Some commenters called for robust--if not complete--
transparency of short sale-related data, while other commenters 
expressed concerns about the breadth of the activity information to be 
reported, the related cost burdens to report such information, and data 
security.
    Individual investor commenters, generally, were critical of the 
opacity of current short position and short activity data disclosure. A 
group consisting of retail investors stated there was a ``lack of 
transparency around short positions, the inability to adequately 
quantify short interest, and the ability for firms to skirt regulation 
through derivative positions such as options and security-based 
swaps.'' \271\ Some individual investor commenters viewed Proposed Rule 
13f-2 and related Form SHO as a first step toward achieving the full 
transparency in disclosure they perceived as necessary for a fair and 
efficient market.\272\ To these commenters, greater transparency is a 
means to level the playing field for retail investors.\273\
---------------------------------------------------------------------------

    \271\ WTI Letter.
    \272\ Id. See also Anonymously Submitted Comment (Mar. 11, 
2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20119226-272030.htm (``any and all information'' should be 
accessible by any investors); Anonymously Submitted Comments (Apr. 
26, 2022, May 10, 2022, Oct. 9, 2022, Oct. 26, 2022); Comment from 
Erin Ashford (Oct 9, 22), available at https://www.sec.gov/comments/s7-08-22/s70822-309605.htm (calling for ``robust and complete 
transparency''); cf. Anonymously Submitted Comment (Mar. 17, 2022) 
(raising concerns about data integrity when the reporting system is 
based on reporting).
    \273\ See, e.g., Comment from Richards (Oct. 31, 2022), 
available at https://www.sec.gov/comments/s7-08-22/s70822-317124.htm 
(``Market fairness and transparency is an important part of this 
democracy. It helps to level the playing field.''); Anonymously 
Submitted Comment (Oct. 19, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20146713-312005.pdf (``In summary, I, like 
many others, support the above proposal to increase transparency in 
the markets, and to somewhat level the playing field for smaller, 
independent investors and retail alike.''); Comment from Jonathan 
Patterson (Mar. 14, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-272193.htm (``Shedding some light into the 
transactions of short sellers would be very supportive for retail 
investors and would help to level the playing field.'').
---------------------------------------------------------------------------

    Other commenters acknowledged the Commission's authority to 
promulgate rules to capture short sale-related data but took the 
position that Form SHO reporting should be limited to the bare minimum 
necessary to satisfy the statutory mandate of DFA section 929X (i.e., 
Exchange Act section 13(f)(2)).\274\ These commenters expressed 
concerns about requiring the reporting of anything beyond the data 
elements expressly specified in section 13(f)(2) of

[[Page 75126]]

the Exchange Act.\275\ Expressing concerns that the data required in 
Information Table 2 of Proposed Form SHO is too granular and contains 
an excessive amount of commercially sensitive information that, if 
misappropriated, would lead to commercial harm, these commenters 
recommended that, at a minimum, the scope of information required to be 
reported on Information Table 2 of Proposed Form SHO be substantially 
limited, or that Information Table 2 be eliminated altogether.\276\ 
Some of these commenters suggested that the Commission rely instead on 
existing sources of short-sale related data, such as CAT or short sale-
related data provided to FINRA and the exchanges.\277\ Other commenters 
questioned the utility of the reported information proposed to be 
required.\278\
---------------------------------------------------------------------------

    \274\ See T. Rowe Price Letter, at 2 (urging a measured approach 
to meeting the 929X reporting obligation so that ``the public 
reporting of short sale information only satisfies the specific data 
elements and minimum frequency of dissemination referenced in 
section 929X and goes no further.''); Comment Letter from Robert 
Sloan, Managing Partner, S3 Partners, LLC (May 20, 2022), available 
at https://www.sec.gov/comments/s7-08-22/s70822-20129426-295541.pdf 
(recommending reporting be limited to public disclosure of ``only 
those data elements required by Section 13(f)(2)'') (``S3 Letter''); 
see also AIMA Letter (positing that Information Table 1 of Form SHO, 
without the requirement to report hedging information, would alone 
be sufficient for the Commission to carry out its statutory mandate 
and achieve its goals).
    \275\ See, e.g., SIFMA Letter, at 2 (positing that ``expansive 
reporting regime contemplated under the Proposed Rules would extend 
significantly beyond what Congress intended in passing Section 929X 
. . . .''); Comment Letter from James Toes, President & CEO, et al., 
Security Traders Association (Apr. 26, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20126796-287509.pdf (``STA 
Letter'') (criticizing rulemaking proposal as going far beyond 
mandate of 929X of Dodd-Frank Act to prescribe rules providing for 
public disclosure of short sales and recommending more alignment of 
Proposed Rule 13f-2 reporting requirements with those of Form 13F); 
T. Rowe Price Letter, at 2.
    \276\ See, e.g., Two Sigma Letter, at 3-4 (raising concerns 
about potential data breaches and unintended public dissemination of 
daily short position data); see also AIMA Letter, at 14 (citing 
negative ramifications for Managers, markets and the Commission if 
commercially sensitive and valuable data reported in Information 
Table 2 were to be compromised). See also discussion in supra Part 
II.A.4.a.ii.
    \277\ See, e.g., AIMA Letter, at 2 (calling for elimination of 
Information Table 2 because it is ``too granular''); MFA Letter, at 
4 (calling for elimination of Information Table 2 in favor of ``less 
burdensome alternative''); see also Ropes & Gray Letter, at 2 
(stating that much of the information to be reported under Proposed 
Rule 13f-2 ``is, or soon should be'' available from existing 
reporting regimes--e.g., CAT, and information reported by broker-
dealers to FINRA and the exchanges); SIFMA Letter, at 15-19 
(recommending elimination of Information Table 2 altogether or 
alternatively that reporting of short activity data be limited to 
reporting only gross short positions at the end of each settlement 
day when a reporting threshold is breached (excluding detailed 
purchase and sale activity); cf. T. Rowe Price Letter, at 3 
(recommending that Commission not use the permissive authority 
granted in section 13(f)(2) of the Exchange Act to gather additional 
information that would not be beneficial to the market and would be 
challenging for Managers to compile). See also discussion in supra 
Part II.A.4.a.i.
    \278\ See, e.g., Ropes & Gray Letter, at 3, 6 (stating that it 
would be difficult to ``to discern market sentiment or levels of 
activity from the net number published by the Commission, and the 
utility of publishing daily net transactions data to market 
participants will also likely be limited''); see also K&L Gates 
Letter, at 2 (questioning the ``value and impact'' of the 
information called for under Proposed Rule 13f-2, that would 
supplement information currently available from other sources).
---------------------------------------------------------------------------

    Several commenters expressly or effectively questioning the need 
for Information Table 2, also raised the concern that the short 
activity monitoring necessary to comply with the reporting requirements 
of Proposed Form SHO would require any Manager that engages in short 
selling to expend significant time and resources to enhance or revamp 
its systems to monitor activity continuously, without certainty as to 
if or when its short selling activity would meet or exceed the 
reporting thresholds.\279\ These commenters concluded that the costs to 
operationalize Rule 13f-2 had not been adequately weighed against any 
benefits to regulators or the public.\280\
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    \279\ See, e.g., Two Sigma Letter, at 7 (commenting that the 
``commercial risk and operational burdens created by daily reporting 
of individual short positions'' was not adequately justified in the 
Proposing Release); MFA Letter, at 9-10 (raising concern that costs 
and consequences of Proposals would have a chilling effect on 
institutional investment managers' pursuit of short strategies); 
Perkins Coie Letter, at 2-3 (stating that the benefits of the 
reported information would be outweighed by compliance costs for 
Managers that do not regularly utilize short positions ``[F]or 
institutional investment managers that only selectively utilize 
short positions, or who only do so passively, these additional 
compliance costs in relation to the institutional investment 
manager's usage of short positions could in turn impose untended 
risks to the manager's underlying investors if the institutional 
investment manager must divert additional time and resources for 
compliance and oversight. This appears to be yet another affirmative 
reporting requirement that will increase compliance and overhead 
cost, without a [commensurate] benefit.'').
    \280\ See, e.g., MFA Letter, at 14 (describing categories of 
information required in Information Table 2 as ``unclear, 
requir[ing] complicated judgments on the part of [M]anagers, and . . 
. likely to yield inconsistencies in reporting and results that are 
not accurate.''); Ropes & Gray Letter, at 3 (positing that reporting 
under Proposed Rule 13f-2 would impose ``significant costs'' on 
Managers, would not result in disclosure of ``actionable information 
to market participants,'' and is not necessary to allow the 
Commission to perform ``effective market surveillance''); see also 
S3 Letter, at 2 (predicting that short activity monitoring required 
by Information Table 2 of Form SHO will be a ``substantial lift'' 
for Managers' administrative systems); SBAI Letter, at 2 (positing 
that proposed Form SHO data collection framework not justified from 
a cost benefit perspective and provides ``very limited'' additional 
insight in an untimely manner).
---------------------------------------------------------------------------

Final Rule
    The Commission continues to believe that publication of aggregated 
short position data, on a delayed basis, is a reasonable means of 
minimizing the potential negative impacts of short position and short 
activity disclosures on short selling and allaying data security 
concerns raised by commenters while at the same time increasing 
transparency.\281\ This rationale applies to Information Table 2, which 
is about daily activities. Eliminating Information Table 2 would not 
further the goal of enhancing the transparency of short sale-related 
data.\282\ And for reasons stated below, the data available from 
existing sources of short sale-related information have limitations, so 
they do not extinguish the need for additional transparency in the 
short sale market.\283\
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    \281\ Proposing Release, at 14955.
    \282\ See Proposing Release, at 14987-14988, 14991 (discussing 
how existing sources of short sale-related data are not sufficiently 
granular, for example, to provide sufficient insights to further 
understanding of short selling strategies, to distinguish short sale 
transactions that impact short positions and those that do not, or 
into the timing with which short positions are established or 
covered).
    \283\ See infra Part VIII.B.4.
---------------------------------------------------------------------------

    The data to be reported in the following columns of Information 
Table 2 in Proposed Form SHO will provide regulators with additional 
context and transparency into how and when reported gross short 
positions were closed out or increased, which will help the Commission 
assess systemic risk.\284\ These columns are as follows:
---------------------------------------------------------------------------

    \284\ Proposing Release, at 14959.

<bullet> Column 7: Number of Shares Sold Short
<bullet> Column 8: Number of Shares Purchased to Cover an Existing 
Short Position
<bullet> Column 9: Number of Shares Purchased in Exercised Call Option 
Contracts
<bullet> Column 10: Number of Shares Sold in Exercised Put Option 
Contracts
<bullet> Column 11: Number of Shares Sold Short in Assigned Call Option 
Contracts
<bullet> Column 12: Number of Shares Purchased in Assigned Put Option 
Contracts
<bullet> Column 13: Number of Shares Resulting from Tendered 
Conversions
<bullet> Column 14: Number of Shares Obtained Through Secondary 
Offering Transaction \285\
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    \285\ A secondary offering transaction for purposes of this 
requirement means an offering, other than an initial public 
offering, or ``IPO,'' for the same class of security that is the 
subject of the short sale. Such an offering could be made by the 
issuer and include newly created and or treasury shares and could 
also include or be made exclusively by selling shareholders.
---------------------------------------------------------------------------

<bullet> Column 15: Other Activity that Creates or Increases Manager's 
Short Position
<bullet> Column 16: Other Activity that Reduces or Closes Manager's 
Short Position

    However, the Commission is modifying the design of Information 
Table 2 of Proposed Form SHO to help reduce the costs and burdens of 
complying with the reporting requirements of Proposed Rule 13f-2 
without sacrificing the level of

[[Page 75127]]

transparency of short sale activity data made available to market 
participants as prescribed in Proposed Rule 13f-2(a)(3).
    Under the reporting regime of Proposed Rule 13f-2, Managers would 
have been required to report each category of short activity 
information included in Columns 7-16 (above) of Information Table 2 of 
Proposed Form SHO.\286\ The Commission, for each individual column, 
would then tabulate the information reported to determine and publish 
the net activity in each reported equity security, as aggregated across 
all reporting Managers. That net activity would be expressed by a 
single identified number of shares of the reported equity security and 
be determined by offsetting the purchase and sale activity reported by 
Managers in Columns 7-16 of Information Table 2 of Proposed Form SHO.
---------------------------------------------------------------------------

    \286\ See Special Instructions 9.g of Proposed Form SHO.
---------------------------------------------------------------------------

    Under the adopted version of Information Table 2, Columns 7-16 of 
Information Table 2 of Proposed Form SHO are replaced by a single, new 
Column 7, in which Managers will report net activity in the security 
for which information is being reported (represented as a number of 
shares). More specifically, Special Instruction 9.g of Form SHO, as 
adopted, requires Managers to report net change in short position 
reflecting how the gross short position in shares of the security for 
which information is being reported are being closed out--or 
alternatively, increased--as a result of the acquisition or sale of 
share activity determined by offsetting prescribed types of purchase 
and sale activity. Those prescribed types of purchase and sale 
activities correspond to the purchase and sale activities identified in 
Columns 7-16 of Proposed Form SHO. The net activity will be determined 
by Managers--rather than by the Commission--and reported to the 
Commission. The Commission will then aggregate the reported daily net 
change numbers across Managers for public dissemination. Under the 
adopted version of Information Table 2, the Commission will receive 
less granular information from reporting Managers than was proposed. 
The Commission, however, will receive net activity information from 
reporting Managers for each settlement date during the calendar month 
which will provide additional context and transparency into whether the 
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 this is a reasonable 
approach that considers both those comments that supported additional 
transparency with regard to short sale-related information that would 
result from Information Table 2 reporting, and also comments about cost 
and data security concerns with regard to such reporting. This reported 
net activity information will assist the Commission in assessing 
systemic risk and in reconstructing unusual market events, including 
instances of extreme volatility.\287\
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    \287\ See infra Part VIII.C.1 for a discussion of how the Rule 
13f-2 (and the adopted CAT amendment) will enhance the Commission's 
ability to protect investors and investigate market manipulation by 
providing a clearer view into the short selling market and improving 
the Commission's and other regulators' reconstruction of significant 
market events.
---------------------------------------------------------------------------

    These modifications in the final rule for Information Table 2 of 
Form SHO result in no change to the net activity information that will 
be made publicly available by the Commission. Under Proposed Rule 13f-2 
and Proposed Form SHO, the Commission would publish net activity 
information for each reported equity security, aggregated across all 
categories of activity in Columns 7-16 of Information Table 2 of 
Proposed Form SHO, and aggregated across all reporting Managers. Under 
Rule 13f-2 and Form SHO, the Commission will publish this same net 
activity information for each reported equity security as originally 
proposed by the Commission.\288\ And for this reason, Information Table 
2 as adopted will not sacrifice transparency to market participants.
---------------------------------------------------------------------------

    \288\ Proposing Release, at 14961.
---------------------------------------------------------------------------

e. Filing Amendments
i. Proposal
    To facilitate the Commission's process of aggregating the short 
sale-related information reported on Form SHO for publication, the 
Commission proposed that amendments to Form SHO must restate the Form 
SHO in its entirety. To inform the Commission that the filing is an 
amendment of a previously filed Form SHO, the Commission proposed that 
a Manager must check the box on the Form SHO Cover Page to indicate 
that the filing is an ``Amendment and Restatement.'' On the Cover Page 
of each Amendment and Restatement filed, the Commission proposed that 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 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, the Commission proposed that 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.
    In cases where a revision is reported in an Amendment and 
Restatement that changes a data point reported in the Form SHO by 
twenty-five (25) percent or more, the Commission proposed that the 
Manager must notify the Commission staff via the Office of 
Interpretation and Guidance of the Division of Trading and Markets 
(``TM OIG'') at <a href="/cdn-cgi/l/email-protection#2e7a5c4f4a4740496f404a634f5c454b5a5d6e124f0e465c4b4813" http: sec.gov">sec.gov</a>">TradingAndMarkets@sec.gov</a> within two (2) business days 
after filing the Amendment and Restatement.
ii. Comments and Final Rule
    The Commission received some comments on the issue of amendments 
and restatements. One comment stated that the notification requirement 
for an amendment of 25 percent or more is too large, and that lower 
percentage revisions can be considered significant.\289\ The commenter 
further recommended that the notification requirement for amendments be 
reduced to revisions of 15 percent or more and that the number of 
revisions allowed for individual Managers be limited.\290\ Another 
commenter stated that if a non-material error has been made, a Manager 
should not have to restate Form SHO in its entirety, and that a simple 
note or addendum should suffice.\291\ This commenter also encouraged 
the Commission to adopt a materiality threshold for other errors or 
omissions, i.e., if the error does not ``materially impact the data the 
Commission intends to publish, then the Manager should not be required 
to restate Proposed Form SHO in its entirety,'' stating that this would 
``eliminate the need for the Commission to collect even more 
commercially sensitive and valuable data and, in turn, relieve Managers 
of the time and costs that would be required to calculate, populate, 
and re-file an entirely new Proposed Form SHO.'' \292\
---------------------------------------------------------------------------

    \289\ Comment Letter from Anonymous (Mar. 21, 2022), available 
at https://www.sec.gov/comments/s7-08-22/s70822-20120739-272894.pdf.
    \290\ See id.
    \291\ AIMA Letter, at 15.
    \292\ Id.

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[[Page 75128]]

    The Commission is adopting procedures for filing and amending Form 
SHO consistent with the Proposing Release but modified to no longer 
require Managers to separately notify the Commission that the reporting 
discrepancies presented in an Amendment and Restatement have occurred. 
A Manager that determines or is made aware that it has filed a Form SHO 
with errors that affect the accuracy of the information reported must 
file an amended Form SHO within ten (10) calendar days of discovery of 
the error. The Commission continues to believe that filing an amended 
Form SHO within 10 calendar days of discovery of the error will provide 
Managers with a reasonable period of time to prepare the Form SHO 
amendment, while helping to ensure that accurate information is 
received by the Commission in a timely manner.
    The Commission is adopting the requirement, as proposed, that 
amendments to a previously filed Form SHO restate the Form SHO in its 
entirety, as described in Special Instruction 3 to Form SHO. Form SHO 
Special Instruction 3.a provides that on the Cover Page of each amended 
and restated Form SHO filing, a Manager must: check the box to indicate 
that the filing is an ``Amendment and Restatement,'' provide a written 
description of the revision being made, explain the reason for the 
revision, and indicate whether data from any additional calendar month 
reporting period(s) (up to the past 12 calendar months) is/are affected 
by the amendment. Consistent with the proposed procedures for filing an 
amended Form SHO, if other reporting periods have been affected, a 
Manager must 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 
proposed and discussed further below, the Commission will 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 continues to believe that limiting the 
requirement to file an amended Form SHO to twelve months will reduce 
the burden and cost on Managers.\293\ In response to comments 
requesting a materiality threshold, requiring a Form SHO to be restated 
in its entirety should add little if any additional burden, as the 
Manager will have already compiled such data, and thus no additional 
data collection will be required other than to correct the data point 
that is being amended. A materiality threshold could create additional 
complexity in determining how and when to file an amendment to Form 
SHO, and as such, the Commission is adopting the straightforward 
approach that any revision requires the Manager to restate Form SHO in 
its entirety when filing an amendment.
---------------------------------------------------------------------------

    \293\ Proposing Release, at 14960.
---------------------------------------------------------------------------

    The Commission is not adopting, however, the requirements that a 
Manager provide the Commission notice of the revision(s) reported in an 
Amendment and Restatement and an explanation of the reason(s) for the 
revision(s), as prescribed in Proposed Form SHO Special Instruction 3.b 
and 3.c; \294\ and each of those Special Instructions in Proposed Form 
SHO is deleted from Form SHO as adopted. This change will reduce 
compliance costs for Managers filing Amendments and Restatements by not 
requiring them to provide a separate notice regarding information that 
has been reported, and therefore is available, to the Commission via 
EDGAR, without sacrificing transparency.
---------------------------------------------------------------------------

    \294\ Special Instruction 3.b of Proposed Form SHO provided that 
if a 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 
<a href="/cdn-cgi/l/email-protection#e7b39586838e8980a68983aa86958c829394a7db86c78f958281da" http: sec.gov">sec.gov</a>">TradingAndMarkets@sec.gov</a>, with notice of (1) this circumstance; and 
(2) an explanation of the reason for the revision. Special 
Instruction 3.c of Proposed Form SHO provided that if a revision 
reported in an Amendment and Restatement changes a data point 
reported in the Form SHO that is being amended by 25% or more, the 
Manager must notify the Commission staff via TM OIG at 
<a href="/cdn-cgi/l/email-protection#3c684e5d5855525b7d5258715d4e5759484f7c005d1c544e595a01" http: sec.gov">sec.gov</a>">TradingAndMarkets@sec.gov</a> within two business days after filing the 
Amendment and Restatement.
---------------------------------------------------------------------------

    Consistent with the proposed procedures for publishing data 
reported on or derived from Form SHO reports--including any Amendments 
and Restatements, the Commission plans to update prior months' 
aggregated 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 that changes a data point 
reported in the Form SHO by 25 percent or more to highlight for market 
participants that the published aggregated data includes significantly 
revised data. The Commission will publish the aggregated 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 Form SHO data will include a disclaimer that the Commission 
does not ensure the accuracy of the data being published.\295\ 
Maintaining these requirements will help preserve the integrity of the 
reported short sale data and alert market participants to any potential 
issues with published data.\296\
---------------------------------------------------------------------------

    \295\ See Proposing Release, at 14961.
    \296\ See id.
---------------------------------------------------------------------------

f. Confidential Treatment
i. Proposal
    The instructions to Proposed Form SHO provided that all information 
that would reveal the identity of a Manager filing a Proposed Form SHO 
report with the Commission would be deemed subject to a confidential 
treatment request under 17 CFR 240.24b-2 (``Rule 24b-2'').\297\ As 
discussed in the Proposing Release, the Commission proposed to publish 
only aggregated data derived from information provided in Proposed Form 
SHO reports. Proposed Form SHO, by its terms, ensured that information 
reported on the form that could reveal the identity of the reporting 
Manager would 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 the Freedom of Information Act 
(``FOIA''), section 13(f)(4) and (5), Rule 24b-2(b) under the Exchange 
Act, and any other applicable law.
---------------------------------------------------------------------------

    \297\ Id. at 14957.
---------------------------------------------------------------------------

ii. Comments and Final Rule
    The Commission received a single comment regarding confidential 
treatment. Stating that there are a variety of valid reasons beyond the 
example provided in the Proposing Release that a Manager might seek 
confidential treatment of information reported on Proposed Form SHO, 
the commenter urged the Commission to adopt a more flexible process for 
seeking confidentiality that would enable Managers and the Commission 
staff to determine whether confidential treatment is appropriate.\298\ 
The Commission is adopting an approach consistent with the Proposing 
Release but modified to refer to Rule 83 (17 CFR 200.83), and to 
provide that all

[[Page 75129]]

information will be deemed subject to a confidential treatment request 
under Rule 83.
---------------------------------------------------------------------------

    \298\ Schulte Roth & Zabel Letter, at 5 (urging the Commission 
to permit confidential treatment requests with respect to the data 
to be included in the aggregated data to be published by the 
Commission on a case-by-case basis).
---------------------------------------------------------------------------

    As proposed, the instructions to Form SHO expressly provided that 
all information that would reveal the identity of a Manager filing a 
Proposed Form SHO report with the Commission would be deemed subject to 
a confidential treatment request under Rule 24b-2, as described in the 
``Filing of Form SHO'' section of the General Instructions to Form SHO. 
Because the Commission does not intend those filings to be public, Rule 
83 includes appropriate and less burdensome procedures and, 
accordingly, is revising the General Instructions to provide that data 
will also be deemed subject to a confidential treatment request under 
Rule 83.
    As with the Proposed Rule, the Commission currently plans to 
publish only aggregated data derived from information provided in 
Proposed Form SHO reports. While it is possible a person may be able to 
determine the identity of a Manager (or reverse engineer a Manager's 
trading strategies) in a situation where only one person was selling 
short, especially where the short seller has publicly disclosed that it 
has a short position in a specific security, the Commission continues 
to believe that excluding such data from the aggregated data published 
by the Commission could affect the integrity of the data. The 
Commission anticipates that the risk of exposing a single short seller 
will be mitigated by the delay in publication of the aggregated data.
    The Commission does not anticipate disclosing information in Form 
SHO, other than to the extent the data is included in the Commission's 
aggregated disclosures, and the Commission will deem the information 
included in Form SHO as being subject to a confidential treatment 
request under Rule 83. Accordingly, the Commission is further revising 
the General Instructions to provide that all information included in 
the Form SHO is deemed subject to a confidential treatment request 
under Rule 83. Pursuant to section 13(f) of the Exchange Act, the 
Commission may prevent or delay public disclosure of all other 
information reported on Form SHO in accordance with FOIA, section 
13(f)(4) through (5), Rule 83, and any other applicable law.\299\
---------------------------------------------------------------------------

    \299\ The Commission will follow Rule 83 procedures in 
addressing any requests for information reported on Form SHO deemed 
subject to a confidential treatment request.
---------------------------------------------------------------------------

g. Preventing Duplicative Reporting
i. Proposal
    The rules to prevent duplicative reporting of information regarding 
short positions and short activities of an equity security in Proposed 
Form SHO were partially modeled after those in Form 13F.\300\ More 
specifically, as described in the General Instructions to Proposed Form 
SHO, if two or more Managers, each of which would be required by 
Proposed Rule 13f-2 to file Proposed Form SHO for the reporting period, 
exercise investment discretion with respect to the same security, only 
one such Manager would be required to report information regarding that 
security in its Proposed Form SHO report. The Commission proposed that 
if a Manager were required to file a Proposed Form SHO report with 
respect to a security and chose to rely on the duplicative reporting 
provisions of the General Instructions to Proposed Form SHO, then such 
Manager would be required to identify on the cover page of its Proposed 
Form SHO report any other Managers filing a Proposed Form SHO report 
with respect to such security on behalf of the Manager, in the manner 
described in Special Instruction 5 of Proposed Form SHO. Duplicative 
reporting could result in unnecessary costs to Managers and could make 
the aggregated data published by the Commission less accurate.
---------------------------------------------------------------------------

    \300\ See ``Rules to Prevent Duplicative Reporting'' in the 
``General Instructions'' of Form 13F, available at https://www.sec.gov/pdf/form13f.pdf.
---------------------------------------------------------------------------

ii. Comments and Final Rule
    The Commission did not receive any comments regarding duplicative 
reporting, and for the reasons stated in the Proposing Release, is 
adopting Special Instruction 5 to Form SHO as proposed.
h. Verification of Short Sale Data
i. Proposal
    The Commission stated in the Proposing Release that it 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.\301\ The Commission further stated that field validations act 
as an automated form completeness check when a Manager files Proposed 
Form SHO through EDGAR, and that the validations do not verify the 
accuracy of the information filed in the Proposed Form SHO 
filings.\302\
---------------------------------------------------------------------------

    \301\ Proposing Release, at 14955.
    \302\ Proposing Release, at 14960 n.72.
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ii. Comments and Final Rule
    The Commission received many comments on the issue of Manager 
reporting and data verification. The comments supported implementing a 
Commission verification system for reported data, stating that 
reporting as proposed would lead to inconsistencies. Commenters 
expressed concerns regarding the self-reporting of data, citing the 
potential for errors or intentional manipulation of data.\303\ One 
commenter stated that Managers have incentives to report inaccurately, 
especially if there is concern over unveiling short selling 
strategies.\304\ Other commenters cited examples of instances of 
potential issues with data resulting from under-reporting, over-
reporting, and misreporting.\305\ One commenter stated, without further 
detail, that orders were being mismarked as short exempt in order to 
circumvent the short sale circuit breaker of Rule 201 of Regulation 
SHO.\306\ Other commenters suggested that the Commission verify the 
accuracy of reported data via a random audit, such as auditing 
reporting at a rate applicable to five percent of reported data per 
quarter.\307\ Several commenters also suggested that short sale 
transactions be placed on a publicly available,

[[Page 75130]]

immutable log, perhaps using blockchain technology, as a solution to 
the issue of verification.\308\ Finally, one commenter suggested that 
it should be the duty of exchanges and broker-dealers to report 
eligible short positions.\309\
---------------------------------------------------------------------------

    \303\ See, e.g., Comment from Dale Eaglen (Feb. 25, 2022), 
available at https://www.sec.gov/comments/s7-08-22/s70822-20117894-270815.htm; Comment from Michael Behrens (Feb. 25, 2022), available 
at https://www.sec.gov/comments/s7-08-22/s70822-270806.htm 
(``Michael Behrens Comment''); Comment from Stephen (Mar. 4, 2022), 
available at https://www.sec.gov/comments/s7-08-22/s70822-20118671-271537.pdf; Comment from Kevin B. (Mar. 14, 2022), available at 
https://www.sec.gov/comments/s7-08-22/s70822-20119357-272243.htm; 
see also Steve B. Comment (expressing concern that ``[s]hort 
positions are currently `self regulated' ''), Comment Letter from 
Mike Monisky (Mar. 4, 2022) available at https://www.sec.gov/comments/s7-08-22/s70822-20118657-271529.pdf (expressing concerns 
about misreporting of securities transactions to FINRA) (``Mike 
Monisky Letter''), Comment from Jonathan Dumaine (Mar. 14, 2022), 
available at https://www.sec.gov/comments/s7-08-22/s70822-20119364-272250.htm (expressing general concern for potential for abuse 
whenever self-reporting on forms is involved) (``Jonathan Dumaine 
Comment'').
    \304\ Comment from J. T. (Oct. 2, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-309405.htm.
    \305\ See, e.g., Michael Behrens Comment; Mike Monisky Letter; 
Jonathan Dumaine Comment.
    \306\ See Michael Behrens Comment.
    \307\ See, e.g., Michael Behrens Comment; Comment from Jana 
Caperton (Mar. 12, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20119201-272007.htm; Comment from Jim Lee (May 26, 
2022), available at https://www.sec.gov/comments/s7-08-22/s70822-295810.htm (``Jim Lee Comment''); Comment from Gerry T. (Oct. 31, 
2022), available at https://www.sec.gov/comments/s7-08-22/s70822-317082.htm; Comment Letter from Wayne C. Smith (Dec. 3, 2022), 
available at https://www.sec.gov/comments/s7-08-22/s70822-20152504-320238.pdf.
    \308\ See, e.g., Comment from Joseph M. Grato (Mar. 21, 2022), 
available at https://www.sec.gov/comments/s7-08-22/s70822-20120589-272777.htm (``Joseph Grato Comment''); Jim Lee Comment.
    \309\ Jonathan Dumaine Comment.
---------------------------------------------------------------------------

    The Commission is adopting the reporting requirement as proposed. 
Consistent with the Commission's statement in the Proposing Release, 
the Commission does not intend to verify the accuracy of the data 
received from the Managers but may consider doing so after assessing 
whether such verification would be useful or necessary to enhance the 
integrity of the data. The reporting Managers are responsible for the 
completeness, timeliness, and accuracy of information included in their 
mandatory filings to the Commission. The Commission has the ability to 
conduct examinations to help evaluate whether reporting Managers are in 
compliance and, where necessary, the Commission may bring enforcement 
actions where potential violations are believed to have occurred.
i. New Reporting Regime--Comments and Final Rule
    Rather than create a new reporting regime by adopting the 
Proposals, several industry commenters urged the Commission to leverage 
the existing data frameworks of FINRA, CAT, and other data filed with 
the Commission (e.g., Form N-PORT).\310\ These commenters stated that 
leveraging existing reporting frameworks would alleviate compliance 
burdens and associated costs,\311\ and that existing reporting 
frameworks were already sufficient for short interest reporting.\312\ 
These commenters stated, and the Commission acknowledges,\313\ that 
there are multiple sources of existing public and non-public data 
related to short sales. FINRA and most exchanges collect and publish 
daily aggregate short sale volume data, and on a one month delayed 
basis publish aggregated information regarding short sale transactions. 
FINRA collects and aggregates short interest data from broker-dealer 
member firms, by security, twice each month.
---------------------------------------------------------------------------

    \310\ See, e.g., Ropes & Gray Letter, at 2; Two Sigma Letter, at 
9-10; ICI Letter, at 5; see also K&L Gates Letter, at 2 (stating 
that the Proposal ``is unnecessary and, on balance, overly 
burdensome given the sufficiency of existing data availability''); 
Virtu Letter, at 2 (stating that the Commission ``has not proffered 
a regulatory need or justification for why the current reporting 
regime is inadequate''); SIFMA Letter, at 13 (``respectfully 
disagree[ing] with the Commission's assertions that the data 
available to it through the existing reporting regimes is not 
sufficient to allow the SEC to meet its obligations under Section 
929X''); Perkins Coie Letter, at 2; AIMA Letter, at 8-10 (stating 
that ``[w]ith tailored refinements to FINRA reporting and the 
combination of the proposed CAT amendments . . . the Commission can 
still fulfill the statutory mandate and achieve the goals outlined 
in the Proposal but without creating additional reporting 
requirements, burdens and costs for many market participants''); 
SBAI Letter, at 2 (stating that instead of implementing a new 
reporting regime, the Commission should ``[f]ocus should instead lie 
on making enhancements to FINRA's existing collection and activity 
fit for purpose.''); T. Rowe Price Letter, at 3 (stating that 
``[g]iven the extensive data already available to the SEC through 
FINRA's existing short interest reporting, stock exchanges' 
reporting of short sale activity, and the [CAT], the SEC should 
extract the short data it desires from these sources, rather than 
create new reporting obligations for managers whose activity is 
already captured by these existing frameworks.'').
    \311\ See, e.g., Ropes & Gray Letter, at 2; SIFMA Letter, at 19.
    \312\ See, e.g., SIFMA Letter, at 9-10; K&L Gates Letter, at 2; 
Virtu Letter, at 2.
    \313\ See Proposing Release, at 14953-4.
---------------------------------------------------------------------------

    In assessing how the Commission might leverage existing data to 
satisfy the mandate of section 929X, it is important to note 
differences in reporting entities, timing, and the specific data being 
collected in existing public and non-public sources of short sale-
related data. The letters submitted by industry commenters critical of 
the Proposed Rule 13f-2 reporting regime did not explain with any 
specificity how the Commission could leverage existing sources of short 
data so that the Commission would receive equal or comparable data to 
that which will be reported on Form SHO, nor did Commenters articulate 
how short data that is currently available to market participants is 
comparable to data which would be reported on Form SHO and published by 
the Commission, rather the comments referenced leveraging of existing 
sources generally.\314\
---------------------------------------------------------------------------

    \314\ See, e.g., Virtu Letter, at 2 (stating that the 
Commissions should ``explore ways to utilize the existing sources of 
data that already are available to the SEC rather than establishing 
yet another pool of short sale data.'').
---------------------------------------------------------------------------

    After considering the viewpoints of commenters, the Commission 
believes that a new reporting regime will increase transparency into 
short positions consistent with the goals of DFA 929X, and that market 
participants and regulators alike will benefit from the required Form 
SHO disclosures, as they are distinct from existing short sale 
reporting regimes. Further, the short sale-related information that 
will be collected under Rule 13f-2 and Form SHO will fill an 
information gap for market participants and regulators by providing 
insights into increases and decreases in reported short positions. As 
stated in the Proposing Release, the Commission believes that the short 
position data reported pursuant to Rule 13f-2 on Form SHO will 
supplement the short sale information that is currently publicly 
available from FINRA and the exchanges.\315\ In the Proposing Release, 
the Commission elaborated on the limitations of using existing data, 
such as the CAT or FINRA data, to reconstruct market events like the 
``meme'' stock events of January 2021.\316\ The Commission stated that 
while some existing sources report daily short sale volume, there are 
several limitations with regard to using existing data sources to 
accurately represent the short exposure of Managers. The short sale 
data reported on Form SHO will include the daily ``net'' activity by 
reporting Managers on each settlement date during the calendar month in 
the security for which information is being reported, and such 
information is not currently available from FINRA or the exchanges. 
Moreover, because FINRA's existing short interest data reports 
aggregate short positions on a bimonthly basis,\317\ those reports 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 reported on Form SHO will help to fill that information gap. The 
Commission continues to believe that publication of this additional 
aggregated information can help to further inform market participants 
regarding overall short sale activity by Managers with substantial 
short positions and will provide regulators as well as market 
participants with important information regarding the timing of 
increases and decreases in the reported short positions.\318\ Finally, 
compared to other existing reporting regimes, the Reporting Thresholds 
in Rule 13f-2 are designed to require the reporting of only 
substantial, hence more informative, short positions.\319\
---------------------------------------------------------------------------

    \315\ See Proposing Release, at 14981-82. See also infra Part 
VIII.B.4.
    \316\ See Proposing Release, at 14981-82.
    \317\ The short interest data reported reflects aggregate short 
positions as of the specified reporting dates.
    \318\ Proposing Release, at 14995.
    \319\ With regard to Threshold B, as discussed in the Proposing 
Release, a $500,000 or more threshold for non-reporting company 
issuer securities is similar to the median dollar value of a 
position of 2.5 percent of the market capitalization of OTC stocks 
for which the Commission was able to obtain information on total 
shares outstanding. Hence, it is proportional to Threshold A in 
capturing substantial short positions. See supra Part II.A.3.a for 
additional discussion of Reporting Thresholds.
---------------------------------------------------------------------------

    Further, the Commission understands that while FINRA makes publicly

[[Page 75131]]

available short sale-related data pertaining to both exchange-traded 
equity securities and OTC equity securities that is reported to it by 
its member firms,\320\ some of the exchanges require payment of a fee 
to access short sale-related data, which may make it difficult for some 
investors to access the data. The reporting regime under Rule 13f-2, by 
contrast, will provide aggregated short sale-related data in a readily 
accessible location (i.e., EDGAR or the Commission website), free and 
accessible to all investors and other market participants. The 
Commission continues to believe that providing free, accessible, and 
more complete information to market participants regarding short sale-
related data will aid market participants in their understanding of the 
level of negative sentiment about a particular equity security and the 
actions of short sellers collectively and aid the Commission's 
oversight of short selling.\321\
---------------------------------------------------------------------------

    \320\ In mid-to-late Dec. 2022, FINRA began publishing short 
sale information for exchange-traded as well as OTC equity 
securities. See Equity Short Interest Files, FINRA, available at 
https://www.finra.org/finra-data/browse-catalog/equity-short-interest/files.
    \321\ Proposing Release, at 14952.
---------------------------------------------------------------------------

    Other industry commenters were concerned about reporting burdens 
for smaller Managers, and one such commenter predicted that the 
increased reporting costs resulting from the Proposals and other 
related Commission proposed rulemakings could lead to industry 
consolidation and decrease competition and investor choice.\322\ The 
Commission continues to believe that application of the Reporting 
Thresholds will not result in Rule 13f-2 applying to a significant 
number of small entities, especially considering the modification to 
Threshold A to be based on a monthly average gross short position 
rather than the proposed daily calculation.\323\
---------------------------------------------------------------------------

    \322\ See, e.g., MFA Letter, at 2 (positing that combined costs 
of compliance with the Proposals and other related Commission 
proposed rulemakings would be ``insurmountable for small and newly-
formed advisers''); Anonymous Fund Manager Letter, at 7-8. See infra 
Parts VIII.B, VIII.C.6.f, VIII.D.2 for a discussion of interactions 
between the economic effects of the adopted rule and other 
Commission rulemakings.
    \323\ See infra Part IX.
---------------------------------------------------------------------------

    In response to comments about reporting burdens, the Commission is 
not adopting the proposed hedging requirement, not adopting Proposed 
Rule 205 and ``buy to cover'' reporting to CAT, and is streamlining 
Information Table 2, thus reducing the costs of reporting from the 
proposed rule and form as compared to Rule 13f-2 and Form SHO as 
adopted.\324\
---------------------------------------------------------------------------

    \324\ See generally infra Part VIII.
---------------------------------------------------------------------------

B. Data Aggregation and Publication of Information by the Commission

1. Proposal
    The Commission proposed to require Managers exercising investment 
discretion over short positions meeting specified thresholds to report 
information relating to end-of-the-month short positions on Information 
Table 1, and certain daily activity affecting such short positions on 
Information Table 2, of a new Form SHO. The Commission would aggregate 
the reported data by security, including daily short sale activity 
data, and then, on a delayed basis, make such aggregated data available 
to the public. As proposed, data would be aggregated across all 
reporting Managers for each reported equity security prior to 
publication. The Commission stated its belief that publicly disclosing 
the identity of individual reporting Managers may not 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.\325\
---------------------------------------------------------------------------

    \325\ See Proposing Release, at 14955.
---------------------------------------------------------------------------

    As proposed, the Commission would publish aggregated information 
derived from data reported on Proposed Form SHO. The Commission 
estimated 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, and would also help to reduce the 
risk of imitative trading activity by market participants and help to 
protect report Managers' proprietary trading strategies.\326\ In 
proposing an approach for reporting the short sale-related information 
gathered, the Commission sought to balance calls to level the playing 
field for retail investors by, for example, taking steps to enhance the 
transparency of short sale-related data, with, among other things, 
concerns raised--primarily by institutional investors--regarding 
potential ``chilling effect[s]'' on short selling and potential issuer 
and investor retaliation against an identified short seller.\327\
---------------------------------------------------------------------------

    \326\ See id., at 14955.
    \327\ See id., at 14955.
---------------------------------------------------------------------------

    The Commission also presented, and sought comment on, an 
alternative approach for its publishing of information reported on 
proposed Form SHO that would offer greater transparency and less 
anonymization of the published short sale-related data.\328\ 
Specifically, under this alternative, the Commission would publish the 
information reported to it at the individual Manager level rather than 
aggregate that information across all reporting Managers.\329\ Before 
publication, a reporting Manager's identifying information would be 
removed to anonymize the information published.
---------------------------------------------------------------------------

    \328\ See id., at 14967.
    \329\ Id.
---------------------------------------------------------------------------

2. Comments
    Several commenters raised concerns about potential negative 
consequences of more detailed short position disclosures--particularly, 
negative effects on liquidity and price discovery, the facilitation of 
copycat trading, and the greater susceptibility of holders of short 
positions to short squeezes.\330\ These commenters also preferred an 
``aggregation'' approach to the alternative of publishing data at the 
individual Manager level, due to the commercially sensitive investment 
and trading information that Managers are required to report under Rule 
13f-2.\331\
---------------------------------------------------------------------------

    \330\ E.g., SBAI Letter, at 2 (concluding that ``only aggregate, 
anonymized, and delayed public reporting of short positions'' 
mitigates concerns about the potential risks of short position 
disclosures); Two Sigma Letter, at 1-3 (expressing concerns that 
disclosure of individual short positions could lead to revelation of 
commercially sensitive systematic investment strategies and to 
front-running and other actions that undermine those strategies, and 
that such disclosures would provide incomplete information, and 
potentially misleading signals, to investors); see also T. Rowe 
Price Letter, at 2 (raising concerns about the effects the 
rulemaking proposal would have on liquidity and price discovery); 
Law and Finance Professors Letter, at 2-3 (stating potential 
chilling effect on short selling if identities of short sellers are 
publicly disclosed).
    \331\ E.g., Schulte Roth & Zabel Letter, at 4 (alternative 
proposal to publish anonymized short sale-related data reported on 
an individual Manager would risk eviscerating potential 
confidentiality protections of reporting Managers and jeopardize the 
confidentiality of a Manager's positions, strategies or proprietary 
business information); MFA Letter, at 3 (stating the need for 
``robust data security protocols'' to protect information reported 
pursuant to Proposed Rule 13f-2).
---------------------------------------------------------------------------

    These commenters stated, however, that aggregation would not go far 
enough to lower the risk that the trading and investment behavior 
reported

[[Page 75132]]

would be attributable to a single Manager or set of Managers.\332\ 
Commenters stated that the risk of Manager attribution would be 
heightened when only one Manager or a small set of Managers report a 
short position in the relevant security. Under these circumstances, 
market participants could use the information reported on Form SHO to 
extrapolate an individual Manager's overall position, and potentially 
the Manager's strategies or portfolio management methods across 
different clients.\333\ One commenter expressed concern that Manager 
attribution/identification could result in retaliation against Managers 
by market participants.\334\
---------------------------------------------------------------------------

    \332\ E.g., MFA Letter, at 3 (stating that publishing aggregated 
short position data can help mitigate the risk of identification of 
Manager(s), but is not ``foolproof, . . . the effectiveness will 
depend on what data is published and with what frequency''); AIMA 
Letter, at 4 (stating that ``even if the data is anonymized, market 
participants could still identify certain reporting Managers.''); 
see also SIFMA Letter, at 5 (positing that reporting anonymized 
short sale data at the Manager level without first aggregating such 
information is inconsistent with the directive in 929X of DFA and 
could expose investment strategies of institutional investment 
managers and their clients to their detriment); T. Rowe Price 
Letter, at 2 (positing that ``attribution or anonymized manager-
level data in public reports would be inappropriate and . . . create 
unacceptable risks to . . . [market] participants and discourage a 
useful source of liquidity provision.'').
    \333\ See, e.g., ICI Letter, at 7-8 (further stating that risk 
of Manager identification ``may be especially high'' for [regulated 
investment] funds that currently disclose their identities as well 
as their individual short positions on Form N-PORT filings with the 
Commission).
    \334\ MFA Letter, at 9 (citing potential for retaliation against 
short sellers if Manager's confidential information reported on 
Proposed Form SHO is leaked).
---------------------------------------------------------------------------

    By contrast, other commenters favored the alternative approach of 
publishing reported information at the individual Manager level after 
removing all identifying information of the reporting Manager that the 
Commission sought comment on in the Proposing Release.\335\ While 
expressing general support for rulemaking that increases transparency 
of short sale-related data, proponents of this alternative approach 
also criticized Proposed Rule 13f-2 for not going far enough.\336\ 
These commenters pointed to a need for complementary reporting of long 
and short positions, and downplayed industry concerns about potential 
risks of greater transparency of short sale data, including, the costs 
and challenges of operationalizing Rule 13f-2 and the threat of 
``copycat trading'' if short positions are disclosed pursuant to Rule 
13f-2.\337\ These commenters supported publishing short sale-related 
data that is ``current.'' \338\ Two such commenters suggested that the 
Commission publish, or at least share on a confidential basis with 
issuers of the securities for which information is reported on Form 
SHO, the names of the firms shorting securities.\339\ Other commenters 
further recommended that the Commission glean more from and build upon 
the experience of the European Union (``EU'') with publishing short 
sale-related data in developing an approach for gathering and reporting 
such data.\340\ A few commenters also pointed out ways that, by 
monitoring the published information from Form SHO reports, the public 
and reporting companies could serve as watchdogs for the SEC, a ``first 
line of defense against abusive practices.'' \341\
---------------------------------------------------------------------------

    \335\ See, e.g., Better Markets, at 13; Comment from An Investor 
(Apr. 4, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20122297-278355.htm; Comment from Rick Sweeney (Oct. 10, 
2022), available at https://www.sec.gov/comments/s7-08-22/s70822-309597.htm (Rick Sweeney Comment). But see Samuel Meadows Comment 
(``It would be strongly against retails best interests to have the 
reports published at the managers level. This would make finding and 
understanding the scope of shorting very difficult. I believe it is 
best to have the report aggregated with other reporting Managers 
reports. Ease of access to this information is critical in creating 
fairer markets.''); Comment Letter from Matthew D. Brusch, Interim 
President and CEO, National Investor Relations (Apr. 28, 3033), at 
4, available at https://www.sec.gov/comments/s7-08-22/s70822-20127576-288806.pdf (``NIRI Letter''); K&L Gates Letter, at 5-6. See 
Proposing Release, at 14967.
    \336\ In addition to underscoring the need for transparency in 
the reporting of short sale-related data, commenters recommended 
ways to enhance the transparency of U.S. stock market transactions 
with the creation of a ``transparent and publicly viewable 
platform'' through which U.S. stock market securities would be 
traded, and the use of block chain technology to allow verification 
of transactions in real time. See, e.g., Joseph Grato Comment; 
Anonymously Submitted Comment (Mar. 7, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-271636.htm; Comment from Jason 
Payne (Mar. 7, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20118798-271634.htm; Comment from Lex Stultz (Mar. 13, 
2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20119199-272005.htm; Comment from Devon Turcotte (Mar. 15, 2022), 
available at https://www.sec.gov/comments/s7-08-22/s70822-20119399-272285.htm.
    \337\ See WTI Letter. These and other commenters expressed 
concern for the danger to ``fair and free'' U.S. markets posed by 
``the lack of transparency, the inability to adequately quantify 
short interest, and the ability of firms to skirt regulations 
through derivative positions such as options and security-based 
swaps.'' These commenters also called for symmetry in the level of 
disclosures and transparency for short positions as is currently the 
case for long positions, to allow retail and institutional investors 
to conduct the same type of analysis regarding short positions as is 
currently possible for long positions using data from Form 13F.
    \338\ See, e.g., NIRI Letter, at 4 (stating that the alternative 
approach to publishing Form SHO reports would bring short position 
information to the marketplace faster, closer in real time to when 
the Form SHO is filed).
    \339\ See id. (recommending confidential disclosures of short 
position and identifying Manager information reported on Form SHO to 
an issuer whenever a ``large short position'' is reported for a 
security of that issuer, or alternatively, only to those issuers 
that request such confidential information); Letter from Tim Quast, 
President and Founder, Modern Networks IR LLC (Apr. 4, 2022), 
available at https://www.sec.gov/comments/s7-08-22/s70822-20122528-278558.pdf (urging Commission to publish the names of reporting 
Managers) (``Modern IR Letter'').
    \340\ Better Markets Letter, at 13 (suggesting reliance on 
``EU's experience with publishing much more comprehensive, specific, 
and current information'' in developing an approach for gathering 
and reporting short sale data that enhances the usability of short 
position information to be published pursuant to Proposed Rule 13f-2 
without ``inviting some of the more damaging consequences'' of doing 
so). More generally, a few commenters recommended harmonizing 
Proposed Rule 13f-2 requirements with potentially overlapping EU and 
UK regulations. See, e.g., WTI Letter, at 2-3; HSBC Letter, at 14-
15.
    \341\ E.g., Anonymously Submitted Comments (Oct. 14, 2022, Oct. 
24, 2022, Oct. 29, 2022, Oct. 31, 2022, Nov. 1, 2022); Rick Sweeney 
Comment.
---------------------------------------------------------------------------

3. Final Rule
    The approach taken for publishing short sale-related data reported 
on Form SHO must balance competing interests of public transparency 
against the potential negative impacts on price discovery, and of short 
position and short activity disclosures on short selling as well as 
data security concerns. After considering the comments received, the 
Commission continues to believe that the indirect costs of publishing 
information reported at the individual Manager level would likely 
exceed those of publishing information aggregated across all reporting 
Managers.\342\ More specifically, the Commission continues to believe 
that if the Commission were to release the information reported on Form 
SHO as filed, there would be a greater potential to reveal a reporting 
Manager's trading strategies and to signal whether a Manager has a 
large and potentially vulnerable short position. It would also make it 
easier for a market participant to deduce the identity of a reporting 
Manager, even if that Manager's identity remains anonymous.\343\ The 
easier it is for a market participant to deduce the identities of 
individual short sellers, the greater the risk of retaliation, copycat 
trading and other market activity that might have an undesired chilling 
effect on price discovery.\344\ For these reasons, and in response to 
commenters that raised concerns about potential negative consequences 
of more detailed short position disclosures, the Commission believes 
that the anticipated benefit of enhanced transparency by publishing 
reported information at the individual Manager level after removing all

[[Page 75133]]

identifying information of the reporting Manager does not justify the 
costs were the Commission to take that approach in publishing 
information reported to it on Form SHO.
---------------------------------------------------------------------------

    \342\ See infra Part VIII.E.2.a.
    \343\ Id.
    \344\ Id.
---------------------------------------------------------------------------

    Some commenters suggested the Commission adopt an approach similar 
to that of the EU structure whereby individual short sellers' names are 
made public.\345\ The final rule, as modified, addresses the potential 
risk of retaliation towards individual short sellers, and the potential 
chilling of the incentive of gathering information and price 
discovery.\346\ For more discussion of the EU's approach and the 
Commission's decision to aggregate and publish anonymized data instead, 
see Part VIII.E.1.c.
---------------------------------------------------------------------------

    \345\ See WTI Letter at 2-3; Better Markets Letter at 13 and 16. 
See also Proposing Release, at 15005.
    \346\ See supra Part II.A.2.b.
---------------------------------------------------------------------------

    Further, aggregating across reporting Managers will address certain 
non-financial costs and burdens identified by commenters by helping to 
safeguard against the concerns raised about potential chilling effects 
on short selling and data security regarding the information reported 
by Managers on Form SHO.\347\ Additionally, the Commission anticipates 
that many potential negative effects on the market will be mitigated by 
the delay in publication of the aggregated data. Accordingly, the 
Commission is adopting as proposed the approach of publishing, on a 
delayed basis, aggregated short sale-related data reported on Form SHO 
and treating each filed Form SHO confidentially.
---------------------------------------------------------------------------

    \347\ Id.
---------------------------------------------------------------------------

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

A. Proposed Rule 205

    Under Proposed Rule 205, 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 broker-dealer at the 
time of order entry. Unlike the netting requirements under Rule 200 of 
Regulation SHO, the ``buy to cover'' order marking determination under 
Proposed Rule 205 would be made on a ``gross'' basis. Under the 
proposed rule, short positions held by the purchaser in any account(s) 
other than the purchasing account, as well as offsetting long positions 
held by the purchaser in the purchasing account or any other 
account(s), would not be considered by a broker-dealer when making a 
``buy to cover'' order marking determination. The Proposed CAT 
Amendments, discussed below, would require CAT reporting firms to 
report ``buy to cover'' order marking information to CAT.

B. Comments

    Some commenters expressed support to adopt Proposed Rule 205, and 
generally applauded the potential added transparency that ``buy to 
cover'' order marking could help provide.\348\ Other commenters stated 
that the proposed rule would assist the Commission in monitoring short 
selling activity and help to ensure compliance with the requirements of 
Regulation SHO.\349\
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    \348\ See, e.g., Comment from Mark Tate (Mar. 1, 2022), 
available at https://www.sec.gov/comments/s7-08-22/s70822-20118151-271054.htm (``Mark Tate Comment'') (believed that increased 
information about marking trades as ``buy to cover'' is a ``good 
thing for the market''); Comment from An Investor (Apr. 4, 2022), 
available at https://www.sec.gov/comments/s7-08-22/s70822-20122297-278355.htm (expressing general support for Proposed Rule 205 and the 
``gross'' short position approach); Comment from Jean Garcia-Gomez 
(Oct. 9, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-309610.htm (``Jean Garciz-Gomez Comment'') (expressing 
general support for ``buy to cover'' order marking); Comment from 
Aladdin Erzrumly (Oct. 19, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-312058.htm (expressing general support for 
``buy to cover'' order marking); Comment from Brian Herrmann (Jan. 
20, 2023), available at https://www.sec.gov/comments/s7-08-22/s70822-323670.htm (expressing general support for Proposed Rule 
205).
    \349\ See, e.g., Better Markets Letter (stating that ``buy to 
cover'' order marking should assist the Commission in monitoring 
short sale activity and actually ensure compliance with Regulation 
SHO requirements); ICI Letter (Apr. 26, 2022) (stating that, to the 
extent that the Commission requires information on close outs of 
open short positions, ICI supports the proposed approach of amending 
Rule 205 of Regulation SHO to require a broker-dealer to mark 
transactions as ``buy to cover,'' and supports the simplified single 
account gross short position approach as proposed); BIO Letter 
(stating that ``buy to cover'' reporting would assist in 
understanding ``the full lifecycle of short positioning in the 
biotechnology industry'').
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    The Commission also received numerous comments that opposed the 
adoption of Proposed Rule 205.\350\ In opposing Proposed Rule 205, 
these commenters voiced concerns regarding the extensive costs and 
burdens associated with anticipated systems changes necessary to 
implement and report ``buy to cover'' order marking as proposed.\351\ A 
number of these commenters stated that a ``buy to cover'' order mark 
does not currently exist and would require broker-dealers to 
effectively redesign and update their order creation systems and 
communications protocols to accommodate the recording and downstream 
reporting of a ``buy to cover'' order mark.\352\ One commenter stated 
that all industry participants (which it described as ``all 
institutions and all broker-dealers'') will also need to create a new 
``buy to cover'' order type and capture that in their respective books 
and records protocols and regulatory reporting systems.\353\ One 
commenter suggested that costs to implement changes necessary to comply 
with the requirements of Proposed Rule 205 could range from $5 million 
to $10 million, or more.\354\
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    \350\ See, e.g., SIFMA Letter; Virtu Letter; AIMA Letter; 
Comment Letter from Joanna Mallers, Secretary, FIA Principal Traders 
Group (Apr. 27, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20127313-288259.pdf (``FIA PTG Letter''); Comment 
Letter from Howard Meyerson, Managing Director, Financial 
Information Forum (Apr. 25, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20126605-287256.pdf (``FIF Letter''); STA 
Letter; XR Securities Letter; Comment Letter from Kirsten Wegner, 
Chief Executive Officer, Modern Markets Initiative (Apr. 4, 2022), 
available at https://www.sec.gov/comments/s7-08-22/s70822-20122473-278481.pdf (``MMI Letter'').
    \351\ See, e.g., FIA PTG Letter, at 2 (requiring the reporting 
of orders on an order-by-order basis with either a ``buy to cover'' 
or bona fide market making attestation appears unnecessary from an 
added transparency perspective and therefore unnecessarily costly); 
MMI Letter, at 2; Virtu Letter, at 3 (``If this aspect of the 
Proposal were adopted, firms would have to reprogram their systems 
to recognize a `buy to cover' order. We believe that this would be 
exceedingly burdensome, costly, and challenging for broker-dealers 
to make the required changes and provide the required 
information.''); STA Letter, at 4 (stating that ``buy to cover'' as 
proposed would ``impose tremendous costs on industry firms by 
essentially forcing them to keep two separate position 
aggregations'' and suggesting that there be an exemption for firms 
with ``low'' amounts of ``buy to cover'' order types); FIF Letter, 
at 10; XR Securities Letter, at 2; SIFMA Letter, at 3; FIA PTG 
Letter, at 2.
    \352\ See, e.g., SIFMA Letter, at 23-24; Virtu Letter, at 3; FIF 
Letter, at 3; STA Letter, at 6; XR Securities Letter, at 2; FIA PTG 
Letter, at 2-3.
    \353\ See FIF Letter, at 3.
    \354\ See SIFMA Letter, at 24.
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    Some commenters that opposed the adoption of Proposed Rule 205 
expressed general concerns that the proposed single account ``gross'' 
short position methodology (which, by design, does not require the 
broker-dealer to consider the purchaser's other positions held in that 
account, in other accounts at the broker-dealer, or elsewhere) could 
routinely result in inaccurate ``buy to cover'' order marking reporting 
by broker-dealers.\355\ Some commenters also questioned whether

[[Page 75134]]

the proposed ``buy to cover'' order marking reporting would provide 
regulatory benefits, including identifying signals of a ``short 
squeeze,'' as was suggested by the Commission in the proposing 
release.\356\
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    \355\ See, e.g., Virtu Letter, at 5; AIMA Letter, at 16; SIFMA 
Letter, at 22-23; FIF Letter, a 6.
    \356\ See e.g., Virtu Letter, at 6 (``The Proposal's rationale 
for requiring broker-dealers to mark transactions a `buy to cover'--
i.e. to facilitate the identification of potential `short squeeze' 
activity--is equally unpersuasive. As described above, the data that 
will be reported under this provision will bear little resemblance 
to a firm's actual short sale positions and therefore will not yield 
meaningful information that would allow the Commission to target 
short squeeze activity.''); SIFMA Letter, at 23 (believed there is 
only a remote chance that Proposed Rule 205 reporting might identify 
signals of a short squeeze that would not otherwise be identifiable 
to the Commission through other currently available information).
---------------------------------------------------------------------------

    Commenters highlighted the inherent differences and resulting 
complexities between Proposed Rule 205's single account ``gross'' short 
position methodology for purchases, and Regulation SHO's all accounts 
net position order marking requirements for sales. These commenters 
generally stated that if Proposed Rule 205 were adopted, broker-dealers 
would be required to create and maintain, at great expense, two 
separate order marking systems that utilize very different 
methodologies--one for determining whether a purchase order should be 
marked as ``buy'' or ``buy to cover,'' and another for determining 
whether a sell order should be marked as ``long'' or ``short.'' \357\ 
Some of these commenters suggested that if the Commission were intent 
on adopting a ``buy to cover'' order marking reporting requirement, it 
should instead consider utilizing the Commission's ``alternative'' 
approach.\358\ These commenters stated that utilizing this 
``alternative'' approach would help to ensure that Proposed Rule 205 
would operate in a manner that is more consistent with current 
Regulation SHO order marking requirements, which would effectively help 
reduce complexity and interpretive confusion for broker-dealers. 
Another commenter suggested that the Commission consider an exception 
for firms with ``low'' amounts of ``buy to cover'' order types.\359\
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    \357\ See, e.g., STA Letter, at 4; FIF Letter, at 8; FIA PTG 
Letter, at 2-3; MMI Letter, at 2; SIFMA Letter, at 24; XR Securities 
Letter, at 2; Virtu Letter, at 5.
    \358\ See, e.g., MMI Letter at 2; FIF Letter, at 2. In the 
Proposing Release, the Commission explained that it had considered 
an ``alternative approach'' that would have required the broker-
dealer, when making a ``buy to cover'' order marking determination, 
to net all positions (long positions and short positions) held by 
the purchaser in any account, whether at the broker-dealer itself, 
or elsewhere. See Proposing Release, at 14968.
    \359\ STA Letter, at 5.
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    One commenter stated that additional guidance or clarification 
would be necessary if the Commission adopted Proposed Rule 205.\360\ 
Another commenter stated that Proposed Rule 205 fails to recognize that 
broker-dealers would need to rely on representations from purchasers/
account holders in order to accurately report ``buy to cover'' order 
marking information, similar to how broker-dealers currently rely on 
account holders when marking sale orders ``long'' or ``short.'' \361\ 
One commenter stated that this would be especially true where the 
broker-dealer does not custody the purchaser's positions (i.e., where 
the customer's positions are custodied ``away,'' such as at a prime 
broker or bank), and for a number of operational reasons, be equally 
true even when the broker-dealer custodies the purchaser's 
positions.\362\
---------------------------------------------------------------------------

    \360\ XR Securities Letter, at 2.
    \361\ SIFMA Letter, at 23.
    \362\ SIFMA Letter, at 23.
---------------------------------------------------------------------------

    The Commission is not adopting Proposed Rule 205 in light of 
questions raised by commenters regarding potential operational issues 
with the requirement as proposed that merit further consideration, and 
the Commission will continue to evaluate the issues raised to determine 
if any further action is appropriate.

IV. Amendments to CAT

    In July 2012, the Commission adopted 17 CFR 242.613 (``Rule 613 of 
Regulation NMS''), which required national securities exchanges and 
national securities associations (the ``Participants'') \363\ to 
jointly develop and submit to the Commission a national market system 
plan to create, implement, and maintain a CAT that captures customer 
and order event information for orders in NMS securities.\364\ The goal 
of Rule 613 was to create a modernized audit trail system that provides 
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 Rule 613, the National 
Market System Plan Governing the Consolidated Audit Trail (the ``CAT 
NMS Plan'').\365\
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    \363\ 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.
    \364\ See Consolidated Audit Trail, Exchange Act Release No. 
67457 (July 18, 2012), 77 FR 45722 (Aug. 1, 2012).
    \365\ 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 84943 at 84696. 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 Aug. 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,\366\ must require Industry Members \367\ 
to record and electronically report certain information to the CAT 
Central Repository. Compliance rules have been adopted by each 
Participant. As such, any broker-dealer that is a member of a national 
securities exchange or a member of a national securities association 
must report each order and reportable event, which includes the 
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.\368\ This requirement is designed to 
provide 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.
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    \366\ ``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.
    \367\ 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.
    \368\ ``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.

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[[Page 75135]]

    Broker-dealers, through the Compliance Rule adopted pursuant to the 
CAT NMS Plan, are required to report certain short sale order data, 
including for sell orders, whether an order is long, short, or short 
exempt,\369\ 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 
to 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 proposed 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.
---------------------------------------------------------------------------

    \369\ 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. Proposal To Require ``Buy to Cover'' Order Marking

    The Commission proposed that Industry Members be required to report 
to the CAT ``buy to cover'' information, which was proposed to be 
collected pursuant to Regulation SHO through Proposed Rule 205 
(discussed above). Specifically, the Commission proposed to amend 
section 6.4(d)(ii) of the CAT NMS Plan by adding new paragraph 
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 Proposed Rule 205(a).\370\ This provision would 
have required Industry Members to identify ``buy to cover'' equity 
orders received or originated by Industry Members and Customers \371\ 
as ``buy to cover'' orders in order receipt and order origination 
reports submitted to the CAT Central Repository.
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    \370\ 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)).
    \371\ 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 Commission, as discussed in Part III above, is not adopting 
Proposed Rule 205 which would have established a new ``buy to cover'' 
order marking requirement. Accordingly, the Commission is likewise not 
adopting an amendment to add new paragraph 6.4(d)(ii)(D) to the CAT NMS 
Plan which would have required the Participants to update their 
Compliance Rules to require Industry Members to report ``buy to cover'' 
order marking information to CAT.

B. Proposal To Require Reporting of Reliance on Bona Fide Market Making 
Exception

    The Commission also proposed 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(b)(2)(iii) (i.e., the BFMM 
locate exception) for the reported short sales. Specifically, the 
Commission proposed to amend section 6.4(d)(ii) of the CAT NMS Plan to 
add a new paragraph (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 BFMM locate exception is claimed.\372\ The 
Commission believed that this information would provide valuable data 
to both the Commission and other regulators regarding the use of this 
narrow exception. The Commission believed 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 
activity.
---------------------------------------------------------------------------

    \372\ 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.\373\ 
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.\374\ To qualify for the BFMM locate 
exception,\375\ a market maker must be engaged in bona fide market 
making activities at the time they effect a short sale. 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 delays associated with complying with 
such a requirement.\376\
---------------------------------------------------------------------------

    \373\ 17 CFR 242.203(b)(1).
    \374\ 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 (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 61698 at 61690 (Oct. 17, 2008) (``2008 
Regulation SHO Amendments'') (adopting amendments to Regulation SHO 
and providing additional guidance on what constitutes bona fide 
market making). Only market makers that are 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 2008 
Regulation SHO Amendments, at 61699.
    \375\ Rule 204 of Regulation SHO also provides an extended 
close-out period for a fail to deliver resulting from bona fide 
market making activities. 17 CFR 242.204.
    \376\ See Regulation SHO Adopting Release, at 48015 n.67; see 
also 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. 58166 (July 15, 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. 58190 (July 18, 
2008) (excepting from the Emergency Order bona fide market makers); 
see also Proposing Release, at 14970-71 (Mar. 16, 2022) (``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. 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 delays associated with complying with such a 
requirement.'').
---------------------------------------------------------------------------

Comments and Final Rule
    Some commenters supported requiring CAT reporting firms to report 
the use of the BFMM locate exception to CAT.\377\ These commenters were 
in favor of the potential added transparency that BFMM locate exception 
reporting could provide.\378\

[[Page 75136]]

Other commenters stated that such reporting would help the Commission 
to monitor short selling activity and ensure compliance with Regulation 
SHO's requirements, and stated that it is important that the Commission 
have the surveillance tools and data such as BFMM locate exception 
reporting to improve the Commission's oversight of financial markets 
and compliance with existing regulations and otherwise ``police'' the 
markets.\379\
---------------------------------------------------------------------------

    \377\ Virtually all these comments were submitted by individual 
investors, with the vast majority being submitted through an 
identical (or nearly identical) base letter from a grassroots 
advocacy campaign ``by, and for, retail investors.'' These 
commenters stated that they were part of a self-identified group 
called ``We the Investors'' (``WTI''). WTI supported the adoption of 
BFMM locate exception reporting. WTI also suggested that the BFMM 
locate exception be eliminated altogether. See WTI Letter.
    \378\ See e.g., Michael Behrens Comment; Mark Tate Comment; 
Comment from Taj Reilly (Mar. 14, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20119322-272211.htm; Comment 
from Sebastian Stankiewicz Comment (Mar. 15, 2022), available at 
https://www.sec.gov/comments/s7-08-22/s70822-272501.htm; Comment 
from An Investor (Apr. 4, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20122297-278355.htm; Jean-Garcia Gomez 
Comment; Comment from Andrew Gatley (Oct. 31, 2022), available at 
https://www.sec.gov/comments/s7-08-22/s70822-317527.htm. See also 
WTI Letter.
    \379\ See e.g., Better Markets Letter; WTI Letter.
---------------------------------------------------------------------------

    Other commenters opposed the adoption of BFMM locate exception 
reporting to CAT.\380\ These commenters generally believed that the 
costs and burdens associated with the proposal, including costs to 
update systems to accommodate BFMM locate exception reporting to CAT, 
would materially outweigh the benefit of the information reported to 
CAT.\381\ These commenters, however, did not provide cost estimates. 
The Commission continues to believe, as stated in the Proposing 
Release, that Industry Members will incur an initial, one-time external 
expense for software and hardware to facilitate reporting of the new 
data elements to CAT, and separately estimated such costs for Industry 
Members that report directly to the CAT, and those that use third-party 
reporting agents for CAT reporting. The Commission continues to believe 
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 Office of Management and Budget (OMB) number 3235-0671.\382\
---------------------------------------------------------------------------

    \380\ See e.g., SIFMA Letter; Virtu Letter; STA Letter; XR 
Securities Letter; FIA PTG Letter.
    \381\ See e.g., SIFMA Letter, at 24-25; FIA PTG Letter, at 3; 
Virtu Letter, at 6.
    \382\ See infra Part VII.C.
---------------------------------------------------------------------------

    One commenter stated that adopting the proposed BFMM locate 
exception would be operationally difficult and costly to 
implement.\383\ This commenter stated that, under the proposal, the 
BFMM locate exception information would be required to be reported at 
the time the short sale order is effected, requiring that order entry 
systems, and other downstream systems, be updated to allow the BFMM 
locate exception information to be reported to CAT.\384\ To implement 
the rule, the Commission expects that Industry Members will incur an 
initial, one-time external expense for software and hardware to 
facilitate reporting of the new data elements to CAT but believes that 
the benefits of such data, as discussed further below, will justify 
such costs. Brokers or dealers generally include fields in order-entry 
systems, and related downstream systems, to indicate whether the broker 
or dealer obtained a locate as well as the source of such locate under 
Rule 203(b). As stated by the commenter, brokers or dealers may wish to 
update their order entry systems and related downstream systems as a 
convenient method to track their use of the BFMM locate exception to 
ensure accurate reporting of the use of the BFMM locate exception to 
CAT. As a result, brokers or dealers may wish to make one-time updates 
to such systems to add a field or notation to indicate whether the 
broker or dealer is claiming the BFMM locate exception for the short 
sale transaction. However, brokers or dealers may also use other means 
to ensure compliance with the final rule.
---------------------------------------------------------------------------

    \383\ See, e.g., SIFMA Letter, at 24-25; Virtu Letter, at 5.
    \384\ SIFMA Letter, at 24-25.
---------------------------------------------------------------------------

    This commenter agreed with the Commission that a broker-dealer is 
required to determine whether the firm is eligible for the BFMM locate 
exception at the time a short sale is effected but expressed concerns 
that market makers that quote and trade on multiple trading venues, for 
example, might encounter certain systematic or operational difficulties 
in making, and reporting, such determination using existing systems 
design. Specifically, this commenter stated that ``it may be 
systematically and/or operationally difficult for the broker to define 
when it is globally acting in a bona fide market maker capacity given 
the granular details of a market maker's many activities, and the 
existing systems design.'' \385\ However, the final rule does not alter 
the requirements for the use of the BFMM locate exception. The final 
rule requires that brokers or dealers report their use of the BFMM 
locate exception as provided under Regulation SHO.
---------------------------------------------------------------------------

    \385\ SIFMA Letter, at 25 n.64.
---------------------------------------------------------------------------

    Rule 203(b)(2)(iii) provides an exception to the locate requirement 
for ``[s]hort sales effected by a market maker in connection with bona-
fide market making activities in the security for which this exception 
is claimed.'' \386\ Thus, for purposes of qualifying for the BFMM 
locate exception, ``a market maker must also be a market maker in the 
security being sold, and must be engaged in bona-fide market making in 
that security at the time of the short sale.'' \387\
---------------------------------------------------------------------------

    \386\ 17 CFR 242.203(b)(2)(iii). Further, the locate is required 
prior to each short sale order unless the broker or dealer has 
determined that an exception applies. See Rule 203(b)(1). A broker 
or dealer may not accept a short sale order in an equity security 
from another person, or effect a short sale in an equity security 
for its own account, unless the broker or dealer has: (i) borrowed 
the security, or entered into a bona-fide arrangement to borrow the 
security; or (ii) reasonable grounds to believe that the security 
can be borrowed so that it can be delivered on the date delivery is 
due; and (iii) documented compliance with Rule 203(b)(1).
    \387\ See 2008 Regulation SHO Amendments, at 61699; Shortening 
the Securities Transaction Settlement Cycle, Exchange Act Release 
No. 96930 (Feb. 15, 2023), 88 FR 13872, 13911-12 at n.411 (May 5, 
2023) (``Settlement Cycle Adopting Release'').
---------------------------------------------------------------------------

    Some commenters stated that the Commission and other regulators can 
currently request a particular market maker to provide information 
regarding its use of the BFMM locate exception, and questioned why the 
Commission would need to require such costly reporting to CAT.\388\ 
Another commenter stated that there is no data or evidence in the 
Proposing Release to suggest that the Commission's access to such data 
has been limited in any way under the current request process.\389\ 
However, the Commission has stated that Regulation SHO does not require 
market makers to specifically record whether they are relying on the 
BFMM locate exception,\390\ although brokers or dealers should be able 
to identify what trading activity qualifies for the BFMM locate 
exception so a firm can demonstrate its eligibility for the asserted 
exception.\391\ To the extent a broker or dealer has documented such 
eligibility, the Commission and its staff have access to such 
documents.\392\ The final rule will capture information regarding the 
use of the BFMM locate

[[Page 75137]]

exception to Regulation SHO \393\ which will provide the Commission and 
SROs with comprehensive information about market practices with respect 
to the use of the BFMM locate exception.\394\ Because brokers or 
dealers asserting the BFMM locate exception are already required to 
demonstrate eligibility for the exception, the costs of reporting 
should be confined primarily to the one-time implementation costs 
related to updating CAT and any methods elected by the broker or 
dealer, such as updating order entry systems and related systems, to 
ensure compliance.
---------------------------------------------------------------------------

    \388\ See e.g., SIFMA Letter, at 24-25 (``Given that the 
information that would result from this proposed reporting 
requirement is already available to the SEC and other regulators on 
demand, SIFMA believes that the cost and burden of implementing the 
requirement would materially outweigh the benefit of such 
information.''); Virtu Letter, at 6 (``The Proposal offers no data 
or evidence that its access to data about the use of the exception 
has been limited in any way under the current process it uses to 
collect such information from broker-dealers, nor that there are 
widespread violations or other abuses of the exception that warrant 
imposing substantial costs and burdens on market makers also to 
report this information to CAT.'').
    \389\ Virtu Letter, at 6.
    \390\ Proposing Release, at 14971.
    \391\ See Regulation SHO Adopting Release, 48011 n.27 (``As with 
any rule, broker-dealers relying on [an] exception should be 
prepared to monitor for compliance with its conditions, and maintain 
records documenting such compliance.'').
    \392\ See, e.g., section 17(b) of the Exchange Act.
    \393\ Proposing Release, at 14971.
    \394\ FIA PTG Letter, at 3 (``Requiring the reporting of orders 
on an order-by-order basis with either a `buy to cover' or bona fide 
market making attestation appears unnecessary from an added 
transparency perspective and therefore unnecessarily costly.'').
---------------------------------------------------------------------------

    Another commenter stated that regulators should utilize other 
existing short sale data available through CAT that could identify 
activity that is ``disproportionate to the usual market making patterns 
of practices of the broker-dealer'' in order to determine if the BFMM 
locate exception is being misused.\395\ The commenter, however, did not 
provide detail describing how disproportionate the activity would be 
before the Commission could determine whether the exception is being 
misused. Data showing the existence of short sales would not be 
sufficient to assess whether the exception is being misused. Another 
commenter suggested that CAT already has ample existing data fields, 
including a market maker account holder designation field, and 
questioned the need for a BFMM locate exception data field.\396\ 
Further, a broker or dealer's status as a market maker under an 
exchange's rules, or by self-assertion, is not sufficient by itself to 
establish eligibility to use the BFMM locate exception; the broker or 
dealer that is a market maker must be effecting short sales ``in 
connection with bona-fide market making activities in the security for 
which [the] exception is being claimed.'' \397\ Further, as discussed 
above, the broker or dealer, whether it calls itself a market maker, or 
has an account it describes as a market maker account, must still 
determine eligibility for the BFMM locate exception for each 
transaction rather than globally.\398\ Therefore, collecting the data 
regarding the use of the BFMM locate exception will be useful for the 
Commission, including to assess the use of the exception throughout the 
industry.
---------------------------------------------------------------------------

    \395\ STA Letter, at 3.
    \396\ XR Securities Letter, at 2.
    \397\ See, e.g., Rule 203(b)(2)(iii), which requires that the 
broker or dealer (1) be a market maker; (2) that is effecting short 
sales in connection with bona-fide market making activities, and (3) 
in the security for which the exception is claimed. Section 3(a)(38) 
defines the term ``market maker.''
    \398\ See supra n.374.
---------------------------------------------------------------------------

    Another commenter stated that there was no data or evidence in the 
Proposing Release to suggest that there are widespread violations or 
abuses of the BFMM locate exception that warrant the costs imposed by 
the CAT reporting requirements for the BFMM locate exception.\399\ As 
the Commission stated in the Proposing Release, there are a number of 
settled enforcement actions against brokers or dealers in connection 
with their use of the exception.\400\ In addition, one commenter stated 
that ``it may be systematically and/or operationally difficult for the 
broker to define when it is globally acting in a bona fide market maker 
capacity given the granular details of a market maker's many 
activities, and the existing systems design.'' \401\ However, this 
comment concerns compliance with Regulation SHO rather than reporting 
of the use of the BFMM locate exception in CAT; the new requirements do 
not affect compliance with Regulation SHO.
---------------------------------------------------------------------------

    \399\ Virtu Letter, at 6.
    \400\ See Proposing Release, at 14971.
    \401\ See SIFMA Letter, at 25 n.64.
---------------------------------------------------------------------------

    Another commenter did not believe that the BFMM locate exception 
information reported to CAT would assist the Commission in identifying 
violations or misuse of the BFMM locate exception ``because the data 
can be manipulated by bad actors and is susceptible to human errors of 
inappropriately marking short sales with the BFMM indicator when they 
are not eligible.'' \402\ The fact that bad actors may act contrary to 
the requirement is not an appropriate reason not to adopt a 
requirement. Similarly, human error is always possible. In addition, 
the human error the commenter describes, if widespread, could be an 
indication of noncompliant use of the BFMM locate exception.
---------------------------------------------------------------------------

    \402\ STA Letter, at 3.
---------------------------------------------------------------------------

    Another commenter stated that if BFMM locate exception reporting 
were adopted, ``most market making firms will simply tag that new [BFMM 
locate exception] field with the affirmative.'' \403\ Again, the fact 
that a commenter speculated that some brokers or dealers may violate 
the requirement by providing incorrect data is not a reason to not 
adopt a requirement. Understanding whether market makers always claim 
the BFMM locate exception (as this commenter suggests), sometimes claim 
the exception, or never claim the exception, will provide important 
information and context regarding how market makers use the 
exception.\404\
---------------------------------------------------------------------------

    \403\ XR Securities Letter, at 3.
    \404\ One commenter disagreed with existing Regulation SHO order 
marking requirements, with a specific focus on a statement made by 
Commission staff that a broker or dealer should generally not 
continue to mark orders ``long'' if it has submitted orders beyond 
the number of shares for which it is long. See Virtu Letter, at 3-5; 
see also FAQ 2.5, Responses to Frequently Asked Questions Concerning 
Regulation SHO, Division of Market Reg., available at https://www.sec.gov/divisions/marketreg/mrfaqregsho1204.htm. This commenter 
generally stated that this results in virtually all sell orders 
being marked as short sales and thus, information that is reported 
to CAT under the proposal would not be representative of the market 
maker's ``actual'' short position and would not be useful short 
sale-related information. Brokers or dealers must mark sell orders 
``long,'' ``short,'' or ``short exempt,'' and must obtain a locate 
for all sales marked short unless the broker or dealer can determine 
that the short sale is ``effected by a market maker in connection 
with bona-fide market making activities in the security for which 
this exception [BFMM locate exception] is claimed.'' See 17 CFR 
242.203(b)(2)(iii).
---------------------------------------------------------------------------

    Some commenters asked that the Commission provide additional 
clarity regarding what constitutes bona fide market making activities 
eligible for the BFMM locate exception, and requested that the 
Commission confirm that certain market making activity (e.g., through 
wholesale market making and other activities in connection with 
facilitating customer orders in the OTC market) was bona fide market 
making activity for purposes of claiming the BFMM locate 
exception.\405\ One of these commenters expressed concerns regarding 
recent Commission statements related to the BFMM locate exception.\406\ 
The statements that the

[[Page 75138]]

commenter references in particular releases are restatements of 
multiple prior Commission statements regarding the BFMM locate 
exception.\407\ One commenter expressed concerns that the proposal to 
require BFMM locate exception reporting to CAT was an effort by the 
Commission to further limit the availability of the BFMM locate 
exception in a manner that would be inconsistent with Commission's 
original Regulation SHO guidance.\408\ This commenter expressed 
particular concerns with the Commission's statement in the Proposing 
Release that the proposed BFMM locate exception reporting would be an 
additional tool to determine whether such activity qualifies for the 
BFMM locate exception or conversely ``could be indicative of, for 
example, proprietary trading instead of bona fide market making.'' The 
Commission has consistently stated that the BFMM was intended to be a 
``narrow'' exception,\409\ and the collection of information about its 
usage will be helpful for the Commission to determine whether it is 
being used appropriately as such. The reported information will indeed 
be used as an ``additional tool to determine whether such activity 
qualifies'' for the BFMM locate exception as part of the Commission's 
regulation of short sales, for example, by determining whether brokers 
or dealers are using the exception for proprietary trading, which is 
not appropriate. Other commenters called for the elimination of the 
BFMM locate exception itself.\410\ Such requests are outside the scope 
of this rulemaking. However, the BFMM locate exception is useful for 
brokers and dealers that are, for example, trying to meet demand in 
fast-moving markets where they might otherwise be forced to back away 
from published, marketable quotes being hit by prospective purchasers 
solely because of the locate requirement.
---------------------------------------------------------------------------

    \405\ See SIFMA Letter, at 25 (``Moreover, and especially to the 
extent that there is a requirement to identify reliance on the 
exception through CAT, the SEC should re-confirm that, while bona 
fide market making is based on certain `facts and circumstances' as 
set forth in prior interpretive guidance, there are different ways 
in which broker-dealers engage in bona fide market making, including 
not only through making markets on exchanges, but equally through 
wholesale market making and other activities in connection with 
facilitating customer orders in the OTC market.''); see also STA 
Letter, at 3 (STA recommends that the Commission clarify its views 
on the scope of the BFMM exception, citing as an example an ``OTC 
market makers that provide extensive liquidity for retail trades but 
do not affect the trades pursuant to published quotations.'').
    \406\ See SIFMA Letter, at 25 n.67 (``SIFMA further notes the 
SEC's recent statements in its recent proposing release on 
registration of significant market participants that `bona fide 
market-making exceptions under Regulation SHO are only available to 
registered broker-dealers that publish continuous quotations for a 
specific security in a manner that puts the broker-dealer at 
economic risk', that `[b]roker-dealers that do not publish 
continuous quotations, or publish quotations that do not subject the 
broker-dealer to such risk (e.g., quotations that are not publicly 
accessible, are not near or at the market, or are skewed 
directionally towards one side of the market), would not be eligible 
for the bona fide market maker exceptions' and that `broker-dealers 
that publish quotations but fill orders at different prices than 
those quoted would not be engaged in bona fide market making for 
purposes of Regulation SHO.''). SIFMA cited to Further Definition of 
``As a Part of a Regular Business'' in the Definition of Dealer and 
Government Securities Dealer, Exchange Act Release No. 94524 (Mar. 
28, 2022), 87 FR 23054, 23068-69 at n.157 (Apr. 18, 2022).
    \407\ See 2008 Regulation SHO Amendments, at 61698-99; 
Regulation SHO Adopting Release, at 48015.
    \408\ SIFMA Letter, at 25.
    \409\ See 2008 Regulation SHO Amendments, at 61698-99; 
Regulation SHO Adopting Release, at 48015.
    \410\ See Better Markets Letter, at 14 (``The SEC has correctly 
concluded that naked short sales are abusive. The SEC established 
this loophole, which permits the largest proprietary trading firms 
to engage in naked short selling, on the theory that it facilitates 
trading in hard-to-borrow securities. However, the SEC's settlement 
regulations with respect to mandatory buy-ins already provide 
special accommodations to market-makers that cannot close out their 
short positions within the standard failure-to-deliver close-out 
timeframe. This accommodation already in place calls into serious 
question whether the large loophole in the locate requirement serves 
any legitimate purpose. At the very least, the SEC must closely 
monitor the information it receives regarding reliance on this 
exception to determine whether elimination of this exception is 
warranted.''); see also WTI Letter.
---------------------------------------------------------------------------

    One commenter stated that the costs imposed on market makers to 
implement and maintain the proposed regulatory requirements might 
result in wider spreads, reduced liquidity, and might represent a 
barrier to entry for new market participants.\411\ To the extent the 
commenter is concerned that the costs of implementing reporting may be 
passed on in the form of wider spreads or reduced liquidity, on balance 
the benefits of transparency justify such costs. Importantly, it is 
unclear how reporting the data would create negative results on spreads 
or market liquidity because the reported exception data will only be 
provided to regulators and not made public. If the commenter is 
concerned that once the data is reported, the Commission may become 
more aware of potential misuse of the BFMM locate exception as 
described by commenters, the consequences identified by the commenter 
would not flow from the requirement to report the use of the exception, 
but may instead result from the misuse of it. Collecting the data will 
help the Commission with its oversight of the use of the exception, 
including with regard to potentially abusive ``naked'' short 
selling.\412\ The BFMM locate exception, if properly utilized, benefits 
investors and the market by preserving market liquidity,\413\ but it 
should not be used for speculative \414\ or potentially abusive 
``naked'' short selling.\415\ Instead, the BFMM locate exception data 
reported to the CAT will provide the Commission with a better 
understanding of the use of this limited exception, which should help 
to ensure that the exception is not subject to misuse by brokers or 
dealers in violation of the Commission's short selling rules.
---------------------------------------------------------------------------

    \411\ See STA Letter, at 4.
    \412\ See generally Amendments to Regulation SHO, Exchange Act 
Release No. 60388 (July 27, 2009), 74 FR 38266, 38267-68 (July 31, 
2009) (``2009 Regulation SHO Amendments'').
    \413\ See Regulation SHO Adopting Release, at 48025 
(``[e]xcepting bona-fide market making activity from the locate 
requirement will benefit investors and the market by preserving 
necessary market liquidity.'').
    \414\ See, e.g., 2008 Regulation SHO Amendments, at 61699 (``For 
example, the Commission has stated that bona-fide market making does 
not include activity that is related to speculative selling 
strategies or investment purposes of the broker-dealer and is 
disproportionate to the usual market making patterns or practices of 
the broker-dealer in that security.''); see also Regulation SHO 
Adopting Release, at 48015.
    \415\ See, e.g., 2008 Regulation SHO Amendments, at 61691 (``We 
have previously noted that abusive `naked' short selling, while not 
defined in the federal securities laws generally refers to selling 
short without having stock available for delivery and intentionally 
failing to deliver stock within the standard . . . settlement 
cycle.''). See also Regulation SHO Adopting Release, at 48009, n.10; 
Exchange Act Release No. 56212 (Aug. 7, 2007), 72 FR 45544, n.3 
(Aug. 14, 2007) (``2007 Regulation SHO Final Amendments''); Exchange 
Act Release No. 57511 (Mar. 17, 2008), 73 FR 15376 (Mar. 21, 2008) 
(``Naked Short Selling Anti-Fraud Rule Proposing Release'').
---------------------------------------------------------------------------

    In response to commenters that generally requested additional 
guidance \416\ regarding the scope of bona fide market making activity 
eligible for the BFMM locate exception, the primary requirement is that 
a broker or dealer that is a market maker provide widely accessible, 
continuous quotations at or near the market for which it is at 
risk.\417\ For example, the Commission has stated that for purposes of 
Regulation SHO, a market maker engaged in bona fide market making is a 
``broker-dealer that deals on a regular basis with other broker-
dealers, actively buying and selling the subject security as well as 
regularly and continuously placing quotations in a quotation medium on 
both the bid and ask side of the market.'' \418\ Moreover, the 
Commission has stated that ``[b]roker-dealers that do not publish 
continuous quotations, or publish quotations that do not subject the 
broker-dealer to such risk (e.g., quotations that are not publicly 
accessible, are not near or at the market, or are skewed directionally 
towards one side of the market), would not be eligible for the bona-
fide market-maker

[[Page 75139]]

exceptions under Regulation SHO.'' \419\ Notably, ``broker-dealers that 
publish quotations but fill orders at different prices than those 
quoted would not be engaged in bona-fide market making for purposes of 
Regulation SHO.'' \420\
---------------------------------------------------------------------------

    \416\ See, e.g., SIFMA Letter, at 25; STA Letter, at 3.
    \417\ See, e.g., Settlement Cycle Adopting Release, at n.411 
(``Under Regulation SHO's bona fide market making exceptions, the 
broker-dealer generally should be holding itself out as standing 
ready and willing to buy and sell the security by continuously 
posting widely accessible quotes that are near or at the market. The 
market maker must be at economic risk for such quotes.''); see also 
2008 Regulation SHO Amendments, at 61699. Thus, a market-maker that 
continually executed short sales away from its posted quotes would 
generally be unable to rely on the bona-fide market making 
exceptions of Regulation SHO. See Regulation SHO Adopting Release, 
at 48015 n.68. The market-maker must also be engaged in bona fide 
market making in that security at the time of the short sale for 
eligibility for the exceptions. See 2008 Regulation SHO Amendments, 
at 61699.
    \418\ See, e.g., 2008 Regulation SHO Amendments, at 61699; see 
also Self-Regulatory Organizations; National Association of 
Securities Dealers, Inc.; Order Approving Proposed Rule Change 
Relating to Close-Out Requirements for Short Sales and an 
Interpretation on Prompt Receipt and Delivery of Securities, 
Exchange Act Release No. 32632 (July 14, 1993), 58 FR 39072, 39074 
(July 21, 1993); see also Settlement Cycle Adopting Release, at 
13911-12 n.411.
    \419\ See Settlement Cycle Adopting Release, at 13911-12 n.411.
    \420\ Id. See also Regulation SHO Adopting Release, at 48015 
n.68 (``Moreover, a market maker that continually executed short 
sales away from its posted quotes would generally be unable to rely 
on the bona-fide market making exception'' of Regulation SHO).
---------------------------------------------------------------------------

    After considering the comments received regarding the proposal to 
require CAT reporting firms that are reporting short sales to indicate 
whether such CAT reporting firm is asserting use of the BFMM locate 
exception, the Commission is adopting this proposed amendment to CAT 
with a few technical modifications to improve the readability of the 
amendment.\421\ The Commission recognizes that there will be costs to 
broker-dealers to implement changes to their respective systems and 
processes to accommodate the reporting of the BFMM locate exception 
information to CAT. For the reasons described above, as well as reasons 
stated in the Proposing Release, the Commission believes that the 
benefits to the Commission in its administration of short sale 
regulations will justify the burdens and costs to CAT reporting firms. 
This reporting requirement will not adversely affect short selling 
activity or liquidity in the market as it requires that brokers or 
dealers that are market makers provide information that is, or should 
be, readily available to the market maker at the time they effect a 
short sale, to the Commission without having to request access. The 
requirement does not change how such brokers or dealers that are market 
makers use the exception itself, and the data will not be published.
---------------------------------------------------------------------------

    \421\ The amendment includes the following non-substantive, 
technical changes to the rule text: adding the word ``for'' 
preceding ``a short sale'' to clarify that reporting is required for 
a short sale in which the bona fide market maker exception is 
claimed, adding ``the'' preceding ``exception'' and adding ``in'' 
preceding Rule 203(b)(2)(iii) to clarify that the bona fide market 
making exception is found in Rule 203(b)(2)(iii).
---------------------------------------------------------------------------

V. Other Comments

    Other commenters also discussed issues that were beyond the scope 
of the rulemaking, such as suggestions for the Commission to ban short 
selling, enhance Regulation SHO's locate or close-out requirements, 
address potentially abusive ``naked'' short selling, and reduce the 
reporting timeframes or requirements for Form 13F reporting, among 
others.\422\
---------------------------------------------------------------------------

    \422\ One commenter understood the rule as a ``self-reporting'' 
rule rather than as a mandatory reporting rule. Comment from Sarah 
(Feb. 25, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20117824-270590.htm.
---------------------------------------------------------------------------

VI. Compliance Date

    The Commission received one comment regarding a compliance date for 
Rule 13f-2 reporting requirements; that commenter recommended that 
Managers be given at least 18 months to comply with the new 
requirements.\423\ Specifically, the commenter stated that ``[g]iven 
the complexity and significance of the operational build required by 
the proposed rule, we think a minimum of 18 months would be an 
appropriate implementation timeframe to give advisers adequate time to 
come into compliance with any new requirements.'' \424\ Due to the 
modifications from the proposal which will reduce the complexity of the 
operational build, Managers should require less time than suggested by 
the commenter. Although the data that will result from the Rule 13f-2 
reporting requirements will be useful to market participants and 
regulators as soon as it is available, it is prudent to implement the 
rule at a measured pace to help ensure that Managers have adequate time 
to update systems to meet the reporting requirements of Rule 13f-2. 
Accordingly, a compliance date of 12 months after the effective date of 
this release for Rule 13f-2 strikes the appropriate balance between the 
Commission's goal of increasing transparency of short sale-related 
information and providing Managers with adequate time to implement 
systems and processes to comply with the Rule 13f-2 reporting 
requirements.\425\
---------------------------------------------------------------------------

    \423\ MFA Letter 2, at 3 (stating that the Commission should 
``provide an appropriate amount of time for firms to comply with any 
new requirements [under Rule 13f-2] (18 months at a minimum)'' due 
to the operational build required for compliance with Proposed Rule 
13f-2 and Proposed Form SHO).
    \424\ Id.
    \425\ In addition, with respect to the compliance date, several 
commenters requested the Commission to consider interactions between 
the proposed rule and other recent Commission rules. In determining 
compliance dates, the Commission considers the benefits of the rules 
as well as the costs of delayed compliance dates and potential 
overlapping compliance dates. For the reasons discussed throughout 
the release, to the extent that there are costs from overlapping 
compliance dates, the benefits of the rule justify such costs. See 
infra Parts VIII.B, VIII.C.6.f, and VIII.D.2 for a discussion of the 
interactions of the final rule with certain other Commission rules.
---------------------------------------------------------------------------

    The Commission will begin publishing the aggregated short sale 
related data collected, pursuant to Rule 13f-2, three months after the 
above stated compliance date of 12 months after the effective date of 
this release. The three-month window for the Commission to publish 
aggregated Form SHO data is intended to ensure that Commission systems 
are operating as designed in order to publish the aggregated data.
    Consistent with a suggestion by the commenter, the compliance date 
for the CAT amendments will be 18 months after the effective date of 
this release, as there were not modifications to that requirement from 
proposal. This will allow CAT reporting firms adequate time to update 
systems to facilitate reporting to CAT.\426\ An 18-month compliance 
period for the amendment to CAT strikes the appropriate balance between 
improving the Commission's administration of short sale regulations and 
providing CAT reporting firms adequate time to implement changes to 
their respective systems and processes to accommodate the reporting of 
BFMM locate exception information to CAT, and is reasonable given that 
the information to be reported is, or should be, readily available to 
the market maker at the time they effect a short sale.\427\
---------------------------------------------------------------------------

    \426\ For discussion of the compliance date for the adopted 
amendment to the CAT NMS Plan to require the reporting to the CAT of 
reliance on the bona fide market making exception in Regulation SHO, 
see Notice of the Text of the Amendment to the National Market 
System Plan Governing the Consolidated Audit Trail for Purposes of 
Short Sale-Related Data Collection, Exchange Act Release No. 34-
98739 (Oct. 13, 2023), published elsewhere in this issue of the 
Federal Register, which will have an effective date of 60 days after 
date of publication in the Federal Register and a compliance date of 
18 months after the effective date.
    \427\ See supra Part IV.B. See also infra Part VII.C for 
discussion of costs and burden estimates related to compliance with 
the amendment to CAT.
---------------------------------------------------------------------------

VII. Paperwork Reduction Act Analysis

A. Background

    Certain provisions of Rule 13f-2, Form SHO, and the Amendment to 
CAT impose ``collection of information'' requirements within the 
meaning of the Paperwork Reduction Act of 1995 (``PRA'').\428\ The 
title for the collection of information is: ``Amendments to Enhance 
Short Sale Data'' (OMB Control No. 3235-0804). An agency may not 
conduct or sponsor, and a person is not required to respond to, a 
collection of information unless it displays a current valid control 
number. The requirements of this collection of information are 
mandatory for Managers under Rule 13f-2 and Form SHO, and Plan 
Participants and CAT reporting firms under the Amendment to CAT.
---------------------------------------------------------------------------

    \428\ 44 U.S.C. 3501 et seq.

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[[Page 75140]]

    In accordance with the PRA, the Commission is submitting the final 
amendments to the rules to the Office of Management and Budget (OMB) 
for review. The Commission published a request for comments on these 
collection of information requirements in the Proposing Release,\429\ 
and submitted the proposed requirements to the Office of Management and 
Budget (OMB) for review in accordance with the PRA.\430\ The Commission 
received some comments regarding the Commission's estimates of 
paperwork burdens and costs associated with anticipated compliance of 
Rule 13f-2, Form SHO, and the Amendment to CAT, which are addressed in 
this section.
---------------------------------------------------------------------------

    \429\ See Proposing Release, at 14980-81.
    \430\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
---------------------------------------------------------------------------

    As discussed above, Rule 13f-2 and related 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 Form SHO, through EDGAR in Form SHO-specific XML, 
certain short position and activity data. Under Rule 13f-2 and Form 
SHO, only those Managers that meet a specified Reporting Threshold for 
an equity security will be required to file Form SHO. Such information 
will provide additional context to the Commission and other regulators 
regarding the lifecycle of short sales, assist in reconstructing market 
events, and improve Commission oversight of short selling.
    The Amendment to CAT is intended to supplement the short sale-
related data that will be reported by certain broker-dealers to the 
Commission pursuant to Rule 13f-2 and Form SHO. The Commission's 
amendment to CAT requires, for original receipt or origination of an 
order for equities, the Participants' Compliance Rules require their 
broker-dealer members record and report whether the order is a short 
sale for which the BFMM locate exception in Rule 203 under Regulation 
SHO for the reported short sale is being claimed. This information will 
provide valuable data to both the Commission and other regulators 
regarding the use of the BFMM locate exception. Given the differences 
in the information collections applicable to these parties, the burdens 
applicable to Managers and broker-dealers are separated in the analysis 
below.

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

1. Applicable Respondents
    As discussed above, Rule 13f-2 and Form SHO require Managers that 
trigger a Reporting Threshold to file monthly via EDGAR, on Form SHO, 
certain short position and activity data. Under section 13(f)(6)(A) of 
the Exchange Act and for purposes of Rule 13f-2, Managers 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.\431\ Thus, the requirements of 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.
---------------------------------------------------------------------------

    \431\ See also Instructions to Form 13F.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission stated that it believed 
that the burden associated with Proposed Rule 13f-2 and the related 
Proposed Form SHO reporting in EDGAR would be similar to a Manager's 
reporting requirements under former Form SH. In October 2008, the 
Commission adopted interim final 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.\432\ The Commission estimated in the 
Proposing Release, that based on Form SH data, 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.\433\ The Commission did not receive any comments regarding the 
estimated number of Managers that would be required to file a Form SHO, 
or an alternative estimated number of Managers that commenters believed 
would be more appropriate.
---------------------------------------------------------------------------

    \432\ Disclosure of Short Sales and Short Positions by 
Institutional Investment Managers, 73 FR 61678. 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 supra n.103.
    \433\ This estimate is similar to the estimate provided in the 
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). However, the number of estimated 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 252 Form SH filers would have been required to 
file had a threshold of 2.5% of shares outstanding or $10 million 
monthly average gross short position in an equity security been 
imposed during the analyzed time period. The estimate of 1,000 is 
higher than the 252 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 company 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 
company issuers.
---------------------------------------------------------------------------

    As discussed above, the Commission is adopting aspects of the 
Proposal with certain modifications to Form SHO reporting requirements. 
For example, the modified reporting threshold for the U.S. dollar 
value-based prong of Threshold A for reporting company issuer 
securities is being adopted as a monthly average rather than a daily 
end-of-day calculation, which could result in fewer Managers being 
subject to Form SHO reporting requirements under Threshold A than under 
the Proposed Reporting Thresholds. However, the Commission continues to 
believe that 1,000 Managers is an accurate estimate when considering 
(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 that are included on the 13F 
List as opposed to all equity securities of both reporting and non-
reporting company 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 company issuers. As such, the Commission 
continues to estimate that, each month, approximately 1,000 Managers 
will trigger a Reporting Threshold for at least one security, and 
therefore be required to file a Form SHO.
2. Burdens and Costs
    The Commission explained in the Proposing Release that it believed 
that the burden associated with Proposed Rule 13f-2 and the related 
Proposed Form SHO reporting in EDGAR would be similar to a Manager's 
reporting requirements for former Form SH.\434\ The Commission 
continues to believe

[[Page 75141]]

that the burden associated with Rule 13f-2 and related Form SHO 
reporting in EDGAR is similar to a Manager's reporting requirements for 
former Form SH. 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.\435\ In adopting 
interim temporary Rule 10a-3T, which required certain Managers to file 
weekly non-public reports via Form SH, the Commission estimated that 
Managers would spend approximately 20 hours to prepare and file each 
Form SH.\436\ The Commission estimated in the Proposing Release for 
Form SHO that the burden associated with preparing and filing Form SHO 
in EDGAR would be approximately 20 hours per filing, consistent with 
that of former Form SH.\437\
---------------------------------------------------------------------------

    \434\ See Proposing Release, at 14972-73.
    \435\ Form SH was adopted in the wake of the 2008 financial 
crisis and remained in effect until July 2009.
    \436\ See Disclosure of Short Sales and Short Positions by 
Institutional Investment Managers, 73 FR 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.'').
    \437\ See Proposing Release, at 14973-74.
---------------------------------------------------------------------------

    Some commenters were concerned about the Commission's reliance on 
prior Form SH data in estimating Form SHO reporting burdens, as well as 
the estimated time burden of 20 hours for preparing and filing each 
required Form SHO.\438\ One commenter stated that the estimated 20 
hours to file Form SHO was ``not realistic'' and felt that reliance on 
Form SH for Form SHO burden estimates was not adequately justified in 
the Proposing Release.\439\ Specifically, some commenters stated that 
the Proposing Release underestimated the costs of preparing proposed 
Information Table 2 in relying on the Form SH and Rule 10a-3T 
estimates, emphasizing the complexity of Form SHO as compared to Form 
SH.\440\ One commenter stated that the Proposing Release's estimate of 
20 hours needed to process and file Form SHO per month may be too low, 
and even if accurate, will impose a ``substantial ongoing burden.'' 
\441\ However, these commenters did not provide the Commission with 
alternative burden estimates for reporting Form SHO, or alternative 
sources of data for which to base Form SHO burden estimates.
---------------------------------------------------------------------------

    \438\ See, e.g., MFA Letter, at 15; Two Sigma Letter, at 5-7.
    \439\ Two Sigma Letter, at 5-7 (citing letters received by the 
Commission that it had underestimated the burden of Form SH and 
describing the complexity of Form SHO as compared to Form SH).
    \440\ See, e.g., MFA Letter, at 15; Two Sigma Letter, at 5-7.
    \441\ Anonymous Fund Manager Letter, at 8.
---------------------------------------------------------------------------

    In contrast, one commenter believed that Managers were not being 
genuine about their concerns regarding costs and burdens of complying 
with Form SHO reporting requirements, stating that they were able to 
comply with Form SH requirements.\442\ The commenter also stated that 
the requirements of Form SHO should be less burdensome than the 
requirements of Form SH due to the decreased frequency of reporting.
---------------------------------------------------------------------------

    \442\ See WTI Letter, at 2 (``The protests of the industry in 
terms of the effort required to comply with the Proposal ring hollow 
given the Commission's experience with interim temporary Rule 10a-
3T--firms had no problem complying and the data provided was useful 
to the Commission. Indeed, the Proposal is easier to comply with, 
given the monthly rather than weekly reporting of interim temporary 
Rule 10a-3T.'').
---------------------------------------------------------------------------

    Regarding comments of Form SHO's complexity as compared to Form SH, 
the adopted Form SHO, as described above, does not include the proposed 
requirement to report hedging status, which several commenters thought 
would be particularly burdensome or operationally difficult to 
implement.\443\ As adopted, Form SHO also includes a streamlined 
Information Table 2, which reduces the granularity of the information 
reported, decreasing the costs and burdens that more detailed reporting 
of daily activity data as proposed would have imposed, further reducing 
complexity from the proposed rule and form.
---------------------------------------------------------------------------

    \443\ See, e.g., T. Rowe Price Letter, at 3-4; Virtu Letter, at 
3; MFA Letter, at 4.
---------------------------------------------------------------------------

    As the Commission acknowledged in the Proposing Release, and 
continues to acknowledge, the information required under former Form SH 
differs from that required under Form SHO. However, the Commission 
continues to believe that Form SH is an appropriate basis for Form SHO 
burden estimates. Form SH involved the same type of entities (Managers) 
and the same activity (short positions) as Form SHO. While recognizing 
that the information required under former Form SH differs from that 
required under Form SHO, the Commission continues to believe that both 
forms require the reporting of short sale-related data of similar depth 
and complexity.\444\ Notably, Rule 13f-2 requires 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,\445\ which is anticipated to decrease the overall volume of 
reports required to be filed by Managers under Form SHO in comparison 
to Form SH.
---------------------------------------------------------------------------

    \444\ 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 open 
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. See 
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. 58591 (Sept. 18, 2008), 73 FR 
55175, 55176 (Sept. 24, 2008).
    \445\ See id.
---------------------------------------------------------------------------

    As such, and since the Commission did not receive comments citing 
alternative sources of data that commenters believed would result in 
more accurate Form SHO burden estimates, the Commission continues to 
believe that Form SH is an appropriate basis for which to estimate Form 
SHO burdens. The Commission continues to estimate that the burden 
associated with preparing and filing Form SHO in EDGAR will be 
approximately 20 hours per filing, consistent with the corresponding 
burdens for former Form SH, and consistent with estimates in the 
Proposing Release.\446\ Accordingly, the Commission estimates that the 
burden associated with preparing and filing Form SHO across all 
managers collectively is approximately 240,000 hours per year.\447\
---------------------------------------------------------------------------

    \446\ Proposing Release, at 14973.
    \447\ 20 hours per filing x 1,000 filings by Managers each month 
x 12 months = 240,000 hours. In the Proposing Release PRA, the 
Commission estimated that 346 Form SH filers would have been 
required to file Form SHO had a threshold of 2.5% of shares 
outstanding or $10 million position dollar value been imposed during 
the analyzed time period. Due to the change in the Threshold A 
calculation of the dollar value prong of the Reporting Threshold for 
equity securities of reporting company issuers to be based on a 
monthly average gross short position rather than the proposed daily 
calculation, the estimated number of Form SH filers that would have 
been required to file a Form SHO decreased from 346 to 252. However, 
the Commission continues to estimate that 1,000 Managers will be 
subject to Form SHO reporting per month.
    \448\ See Two Sigma Letter, at 5-7.
---------------------------------------------------------------------------

    The Commission received one comment regarding the approximate 
overall cost of $217.55 per Form SHO filing from the Proposing Release. 
This commenter stated that this cost was ``not realistic,'' but, again, 
did not provide a more accurate cost estimate, or alternative data 
source for which to base a cost estimate.\448\ The Commission believes 
that the hourly cost of internal expertise required for each filing 
will be $251.36, which includes a blended calculation of the estimated 
hourly rate for a compliance attorney, senior programmer, and in-house 
compliance clerk, an increase from the Proposing

[[Page 75142]]

Release's estimated $217.55 to account for inflation.\449\ Taken 
together, the estimated burden hours and hourly rate for the filing of 
Form SHO result in an estimated annual cost to the industry of 
$60,326,400.\450\ The Commission, however, recognizes that advances in 
technology over time could result in Managers spending less time 
preparing and filing Form SHO than is estimated above.\451\
---------------------------------------------------------------------------

    \449\ The $251.36 wage rate reflects current estimates of the 
blended hourly rate for an in-house compliance attorney ($425), a 
senior programmer ($386) and in-house compliance clerk ($82). 
$251.36 is based on the following calculation: (($425) + ((($386 + 
$82) / 2) x 10)) / 11) = $251.36. The estimated proportion of 
compliance attorney (1/11th) to senior programmer and in-house 
compliance clerk (10/11th) 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 
$425 per hour and $386 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 1,800-hour work year and inflation, and 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits, and overhead. The $82 per hour figure for a compliance 
clerk is based on salary information from the SIFMA Report, modified 
by Commission staff to account for an 1,800-hour work-year and 
inflation, and multiplied by 2.93 to account for bonuses, firm size, 
employee benefits, and overhead. See also Form PF; Event Reporting 
for Large Hedge Fund Advisers and Private Equity Fund Advisers; 
Requirements for Large Private Equity Fund Adviser Reporting, 
Release No. IA-6297, 88 FR 38146, 38195-98 (June 12, 2023).
    \450\ 20 hours per filing x 1,000 filings by Managers each month 
x 12 months x $251.36 per hour = $60,326,400.
    \451\ See Electronic Submission of Applications for Orders, 86 
FR 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.'').
---------------------------------------------------------------------------

    Consistent with its estimates in the Proposing Release, the 
Commission also anticipates that most Managers will file Form SHO 
directly in the structured XML-based data language for Form SHO,\452\ 
rather than using the fillable web form provided by EDGAR, resulting in 
some limited additional costs for each filing. While the Commission 
received comments about the use of Form SHO-specific XML 
generally,\453\ it did not receive comments regarding the PRA burden 
estimates of using Form SHO-specific XML. The Commission estimates that 
Managers that file Form SHO using a structured XML-based data language 
could incur an additional burden of 2 hours of work by a 
programmer,\454\ at an estimated cost of $772.\455\ The Commission 
further estimates that Managers will collectively spend up to 
approximately 24,000 hours and $9,264,000 per year to file Form SHO 
directly in a structured XML-based data language.\456\ The Commission 
also estimates that a similar, additional burden of 2 hours of work by 
a programmer per filing will apply to Managers filing an amended Form 
SHO directly in a structured XML-based data language.
---------------------------------------------------------------------------

    \452\ Most Managers will 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. The Commission estimates that all of the 1,000 Managers 
estimated to file Form SHO each month will do so directly using the 
structured XML-based data language rather than the fillable web form 
provided by EDGAR.
    \453\ See XBRL Letter; Comment from An Investor (Apr. 4, 2022), 
available at https://www.sec.gov/comments/s7-08-22/s70822-20122297-278355.htm. Comments regarding the use of XML are addressed in Part 
II.A.4.
    \454\ 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 Money Market Fund Reforms; Form PF 
Reporting Requirements for Large Liquidity Fund Advisers; Technical 
Amendments to Form N-CSR and Form N-1A, Exchange Act Release No. 34-
97876 (July 12, 2023), 88 FR 51404, 51514 (Aug. 3, 2023); see also 
Securities Offering Reform for Closed-End Investment Companies, 
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.'').
    \455\ The $386 per hour figure for a senior programmer is based 
on salary information from the SIFMA Report. 2 hours x $386 = $772.
    \456\ 2 hours per filing x $386 per hour x 1,000 filings each 
month x 12 months = $9,264,000.
---------------------------------------------------------------------------

    Also consistent with the estimates in the Proposing Release, the 
Commission estimates that approximately 3.5 percent of the Managers 
that file Form SHO each month will also file an amended Form SHO, 
resulting in an additional burden and cost for an estimated 35 Managers 
each month.\457\ The additional burden could take up to the original 20 
hours to process and file, as it will require the filing of an entirely 
new Form SHO.\458\ The associated wage rate for filing the amended Form 
SHO is consistent with the cost of expertise required to file the 
original Form SHO, estimated to be $251.36 per hour.\459\ The 
Commission also estimates that each amended Form SHO will 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 Form SHO filing. The Commission did not receive any comments 
regarding the estimated percentage of Managers that will file an 
amended Form SHO each month, or the costs and burden estimates of 
filing an amended Form SHO.
---------------------------------------------------------------------------

    \457\ The estimate of 3.5% of Regulation SHO filers that are 
anticipated to file an amended Form SHO is based on the frequency of 
recent filings of amended Form 13F. For the reporting period of Dec. 
31, 2022, there were 6,924 holdings reports for Form 13F-HR 
submitted, 244 of which were amended. (244 / 6,924 = 3.5%).
    \458\ See Form SHO, Special Instructions, at 4.
    \459\ See Proposing Release, at 14974.

                                   PRA Table 1--Estimated Manager Burden and Costs Associated With Form SHO Reporting
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Form SHO                    Total industry
                                                                                reports     Hours needed    burden hours to               Total industry
                                                                   Managers    processed   to process and  process and file   Wage rate     cost burden
                                                                  (monthly)    and filed    file Form SHO      Form SHO       (average)      (annual)
                                                                                (annual)      (average)        (annual)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Form SHO Filings...............................................        1,000       12,000              20           240,000      $251.36     $60,326,400
Use of Structured XML-Based Data Language in Form SHO Filings..        1,000       12,000               2            24,000          386       9,264,000
Amended Form SHO Filings.......................................           35          420              20             8,400       251.36       2,111,424
Use of Structured XML-Based Data Language in Amended Form SHO             35          420               2               840          386         324,240
 Filings.......................................................
                                                                ----------------------------------------------------------------------------------------
    Total......................................................  ...........  ...........  ..............           273,240  ...........      72,026,064
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 75143]]

    Consistent with estimates in the Proposing Release, in addition to 
the costs associated with the reporting burden, Managers could incur an 
initial technology-related burden of 325 hours, at an hourly estimated 
wage rate of $366,\460\ for an estimated total cost of $118,950 per 
Manager,\461\ to update their current systems to capture the required 
information and automate and facilitate the completion and filing of 
Form SHO. The Commission generally believes that the type of Managers 
that will trigger a Reporting Threshold will likely have sophisticated 
technologies and be able to implement systems to help automate the 
reporting requirements of Rule 13f-2. As discussed in the Proposing 
Release, the estimate of 325 initial technology-related burden hours 
for Managers filing Form SHO was based on the estimated initial filing 
burden (325 hours) for large hedge fund advisers to fulfill amendments 
to the reporting requirements for Form PF,\462\ 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).\463\ 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 Form SHO.
---------------------------------------------------------------------------

    \460\ 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 $360 per hour and a senior risk 
management specialist at a cost of $416 per hour. Of the work 
performed by programmers, we anticipate that it will be performed 
equally by a senior programmer at a cost of $386 per hour and a 
programmer analyst at a cost of $280 per hour. ((($360 per hour x 
0.5) + ($416 per hour x 0.5)) x 195 hours) + ((($386 per hour x 0.5) 
+ ($280 per hour x 0.5)) x 130 hours) / 325 = $366. See Form PF; 
Event Reporting for Large Hedge Fund Advisers and Private Equity 
Fund Advisers; Requirements for Large Private Equity Fund Adviser 
Reporting, Release No. IA-6297 (May 3, 2023), 88 FR 38146, 38195 
(June 12, 2023). See also SIFMA Report.
    \461\ 325 initial technology-related burden hours x $366 per 
hour = $118,950.
    \462\ See Form PF; Event Reporting for Large Hedge Fund Advisers 
and Private Equity Fund Advisers; Requirements for Large Private 
Equity Fund Adviser Reporting, Release No. IA-6297 (May 3, 2023), 88 
FR 38146, 38195 (June 12, 2023). (The Commission recognizes that 
adopted Rule 13f-2 will 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 will be covered by adopted Rule 13f-2.).
    \463\ See Rule 10B-1 Proposal.
---------------------------------------------------------------------------

    One commenter stated that the estimated 325 hours initial 
technology-related burden was ``not realistic'' but did not provide an 
alternative estimate.\464\ One commenter stated that the initial 
estimated costs for initial technology projects per Manager represented 
a ``significant portion'' of a smaller Manager's information technology 
budget but did not state that the estimate was inaccurate.\465\ As a 
result of not adopting the proposed hedging requirement, which a number 
of commenters thought would be operationally difficult to 
implement,\466\ the technology-related burden will likely be reduced 
from that which was estimated in the Proposing Release.
---------------------------------------------------------------------------

    \464\ See Two Sigma Letter, at 5.
    \465\ See Anonymous Fund Manager Letter, at 6-7.
    \466\ See Virtu Letter, at 3.
---------------------------------------------------------------------------

    The Commission did not receive any comments that provided an 
alternative hourly estimate for the initial technology related burden 
for Managers filing Form SHO, or an alternative, more accurate source 
for which to base the initial technology related burden for Managers 
filing Form SHO. Additionally, in response to the comment that the 
Commission generally underestimated the initial technology-related 
burden, and that the technology-related burden is likely reduced from 
the Proposing Release given the Commission's decision not to adopt the 
proposed hedging requirement, the Commission continues to believe that 
an estimate of 325-hours for the initial technology-related burden is 
appropriate.

                          PRA Table 2--Estimated Manager Burden and Costs Associated With Form SHO Initial Technology Projects
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                     Number of hours
                                                                    Managers with       needed for      Industry burden
                                                                  proposed Form SHO      initial       hours for initial    Wage rate    Total industry
                                                                  reportable short      technology        technology        (average)      cost burden
                                                                 interest positions      projects          projects
                                                                                        (average)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Form SHO Initial Technology Projects...........................              1,000              325             325,000          $366      $118,950,000
--------------------------------------------------------------------------------------------------------------------------------------------------------

C. Burdens and Costs Associated With the Amendment to CAT

1. Summary of Collections of Information
    The amendment to the CAT NMS Plan requires Participants to update 
their Compliance Rules to require reporting by Industry Members of 
whether an original receipt or origination of an order to sell an 
equity security is a short sale for which a market maker is claiming 
the bona fide market making exception to the locate requirement in Rule 
203(b)(2)(iii) of Regulation SHO.\467\
---------------------------------------------------------------------------

    \467\ See supra Part IV.
---------------------------------------------------------------------------

2. Use of Information
    As discussed above, reporting of certain short sale information to 
the CAT provides valuable information for the Commission and other 
regulators in investigations and reconstruction of market events. 
Requiring Industry Members to identify short sales for which they are 
claiming the BFMM locate exception will 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 for the amendment to CAT include the 25 Plan 
Participants (the 24 national securities exchanges and one national 
securities association (FINRA)).\468\
---------------------------------------------------------------------------

    \468\ 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.

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[[Page 75144]]

b. Members of National Securities Exchanges and National Securities 
Associations
    The respondents for the Amendment to CAT also include the 
Participants' broker-dealer members, that is, Industry Members. The 
Commission understands that there are currently 3,501 registered 
broker-dealers; \469\ however, not all broker-dealers are expected to 
have new CAT reporting obligations under the Amendment to CAT.\470\ 
Based on an analysis of CAT data from May 2023, conducted by Commission 
staff, the Commission estimates that approximately 100 broker-dealers 
will 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 BFMM locate exception in Rule 
203(b)(2)(iii) of Regulation SHO is claimed. This is a decrease from 
the Commission's estimate in the Proposing Release of 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, because there were 
104 CAT reporters listed as equity market makers in CAT in November 
2021, and 100 CAT reporters listed as equity market makers in CAT in 
May 2023.\471\ The Commission also included an estimate of 1,218 
broker-dealers that would have been required to report ``buy to cover'' 
information on buy orders for equity securities to CAT in the Proposing 
Release,\472\ but since the Commission is not adopting the proposed 
``buy to cover'' reporting requirement, such estimate is not included 
here. The Commission did not receive any comments on the estimated 
number of respondents under the proposed amendments to CAT.
---------------------------------------------------------------------------

    \469\ This is based on FOCUS quarterly filings for 2023 Q1.
    \470\ See supra Part IV.B.
    \471\ See Proposing Release, at 14977.
    \472\ Id.
---------------------------------------------------------------------------

4. Total Initial and Annual Reporting and Recordkeeping Burdens
    The Commission received comments regarding the costs and burdens of 
the proposed amendments to CAT generally \473\ but did not receive 
specific comments regarding the Proposing Release's PRA estimates 
related to the proposed CAT amendments. General comments regarding 
costs and burdens of the proposed CAT amendments are addressed in Part 
IV. 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 
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.\474\ Put another way, pursuant to the Amendment 
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.
---------------------------------------------------------------------------

    \473\ See, e.g., SIFMA Letter, at 25; FIA PTG Letter, at 3; 
Virtu Letter, at 6.
    \474\ The Commission derives estimated costs associated with 
Plan Processor and Industry Member staff time based on per hour 
figures from the SIFMA Report, modified by Commission staff to 
account for an 1,800-hour work-year and inflation, and multiplied by 
5.35 to account for bonuses, firm size, employee benefits and 
overhead.
---------------------------------------------------------------------------

a. Participant Burdens
    The Amendment to CAT will require the Participants to engage the 
Plan Processor to modify the Central Repository to accept and process 
the new BFMM locate exception information on order receipt and 
origination reports. The Commission estimates that the Participants 
will incur an initial, one-time burden of 130 hours, or 5.2 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 initial, one-time, external cost of $113,800, or 
a per Participant expense of approximately $4,552 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 an estimate that it will take 300 hours of Plan 
Processor staff time to implement these changes.\475\ The Commission 
did not receive comment on these estimates.
---------------------------------------------------------------------------

    \475\ 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 $113,800 = 
(Senior Programmer for 200 hours at $386 an hour = $77,200) + 
(Senior Database Administrator for 40 hours at $379 an hour = 
$15,160) + (Senior Business Analyst for 40 hours at $305 an hour = 
$12,200) + (Attorney for 20 hours at $462 an hour = $9,240).
---------------------------------------------------------------------------

    The Commission continues to believe that other Paperwork Reduction 
Act burdens that will 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.\476\ 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.\477\ In addition, the 
Commission anticipates that each exchange and national securities 
association will 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 
Paperwork Reduction Act Information Collection submission for Form 19b-
4.\478\ The Commission does not expect the baseline number of 19b-4 
filings to increase as a result of the Amendment to CAT, nor does it 
believe that the incremental costs exceed those costs used to arrive at 
the average costs and/

[[Page 75145]]

or burdens reflected in the Form 19b-4 PRA submission.
---------------------------------------------------------------------------

    \476\ See CAT NMS Plan Approval Order, 81 FR 84911-43; see also 
OMB Control No. 3235-0671, 85 FR 37721 (June 23, 2020) (notice of 
submission of request for approval of extension).
    \477\ See CAT NMS Plan Approval Order, 81 FR 84918.
    \478\ See OMB Control No. 3235-0045 (Aug. 19, 2016), 81 FR 57946 
(Aug. 24, 2016) (Request to OMB for Extension of Rule 19b-4 and Form 
19b-4 PRA).
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b. Broker-Dealer Burdens
    The Commission anticipates that certain Industry Members will have 
initial, one-time burdens and costs relating to the Amendment to CAT, 
to update systems and processes as necessary to capture and report use 
of the BFMM locate exception to CAT. The Commission has estimated these 
initial burdens and costs below.
    The Amendment to CAT will 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 estimates that the ongoing burden imposed by 
the Amendment to 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.\479\ 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,\480\ 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 of the broker-
dealer's data collection and reporting responsibility.\481\ The 
Amendment to CAT will 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 will 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.
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    \479\ See CAT NMS Plan Approval Order, 81 FR 84911-43. While 
there is no recordkeeping requirement related to reporting use of 
the BFMM locate exception, brokers or dealers should be prepared to 
monitor for compliance with conditions and maintain records 
documenting such compliance. See Regulation SHO Adopting Release, 
48011 n.27 (``As with any rule, broker-dealers relying on [an] 
exception should be prepared to monitor for compliance with its 
conditions, and maintain records documenting such compliance.''). 
There would be a minimal additional ongoing burden for such brokers 
or dealers to record that they have determined such eligibility for 
each transaction reported to CAT.
    \480\ See, e.g., CAT NMS Plan Approval Order, 81 FR 84930.
    \481\ See CAT NMS Plan Approval Order, 81 FR 84930.
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    The Amendment to CAT will impose additional burdens on Industry 
Members that trade equity securities and rely upon or plan to rely upon 
the BFMM locate exception. Based on an analysis of data reported to the 
CAT in May 2023, 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), approximately 100 
CAT Reporters will be subject to the new reporting obligation. 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.
    Regarding the obligation to report the BFMM locate exception 
information to the CAT, the Commission believes that it is appropriate 
to divide the 100 Industry Members, i.e., the CAT reporters listed as 
equity market makers in CAT as of May 2023, that will 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 
100 Industry Members that will be required to report this information, 
58 Industry Members will be reporting this information directly to the 
CAT, and 42 Industry Members will be reporting this information through 
third-party reporting agents. The Commission believes this is a 
reasonable estimation because the majority of Industry Members that are 
identified as market makers in the CAT have developed their own systems 
and technology to report directly to the CAT. The Commission believes 
that the majority of market makers handle reporting themselves because 
they likely submit a sufficient number of reportable events. The 
Commission did not receive any comments regarding the estimated number 
of 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, or about 
the estimated proportion of insourcing vs. outsourcing Industry 
Members. As such, the Commission is keeping the proportion of 
insourcing vs. outsourcing Industry Members the same as in the 
Proposing Release, but reflective of the estimated 100 broker-dealers 
rather than 104 broker-dealers from the Proposing Release.
    The Commission estimates that the 58 insourcing Industry Members 
that report directly to the CAT will incur an initial, aggregate, one-
time burden of 15,080 hours, or that each of these CAT Reporters will 
incur an initial, average one-time burden of 260 hours, and that each 
of these 58 insourcing Industry Members will incur an initial, 
aggregate, one-time external expense of approximately $870,000 for 
software and hardware to facilitate reporting of the new data elements 
to CAT, or that each insourcing Industry Member will incur an initial, 
average one-time external expense of approximately $15,000.\482\ The 
Commission did not receive any comments about the cost and burden 
estimates for insourcing Industry members.
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    \482\ 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 Disclosure of Order Handling Information, 
Exchange Act Release No. 84528 (Nov. 2, 2018), 83 FR 58338, 58383 
(Nov. 19, 2018). This is a reasonable proxy for estimating 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.
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    The Commission estimates that the 42 outsourcing Industry Members 
that use third-party reporting agents to report to the CAT will incur 
an initial, aggregate, one-time burden of 420 hours, or that each of 
these outsourcing Industry Members will incur an initial, one-time 
burden of 10 hours on average, and that these 42 outsourcing Industry 
Members will incur an initial, aggregate, one-time external expense of 
approximately $42,000 for software and hardware to facilitate reporting 
use of the BFMM locate exception to CAT, or that each outsourcing 
Industry Member will incur an initial, average one-time external 
expense of approximately $1,000.\483\

[[Page 75146]]

The Commission did not receive any comments about the cost and burden 
estimates for outsourcing Industry Members.
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    \483\ The Commission believes that the 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 will 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.
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    As discussed above, the Commission continues to believe 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.\484\ Because this information is already 
collected and maintained by market makers that engage in equity trading 
and claim the exception pursuant to 17 CFR 240.17a-3 (``Rule 17a-3 of 
the Exchange Act''), there is no new ongoing burden associated with 
collecting or recording the information necessary to effectuate CAT 
reporting of this new element.
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    \484\ See supra n.476.

                                PRA Table 3--Summary of Estimated Initial One-Time Burdens Related to CAT BFMM Amendment
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                  Number of     Initial one-    Aggregate one-                Aggregate
    Name of information collection                   Type of burden                entities     time hourly      time hourly    Initial one-   one-time
                                                                                   impacted        burden           burden       time cost       cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
CAT: Central Repository--Short Sale     Recordkeeping..........................           25              5.2              130       $4,552     $113,800
 Data.
CAT: Reporting of Bona Fide Market      Direct Report..........................           58              260           15,080       15,000      870,000
 Making Exception--Insourcers.
CAT: Reporting of Bona Fide Market      Third Party Disclosure.................           42               10              420        1,000       42,000
 Making Exception--Outsourcers.
--------------------------------------------------------------------------------------------------------------------------------------------------------

D. Collection of Information Is Mandatory

    The information collections are required under Rule 13f-2 and Form 
SHO for Managers that meet the Reporting Threshold and the Amendment to 
CAT for Plan Participants to collect and process new CAT reportable 
information and for CAT Industry Members that engage in certain short 
sale activity.

E. Retention Period of Recordkeeping Requirement

    Pursuant to 17 CFR 240.17a-4(b)(7) (``Exchange Act Rule 17a-
4(b)(7)''), a broker-dealer must preserve for a period of not less than 
three years, the first two years in an easily accessible place, all 
written agreements (or copies thereof) entered into by such member, 
broker or dealer relating to its business as such, including agreements 
with respect to any account.
    Pursuant to 17 CFR 240.17a-4(e)(7), a broker-dealer must maintain 
and preserve in an easily accessible place each compliance, 
supervisory, and procedures manual, including any updates, 
modifications, and revisions to the manual, describing the policies and 
practices of the member, broker or dealer with respect to compliance 
with applicable laws and rules, and supervision of the activities of 
each natural person associated with the member, broker or dealer until 
three years after the termination of the use of the manual.
    Pursuant to 17 CFR 240.17a-1, every national securities exchange 
and national securities association shall keep and preserve at least 
one copy of all documents, including all correspondence, memoranda, 
papers, books, notices, accounts, and other such records as shall be 
made or received by it in the course of its business as such and in the 
conduct of its self-regulatory activity for a period of not less than 
five years, the first two years in an easily accessible place, subject 
to the destruction and disposition provisions of 17 CFR 240.17a-6 
(``Rule 17a-6'').

F. Confidentiality

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

VIII. Economic Analysis

A. Introduction

    The Commission is adopting a new rule and related form as well as 
an amendment that introduce new reporting requirements in connection 
with short sales. Rule 13f-2, Form SHO, and the amendment to CAT 
(collectively, the ``adoptions'') will improve the transparency of 
short selling activity to regulators, market participants and the 
investing public. The data provided by these adoptions will close 
informational gaps in the currently available data, which in turn will 
benefit market participants and help foster fair and orderly markets. 
The adoptions will also improve regulatory oversight and enhance 
regulators' examination of market behavior and recreation of 
significant market events. These improvements may, in turn, discourage 
market manipulation to the extent that it occurs.\485\
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    \485\ See infra Part VIII.C.1 for additional discussion on 
potential market manipulation.
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    The Commission is mindful of the economic effects that may result 
from the adoptions of Rule 13f-2, Form SHO, and the amendment to CAT, 
including the benefits, costs, and the effects on efficiency, 
competition, and capital

[[Page 75147]]

formation.\486\ The Commission recognizes that the adoptions might 
impose significant compliance costs on market participants. Requiring 
Managers \487\ to report large positions and short sale activity will 
likely impose significant initial and ongoing costs on Managers. The 
amendment to CAT will also impose compliance costs on broker-dealers. 
The Commission is cognizant of these costs and has modified the 
Proposals in a way that is intended to reduce the burdens incurred by 
market participants without sacrificing the transparency that is 
expected to result from the adoption of the Proposals. Modifications 
from the proposed rule and form that are likely to reduce reporting 
costs to Managers relative to the Proposals include: revising a key 
reporting threshold based on a monthly average calculation instead of a 
daily calculation, which is expected to reduce the number of reporting 
entities; streamlining the reporting requirements of Forms SHO; not 
adopting the ``buy to cover'' CAT reporting requirement; and not 
adopting Rule 205. Overall, the Commission has sought to balance the 
costs of the adoptions against the benefit to transparency that will be 
provided to regulators and the public.
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    \486\ 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).
    \487\ See infra note 506 and the accompanying discussion in the 
text on the definition of ``Manager''.
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    The Commission recognizes that the adoptions may lead to tradeoffs 
in market quality, with a risk of negative effects on price efficiency. 
A potential reduction in market manipulation through improved 
regulatory oversight stemming from the adoptions may have a positive 
impact on market quality. Furthermore, the adoptions will provide 
market participants with improved transparency into short selling 
activity, which might also lead to improved price efficiency. On the 
other hand, Rule 13f-2 and the disclosures Form SHO requires will 
increase the costs and risks of implementing large short positions, 
which might reduce price efficiency by reducing short selling and the 
positive effects of such short selling. Furthermore, public disclosure 
of information resulting from Rule 13f-2 and Form SHO might facilitate 
short squeezes, which in turn might also reduce market quality.\488\
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    \488\ See infra Part VII.C.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.
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    The Commission has considered the economic effects of the adoptions 
and wherever possible, has quantified their likely economic effects. 
The Commission is providing both a qualitative assessment and 
quantified estimates of the adopted rule and CAT amendment's economic 
effects where feasible. The Commission has received comments on the 
Proposals and has addressed commenters' concerns with the economic 
analysis. The Commission has incorporated data and other information to 
assist it in the analysis of the economic effects of the adoptions. 
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 not significant.
    The Commission is adopting the Manager reporting and disclosures to 
implement the statutory mandate of section 929X of the Dodd-Frank Act. 
Accordingly, many of the costs and benefits of Rule 13f-2 and Form SHO 
stem from the Commission's implementation of the statutory mandate. In 
addition, the Commission is exercising discretion in its design and 
implementation of Rule 13f-2 and Form SHO and recognizes that this 
discretion has economic effects. Specifically, the Commission is using 
this discretion to ensure that the disclosures are additive to 
currently available data and will be useful to both market participants 
and regulators, with a focus on addressing data limitations exposed by 
market events, especially the market volatility in January 2021. 
Additionally, the Commission is adopting a Proposed CAT amendment in 
order to address such data limitations outside of the context of the 
statutory mandate of section 929X.
    The Commission has access to several sources of data that provide 
some short selling information, one of which is CAT. CAT data can be 
used by regulators for regulatory purposes, including analysis and 
reconstruction of broad-based market events; in market analysis in 
support of regulatory decisions; in market surveillance, 
investigations, and other enforcement activities. At times, these 
regulatory functions can benefit from information on short sale 
positions of market participants and how these positions change over 
time. CAT does not include data that can be used to track such 
positions, and as discussed further above, Commission 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 as well as for informing members of the public and market 
participants. Specifically, current data fail to distinguish the type 
of trader engaged in short selling or identify individual short 
positions, as well as the fluctuation in those positions, even for 
regulatory use. Furthermore, current data do not track the use of the 
bona fide market maker exemption when short selling without the 
``locate''.\489\ The adopted rule will serve to increase the 
Commission's awareness and understanding of short sale activity by 
Managers with large short sale positions by requiring reporting of 
their reliance on the bona fide marker maker locate exception. The 
adopted amendment will serve the Commission in its regulatory capacity.
---------------------------------------------------------------------------

    \489\ See supra note 10 for description of the locate 
requirement of Rule 203 of Regulation SHO.

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[[Page 75148]]

    Existing data sources fail to accurately represent economic short 
positions of Managers due to several limitations.\490\ While FINRA 
publishes aggregate short interest on a bimonthly basis, these data do 
not reflect the timing with which short positions expand or shrink in 
the two-week period between reporting dates.\491\ Some other data 
sources report daily short sale volume \492\ without distinguishing 
between short sale transactions that affect economic short positions 
and short sale transactions meant for purposes such as liquidity 
provision or hedging of long positions. As such, these existing short 
volume data may not be combined with the bimonthly short interest data 
to construct aggregate daily short positions of any particular Manager. 
Securities lending data, bolstered by the recently adopted 17 CFR 
240.10c-1a (``Exchange Act Rule 10c-1a''), will offer a clearer picture 
of the relationship between short interest and securities being lent; 
\493\ however, this does not allow the Commission or the public to 
observe and monitor large short positions of Managers.\494\ No existing 
data identify short positions of individual traders. Even though some 
regulatory data, e.g., CAT data, identify short transactions of 
individual traders, they may not be utilized to reconstruct short 
positions because economic short positions may change in the absence of 
any short sale transactions. Thus, the Commission is adding to the 
existing data sources to further illuminate the short selling 
market.\495\
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    \490\ One commenter stated that the data reported from Form SHO 
would only provide very limited additional relevant insight relative 
to FINRA short interest data. See SBAI Letter at 2. The Commission 
reiterates that Form SHO data are additive to existing data, 
including FINRA short interest data. More specifically, publicly 
released Form SHO data will indicate which equities have large short 
positions held by institutional investment managers. This is 
different from seeing large short interest, which may indicate many 
smaller positions, including those held by retail investors. Large 
short positions accumulated by Managers are often based on 
fundamental research, in contrast to smaller positions which more 
likely stem from hedging or arbitrage strategies. Therefore, 
information on the magnitude of aggregate large short positions, 
especially in relation to overall short interest, may highlight the 
degree to which short sales of a particular security are 
concentrated among Managers guided by fundamental research relative 
to hedging or arbitrage strategies. Thus, Form SHO will provide 
novel information on short sale behavior relative to other short 
sale data sources.
    \491\ 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.
    \492\ 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.
    \493\ Specifically, one will be able to look at a particular 
securities lending data to see if changes in short interest 
correspond to many smaller lending transactions or a smaller 
quantity of large securities loans, which may indicate market 
sentiment towards the particular company. However, it is impossible 
to discern whether these securities loans are being borrowed by 
numerous short sellers or instead concentrated among a small number 
of large short sellers. This information will be covered by Rule 
13f-2 if the short seller(s) crosses the Report Thresholds. In 
addition, unlike FINRA short interest data, Rule 13f-2 data will 
incorporate Managers that are not FINRA members. Furthermore, while 
fees are required to access exchanges' short volume and short 
transaction data, market participants will not have to pay a fee to 
view publicly released Form SHO data.
    \494\ Unlike the Commission, however, the public will observe 
anonymized, aggregated data covering gross short sale positions of 
Managers that exceed at least one of the Reporting Thresholds.
    \495\ One commenter stated that Form SHO data collected by the 
Commission would not fully capture the short selling market. See 
SBAI Letter at 3. The Commission has not stated that Form SHO data 
provides a complete perspective of the short selling market. 
However, Form SHO data will reveal large short positions of 
Managers, which is not readily available from any other data source.
---------------------------------------------------------------------------

    These data limitations inhibit regulators from performing functions 
such as market surveillance and market reconstruction. For example, the 
Commission does 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 currently cannot efficiently 
assess the risk that these positions impose on the market more 
broadly.\496\ Further, with existing data, the Commission may have 
difficulty reconstructing significant market events, thereby inhibiting 
the Commission from quickly understanding market events and providing 
efficient market oversight.
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    \496\ See infra Part VIII.C.1 for discussion of how the 
Commission might use Form SHO data for understanding market events.
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B. Baseline

    The baseline against which the costs, benefits, and the effects on 
efficiency, competition, and capital formation of the final rule are 
measured consists of the current state of the equity market, current 
practices of Managers and broker-dealers, and the current regulatory 
framework. The economic analysis considers existing regulatory 
requirements, including recently adopted rules, as part of its economic 
baseline against which the costs and benefits of the final rule are 
measured.\497\
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    \497\ See, e.g., Nasdaq v. SEC, 34 F.4th 1105, 1111-15 (D.C. 
Cir. 2022). This approach also follows SEC staff guidance on 
economic analysis for rulemaking. See Staff's ``Current Guidance on 
Economic Analysis in SEC Rulemaking'' (March 16, 2012), available at 
https://www.sec.gov/divisions/riskfin/rsfi_guidance_econ_analy_secrulemaking.pdf (``The economic 
consequences of proposed rules (potential costs and benefits 
including effects on efficiency, competition, and capital formation) 
should be measured against a baseline, which is the best assessment 
of how the world would look in the absence of the proposed 
action.''); Id. at 7 (``The baseline includes both the economic 
attributes of the relevant market and the existing regulatory 
structure.''). The best assessment of how the world would look in 
the absence of the proposed or final action typically does not 
include recently proposed actions, because doing so would improperly 
assume the adoption of those proposed actions.

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[[Page 75149]]

    Several commenters requested the Commission consider interactions 
between the economic effects of the proposed rule and other recent 
Commission proposals.\498\ Commenters indicated there could be 
interactions between this rulemaking and five proposals \499\ that have 
since been adopted: Rule 10c-1a,\500\ Beneficial Ownership 
Reporting,\501\ Private Fund Advisers,\502\ Settlement Cycle,\503\ and 
the May 2023 SEC Form PF Amending Release.\504\ These rules were not 
included as part of the baseline in the Proposing Release because they 
were not adopted at that time. In response to commenters, this economic 
analysis considers potential economic effects arising from any overlap 
between the compliance period for the final amendments and each of 
these recently adopted rules.\505\
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    \498\ See, e.g., MFA Letter 2, at 3-4 (``We believe the 
Commission should take into account the sheer scope of all its 
recently proposed rules when determining whether to adopt any final 
rules or in setting compliance dates for any of the new 
requirements''); Eric J. Pan, President and CEO, and Susan Olson, 
General Counsel, Investment Company Institute (Aug. 17, 2023), at 3, 
available at https://www.sec.gov/comments/s7-04-22/s70422-246959-547222.pdf (``ICI Letter 2'') (``we request that the Commission . . 
. publish a thorough analysis of the cumulative effects of the 
Interconnected Rules that accounts for interconnections and 
dependencies among them'').
    \499\ Reporting of Securities Loans, Release No. 34-93613 (Nov. 
18, 2021), 86 FR 69802 (Dec. 8, 2021) (see Ji [rcaron][iacute] 
Kr[oacute]l,Deputy CEO, Global Head of Government Affairs, 
Alternative Investment Management Association Ltd (Aug. 11, 2023), 
at 4, available at https://www.sec.gov/comments/s7-08-22/s70822-243880-514482.pdf) (``AIMA Letter 2''); Modernization of Beneficial 
Ownership Reporting, Release No. 33-11030 (Feb. 10, 2022), 87 FR 
13846 (Mar. 10, 2022) (see MFA Letter 2, at 3; Jennifer Han, 
Executive Vice President, Chief Counsel and Head of Regulatory 
Affairs, Managed Funds Association, and National Association of 
Private Fund Managers (July 21, 2023), at 14-15, available at 
https://www.sec.gov/comments/s7-08-22/s70822-233179-486723.pdf) 
(``NAPFM Letter''); ICI Letter 2, at 7 n. 13); Amendments to Form PF 
to Require Current Reporting and Amend Reporting Requirements for 
Large Private Equity Advisers and Large Liquidity Fund Advisers, 
Release No. IA-5950 (Jan. 26, 2022), 87 FR 9106 (Feb. 17, 2022) (see 
MFA Letter 2, at 3; NAPFM Letter 10-12); Private Fund Advisers; 
Documentation of Registered Investment Adviser Compliance Reviews, 
Release No. 1A-5955 (Feb. 9, 2022), 87 FR 16886 (Mar. 24, 2022) (see 
MFA Letter 2, at 3; NAPFM Letter 10-12); Shortening the Securities 
Transaction Settlement Cycle, Release No. 34-94196 (Feb. 9, 2022), 
87 FR 10436 (Feb. 24, 2022) (see ICI Letter 2 at 7 n. 13).
    \500\ See Reporting of Securities Loans, Release No. 34-98737 
(Oct. 13, 2023) (``Rule 10c-1a''). The securities loan reporting 
rule requires any person who loans a security on behalf of itself or 
another person to report information about securities loans to a 
registered national securities association (namely, FINRA) and 
requires FINRA to make certain information it receives available to 
the public. The covered persons will include market intermediaries, 
securities lenders, broker-dealers, and reporting agents. The final 
rule's compliance dates require that FINRA propose its rules within 
four months of the effective date of final Rule 10c-1a, or 
approximately May 2024, and finalize them no later than 12 months 
after the effective date of final Rule 10c-1a, or approximately 
January 2025; that FINRA implement data retention and availability 
requirements for reporting 24 months after the effective date of 
final Rule 10c-1a, or approximately January 2026; that covered 
persons report Rule 10c-1a information to FINRA starting on the 
first business day thereafter; and that FINRA publicly report Rule 
10c-1a information within 90 calendar days thereafter, or 
approximately May 2026. See Rule 10c-1a, Part VIII.
    \501\ See Modernization of Beneficial Ownership Reporting, 
Release No. 33-11253 (Oct. 10, 2023) (``Beneficial Ownership 
Reporting''). Among other things, the amendments generally shorten 
the filing deadlines for initial and amended beneficial ownership 
reports filed on Schedules 13D and 13G, and require that Schedule 
13D and 13G filings be made using a structured, machine-readable 
data language. The new disclosure requirements and filing deadlines 
for Schedule 13D are effective 90 days after publication in the 
Federal Register. The new filing deadline for Schedule 13G takes 
effect on September 30, 2024, and the rule's structured data 
requirements have a one-year implementation period ending December 
18, 2024. See Beneficial Ownership Reporting, Part II.G.
    \502\ See Private Fund Advisers; Documentation of Registered 
Investment Adviser Compliance Reviews, Release No. IA-6383 (Aug. 23, 
2023), 88 FR 63206 (Sept. 14, 2023) (``Private Fund Advisers 
Adopting Release''). The Private Fund Advisers Adopting Release 
includes new rules designed to protect investors who directly or 
indirectly invest in private funds by increasing visibility into 
certain practices and restricting other practices, along with 
amendments to the Advisers Act books and records rule and compliance 
rule. The amended Advisers Act compliance provision for registered 
investment advisers has a November 13, 2023 compliance date. The 
compliance date is March 14, 2025 for the rule's quarterly statement 
and audit requirements for registered investment advisers with 
private fund clients. For the rule's adviser-led secondaries, 
restricted activity, and preferential treatment requirements, the 
compliance date is September 14, 2024 for larger advisers and March 
14, 2025 for smaller advisers. See Private Fund Advisers Adopting 
Release, Parts IV, VI.C.1.
    \503\ See Settlement Cycle Adopting Release. Settlement Cycle 
Adopting Release shortens the standard settlement cycle for most 
broker-dealer transactions from two business days after the trade 
date to one business day after the trade date (``T+1''). With 
certain exceptions, the rule has a compliance date of May 28, 2024. 
See Settlement Cycle Adopting Release, Parts VII, VII.B.3.
    \504\ See Form PF; Event Reporting for Large Hedge Fund Advisers 
and Private Equity Fund Advisers; Requirements for Large Private 
Equity Fund Adviser Reporting, Release No. IA-6297 (May 3, 2023), 88 
FR 38146 (June 12, 2023) (``May 2023 SEC Form PF Amending 
Release''). The Form PF amendments require large hedge fund advisers 
and all private equity fund advisers to file reports upon the 
occurrence of certain reporting events. For new sections 5 and 6 of 
Form PF, the compliance date is December 11, 2023; for the amended, 
existing sections, it is June 11, 2024. See May 2023 SEC Form PF 
Amending Release, Part II.E.
    \505\ In addition, commenters indicated there could also be 
overlapping compliance costs between the final amendments and 
proposals (or in the case of Release No. 34-93784, a portion of the 
proposal) that have not been adopted. Cybersecurity Risk Management 
for Investment Advisers, Registered Investment Companies, and 
Business Development Companies, Release No. 33-11028 (Feb. 9, 2022), 
87 FR 13524 (Mar. 9, 2022) (see MFA Letter 2, at 3; NAPFM Letter 18-
19); Outsourcing by Investment Advisers, Release No. IA-6176 (Oct. 
26, 2022), 87 FR 68816 (Nov. 16, 2022) (see MFA Letter 2, at 3; 
NAPFM Letter 17-18); Enhanced Disclosures by Certain Investment 
Advisers and Investment Companies about Environmental, Social, and 
Governance Investment Practices, Release No. 33-11068 (May 25, 
2022), 87 FR 36654 (June 17, 2022) (see MFA Letter 2, at 3; NAPFM 
Letter 19-20); Safeguarding Advisory Client Assets, Release No. IA-
6240 (Feb. 15, 2023), 88 FR 14672 (Mar. 9, 2023) (see MFA Letter 2, 
at 3; NAPFM Letter 9-10); 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, Release No. 34-
93784 (Dec. 15, 2021), 87 FR 6652 (Feb. 4, 2022) (see MFA Letter 2, 
at 3; NAPFM Letter 13-14; AIMA Letter 2, at 3; ICI Letter 2, at 7 n. 
13); Prohibition Against Conflicts of Interest in Certain 
Securitizations, Release No. 33-11151 (Jan. 25, 2023), 88 FR 9678 
(Feb. 14, 2023) (see MFA Letter 2, at 3; NAPFM Letter at 21-22); 
Further Definition of ``As a Part of a Regular Business'' in the 
Definition of Dealer and Government Securities Dealer, Release No. 
34-94524 (Mar. 28, 2022), 87 FR 23054 (Apr. 18, 2022) (see NAPFM 
Letter 12-13); Standards for Covered Clearing Agencies for U.S. 
Treasury Securities and Application of the Broker-Dealer Customer 
Protection Rule With Respect to U.S. Treasury Securities, Release 
No. 34-95763 (Sept. 14, 2022), 87 FR 64610 (Oct. 25, 2022) (see 
NAPFM Letter 16-17); Amendments Regarding the Definition of 
``Exchange'' and Alternative Trading Systems (ATSs) That Trade U.S. 
Treasury and Agency Securities, National Market System (NMS) Stocks, 
and Other Securities, Release No. 34-94062 (Jan. 26, 2022), 87 FR 
15496 (Mar. 18, 2022) (see NAPFM Letter 22-23). To the extent those 
proposals are adopted, the baseline in those subsequent rulemakings 
will reflect the existing regulatory requirements at that time.
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1. Institutional Investment Managers
    The potential universe of persons who meet the definition of 
Manager is broad and diverse. 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.'' \506\ 
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.'' \507\ As a result, Managers exercising 
discretion over the accounts of others include but are not limited to

[[Page 75150]]

investment advisers 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; firms, 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.\508\
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    \506\ See also Exchange Act section 3(a)(35) defining when a 
person exercises ``investment discretion'' with respect to an 
account.
    \507\ 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).
    \508\ To the extent that a natural person exercising discretion 
over the account of another person has a short position exceeding 
the thresholds, that natural person would be subject to the costs 
associated with Rule 13f-2 and the Form SHO. We expect such a 
natural person would likely use the fillable web form provided by 
EDGAR to input Form SHO disclosures. Few Managers that are natural 
persons would be likely to have short positions large enough to 
exceed the threshold. See infra Part VIII.C.6 for more information 
on Managers' costs.
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    Notwithstanding the broad statutory definition of Manager, it is 
the Commission's understanding that only a fraction of Managers is 
believed to engage in short selling and fewer still engage in any 
substantial short selling. Registered broker-dealers' market making 
operations, for example, engage in short selling but, with the 
exception of option market makers, generally do not hold large 
positions overnight. The Commission is 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.\509\ Using 
actual investment strategies employed by registered investment 
companies \510\ 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 percent of all funds were allowed to engage in short 
selling, only 5 percent of all funds actually did so.'' \511\ As of 
December 2022, there were 7,164 registered investment companies with 
total equity positions valued at approximately $14.7 trillion. Of 
those, 138 funds had short positions with a total short position value 
of approximately $15 billion. Of the funds with short positions, only 
15 funds held positions equal to or greater than $10 million.\512\ 
Additionally, according to an analysis of publicly available Form PF 
data, approximately sixteen percent of single-strategy hedge funds 
employ strategies involving short selling.\513\
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    \509\ Peter Molk Frank Partnoy, Institutional Investors as Short 
Sellers?, 99 B.U. L. Rev. 837, 839 (2019). Molk and Partnoy's paper 
``identif[ies] the regulatory and other barriers that keep key 
categories of institutions, specifically, mutual funds, insurance 
companies, pension funds, banks, sovereign wealth funds, endowments, 
and foundations, from acquiring significant short positions.'' Id. 
at 844.
    \510\ As of Dec. 20212, there were 9,050 mutual funds (excluding 
money market funds) with approximately $22,652 billion in total net 
assets, 2,819 ETFs organized as an open-end fund or as a share-class 
of an open-end fund with approximately $5,910 billion in total net 
assets, 680 registered closed-end funds with approximately $363 
billion in total net assets, 701 unit investment trusts with 
approximately $2,184 billion in total net assets, and 15 variable 
annuity separate accounts registered as management investment 
companies on Form N-3 with $237 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, 2023. 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.
    \511\ 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.
    \512\ This is based on an analysis of data provided by 
registered investment companies to the Commission on Form N-PORT 
filings received through July 31, 2023.
    \513\ As of 2022 Q4, there are 1,107 hedge funds out of 6,553 
Equity Single-Strategy hedge funds (excluding fund-of-funds hedge 
funds) that employ short selling in an Long/Short and Short Bias 
strategy. Assets under management (AUM) in these types of hedge 
funds total approximately $1.165 trillion. 2022 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 
do 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 2022 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) (retrieved from Factiva database).
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    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 rule's 
reporting requirement.\514\ One possible proxy for the number of 
Managers that might 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 that exceeds Rule 13f-2's thresholds. As of 
March 31, 2023, 8,551 Managers \515\ with investment discretion over 
approximately $38.79 trillion reported holdings on Form 13F in Section 
13(f) securities.\516\ The Commission also believes that registered 
investment advisers, particularly those managing hedge funds, are the 
primary Managers likely to be affected by Rule 13f-2. Though the 
Commission lacks data to quantify the exact number affected parties, 
the Commission estimates that the total number of Managers with 
reporting obligations will be between 252 and 1,000.\517\
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    \514\ 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 509, 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.
    \515\ A portion of these filings are Form 13Fs filed to declare 
that the filer's holdings are reported on another filer's Form 13F. 
Thus, not all 8,551 Managers' Form 13Fs represent unique holdings.
    \516\ The statistic is computed by the Commission from data 
filed on Form 13F.
    \517\ See supra Part VII.B.1 for more information on the 
estimates of how many Managers would have reporting obligations. The 
Commission estimated the number of reporting Managers using the 
short sale activity of Managers that submitted Form SH. Only 
Managers that exercised investment discretion over accounts with 
aggregate fair market values of at least $100,000,000 in securities 
described in Rule 13f-1(c) under the Exchange Act, and effected 
short sales of those securities, were required to file Form SH. 
Given that Managers included in the Form SH data may be a subset of 
Managers with obligations under Rule 13f-2, the estimate of 252 
Managers is likely lower than the number who will ultimately report 
Form SHO. However, the Commission lacks data to better estimate the 
universe of Managers with obligations under 13f-2. See also infra 
Part VIII for a discussion of the applicability of Form SH data to 
estimating the number of Managers affected by Rule 13f-2.
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2. Short Selling
    Short selling is a widely used market practice, which allows 
investors to

[[Page 75151]]

profit if an asset declines in value or to hedge risks. Market 
participants can build an economic short position 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.
a. 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.\518\ 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.\519\ 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 short seller 
will make money. Short selling contributes to price efficiency when 
short sellers trade to incorporate negative information into stock 
prices.
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    \518\ See Rule 200(a) of Regulation SHO, 17 CFR 242.200(a). See 
also Regulation SHO Adopting Release.
    \519\ One commenter supported this statement, stating that short 
selling provides liquidity and is an important hedging tool. See 
SBAI Letter at 2.
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    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 benefit from 
temporary pricing anomalies. While short selling to trade on 
information or to hedge generally results in short positions that are 
held for some time, registered broker-dealers engaged in market making 
operations 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.\520\
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    \520\ See infra Part VIII.B.4.i for a discussion of existing 
short interest data.
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    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 percent--including the 
proceeds of the short sale plus an additional 50 percent of the value 
of the short position.\521\ 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.
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    \521\ Regulation T specifies that in most situations margin 
requirements for equity short sales must be 150%. See 12 CFR 220.12.
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    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.\522\ Consequently, a short seller 
(or its 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 it is required to 
deliver the share to settle the stock market transaction.
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    \522\ On Feb. 15, 2023, the Commission adopted a rule to shorten 
the settlement cycle to one business day; compliance by broker-
dealers will be required as of May 28, 2024. See Settlement Cycle 
Adopting Release.
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    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.\523\
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    \523\ One commenter stated that biotechnology companies, 90% of 
which have market capitalizations that would qualify as small-cap or 
micro-cap stocks, face an outsized proportion of short positions. 
See infra note 593.
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    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 percent of 
trading volume, while only about 2 percent of shares outstanding are 
held short in the U.S. equity markets.\524\ This average volume of 
short selling tends to be much higher than the typical changes in short 
interest,\525\ suggesting that a significant fraction of short selling 
volume is reversed very quickly. Such short selling is indicative of 
the fact that short selling is a key component of modern market making 
strategies and technical algorithmic trading.\526\
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    \524\ See DERA 417(a)(2) Study. 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).
    \525\ 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 5% of shares 
outstanding each week, with approximately half of all trades 
involving short sellers. Consequently, total short selling volume 
amounts to approximately 5% of shares outstanding every two weeks 
for a typical stock. In contrast, from 2015 through 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 bimonthly 
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.
    \526\ See infra Part VIII.C.3 for a more detailed discussion of 
short selling and liquidity provision.
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BILLING CODE 8011-01-P

[[Page 75152]]

[GRAPHIC] [TIFF OMITTED] TR01NO23.000

BILLING CODE 8011-01-C
b. 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. Providing evidence of 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.\527\
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    \527\ 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.

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[[Page 75153]]

    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 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.\528\ Convertible debt securities offer the owner a stream of 
payments and the ability to convert the security into equity should the 
owner's strategy deem this beneficial.\529\ 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 its price.\530\ 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.\531\
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    \528\ On Sept. 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.
    \529\ Convertible debt securities are also employed in hedging 
strategies whereby the equity is sold short while the convertible 
security of that equity is held long.
    \530\ On July 9, 2012, the Commission approved rules and 
definitions of Security based swaps. See 17 CFR parts 230, 240, and 
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, 77 FR 48208 (Aug. 13, 2012), 
available at https://www.sec.gov/rules/final/2012/33-9338.pdf.
    \531\ See, e.g., 2015 Regulation SBSR Adopting Release, supra 
note 97; 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, 86 FR 8977 (Feb. 10, 2021), available at https://www.sec.gov/rules/other/2021/34-91798.pdf.
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    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
    The Commission adopted Regulation SHO \532\ 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.\533\
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    \532\ See Regulation SHO Adopting Release.
    \533\ 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'').
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    In adopting Regulation SHO, the Commission recognized that short 
sales can provide important pricing information \534\ and liquidity to 
the market.\535\ 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.
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    \534\ 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 (Oct. 28, 
2003), 68 FR 62972 (Nov. 6, 2003), available at https://www.sec.gov/rules/proposed/34-48709.htm#P179_15857.
    \535\ 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 (Oct. 28, 2003), 68 FR 62972 
(Nov. 6, 2003), available at https://www.sec.gov/rules/proposed/34-48709.htm#P179_15857.
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    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,\536\ strengthened those same 
close-out requirements by adopting Rule 204,\537\ and reintroduced a 
short sale price test restriction by adopting Rule 201.\538\ In 
addition, the Commission adopted a targeted antifraud rule, Rule 10b-
21, to further address failures to deliver in securities

[[Page 75154]]

that have been associated with ``naked'' short selling.\539\
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    \536\ 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.
    \537\ In 2008, the Commission adopted 17 CFR 242.204T 
(``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.
    \538\ 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.
    \539\ Rule 10b-21 is an antifraud provision that supplements 
existing antifraud rules, including 17 CFR 240.10b-5 (``Rule 10b-
5''), and was adopted to further evidence the liability of short 
sellers. Specifically, Rule 10b-21 applies to short sellers, 
including 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 14, 
available at https://www.sec.gov/rules/final/2008/34-58774.pdf.
---------------------------------------------------------------------------

    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 imposes certain recordkeeping obligations on broker-
dealers. However, the Commission does not have market-wide 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.\540\
---------------------------------------------------------------------------

    \540\ See supra Part IV.B for a discussion on the use of the 
bona fide market making locate exception.
---------------------------------------------------------------------------

    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 positions 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 using these data to estimate short positions would 
be significantly inaccurate and inefficient.
a. Bimonthly Short Interest Data
    One of the primary data sources for aggregate short selling data is 
the bimonthly short interest data collected by FINRA.\541\ FINRA 
collects aggregate short interest information in individual securities 
on a bimonthly 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.\542\ 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.\543\ 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.\544\ 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.\545\ Member firms must report 
their short positions to FINRA regardless of position size.\546\ The 
process of gathering and validating short interest data takes 
approximately two weeks.\547\ Thus the data are available with 
approximately a two week lag.
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    \541\ See DERA 417(a)(2) Study at 17-18, supra note 6.
    \542\ 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.
    \543\ 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.'').
    \544\ FINRA Rule 4560 excludes short sales in ``restricted 
equity securities,'' as defined in Securities Act Rule 144, from the 
reporting requirement.
    \545\ See FINRA Rule 4560(b)(1).
    \546\ 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.
    \547\ See DERA 417(a)(2) Study at 17-18, supra note 6.
---------------------------------------------------------------------------

    FINRA short interest data are widely available and are used by 
academics and other market participants.\548\ Furthermore, these short 
interest data are found to predict future stock and market returns over 
the monthly and annual horizons, suggesting that the bimonthly short 
interest data capture the economic short selling based on fundamental 
research.\549\ However, these data face two major limitations. First, 
the information 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.\550\ Second, given that short interest is aggregated at 
the security-level, the aggregation does not provide an understanding 
of certain aspects of the underlying short selling activity. For 
example, the data cannot inform on whether short sentiment is broadly 
or narrowly held or held by persons with larger positions. The data 
also does not inform on the extent to which short interest has been 
hedged.
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    \548\ See supra note 491. FINRA and the listing exchanges make 
these data publicly available with biweekly updates.
    \549\ See, e.g., Peter N. Dixon and Eric K. Kelley, Business 
Cycle Variation in Short Selling Strategies: Picking During 
Expansions and Timing During Recessions, 57(8) J. of Fin. and 
Quantitative Analysis 3018-3047 (2022); 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).
    \550\ For example, the public will not have information on 
stock-specific volatility in real-time that may relate to short 
selling of the particular stock. Such volatility may be explained, 
though only through assumption, once the bimonthly short interest 
data becomes available. Assumption is necessary because the data are 
still not at the daily level.
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b. 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 \551\ and publication of short sale 
transaction information on no more than a two-month delay.\552\

[[Page 75155]]

Some SROs make the historical daily short volume data available to 
market participants for a fee.\553\ 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, several 
SROs provide intraday short sale transaction information for the orders 
that execute on their respective venues. As an example, FINRA provides 
information from FINRA's Trade Reporting Facility (``TRF'') and 
Alternative Display Facility (``ADF'') \554\ (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 bimonthly short interest observations discussed earlier.
---------------------------------------------------------------------------

    \551\ 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 
492. 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.
    \552\ 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 492. 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 
(June 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.
    \553\ 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://datashop.cboe.com/us-equity-short-volume-and-trades.
    \554\ 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 than bimonthly short interest 
data, these existing short volume data provided by the SROs, including 
FINRA, have a number of limitations. First, the data do 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 to separate trading volume associated 
with market makers, algorithmic traders, investment managers, or other 
trader types. Form SHO will address this limitation by providing data 
on the gross short sale positions and activity of investment managers 
with large short sale positions.
    Additionally, the data do not provide insight into activities that 
may reduce exposure, making the use of these data to estimate investor 
sentiment fraught with potential bias. Moreover, 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,\555\ convert bonds to stock, or redeem 
ETF shares containing the equity. As a result, the short selling volume 
and transactions data cannot easily explain changes in short interest, 
exposing a gap between these two types of existing data.
---------------------------------------------------------------------------

    \555\ See supra note 285.
---------------------------------------------------------------------------

    Aggregate short selling statistics and short selling transactions 
data have different lags with which they are available. Aggregate short 
selling volume statistics are usually made available 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 are released with a one-
month lag--implying that some short selling transactions data are not 
available for two months.\556\
---------------------------------------------------------------------------

    \556\ For example, a short sale transaction that takes place in 
late June could be released in a dataset in the month of August.
---------------------------------------------------------------------------

    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.\557\ If a market participant is unclear whether its trade will 
meet all the requirements at settlement to be marked a long sale, then 
it 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.\558\
---------------------------------------------------------------------------

    \557\ See Rule 200(g) of Regulation SHO specifies when an order 
can be marked as long. See also Part IV.B; Regulation SHO Adopting 
Release. An economic long sale is a sale of an owned, not borrowed, 
security.
    \558\ 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.
---------------------------------------------------------------------------

c. Securities Lending
    Securities lending data provide information on stock loan volume, 
lending costs, and the percentage of available stock out on loan. In 
the equity market, a primary reason for end borrowers to engage in a 
securities loan is to facilitate a short sale,\559\ leading to a close 
correlation between information about certain loan volumes and short 
interest. Therefore, some market participants use securities lending 
data as a measure of short sale positions.\560\ Since the proposing 
release, the Commission has adopted Rule 10c-1a. Below, we describe the 
baseline securities lending data--commercial securities lending data as 
well as forthcoming Rule 10c-1a data.\561\
---------------------------------------------------------------------------

    \559\ One reason for this is that the ``permitted purpose 
requirement'' of the Board of Governors of the Federal Reserve 
System's Regulation T, which broadly governs the lending activities 
of broker-dealers, specifies that a broker dealer may generally 
borrow or lend U.S. securities from or to a (non-broker-dealer) 
customer solely ``for the purpose of making delivery of the 
securities in the case of short sales, failure to receive securities 
required to be delivered, or other similar situations,'' unless an 
exemption applies. See 12 CFR 220.10(a).
    \560\ 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.managedfunds.org/industry-resources/industry-research/the-effects-of-short-selling-public-disclosure-of-individual-positions-on-equity-markets/.
    \561\ While the adoption of Rule 10c-1a occurred before the 
adoption of Rule 13f-2, and Rule 10c-1a has certain intermediate 
compliance dates related to FINRA rulemaking that precede Rule 13f-2 
compliance dates, we expect that the reporting and publication of 
Rule 13f-2 information will occur before the reporting and 
publication of Rule 10c-1a information. See supra Part VI and infra 
note 585. Rule 10c-1a is thus part of the baseline for Rule 13f-2, 
but significant aspects of Rule 10c-1a will be implemented later.
---------------------------------------------------------------------------

i. Commercial Securities Lending Data
    The securities lending industry appears to use commercial 
securities lending data widely,\562\ though these data are generally 
available only by subscription.\563\ The use of commercial

[[Page 75156]]

security lending data as proxy for economic short interest has several 
limitations. These include the fact that commercial vendors of the 
securities lending data often impose access restrictions via give-to-
get models. In addition, the data are not comprehensive and are based 
on voluntary contributions, which leads to self-selection bias. In this 
setting, the entities contributing data are mindful of whether other 
entities can access 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 data collected by each vendor.
---------------------------------------------------------------------------

    \562\ Several commercial entities sell data on securities 
lending to clients. See, e.g., 2011 Letter from Data Explorers 
(hereafter ``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 stated, stock lending facilitates short selling. 
See, e.g., Speech by Chester Spatt, former Chief Economist of the 
SEC (Apr. 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.
    \563\ See DERA 417(a)(2) Study at 22-23. See also Rule 10c-a, 
Part IX.B.5.
---------------------------------------------------------------------------

    The data for securities lending is potentially biased \564\--either 
containing information about the wholesale market or the customer 
market, but not both, making it difficult for a given market 
participants to obtain comprehensive security lending information from 
one source. Furthermore, even the cumulative data provided by vendors 
is still not be comprehensive, primarily because it is based on 
voluntary data contributions.\565\ The reliance on voluntary data 
contributions increases the likelihood that data are missing in a non-
random manner which can introduce biases into the data. To this end, 
the existing data accessible by an individual market participant may 
not accurately proxy short selling activity.
---------------------------------------------------------------------------

    \564\ For example, while the Commission believes that certain 
currently available securities lending data products may be biased 
due to missing observations, the extent of the biases cannot be 
quantified as the data that would be needed to assess the extent of 
the bias are missing.
    \565\ Voluntary data contributions are provided either through 
customer market surveys or using a give-to-get model. The Commission 
believes that both give-to-get and customer market survey data lack 
comprehensiveness, as it is unlikely that the full universe of 
lending programs and borrowers contribute all data to any given data 
vendor. The voluntary nature of submissions to both give-to-get and 
customer market survey data may mean that some data may be withheld. 
Market participants that choose not to disclose their data to the 
commercial data vendors likely make that choice because it is in 
their strategic interest not to disclose, resulting in nonrandom 
omissions. These omissions likely insert bias into the commercial 
databases.
---------------------------------------------------------------------------

    Existing commercial securities lending data only provide a noisy 
proxy of short sentiment. This is because current commercial securities 
lending data originates from either surveys of a subset of asset 
managers about their securities lending experience, or it comes from 
give-to-get arrangements where those involved in securities lending 
must give data to the data providers in order to be able access data 
from the data providers. Because the survey data are not comprehensive 
it can only provide a noisy proxy of actual short sentiment. The give-
to-get data also provides only a noisy proxy because it too relies on 
voluntary data submissions. It is also generally limited to information 
about loans from lending programs to broker dealers (``Wholesale 
Loans''), which are made largely to facilitate clearing and settlement 
on a net basis at a clearing broker, rather than by transaction or 
position.\566\ Thus, Wholesale Loans are not traceable to individual 
short sellers. Further, the Commission understands that broker-dealers 
will usually source shares to meet their net clearing and settlement 
requirements from other sources, such as their own inventory or 
customer margin accounts, before engaging in Wholesale Loans. Thus, 
current commercial securities lending data serve only as an imperfect 
measure of short sentiment.
---------------------------------------------------------------------------

    \566\ See Rule 10c-1a, Part IX.B.2 for a more detailed 
discussion.
---------------------------------------------------------------------------

ii. Rule 10c-1a Data
    On October 13, 2023, the Commission adopted Rule 10c-1a.\567\ Rule 
10c-1a requires that the data elements in paragraph (c) of Rule 10c-1a, 
except for the size of the loan, are required to be made publicly 
available by an RNSA not later than the morning of the business day 
immediately after the covered securities loan is effected. Rule 10c-1a 
requires that the size of the loan be made publicly available by an 
RNSA on the twentieth day immediately after the covered securities loan 
is effected. In addition, Rule 10c-1a requires covered persons to 
report to an RNSA the legal name of each party to the loan (lender, 
borrower, and intermediary) and that an RNSA keep such information 
confidential. Next-day summary volume information will indicate the 
magnitude but not the direction of the activity, such that loan 
decreases are added to, not subtracted from, loan increases. Therefore, 
these data will not allow a viewer to discern between increases in 
aggregate short positions and decreases of aggregate short positions.
---------------------------------------------------------------------------

    \567\ Rule 10c-1a will provide the Commission and market 
participants with access to comprehensive securities lending data 
market data. See Rule 10c-1a; see also supra note 561.
---------------------------------------------------------------------------

    Because loans to end-borrowers are usually made to facilitate short 
sales,\568\ these loans relate very closely to those customers' short 
positions. By aggregating the total amount of shares on loan in the 
``customer'' category, market participants could likely estimate 
outstanding short interest with considerable accuracy, though with an 
approximately one-month delay.\569\ Additionally, since each loan 
likely relates to a unique market participant, the Rule 10c-1a data 
will provide an indication of the distribution of short sentiment--that 
is, whether short interest is concentrated on a few short sellers with 
large positions, or whether it is spread out over many short 
sellers.\570\ Examining the change in the size of a loan from the 
reported data can also indicate when individual market participants 
increased or decreased their short positions, albeit with an 
approximate one-month delay.
---------------------------------------------------------------------------

    \568\ See infra Part VIII.C.2.
    \569\ While most loans that facilitate short sales likely come 
from this category of `customer' loans, not all will. Some large 
market participants do not use broker dealers as an intermediary 
when sourcing loans, rather they maintain relationships directly 
with lending programs to source shares when they wish to short sale. 
These transactions would show up in the data as loans to ``Other'' 
entities. Lastly, to the extent that a broker dealer borrows shares 
to facilitate their own short selling, the loan would show up in the 
data as a loan to a broker dealer. However, by summing up all 
`customer' and `other' loans, market participants could likely 
estimate aggregate short interest with considerable accuracy. 
However, only publicly released Form SHO data will isolate large 
gross short sale positions of Managers. The delay of 21 days is due 
to the settlement of the loan occurring in T+1 manner plus the 
publication of the data 20 days after settlement.
    \570\ The ability to identify changes in customer short 
positions is reduced to the extent that some short sellers, such as 
large institutions, have relationships with and are able to spread 
their borrowing across multiple prime brokers, which would make 
short interest appear less concentrated.
---------------------------------------------------------------------------

    Pursuant to Rule 10c-1a, persons will be required to identify the 
legal name of all the parties to a securities loan without any delay to 
the RNSA. Consequently, regulators can use the data to track the size 
of shares on loan, and thus approximate an individual entity's short 
position with little delay, potentially even if that entity uses 
multiple broker-dealers to source shares. Because loan modifications, 
such as increases, decreases, or terminations of loans, must be 
reported, regulators can produce running estimates of changes in 
individual entity's estimated short positions.
d. CAT Data
    Regulators can also extract short sale information from CAT data, 
which provide order lifecycle information for stocks and options.\571\ 
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'

[[Page 75157]]

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.
---------------------------------------------------------------------------

    \571\ 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 due to several 
circumstances. First, CAT data do not include information on the long 
or short positions held in each account at the time that an Industry 
Member initially begins reporting to CAT. Thus, 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. Thus, there are activities that affect positions that are 
not contained in CAT in any capacity.
    While CAT is not designed to track positions, CAT data can be used 
in very limited and specific circumstances to offer rough position 
estimates. When focused on one or few accounts, estimating positions, 
though potentially inaccurate, can be manageable. However, 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 considerable 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.\572\
---------------------------------------------------------------------------

    \572\ See Staff Report on Equity and Options Market Structure 
Conditions in Early 2021, SEC (Oct. 14, 2021), available at https://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-early-2021.pdf.
---------------------------------------------------------------------------

    Finally, even though CAT data identify short selling by market 
makers, the data do not provide information as to whether a broker-
dealer is claiming use of the exception for bona fide market making 
from Regulation SHO's locate requirement. Rather, the Commission has to 
make individual document requests to obtain such information currently. 
The adopted amendment will make this information readily available to 
regulators in a uniform electronic format and consolidate it with the 
other material terms of orders required to be reported to CAT.
    There are 24 national securities exchanges and one national 
securities association (FINRA) that are CAT Plan Participants. There 
are also 3,501 broker-dealers who have reporting obligations to CAT as 
Industry Members.\573\ These Industry Members often use third-party 
reporting agents such as service bureaus for CAT reporting.
---------------------------------------------------------------------------

    \573\ See supra Part VII.C.4.b for discussion of PRA costs for 
broker-dealers due to the CAT amendment. Not all 3,501 broker-
dealers will bear the same costs due to the CAT amendment.
---------------------------------------------------------------------------

e. Exchange Act Form SH
    For a ten-month period in 2008 and 2009,\574\ the Commission 
required certain Managers to file confidential weekly reports of their 
short positions in section 13(f) securities, other than options, on 
Exchange Act Form SH, through temporary Rule 10a-3T.\575\ De minimis 
short positions of less than 0.25 percent of the class of shares with a 
fair market value of less than $10 million were not required to be 
reported.\576\ Additionally, 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 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,\577\ a more frequent disclosure 
interval than the quarterly public reporting of long positions required 
on Exchange Act Form 13F.\578\
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    \574\ See DERA 417(a)(2) Study at 18, supra Part II.A.3 at 6.
    \575\ 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 10a-3T. 
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).
    \576\ See Exchange Act Release No. 58591 (Sept.18, 2008), 73 FR 
55175 (Sept. 24, 2008).
    \577\ See Exchange Act Release No. 58785, 73 FR 61678.
    \578\ 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 difficult to work 
with because they 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.\579\
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    \579\ See Proposing Release, at 14963 for information on the 
methodology and caveats of using Form SH data.
---------------------------------------------------------------------------

5. Competition
    Many Managers operate in the investment management industry.\580\ 
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 do not in that a security owner can trade more 
cheaply on

[[Page 75158]]

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 have 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.\581\ The Commission is cognizant of such research 
and has taken steps to help ensure that the impact of published data 
will be minimized by delaying publication by approximately one month 
and anonymizing and aggregating reporting Managers' short position 
data.
---------------------------------------------------------------------------

    \580\ See supra Part VIII.B.1 for discussion of Institutional 
Investment Managers.
    \581\ 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 
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 to try to mimic the Managers' strategy, potentially 
competing away the profitability of the strategy or other traders could 
anticipate when the Manager 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.\582\
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    \582\ The securities lending market is large and complex. See 
Parts IX.B.1-IX.B.4 of Rule 10c-1a for a more detailed description 
of this market and players.
---------------------------------------------------------------------------

    The Commission estimates there are 3,501 broker-dealers. These 
broker-dealers also compete with each other for order flow. The broker-
dealer industry is a competitive industry with reasonably low barriers 
to entry to many segments of the industry. 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.\583\ 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.
---------------------------------------------------------------------------

    \583\ See Rule 613 Adopting Release.
---------------------------------------------------------------------------

C. Economic Effects \584\
---------------------------------------------------------------------------

    \584\ 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 Part VIII.C.1.
---------------------------------------------------------------------------

1. Investor Protection and Market Manipulation
    The adopted Rule 13f-2 and CAT amendment will enhance the 
Commission's ability to protect investors and investigate market 
manipulation by providing a clearer view into the short selling market 
and improving the Commission's reconstruction of significant market 
events. This in turn may lead to improved identification of 
manipulative short selling strategies which may also serve as a 
deterrent to would-be manipulators and thus may help prevent 
manipulation. It will also improve the Commission's observation of 
short sale activity that potentially poses a systemic risk. The 
Commission believes that the adoption of Rule 13f-2 and the CAT 
amendment will benefit investors by facilitating the Commission's 
observation of short selling and will thus help protect investors and 
help ensure the sufficiency of information related to short selling in 
the market.
    The Commission believes that the Rule 13f-2, Form SHO, and the CAT 
Amendment will improve regulators' oversight of markets and enhance the 
Commission's and SROs' 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 
Form SHO data combined with other data to reconstruct market events and 
better understand the link between trading activity of large short 
seller 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 period of 
heightened volatility, large short sellers may have been engaging in 
trading behavior that was distinct from other short sellers.
    The recent adoption of Rule 10c-1a will further enhance the 
usefulness of adopted Form SHO.\585\ As another source of data covering 
the short selling market, the Commission may use Rule 10c-1a data 
combined with Form SHO data in an attempt to match securities lending 
with actual short positions taken. While the timing of the data being 
received may be asynchronous, Form SHO and Rule 10c-1a data sources 
will have a natural relationship with each other. This combination of 
data can be useful for market reconstructions, but also useful in 
detecting activities such as naked short selling or other potential 
violations.
---------------------------------------------------------------------------

    \585\ Rule 10c-1a, which was adopted prior to Rule 13f-2, 
includes multiple compliance dates, and certain disclosures required 
by Rule 13f-2 may be implemented before certain of Rule 10c-1a's 
compliance dates. Due to this uncertainty, the Commission describes 
the effects of Rule 13f-2 and the CAT amendment as coming into 
existence prior to those associated with Rule 10c-1a but 
acknowledges that there may be a period in which this is not true. 
The beneficial combined effects will not materialize until the 
disclosure requirements of both rules are implemented. See infra 
note 615.
---------------------------------------------------------------------------

    Hypothetically, if Form SHO data had been available to the 
Commission at the time of the market events of January 2021, the 
Commission could have used these data to examine the short selling 
behavior of individual large short sellers. Additionally, because short 
positions often take some time to create, the Commission could have 
attempted to identify individual short sellers with large short 
positions in the various meme stocks in January 2021 based on the most 
recent reports; the Commission could then have used CAT data to better 
understand how these short sellers traded during the heightened 
volatility.\586\ One commenter stated that the lack of transparency 
into short positions did not just hamper the SEC's understanding of 
these events as they unfolded but, ``. . . may also be interfering with 
the SEC's and market

[[Page 75159]]

observers' ability to say with confidence what happened in 
retrospect.'' \587\ The Commission agrees that more data, as is being 
generated by the adoption of this rule, would have aided the Commission 
in analysis of the events of January 2021.
---------------------------------------------------------------------------

    \586\ 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.
    \587\ See Better Markets Letter at 7.
---------------------------------------------------------------------------

    As noted above in Part VIII.B, Form SHO data will provide the 
Commission with data that are additive rather than duplicative.\588\ 
After implementation of Rule 13f-2, the activity data provided in Form 
SHO will allow the Commission to observe how large short sellers 
respond to the heightened volatility, albeit with a time lag, due to 
the filing deadline. Specifically, the Commission will be able to 
observe more precisely which days reporting short sellers most actively 
increase or decrease their short positions and correlate this activity 
to market conditions on those days.
---------------------------------------------------------------------------

    \588\ See supra Part VIII.B for discussion.
---------------------------------------------------------------------------

    Analysis of Form SHO data during periods of high volatility might 
help the Commission maintain fair and orderly markets by highlighting 
key economic channels and mechanisms through which short selling could 
both impact and be impacted by periods of volatility. This information 
can, in turn, allow the Commission to more specifically tailor 
responses to similar or related events in the future. While the data 
provided by the CAT amendment will be visible to the Commission 
relatively quickly, the Form SHO data will only be available following 
a lag of at least two weeks.\589\ Thus, while Form SHO data will be 
useful in market reconstruction, it will have limitations in its 
timeliness.
---------------------------------------------------------------------------

    \589\ Form SHO is required to be reported 14 days after the end 
of the month. Thus, trades happening in the first two weeks of the 
month will not be reported for more than a month.
---------------------------------------------------------------------------

    The bona fide market making information from the CAT Amendment will 
facilitate regulatory analysis of the use of the bona fide market 
making exceptions to Regulation SHO.\590\ In particular, this 
information will provide regulators investigating potential Regulation 
SHO violations with clearer evidence regarding whether a market maker 
was relying on a bona fide market making exception. This might save a 
significant amount of time during an investigation. Having regular 
access to these data will provide the Commission with further insight 
into whether the exceptions for bona fide market making in Regulation 
SHO Rules 203 and 204 are being used appropriately, which may assist in 
assessing compliance with Regulation SHO.
---------------------------------------------------------------------------

    \590\ 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+4), rather than the settlement day following the settlement 
date (T+1). See 17 CFR 242.204(a)(3).
---------------------------------------------------------------------------

    The bona fide market making information might 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 will 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. Since such short selling is more likely to 
be in response to customer demand, it is less likely to signify that 
the short seller anticipates a price decline, relative to cases in 
which the short seller is trading directionally.
    Additionally, the data provided by adopted Rule 13f-2 and the CAT 
amendment may improve the Commission's ability and effectiveness in 
detecting certain types of fraud. Form SHO data will provide the 
Commission flags that may signal potential fraud during an examination. 
Additionally, the enhanced CAT data will 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.
    Enhanced fraud detection by the Commission may also help deter 
fraud, resulting in improved 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.\591\ In 
``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.\592\ If a ``short and distort'' campaign is suspected, 
then detecting this behavior using the position and activity data in 
Form SHO will be easier than using current data.
---------------------------------------------------------------------------

    \591\ See, e.g., comment letters submitted with regards to Short 
Sale Reporting Study Required by Dodd-Frank Act section 417(a)(2): 
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. (June 10, 2011); Jeffrey D. Morgan, President and 
CEO, National Investor Relations Institute, at 3 (June 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). All letters are available at 
https://www.sec.gov/comments/4-627/4-627.shtml.
    \592\ 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.
---------------------------------------------------------------------------

    Short and distort campaigns are more likely to occur in stocks with 
lower market capitalizations with less public information.\593\ 
Consequently, among these stocks, it may not take a very large short 
position in dollar terms to reach the daily average 2.5 percent of 
shares outstanding over the preceding calendar month threshold for 
smaller reporting issuers or the $500,000 or more at the end of a 
settlement day threshold for non-reporting company issuers.\594\ As a 
result, it is likely that an entity engaging in such a practice will be 
required to report Form SHO data.\595\ Consequently,

[[Page 75160]]

if ``short and distort'' type behavior is suspected, then the 
Commission will be more likely to identify Managers with large short 
positions and thus quickly focus their inquiries on entities that could 
potentially profit from manipulation. The Commission could then match 
estimated ``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.\596\ In addition, the Commission could use 
CAT data to further investigate the trading activity of the alleged 
manipulator. CAT data would be used to corroborate Form SHO reporting 
to CAT reported transactions. Using the identified manager's data in 
CAT, the Commission could see all CAT reportable activity, but will not 
be able to see other activity such as options exercises or 
participation in secondary offerings from an issuer.
---------------------------------------------------------------------------

    \593\ One commenter stated that biotechnology companies, 90% of 
which have market capitalizations that would qualify as small-cap or 
micro-cap stocks, face a disproportionately high share of short 
positions. The commenter believes that biotechnology firms are 
disproportionately targeted by short sellers for multiple reasons. 
First, because biotechnology companies cannot disclose interim data 
until validated, the time gap between milestone announcements makes 
these stocks targets for ``short-and-distort'' campaigns. Second, 
the commenter stated that short sellers of biotechnology firms will 
challenge patent claims in order to drive their stock prices lower, 
which makes short positions on these stocks more valuable. The 
commenter supports the Commission's inclusion of the 2.5% threshold, 
which would be reached before the $10 million daily average 
threshold for the majority of biotechnology firms. See Bio Letter at 
5-8.
    \594\ Academic research has found that the average short 
interest in stocks targeted by activist short sellers is about 10%, 
while it is only 4% 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.
    \595\ 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. Several commenters agreed that the 
2.5% threshold for Rule 13f-2 was important because it protects 
firms with lower market capitalizations. See, e.g., BIO Letter at 9.
    \596\ ``Buy to cover'' activity would be inferred from position 
changes reported on Form SHO. This method is only a proxy for ``buy 
to cover'' information. Specifically, the Commission would be 
assuming that changes in position came from ``buy to cover'' 
activity, though there are other mechanisms which could change a 
Manager's net position that do not occur from ``buy to cover'' 
transactions. Further, Form SHO will not show intraday short sales 
and buying to cover if the amounts are equal, as the net position 
will not change.
---------------------------------------------------------------------------

    Enhanced oversight due to the adopted rule and amendment could also 
provide increased protection from other sources of harm caused by 
manipulative short sale activity. First, if firm manager decision-
making is influenced by shifts in stock prices, as one theoretical 
study suggests,\597\ then short sellers could seek to drive down stock 
prices when profitable projects are announced, which may cause firm 
managers to reassess these projects. Doing so may lead to worse 
managerial decision making and lower stock prices. Second, another 
theoretical study argues that due to high levels of leverage and 
interconnectedness in the finance industry, even small declines in 
stock prices due to manipulative short sellers could ripple through the 
financial system with large effects.\598\ While manipulation is 
difficult to verify, should it be suspected, such activity might be 
more easily identified with Form SHO positions and activity data. The 
positions data will allow the Commission to more quickly identify 
individuals with large short positions and then use the activity to 
identify what data to gather, including CAT data to investigate their 
trading behavior to look for signs of manipulation. Improved detection 
capacity may also deter manipulative behavior due to increased fear of 
detection, potentially leading to an overall decline in fraudulent 
activity.\599\
---------------------------------------------------------------------------

    \597\ See I. Goldstein and A. Guembel, Manipulation and the 
Allocational Role of Prices, 75 (1) The Rev. of Econ. Studies 133-
164 (2008).
    \598\ See Markus K. Brunnermeier and Martin Oehmke, Predatory 
Short Selling, 18 (6) Rev. of Fin. 2153-2195 (2014). Similarly, some 
have also stated 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).
    \599\ 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 
that is harmful to short sellers, including orchestrated short 
squeezes. More specifically, to the extent that Managers are still 
holding their short positions when the data becomes public, the 
Commission believes that the information disclosed pursuant to Rule 
13f-2 and the disclosures Form SHO requires also might, in some cases, 
potentially facilitate manipulative strategies targeting short sellers, 
such as short squeezes.
    However, the Commission has sought to reduce this risk by releasing 
only aggregated and anonymized data. Several commenters agreed that 
only aggregated and anonymized data should be published by the 
Commission in order to reduce the likelihood of short squeezes and 
chilling short sale activity, the latter of which could harm stock 
price efficiency and market liquidity.\600\ In contrast, however, 
multiple commenters stated that individual Manager's positions should 
be publicly disclosed in order to uncover hidden short positions, which 
one commenter stated pose risks to investors and the markets.\601\ The 
Commission has sought to balance the costs and benefits of Rule 13f-2 
and Form SHO by collecting Manager-specific data, which should provide 
the Commission with improved detection of manipulative and potentially 
destabilizing activity, while publicly releasing only aggregated, 
anonymized data, which should reduce the likelihood of short squeezes 
and copycat behavior but still increase the transparency of large short 
sale activity.\602\
---------------------------------------------------------------------------

    \600\ For discussion of data aggregation, see supra Part II.C. 
See also MFA Letter, at 18; SIFMA Letter, at 22; AIMA Letter, at 5 
comment letters of supporters.
    \601\ This commenter stated that reducing or eliminating the 
reporting thresholds to Form SHO would provide benefits. See Better 
Markets Letter, at 13. Several retail investor commenters also said 
that the reporting thresholds to Form SHO should be reduced or 
eliminated. See supra note 25.
    \602\ One commenter stated it was confusing that the Commission 
believes that the public release of Form SHO may give opportunities 
to orchestrate short squeezes, but at the same time, also help 
detect short squeezes. See Two Sigma Letter, at 10-12. While 
publicly released Form SHO data may, in some cases, increase the 
opportunity to orchestrate short squeezes, the Commission has 
reduced this risk by only releasing, aggregated, anonymized data. 
Moreover, this risk is further reduced by the Commission's ability 
to utilize disaggregated, Manager-identified short sale data in 
order to increase its detection of short squeezes and other 
manipulative behavior.
---------------------------------------------------------------------------

    The Commission recognizes that the position size thresholds that 
underlie publicly released information may lead to the risk of Managers 
being identified by the public. The Commission estimates that 39 
percent of stocks reported on Form SHO would only have one Manager 
above the reporting Threshold A.\603\ By focusing on stocks in which 
market participants can ascertain that only one Manager exceeded the 
threshold,\604\ combined with a Manager's posts on social media or 
information discovered by a private investigator, market participants 
may be able to identify the Manager holding the short position.\605\ As 
such, the limited

[[Page 75161]]

number of reporters potentially risks shining a spotlight on the few 
Managers with large short positions.\606\ However, due to the delay 
before publicly releasing the data, public Form SHO information will 
not be as up-to-date and thus may not as accurately reflect current 
short positions.\607\ Thus, efforts to orchestrate a short squeeze 
based on the public Form SHO data could result in losses to the 
initiators of the short squeeze if the short positions they target no 
longer exist.\608\ Based on analysis using Form SH data, the Commission 
expects that most, but not all, of the short positions leading to 
reporting on Form SHO will be closed by the time that the aggregated 
Form SHO data are released.\609\ An additional factor that may help 
mitigate the risk of a short squeeze due to the public release of Form 
SHO data is the fact that non-public Form SHO data, in coordination 
with CAT data, will improve the SEC's ability to detect short squeeze 
activity, which may deter some market participants from seeking to 
orchestrate a short squeeze.
---------------------------------------------------------------------------

    \603\ Based on analysis of Form SH data. See Proposing Release, 
at 14963. Commenters questioned the use of Form SH data in this and 
other contexts. See infra Box 1: Use of Form SH Data for responses 
to comments on the use of these data.
    \604\ In some cases, identifying which equity securities 
reported to the public via Form SHO data had only one Manager 
reporting may not be difficult. For example, if the aggregated short 
positions reported in an equity security were less than $20 million, 
it could be estimated that one Manager had a short position of at 
least $10 million average over the month. However, this estimation 
could be incorrect if Managers' end of month gross short position 
differs significantly from their average gross short position over 
the month. This estimation could be further honed by looking at 
daily data to see changes in daily short positions to better 
estimate the size of the position, and thus the number of Managers.
    \605\ 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 (Aug. 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).
    \606\ Though the count of Managers filing Form SHO in any 
particular equity security may sometimes be able to be estimated 
with some accuracy, the identities of Managers will not be disclosed 
by Form SHO data.
    \607\ 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 Proposing 
Release, at 14963 for information on the methodology and caveats of 
using Form SH data. Commenters questioned the use of Form SH data in 
this and other contexts. See infra Box 1: Use of Form SH Data for 
responses to comments on the use of these data.
    \608\ That is because the short position has already been closed 
and the organizers of the short squeeze are incorrectly assuming the 
Manager still has an open short position. Depending on the Manager's 
desired length of time of the short position, the public version of 
Form SHO data may still accurately portray the aggregated short 
position in a given equity security. However, those basing their 
decisions on public Form SHO data will not know whether the Managers 
underlying the aggregated short positions in Form SHO data have 
closed out their positions within the two weeks publication delay. 
Other data sources, combined with Form SHO data, can be used in an 
attempt to discover if the position is closed out, but those are 
also on a delayed basis.
    \609\ See infra note 622 for a discussion on the Commission's 
estimates on how long Managers hold short positions. See also infra 
note 629 for more information on short sellers that do hold their 
positions for longer periods of time. Commenters questioned the use 
of Form SH data in this and other contexts. See infra Box 1: Use of 
Form SH Data for responses to comments on the use of these data.
---------------------------------------------------------------------------

    Having detailed confidential information about which Managers 
currently hold large positions might 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 long transactions, short selling 
places an investor at risk of losing significantly more than the 
investor's 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 position 
liquidations if capital requirements cannot be met.\610\ 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.
---------------------------------------------------------------------------

    \610\ 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 
J. of Fin. 551-584 (2002). See also, e.g., Andrei Shleifer and 
Robert W. Vishny, The Limits of Arbitrage, 52 J. of Fin. 35-55 
(1997) and Denis Gromb and Dimitri Vayanos, Limits of Arbitrage, 2 
Annu. Rev. Fin. Econ. 251-275 (2010) (citations therein).
---------------------------------------------------------------------------

    One commenter stated they were unaware of cases of short selling 
causing systemic harm.\611\ However, the potential instability that the 
Commission wishes to detect includes spillovers from events in one 
asset, such as a particular equity security, to the market for another 
asset.
---------------------------------------------------------------------------

    \611\ See SBAI Letter at 4.
---------------------------------------------------------------------------

    Manager level short position data of individuals with large short 
positions might allow the Commission to better observe these positions, 
study, and more appropriately respond to any market events that arise. 
For example, if the Commission had Form SHO data during the meme stock 
events of January 2021 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 could have been at greatest risk of suffering 
significant harm from a short squeeze. However, the ability of the 
Commission to respond to market events is likely impacted by the 
timeliness of the short sale data that it receives. One commenter 
stated that due to the delay in reporting of Form SHO, the data would 
not be useful to the Commission to respond to market events.\612\ While 
the delay will not aid the Commission in responding in real-time to 
market events, it does aid the Commission in developing responses to 
events over a longer time horizon. Regulatory changes rarely happen in 
real time and involve careful analysis prior to implementation. The 
Commission has chosen a reporting regime which balances the benefits of 
more frequent and timely data with the costs incurred by Managers 
having to report more quickly, including higher explicit reporting 
costs as well as heightened risks of short squeezes and copycat 
trading.
---------------------------------------------------------------------------

    \612\ See SBAI Letter at 2.
---------------------------------------------------------------------------

    All the effects, positive and negative, associated with the data 
collected by Rule 13f-2 discussed in this section will be limited by 
data accuracy. Upon filing, Form SHO will 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 will reduce the utility of the data. However, the amendment 
process will require Managers to amend filings when they discover 
errors, thus promoting the accuracy of the information.
2. Effects on Stock Price Efficiency
    The Commission believes that Rule 13f-2 and Form SHO may have 
uncertain effects on stock price efficiency.\613\ The uncertain effects 
on price efficiency stems from increased transparency of short sales 
generally increasing efficiency, whereas increased transparency might 
also discourage potential short sellers from gathering information--
which harms price efficiency. This section discusses both the concept 
of price efficiency and the positive and negative impacts that adopted 
Rule13f-2 and the CAT amendment may have on price efficiency.
---------------------------------------------------------------------------

    \613\ See infra Part VIII.D.1 for additional discussion of the 
effect of adopted Rule 13f-2 and the CAT amendment on efficiency.
---------------------------------------------------------------------------

a. Comparisons to Other Public Short Selling Data
    The publicly released aggregated data from Form SHO will provide 
information to market participants about the aggregate activities of 
large short sellers--with a planned lag of approximately fourteen days 
from the end of the filing deadline, which is fourteen days after the 
last day of the month.\614\ Existing short selling data, such as the 
FINRA short interest data, is timelier than the data that will be

[[Page 75162]]

filed pursuant to Rule 13f-2 and Form SHO. Forthcoming information from 
Rule 10c-1a data, which could be used to estimate short interest, is 
also expected to be timelier than Rule 13f-2 and Form SHO data.\615\ 
Nevertheless, Rule 13f-2 and Form SHO data will provide information on 
short sale behavior that is not available from other short sale data 
sources. For example, while FINRA short interest data includes short 
interest for all short sales known to clearing broker-dealers, it does 
not provide the Commission or the public with daily information on 
short sellers' activities. In contrast, Form SHO data will provide 
daily information on gross short positions of Managers that exceed 
Reporting Thresholds.\616\ Moreover, while Rule 10c-1a data will 
disseminate to the public anonymized transactions-by-transaction 
securities lending data by all market participants, it does not allow 
for an accounting of the timing of aggregate short sales conducted by 
Managers, nor does it reveal aggregate short positions of Managers with 
large short positions, as will the data from publicly available Form 
SHO.\617\ Thus with the adoption of Rule 13f-2 and Form SHO, market 
participants, who will only see anonymized data, will have increased 
awareness into the activity of Managers with large short sale 
positions.\618\ These benefits are afforded by the adoption of Rule 
13f-2 and the required reporting of Form SHO.
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    \614\ Thus, it will be a one-month delay after the last day of 
the month of data being reported. See supra Part II.B.3 for more 
information on the delay of public dissemination of Form SHO data.
    \615\ We expect that the reporting and publication of Rule 13f-2 
information will occur before the reporting and publication of Rule 
10c-1 information. See supra note 531. Reporting and disclosure 
under Rule 13f-2 will provide more information over current short 
selling data until reporting and disclosure under Rule 10c-1a are 
fully implemented. This could temporarily magnify the benefits and 
costs of many of the effects discussed in this section and elsewhere 
in the Economic Analysis.
    \616\ The Commission will anonymize these data before they are 
publicly disseminated.
    \617\ For example, a Manager could accumulate a large short 
position in a particular security using securities loans from 
multiple prime brokers. Each of these loans will be reported as a 
distinct Rule 10c-1a securities loan, and observers may not be able 
to ascertain whether they are part of a single Manager's short 
position. As a result, a large securities loan in Rule 10c-1a data 
may not represent a single large position reportable under Rule 13f-
2.
    \618\ The Commission will have enhanced data regarding Managers 
and trading activity of stocks in which thresholds are triggered. 
See supra Part VIII.C.1 for discussion.
---------------------------------------------------------------------------

    There is overlap between the information about stock fundamentals 
contained in FINRA short interest data, forthcoming Rule 10c-1a data, 
and the data that will be aggregated from Form SHO filings. However, 
the information in Form SHO filings provides data on Managers, 
including their aggregated daily net changes in positions.\619\ Thus, 
Form SHO will increase the information available to investors about 
past bearish sentiment in the market on a specific time frame. For 
example, Form SHO data could be combined with FINRA short interest data 
to calculate the proportion of short interest comprised of Managers 
with substantial positions. Furthermore, the accompanying activity 
information of Form SHO will provide market participants with an 
enhanced view of short interest and securities lending as well as 
increased insight on how the short sale activity measured by these data 
series change over time. Further, the use of the last day of the month 
as the reference month for the Form SHO reports will allow for a direct 
comparison of the Form SHO data to the FINRA short interest data. For 
example, market participants might search for correlations between 
significant increases or decreases in short positions found in Form SHO 
data 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 FINRA final short interest tally at the end 
of the month. While Rule 10c-1a data could also be used with FINRA 
short interest data for such analysis, Form SHO data will more clearly 
reveal how Managers with large gross short positions view these actions 
or events. Thus, market participants and regulators will be able to use 
Form SHO data along with FINRA short interest data to assess the degree 
to which short interest is concentrated among Managers with large 
positions. It will also allow regulators to better assess which 
securities face the greatest risk of short squeezes and other 
manipulative strategies.
---------------------------------------------------------------------------

    \619\ This is in contrast to other data sources, which only 
provide data on securities such as the short interest in a 
particular security (i.e., FINRA short interest) or the volume of 
securities lent (i.e., Rule 10c-1a data).
---------------------------------------------------------------------------

    Form SHO data could also be combined with forthcoming Rule 10c-1a 
data in order to assess the degree to which securities lending is 
widely dispersed among market participants or concentrated among 
Managers who filed Form SHO.
b. Potential Improvements to Price Efficiency
    Rule 13f-2 and Form SHO may also improve price efficiency if they 
mitigate fraud as discussed in Part VIII.C.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 Form SHO, Rule 13f-2 will 
result in improved price efficiency.
    More generally, the impact of Form SHO on price efficiency will be 
commensurate with the degree to which aggregated Form SHO data are 
newer or more timely than other publicly available short selling 
information and useful for valuing stocks. Price efficiency (also known 
as market efficiency) refers to how accurately prices reflect available 
information relevant to the value of the asset.\620\ This information 
may allow market participants to more effectively make trading 
decisions and manage risk--increasing price efficiency. For example, if 
aggregate Manager short positions provide better info on bearish 
sentiment, then prices could react to updated Form SHO information on 
bearish sentiment.\621\ Although the majority of Managers' short 
positions may be closed by the time the aggregated data from Form SHO 
will be made public due to the lag in reporting and public 
dissemination, a portion of the short positions may still be open.\622\ 
Information on the aggregate size and activity of positions that remain 
open could be combined with FINRA short interest and forthcoming Rule 
10c-1a data to estimate the proportion of short positions held by large 
short sellers. If this proportion is not yet reflected in prices, 
prices will adjust upon publication.
---------------------------------------------------------------------------

    \620\ See, e.g., Eugene Fama, Efficient Capital Markets II, 
46(5) J. Fin. 1575-1617 (1991).
    \621\ See, e.g., A. Senchack and L. Starks, Short-Sale 
Restrictions and Market Reaction to Short-Interest Announcements, 28 
J. of Fin. and Quantitative Analysis 177-194 (1993).
    \622\ 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 
position is held above the threshold is 9.68. This suggests that the 
majority of positions will be closed while some are held longer than 
the delay in reporting.

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

[[Page 75163]]

    Even if many positions are closed by the time the information is 
disseminated, Tables 1 and 2 will still promote price efficiency if the 
prices do not yet reflect the historical short position and activity 
information. Table 2, for example, will provide information on the 
variability of large short positions in a security and how large short 
positions changed around corporate events. Such information will 
improve the precision of signals from Table 1 information and corporate 
events.
c. Potential Harms to Price Efficiency
    Rule 13f-2 may harm price efficiency by increasing the cost of 
short selling.\623\ 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 more difficult, and because 
costly short selling dissuades investors from collecting information in 
the first place.\624\ Short sellers fill the role of incorporating 
negative information by making short sales that reflect the short 
sellers' beliefs about the true value of the company.\625\
---------------------------------------------------------------------------

    \623\ Adopted Rule 13f-2 will have direct impacts on 
establishing large short positions which may trigger reporting 
obligations. Additionally, there may be lesser effects which 
dissuade market participants from short selling in fear of 
triggering reporting of Form SHO.
    \624\ See supra note 597. See Edward Miller, Risk, Uncertainty, 
and Divergence of Opinion, 32 J. of Fin. (1977). See Robert F. 
Stambaugh, Jianfeng Yu, and Yu Yuan, The Short of It: Investor 
Sentiment and Anomalies, 104 J. of Fin. Econ. 288-302 (2012).
    \625\ Several commenters made statements and cited research on 
how short selling improves price efficiency. See, e.g, NASDAQ Letter 
at 1, AIMA Letter at 5, which state that short selling promotes 
efficient price formation, enhances liquidity, and facilitates risk 
management. Furthermore, one comment letter, ``. . . urge(d) the 
Commission to consider the widely-cited academic law and finance 
literature as part of its analysis of the Proposed Short Reporting 
Rules,'' and cited multiple studies that provide evidence that short 
selling contributes to price efficiency. See also ``Law and Finance 
Professors letter'' at 2. Cited studies include Jonathan M. Karpoff 
and Xiaoxia Lou, Short Sellers and Financial Misconduct, 65 J. of 
Fin. 1879-1913 (2010) and Ekkehart Boehmer, Charles Jones, and 
Xiaoyan Zhang, Which Shorts Are Informed? 63 J. of Fin. 491-527 
(2008), and Lauren Cohen, Karl Diether, and Christopher Malloy, 
Supply and Demand Shifts in the Shorting Market, 62 J. of Fin. 62, 
2061-2096 (2007). Other cited studies find evidence that constraints 
on short selling reduce market efficiency, including Joseph E. 
Engelberg, Adam V. Reed, and Matthew C. Ringgenberg, Short Selling 
Risk, 73 J. of Fin. 755-786 (2018), Ekkehart Boehmer, Charles Jones, 
and Xiaoyan Zhang, 2013, Shackling the Short Sellers: The 2008 
Shorting Ban, Review of Financial Studies 26, 1363-1400, Pedro Saffi 
and Kari Sigurdsson, Price Efficiency and Short Selling, Review of 
Financial Studies 24, 821-852 (2011). One cited paper favors reduced 
regulation of short selling in order to avoid undermining the market 
quality improvements provided by short selling. See Peter Molk and 
Frank Partnoy, The Long-Term Effects of Negative Activism, Univ. of 
Illinois L. Rev., 1-70 (2022). Another cited paper favors less 
regulation of short selling that enhances price efficiency but 
increased regulation of short selling that is aimed at disabling the 
fundamental value of targeted firms. See Barbara Bliss, Peter Molk, 
and Frank Partnoy, Negative Activism, 97 Wash. Univ. L. Rev. 1333-
1395 (2020)). The comment letter's suggestion to delay public 
release of Form SHO data for one year and receive additional input 
on which Form SHO thresholds to apply stem from a concern that Rule 
13f-2 could undermine the market quality benefits of short selling, 
of which the above cited studies find evidence. However, the 
Commission is also cognizant of the of the benefits provided by 
short selling, as noted in supra Part VIII.B.2. Furthermore, the 
Commission discusses in detail below the potential costs to price 
efficiency stemming from Rule 13f-2 and Form SHO. See infra Part 
VIII.C.2.c.ii.
---------------------------------------------------------------------------

i. Costs That Impact Price Efficiency
    Rule 13f-2 increases the costs of short selling in at least four 
ways: (1) Compliance costs, (2) potentially revealing short sellers' 
information that may have been acquired through fundamental research, 
(3) potentially revealing short sellers' trading strategies, and (4) 
increasing the threat of retaliation against Managers by other market 
participants.
(a) Compliance Cost Effects
    The compliance costs associated with reporting large short 
positions will result in an increase in the cost of short selling.\626\ 
As many Managers have underlying investors, these costs will likely be 
passed on to end consumers in the form of lower returns due to limiting 
the strategies that Managers could profitably employ and reducing the 
profitability of strategies still employed. On net, an increase in the 
cost of short selling will reduce short selling, harming price 
efficiency.\627\
---------------------------------------------------------------------------

    \626\ See infra Part VIII.D.2 for a discussion of how these 
direct costs may affect investors in funds that employ short 
selling.
    \627\ See supra note 624 and accompanying text.
---------------------------------------------------------------------------

(b) Potentially Revealing Information of Short Sellers
    Publicly releasing aggregated Form SHO data has the potential to 
reveal some of the information that short sellers may have acquired 
through fundamental research.\628\ 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 this information 
and providing less incentive to produce fundamental research. Thus, the 
publication of Form SHO data represents an additional cost to short 
selling in the form of potentially lower profitability for trading on 
negative information. Relative to the proposed rule, the Commission has 
modified the final rule's requirements for publication of Form SHO data 
(from the proposed rule) to decrease the risks of revealing this 
information by requiring much less granular information in Table 2 of 
Form SHO. In addition, adopted Rule 13f-2 will mitigate revealing 
information by delaying publication at least 14 days from the last day 
of a month and only publishing aggregated data.
---------------------------------------------------------------------------

    \628\ Several commenters agreed. See, e.g., SBAI Letter at 2-3, 
Two Sigma Letter at 1-2, SIFMA Letter at 2.
---------------------------------------------------------------------------

    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.\629\ 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.\630\ 
Additionally, the threshold may protect short sellers with smaller 
short positions from having the information in their trades revealed. 
In contrast, Rule 13f-2 may highlight large positions, potentially 
increasing the likelihood that some of the information contained in the 
trades of large short sellers will be acted on by other market 
participants before the short seller could acquire their optimal 
position. Thus, the Commission expects that publication of aggregated 
Form

[[Page 75164]]

SHO data will still represent a cost to short selling.\631\
---------------------------------------------------------------------------

    \629\ 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''), 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, 
17.9% of positions were held above the proposed Threshold A for at 
least a month. Commenters questioned the use of Form SH data in this 
and other contexts. See infra Box 1: Use of Form SH Data for 
responses to comments on the use of these data.
    \630\ See supra Part VIII.C.1 for a discussion of how market 
participants may attempt to uncover individual identities.
    \631\ 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.
---------------------------------------------------------------------------

    Relatedly, Managers who wish to build large short positions may 
choose to execute their transactions at a pace that is faster than what 
they would have done otherwise to attempt to profit from their research 
before information is disclosed and copycat 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.\632\ Additionally, trading 
faster than is optimal may harm price efficiency by leading prices to 
over-react to the aggressive trading.\633\
---------------------------------------------------------------------------

    \632\ See Kyle (1985) at supra note 630.
    \633\ See e.g., Albert S. Kyle and Anna A. Obizhaeva, Large Bets 
and Stock Market Crashes (Mar. 22, 2019), available at https://ssrn.com/abstract=2023776 or https://dx.doi.org/10.2139/ssrn.2023776.
---------------------------------------------------------------------------

(c) Potentially Revealing Trading Strategies of Short Sellers
    If Form SHO data provides information about the specific trading 
strategies or identities of certain short sellers, those short sellers 
could be harmed by actions such as others profiting from predicting 
their trading or copycat trading.\634\ This harm could result in less 
short selling, reducing the price efficiency benefits of short selling.
---------------------------------------------------------------------------

    \634\ If the identity of the short seller is exposed, then this 
may also incentivize retaliation against them. See infra Part 
VIII.C.2.i.(d).
---------------------------------------------------------------------------

    While Rule 13f-2 was designed to minimize the possibility of 
identifying Managers or their proprietary information, there are 
conditions that may arise that would be conducive to revealing 
proprietary trading strategies. For example, in cases where market 
participants may be able to discern that there is only one Form SHO 
filer,\635\ then market participants might attempt to use the activity 
data to extract information about the specific trading strategies that 
short sellers use to implement their trades. Market participants might 
then try to identify similar patterns in the real time market trading 
and quote 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. The Commission received several comment letters that 
addressed the risk of copycat trading due to public disclosure of Form 
SHO data.\636\ While the Commission acknowledges this risk, it believes 
that the design of the published activity data will significantly limit 
this risk. In particular, the netting of short selling activity across 
short sellers will mask much of the trading behavior of individual 
short sellers while still providing information about changes in 
bearish sentiment in the market. By netting trading activity in the 
aggregations across Form SHO filers, market participants viewing the 
publicly reported Form SHO data will still get a view of changes in 
bearish sentiment while keeping Manager specific trading strategies 
hidden.
---------------------------------------------------------------------------

    \635\ This could partially be achieved through the use of Rule 
10c-1a data, depending on the timing of the securities loan, among 
other factors. However, such risk is mitigated by the fact that 
securities lending transaction sizes in Rule 10c-1a data are not 
publicly disseminated for 20 business days and counterparties 
identities are not publicly disseminated.
    \636\ See, e.g., SBAI letter at 2, Two Sigma letter at 1, David 
Kwon letter at 3. Furthermore, supporting commenters' views, there 
is empirical evidence that copycat trading in response to media 
reports may harm price efficiency. See Jiang, George and Strong, 
Cuyler, Unusual Option Activity: Is it Smart to Follow `Smart 
Money'? (Aug. 29, 2022). available at https://ssrn.com/abstract=3618427.
---------------------------------------------------------------------------

(d) Retaliation Against Short Sellers
    The public disclosure requirements might also increase short 
selling costs by exposing Managers to the risk of retaliation by other 
market participants, but the risk may be low.\637\ An issuer's 
directors or shareholders may have the incentive to retaliate if they 
believe short sellers are inappropriately reducing the value of the 
stock.\638\
---------------------------------------------------------------------------

    \637\ See 2011 MFA Letter; 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 (Nov. 
2021), available at https://ssrn.com/abstract=3849581 or https://dx.doi.org/10.2139/ssrn.3849581.
    \638\ The motivation behind such retaliation may be strengthened 
by the belief that the short seller's aim is to profit from reducing 
the value of the stock rather than uncovering mismanagement or other 
negative information about the firm to shareholders. See generally 
Barbara Bliss, B., Peter Molk, and Frank Partnoy (2020), Negative 
Activism, Wash. U. Law Review 97:1333-1395 (2020), which 
distinguishes between ``informational negative activism,'' which 
serves to uncover, ``. . . the truth about companies whose shares 
the activists believe are overvalued,'' and ``operational negative 
activism,'' which, ``. . . involves dismantling or disabling sources 
of value at companies.''
---------------------------------------------------------------------------

    Although aggregating the data before releasing it to the public on 
a delay will 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, market participants might 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.
    In the event that Managers can be identified from Form SHO 
disclosures, 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.\639\ One commenter provided further examples of retaliatory 
behavior that short sellers may face the threat of, including short 
squeezes, nuisance lawsuits, intimidation, and physical violence.\640\ 
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.\641\ 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.\642\ Some 
issuers have even been known to hire private investigators in an 
attempt to uncover the identities of individuals short selling their 
stock.\643\ Some short sellers have also expressed that they have 
experienced threats to their personal safety after their short 
positions were revealed.\644\
---------------------------------------------------------------------------

    \639\ 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.
    \640\ See MFA Letter at 9.
    \641\ See infra note 645.
    \642\ See Owen A. Lamont, Go Down Fighting: Short Sellers vs. 
Firms, 2 (1) The Rev. of Asset Pricing Studies 1-30 (2012).
    \643\ Id.
    \644\ See Game Stopped? Who Wins and Loses When Short Sellers, 
Social Media, and Retail Investors Collide: Hearing Before the H. 
Comm. on Fin. Serv., 117th Cong. (2021) (statement of Gabriel 
Plotkin, Founder and CEO, Melvin Capital Management), available at 
https://www.congress.gov/117/meeting/house/111207/witnesses/HHRG-117-BA00-Wstate-PlotkinG-20210218.pdf (stating that after company's 
short positions were made known, Reddit users made posts and others 
sent personal text messages that were laced with anti-Semitic slurs 
and threats of physical harm to him and others).

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[[Page 75165]]

    In addition, publicly disclosing that Managers, in aggregate, 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.C.1.\645\ 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.
---------------------------------------------------------------------------

    \645\ As noted in Part VIII.C.1, the Commission will also be 
better able to detect short squeezes.
---------------------------------------------------------------------------

ii. Impact of the Costs
    Because reporting information on Form SHO increases the costs of 
short selling, the adopted rules could have several negative effects on 
price efficiency. In particular, negative price efficiency effects 
could derive from a reduction in fundamental research,\646\ strategic 
trading to avoid exceeding the thresholds, and reduced liquidity in 
options markets. Reduced short selling could also take place from the 
effect of negative price efficiency. Rule 13f-2 and Form SHO have been 
designed to reduce the likelihood of these risks occurring to the 
extent possible while still providing market participants and 
regulators with enhanced transparency of short sale behavior. To the 
extent that fundamental research decreases, price efficiency might be 
harmed as prices will not necessarily reflect all available relevant 
information, only that portion that had been discovered by investors 
continuing to perform fundamental research.
---------------------------------------------------------------------------

    \646\ Several commenters also stated there could be a possible 
reduction in fundamental research. See, e.g., MFA Letter at 10.
---------------------------------------------------------------------------

    It is possible that short sellers may strategically select average 
short position just below the threshold in order 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.\647\ 
Consequently, to the extent that Managers may choose to select 
otherwise sub-optimal short positions to avoid reaching the reporting 
threshold, Rule 13f-2 and Form SHO might 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.\648\
---------------------------------------------------------------------------

    \647\ See, e.g., supra note 629.
    \648\ See, e.g., supra note 625. 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). Consistent with statements in the 
Proposing Release, the Commission continues to believe that this 
effect is the not 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. Proposing 
Release at 14996 n. 281. See also letters from OTC Markets, Provable 
Markets, SIFMA, and Chester Spatt 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 markets adjust to 
short selling constraints as to not overvalue stocks. See Douglas 
Diamond and Robert E. Verrecchia, Constraints on Short-Selling and 
Asset Price Adjustment to Private Information, 18 J. of Fin. Econ. 
277-311 (1987).
---------------------------------------------------------------------------

    Additionally, Rule 13f-2 might dissuade options market makers from 
holding large short positions and providing liquidity in options 
markets and, thus, might harm price efficiency in equity markets. 
Research has found 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.\649\
---------------------------------------------------------------------------

    \649\ See infra Part VIII.C.3. See also David Easley, Maureen 
O'Hara, and Pulle Subrahmanya Srinivas, Option Volume and Stock 
Prices: Evidence on Where Informed Traders Trade, 52 J. of Fin. 431-
465 (1998).
---------------------------------------------------------------------------

d. Limitations on Price Efficiency Effects
    As with the discussion in Part VIII.C.1, many of the economic 
effects articulated in this section relating to the reporting of Form 
SHO might be limited to the extent that the data reported in Form SHO 
contains factual errors. The EDGAR system will check the data for 
technical errors but not the accuracy of the data entry by filers. 
Thus, the data reported in Form SHO might 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 delay in the publication of the 
data. Furthermore, the data will only be available for those securities 
with Managers who have short positions over the threshold, which 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 adopted Rule 13f-2 and CAT amendment on liquidity 
is uncertain. Part VIII.C.2.c discusses the possibility that Rule 13f-2 
and Form SHO may harm price efficiency by dissuading investors from 
pursuing fundamental research. Alternatively, Rule 13f-2 and Form SHO 
may help price efficiency by increasing transparency with respect to 
the actions of large short sellers. To the extent that the adopted rule 
and amendment improve price efficiency, this might also indirectly 
improve liquidity because market makers would be subject to less 
mispricing risk. 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, to the extent 
that the Rule 13f-2 enhances price efficiency, it may also enhance 
liquidity by mitigating mispricing risk. Conversely, if the Rule harms 
price efficiency, it may also harm liquidity.
    Equity market makers generally do not carry large gross short 
positions overnight. However, adopted Rule 13f-2 and Form SHO may make 
market makers more concerned that a particularly volatile trading day 
may cross the Reporting Thresholds requiring the filing of Form SHO. 
One commenter described the concern for unintentionally crossing the 
threshold while market making.\650\ While the Commission believes the 
adopted Reporting Thresholds will generally be very difficult for 
market makers to trigger,\651\ market makers could still choose to 
reduce market making activities during periods of volatility due to 
concerns over having to report Form SHO. To the extent market makers 
believe high volatility may necessitate a large short position, the 
adopted rule may reduce market liquidity.
---------------------------------------------------------------------------

    \650\ See HSBC Letter at 15.
    \651\ Market makers typically use short selling to maintain two 
sided quotes in the absence of inventory and other high frequency 
traders. While market makers trade in large volumes, they tend to 
end trading sessions fairly flat on inventory in larger stocks. 
Therefore, while it is possible that market makers may end a single 
trading day holding a gross short position of $10 million, it is 
highly unlikely that this will occur frequently enough for them to 
end the month with an average daily position of $10 million.

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[[Page 75166]]

    Additionally, in the event that an options market maker might have 
short equity position close to the Reporting Thresholds, Rule 13f-2 
might dissuade these option market makers from increasing their short 
position, which may harm their willingness to provide liquidity in 
options markets. Alternatively, Rule 13f-2 might not cause option 
market makers that exceed the Reporting Thresholds to reduce their 
positions in order to avoid filing Form SHO, in which case the 
additional associated spending on filing Form SHO (and other compliance 
costs) might result in wider spreads if the compliance costs are large 
enough.
4. Effect on Corporate Decision Making
    The Commission believes that Rule 13f-2 and Form SHO might have 
mixed effects on corporate decision making. On one hand, research 
suggests that corporate managers learn from market reactions to 
announcements.\652\ Consequently, Rule 13f-2 and Form SHO may provide 
corporate managers with additional feedback on their decisions, albeit 
with a delay. Projects often take some time to design and implement 
after announcement, and consequently, even with the lag in the 
reporting time of Form SHO data, a corporate manager might review the 
data around significant announcements to better understand how some 
Managers viewed a particular project or announcement. For example, if 
large short positions were built shortly after a corporate project 
announcement, then this may help signal to a corporate manager that the 
market viewed that project announcement negatively, and this 
information could enhance the corporate manager's decision-making on 
the project.
---------------------------------------------------------------------------

    \652\ 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 another aspect, 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 wrongdoing, 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, at times, through doing 
research, uncovered fraudulent behavior.\653\ Academic research has 
also shown that even the threat of short selling serves to discipline 
managers.\654\ As discussed in Parts VI.C.1 and VI.C.2, Rule 13f-2 may 
discourage Managers from performing fundamental research. If less 
fundamental research is performed by short sellers,\655\ then their 
role as monitors of the firm diminishes. Less monitoring might lead to 
higher incidences of fraud as managers feel that the likelihood of 
being caught declines.\656\ Thus, to the extent that Rule 13f-2 and 
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 fraudulent actors that are discovered by 
investors.
---------------------------------------------------------------------------

    \653\ 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) (retrieved from Factiva database). Cf. Nessim Mezrahi et 
al., More Securities Class Actions May Rely on Short-Seller Data, 
Law360 (Jan. 10, 2022, 7:07 p.m.) available at https://www.law360.com/articles/1453499/ more-securities-class-actions-may-
rely-on-short-seller-data (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'').
    \654\ 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).
    \655\ See supra Part VIII.C.2 for a discussion of the potential 
for the final rule to reduce the incentives for short sellers to 
conduct fundamental research.
    \656\ 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 on the Securities Lending Market
    As discussed in Parts VIII.C.1 and VIII.C.2, the adopted rule and 
related Form SHO will increase the cost of short selling, particularly 
large short positions--potentially leading to less overall short 
selling. As discussed in Part VIII.C.2, short sellers must borrow 
shares for their short position. When short sellers 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.\657\ Consequently, to the 
extent that the adoptions discourage short selling, they may also lower 
overall portfolio returns, including for institutional investors that 
engage in securities lending.\658\
---------------------------------------------------------------------------

    \657\ See supra note 563.
    \658\ 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.
---------------------------------------------------------------------------

6. Compliance Costs
    The Commission believes that there will be direct costs associated 
with adopted Rule 13f-2, Form SHO, and the CAT amendment. These costs 
include Managers reporting position and activity data, broker-dealers 
updating CAT reporting processes, and the Commission processing and 
releasing the Manager reports through EDGAR. Rule 13f-2, related Form 
SHO, and the amendment to CAT in aggregate, will result in an estimated 
maximum of $119,975,800 in initial costs and $72,026,064 in annual 
costs.\659\
---------------------------------------------------------------------------

    \659\ See supra Table 1, Table 2, and Table 3 in Part VII. These 
costs assume 1,000 Managers would file Form SHO annually and 35 
Managers would file amendments each month. The initial costs are 
calculated by adding the Form SHO Initial Technology Projects cost, 
the CAT: Central Repository--Short Sale Data cost, CAT: Reporting of 
Bona Fide Market Making Exception--Insourcers cost, and the CAT: 
Reporting of Bona Fide Market Making Exception--Outsourcers cost. 
($118,950,000 + $113,800 + $870,000 + $42,000 = $119,975,800). The 
annual costs are calculated by adding the Form SHO Filings cost, the 
Use of Structured XML-Based Data Language cost, the Amended Form SHO 
Filings cost, and the amending Use of Structured XML-Based Data 
Language cost. ($60,326,400 + $9,264,000 + $2,111,424 + $324,240 = 
$72,026,064). See also infra Part VIII.C.6.a and Part VIII.C.6.c for 
further explanations of these costs.
---------------------------------------------------------------------------

    The Commission received several comments from industry groups 
concerned about the cost of implementing Rule 13f-2, Form SHO, and the 
CAT amendment. One commenter stated that Managers currently do not have 
systems in place to comply with Rule 13f-2, Form SHO, and the CAT 
amendment. Multiple commenters stated that there would be high costs 
associated with tracking positions for the purpose of seeing if they 
had crossed the Reporting Thresholds.\660\ Another commenter stated 
that the Commission's estimated costs in the proposing release, in 
general, were ``materially understated''.\661\ However, the Commission 
has attempted to use the applicable resources available to it to 
estimate the costs of implementing adopted Rule 13f-2, Form SHO, and 
the CAT amendment. The Commission did not receive any information from 
commenters that might otherwise have been used to refine or adjust its 
estimates of the implementation costs of adopted Rule 13f-2, Form SHO, 
and the CAT amendment. Thus, the Commission believes its estimates to 
be reasonable given the information it has

[[Page 75167]]

available. Furthermore, the Commission has adjusted estimates in 
response to policy choices that differ from the Proposing Release, some 
of which will lower compliance costs, including the exclusion of the 
``buy to cover'' proposals (proposed Rule 205 and the related CAT 
amendment) and a change to one of the reporting thresholds that will 
likely result in fewer Managers having to report Form SHO. As discussed 
in Part II.B, these policy changes, to the extent possible, address or 
are in response to statements from commenters regarding costs stemming 
from the Proposing Release.
---------------------------------------------------------------------------

    \660\ See infra note 679.
    \661\ See MFA Letter, at 19.
---------------------------------------------------------------------------

a. Form SHO Compliance Costs
    The Commission believes that Managers will incur an initial 
technology-related burden to update their current systems to capture 
the required information and automate and facilitate the completion and 
filing of Form SHO.\662\ While Managers likely have other existing 
reporting obligations that are similar to Form SHO filing obligations, 
Managers will need to update their systems to ensure timely and 
accurate filing of the specific information required under Form 
SHO.\663\ The estimated aggregate cost of Form SHO initial technology 
projects across all Managers ranges from $29,975,400 to $118,950,000. 
The Commission estimates that between 252 \664\ and 1,000 Managers will 
be required to file Form SHO. The lower estimate is based on the number 
of Form SH filers above Threshold A. The actual number of reporting 
Managers will likely be higher than 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.\665\ However, the 
actual number of reporting Managers will likely be lower than the 
Commission's high estimate, since this estimate is also based on an 
initial analysis of Form SH filings, which were filed weekly and 
therefore more likely to trigger reporting thresholds, as compared to 
adopted Form SHO, which will involve monthly assessment and therefore 
require a longer-held large short position to trigger a reporting 
threshold.\666\ The Commission discusses the use of Form SH Data, 
including commenter concerns about the use of the data in this and 
other contexts, in Box 1: Use of Form SH Data.
---------------------------------------------------------------------------

    \662\ See supra Part VII.4.
    \663\ See infra Part VIII.C.6.c.
    \664\ In the Proposing Release, the Commission estimated 346 
Managers would be required (on the low end of the estimate). The 
Commission changed the parameters for this estimate to match the 
scenario of a $10 million daily average over the month or 2.5% daily 
average over the month of shares outstanding thresholds that are 
being adopted as Threshold A.
    \665\ See Proposing Release, at Table I. See also Proposing 
Release, at 14963 for more information on the methodology and 
caveats of using Form SH data.
    \666\ See Disclosure of Short Sales and Short Positions by 
Institutional Investment Managers, 73 FR 61679. Form SH filers filed 
weekly reports. As a result, each reporting manager would file fewer 
reports under Rule 13f-2, because Form SHO would be filed monthly. 
See also 73 FR 61686 (estimating 1,000 weekly Form SH filings by 
reporting Managers).

------------------------------------------------------------------------
 
-------------------------------------------------------------------------
Box 1: Use of Form SH Data:
    The Commission's estimation of the minimum number of Managers likely
     to report Form SHO draws on an analysis of data collected under
     Form SH, the only existing data source of individual Manager-level
     short sale positions. In addition to estimating the minimum number
     of reporting Managers, the Economic Analysis also uses Form SH data
     for comparisons of alternative thresholds and to estimate the share
     and number of potential reported securities with only one reporting
     Manager, the potential share of gross short sale dollar volume
     covered by reporting Managers, and statistics on potential holding
     periods after hitting a threshold.
    The Commission received several comment letters questioning the
     applicability of Form SH data to the current time period.\a\ One
     commenter stated that the period surrounding the filing of Form SH
     was an abnormal period for financial markets, and also stated that
     many prominent short sellers have left the industry.\b\ While there
     are various limitations to be considered when using Form SH
     data,\c\ Form SH data are the most relevant and applicable source
     of data available for the purposes of estimating the costs of the
     design and analysis of Rule 13f-2. There are no other data sources,
     public or regulatory, which specifically track Managers' short
     position activities in the U.S. While the Commission agrees that
     having more current data would be useful for the purposes of Rule
     13f-2's design and analysis, no commenters provided such data, and
     the Commission believes Form SH data are sufficiently informative
     to analyze the predicted impact of the amendments.\d\
    Further, in response to these comments, the Commission analyzed
     FINRA short interest data over the period of 2008 to present with
     the goal of seeing if short interest was comparable between the
     current period and the period surrounding Form SH filings.\e\
     Specifically, we compared the trend of average short interest to
     the trend of the number of equities counted from each FINRA short
     interest files covered 2009 to 2023. The analysis revealed that the
     average short interest per equity symbol has increased over time by
     approximately 46 percent, while the number of symbols has increased
     at a much slower rate of 17 percent. Thus, we observe that the
     average short interest per equity symbol has increased from 2009 to
     present. However, the Commission cannot assess whether the size of
     Manager positions has changed over time.\f\ Without this piece of
     knowledge, it is indeterminate whether the average amount of short
     interest generated by a manager has changed over time. If there are
     currently more Managers relative to 2008, it is possible that the
     average short position per manager is smaller than during the
     period Form SH was used. Conversely, if there are fewer Managers,
     it is likely the average short position per manager has increased
     relative to 2008.
------------------------------------------------------------------------
\a\ See, e.g., Law and Finance Professors Letter, at 3; AIMA Letter at
  11-12; Two Sigma Letter at 5-6.
\b\  See Law and Finance Professors Letter, at 3.
\c\ See supra Part VIII.B.4.e and note 670 for a discussion of
  limitations in the use of Form SH data. See also Part VII.B.1 for a
  discussion of other ways Form SH data differ from Form SHO data.
\d\ See supra Part II.A.3 for additional discussion of comments
  regarding the Reporting Thresholds and note 177 for further discussion
  of the time period of the data.
\e\ FINRA Short Interest data are available at https://www.finra.org/finra-data/browse-catalog/equity-short-interest/data. See also Part
  VIII.B.4 a for further information about FINRA Short Interest Data.
\f\ See supra Part VII.B.1 for a discussion of estimates of the number
  of affected Managers using Form SH, which most closely mirrors the
  criteria of Rule 13f-2 and Form SHO and how the number may have
  changed over time.

    The Commission estimates that the annual cost to Managers for 
filing Form SHO ranges from $15,202,252 to $60,326,400.\667\ The 
Commission estimates that Managers will collectively spend an 
additional $2,334,528 to $9,264,000 per year to structure Form SHO 
directly in Form SHO-specific XML.\668\ The Commission estimates that 
the Managers that will file amended Form SHOs will collectively spend 
$542,938 to $2,111,424 per year to file amended Form SHOs.\669\ 
Further,

[[Page 75168]]

the Commission estimates that Managers filing amended Form SHO will 
collectively spend an additional $83,376 to $324,240 per year to 
structure Form SHO directly in Form SHO-specific XML.\670\ The 
Commission thus estimates that the aggregate cost of structuring and 
filing Form SHO across all Managers ranges from $18,163,094 to 
$72,026,064.\671\ Costs might 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 Form SHO on a monthly basis will likely still incur the 
initial costs. Furthermore, because Manager short positions are fluid, 
some Managers will not be required to file a report every month when 
they do not cross 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 will also vary 
by Manager. Initial costs might also be higher for some Managers who do 
not currently have systems built to report to EDGAR.\672\ By contrast, 
because we expect Managers will have a financial incentive to automate 
the reporting process by leveraging Form SHO-specific XML reporting, 
the aggregate costs associated with Form SHO-specific reporting may be 
meaningfully lower going forward.\673\
---------------------------------------------------------------------------

    \667\ See supra PRA Table 2 and note 450. The lower estimate was 
calculated using 252 Managers. 20 hours per filing x 252 filings by 
Managers each month x 12 months x $251.36 = $15,202,252. The 
Commission estimates that 252 Managers would have been required to 
file Form SH had Form SH been subject to the same $10 million and 
2.5% threshold.
    \668\ See infra Part VIII.C.6.c and infra note 686. The lower 
estimate was calculated as follows: 2 hours per filing x $386 per 
hour for a programmer x 252 filings by Managers each month x 12 
months = $2,334,528.
    \669\ See supra PRA Table 1 and accompanying text discussing 
amended Form SHO estimates. We maintain the assumption of 3.5% of 
Managers amending monthly in all of our estimated costs for amending 
Form SHO. Using the lower estimate of 252 Managers, this would 
result in 9 Managers filing amendments monthly. 20 hours per filing 
x 9 filings by Managers each month x 12 months x $251.36 per hour = 
$542,938.
    \670\ Using the lower estimate of 9 Managers filing amendments 
monthly would result in $83,376 to structure amended Form SHO 
filings in Form SHO-specific XML. 2 hours per filing x 9 filings by 
Managers each month x 12 months x $386 per hour = $83,376.
    \671\ See supra PRA Table 2. These costs are calculated by 
adding the costs for Form SHO Filings, Use of Structured XML-Based 
Data Language, Amended Form SHO Filings, and the amending Use of 
Structured XML-Based Data Language together. For the lower estimate, 
we calculate using 252 Managers filing each month annually and 9 
Managers filing amendments monthly. ($15,202,252 + $2,334,528 + 
$542,938 + $83,376 = $18,163,094).
    \672\ Most Managers will be familiar with EDGAR filing 
requirements through other reporting obligations, such as Form 13F. 
See supra notes 193 and 452. See also infra Part VIII.C.6.c.
    \673\ See supra note 451 and infra note 711.
---------------------------------------------------------------------------

    For some Managers, there may be additional considerations, which 
may increase costs. For example, rules for filing Form SHO require 
Managers to prevent duplicative reporting.\674\ The burden to ensure 
that duplicative reporting doesn't occur will vary by Manager and will 
depend on whether two or more Managers exercise investment discretion 
over the same reportable securities position. Also, Managers managing 
multiple accounts with short positions requiring aggregation may have 
additional costs associated with the aggregation when modifying systems 
to track the Reporting Thresholds and report positions on Form SHO.
---------------------------------------------------------------------------

    \674\ See Form SHO, General Instructions at Rules to Prevent 
Duplicative Reporting.
---------------------------------------------------------------------------

    The Commission believes the need to amend Form SHO may vary by 
familiarity with filing Form SHO. 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 Form 
SHO. As part of updating systems to comply with the reporting 
requirements of Rule 13f-2, Managers must calculate the market value of 
their position using the official closing price as of the close of 
regular trading hours for the trade settlement date in question at the 
end of the month, which may not be the fair market value at the time in 
which the trade occurred.\675\ However, the Commission believes that in 
most cases this will be a small burden on Managers as the data needed 
for the calculation will be publicly available and that Managers may 
already track the end of day fair market value of short positions. 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 
will 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 
will be readily available to the Manager.
---------------------------------------------------------------------------

    \675\ See Form SHO, General Instructions at INSTRUCTIONS FOR 
CALCULATING REPORTING THRESHOLD. See also PRA Table 2 in Part VII 
for an estimate of these burden hour.
---------------------------------------------------------------------------

b. Costs of Tracking Threshold Status
    There will be costs associated with tracking short positions in 
relation to the threshold.\676\ Particularly, after the last day of 
each calendar month, Managers must calculate their average short 
positions over the month to be aware if their average daily gross short 
position exceeds $10 million \677\ or 2.5 percent of shares 
outstanding; or in the case of equity securities of non-reporting 
company issuers, if Managers meet or exceed a gross short position of 
$500,000 at the close of regular trading hours on any settlement date. 
However, the Commission believes that the Reporting Thresholds will 
generally limit the burden on Managers, in aggregate, as fewer Managers 
will be required to report than if the Commission did not adopt an 
amended reporting threshold. For example, the Commission believes that 
certain types of Managers that carry short positions will not meet a 
Reporting Threshold.\678\ Additionally, certain types of Managers may 
be less likely to meet the threshold, resulting in lower overall costs 
for these Managers.\679\ Using Form SH data, the Commission estimates 
that an average of 442 Managers were required to file Form SH each 
month under the threshold in place during temporary Rule 10a-3T. 
However, only 252 eligible Managers would have been required to file 
had Threshold A of adopted Form SHO been in place instead of the 
threshold in temporary Rule 10a-3T.\680\
---------------------------------------------------------------------------

    \676\ As stated in the proposing release, 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 continue to anticipate that only a small fraction of Managers is 
likely to have monitoring responsibilities pursuant to the rule and, 
given the Reporting Thresholds and the modification of Threshold A, 
an even smaller fraction is likely to have reporting obligations. 
Proposing Release at 14998 n. 298.
    \677\ Under Proposed Form SHO, the threshold was triggered if a 
gross short position exceeded $10 million on a single day. Adopted 
Form SHO requires a daily average gross short position of $10 
million over the month.
    \678\ See supra Part VIII.B.1 for a discussion on why certain 
types of Managers are more likely to have reporting requirements. 
For example, market makers and algorithmic technical traders are not 
likely to meet the thresholds because they generally close their 
positions by the end of the day.
    \679\ However, Managers that trigger a threshold(s) but do not 
currently report to EDGAR may face additional compliance costs 
associated with Rule 13f-2.
    \680\ The lower number of estimated reporting Managers in Form 
SHO compared to Form SH is due to the fact that the Reporting 
Thresholds are higher for Form SHO than Form SH in Threshold A 
(average daily gross position of $10 million vs. a single day 
threshold of $10 million, and 2.5% of shares outstanding vs. 0.25% 
of shares outstanding). This estimate differs from the Proposing 
Release due to modification of the part of the threshold from $10 
million daily to $10 million average daily over the month. 
Commenters questioned the use of Form SH data in this and other 
contexts. See supra Box 1: Use of Form SH Data for responses to 
comments on the use of these data.

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[[Page 75169]]

    The Commission received several comment letters that described what 
they believed were the high cost of monitoring with respect to the 
thresholds to file Form SHO under Rule 13f-2.\681\ One commenter stated 
that the cost of daily monitoring would be high, although no specific 
estimated cost is provided.\682\ While the costs would likely be higher 
if firms choose to monitor daily, Rule 13f-2 does not require daily 
monitoring, either for reporting or non-reporting stocks.
---------------------------------------------------------------------------

    \681\ See, e.g., MFA Letter, at 13; AIMA Letter, at 12-14; ICI 
Letter, at 5; Ropes & Gray Letter, at 2 and 5-7; SBAI Letter, at 4; 
SIFMA Letter, at 4, 7-8, and 13-19; T. Rowe Price Letter, at 3-4, 
Two Sigma Letter, at 6-7 and 10.
    \682\ See ICI Letter, at 11.
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    For Managers engaged in shorting selling, the rule necessitates 
that Managers calculate their average daily gross short position in 
equity securities for which they have conducted short sales during that 
calendar month in order to know if they are required to file Form SHO 
within 14 days of the end of that month.\683\ Managers may choose to do 
this calculation on a rolling basis, or to do the calculation after the 
month has ended. While some Managers may choose to incur the higher 
costs of daily tracking and calculation for purposes of compliance with 
Rule 13f-2, the final rule's reporting threshold is not based on a 
Manager's gross short position on a single trading date, reducing the 
need for daily tracking.
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    \683\ As discussed in supra Part II.A.3, Managers with gross 
short sale positions that exceed a daily average during the previous 
month of $10 million or a daily average of 2.5% of a reporting 
firm's shares outstanding will have to file Form SHO. With regard to 
short sale positions of non-reporting firms, Managers will have to 
file Form SHO if their short sale position exceeded $500,000 on any 
single day during the previous month.
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    The Commission understands that the cost of tracking short 
positions might be higher for certain types of equity securities. For 
example, tracking the short position in an ETF as a percent of shares 
outstanding will 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 the 
Manager traded even though the price may be stale.\684\
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    \684\ See supra Part II.A.3.b for discussion of comments 
received related to tracking non-reporting company short positions.
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c. Cost of Reporting Form SHO to EDGAR
    Requiring Form SHO to be filed on EDGAR in Form SHO-specific XML 
will not impose significant incremental costs on Managers. The 
Commission expects most Managers who will be required to file Form SHO 
will likely have experience filing EDGAR forms that use similar EDGAR 
Form-specific XML data languages, such as Form 13F. In that regard, the 
process for filing Form SHO, as well as the XML-based data language 
used for Form SHO, will be similar to the filing process and data 
language used for Form 13F.\685\ We expect that Managers with such 
experience that choose to file Form SHO directly in Form SHO-specific 
XML will incur some compliance costs associated with doing so.\686\
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    \685\ See EDGAR Filer Manual (Volume II) version 67 (September 
2023), 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.
    \686\ See supra PRA Table 2 (estimating the ongoing burden for 
the Form SHO-specific XML requirement at two hours per Manager per 
filing and two hours per amended filing). These estimates 
conservatively assume that Managers will structure their filings in 
Form SHO-specific XML, incurring $772 (2 hours x $386 per hour for a 
programmer = $772) per filing or amended filing, rather than use a 
fillable form. Assuming 1,000 Managers filing 12 Form SHO 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 $9,264,000 in industry costs for filings per 
year (24,000 hours * $386 per hour = $9,264,000) attributable to the 
Form SHO-specific XML requirement. In addition, based on an estimate 
of 420 amended filings per year, the total industry cost for the 
Form SHO-specific XML would be $324,240 for amended filings (420 
amended filings x 2 hours per amended filing x $386 per hour = 
$324,240). As such, the total annual industry cost attributable to 
the Form SHO-specific XML requirement (including amended filings) is 
$9,588,240 ($9,264,000 for filings + $324,240 for amended filings = 
$9,588,240). Using a lower estimate of 252 Managers would result in 
$2,417,904 in total annual industry costs to structure initial and 
amended filings in Form SHO-specific XML. See supra note 517.
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    In addition, Managers will be given the alternate option of filing 
Form SHO using a fillable web form that will render into Form SHO-
specific XML in EDGAR, rather than filing directly in 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 will likely choose this 
option. In that regard, Managers 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.\687\ Of Managers that do not have experience filing Form 13F, 
only a subset are subject to other EDGAR Form-specific XML filing 
requirements.\688\ For any Managers that choose to file Form SHO using 
a fillable web form, whether or not they have prior experience with 
filing forms in EDGAR Form-specific XML, the 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) will not impose any additional compliance costs.\689\
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    \687\ See 17 CFR 240.13f-1(a).
    \688\ For example, registered brokers or dealers that are 
subject to the reporting requirements set forth in 17 CFR 240.17h-2T 
must file Form 17-H either electronically or in paper. Those that 
choose to file electronically must file Form 17-H 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.
    \689\ 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).
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d. Costs Associated With Reporting Bona Fide Market Making Locate 
Exception to CAT
    The 25 Plan Participants will face costs associated with the CAT 
amendment, as they will 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 $4,522 per participant or 
$113,800 total to compensate the Plan Processor for staff time required 
to make the initial necessary programming and systems changes.\690\ 
However, these initial costs might 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 CAT amendment will not impose 
additional ongoing cost to Participants beyond those costs already 
accounted for in existing Paperwork Reduction Act

[[Page 75170]]

estimates that apply for Rule 613 and the CAT NMS Plan approval 
order.\691\
---------------------------------------------------------------------------

    \690\ See supra note 475.
    \691\ See supra Part VII.C.4 for more information on costs for 
CAT Plan Participants.
---------------------------------------------------------------------------

    The Commission believes that the CAT amendment involving the bona 
fide market making exception from the locate requirement will impose a 
one-time cost to Industry Members.\692\ These costs will involve 
creating an additional field in the order origination report. Some 
broker-dealers will incur ongoing costs related to the recording of the 
use of the BFMM locate exception.\693\ To the extent that broker-
dealers are not already recording the use of the exception, broker-
dealers may have costs to inputting the use of the exception into their 
current systems.\694\
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    \692\ Id.
    \693\ The Commission believes these costs will be comparable to 
those estimated in the Proposing Release in connection to the burden 
of marking an order. The Commission estimates that recording 
(marking) this information will take between 0.42 and 0.5 seconds 
per trade, with an annual time burden per Manager equal to 592-7,104 
hours. See Table 3 from Proposing Release at 14975, available at 
https://www.sec.gov/files/rules/proposed/2022/34-94313.pdf.
    \694\ See supra Part IV.B for description of Industry Members' 
use of BFMM.
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    The Commission recognizes that costs will 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,\695\ 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. Additionally, 58 insourcing Industry Members will incur 
an aggregate initial cost of $870,000 or $15,000 individually to update 
systems to facilitate reporting the new bona fide market making 
exception elements to CAT.\696\ However, this cost might be lower if 
the Commission is overestimating the number of insourcing industry 
members, in particular, the additional cost might drive some insourcing 
industry members to begin to outsource. The Commission believes that 
ongoing costs associated with reporting the newly required information 
to CAT will 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 will 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.
---------------------------------------------------------------------------

    \695\ See CAT NMS Plan Approval Order, 81 FR 84860.
    \696\ See supra Part VII.C.4.
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    For Industry Members that outsource, the Commission believes that 
implementation costs will be far lower because the service bureaus that 
provide them with order handling systems and regulatory data reporting 
services will adapt those systems on their customers' behalf.\697\ 
Additionally, 42 outsourcing industry members will incur an aggregate 
one-time cost of $42,000 or $1,000 individually to update systems to 
facilitate reporting the new bona fide market making exception elements 
to CAT.\698\ However, these costs might be higher if some current 
insourcing industry members begin to outsource as a result of the 
increased costs, which will 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 will 
be passed to their Industry Member customers.
---------------------------------------------------------------------------

    \697\ One commenter stated that support from third-party data 
service providers could make Form SHO reporting less burdensome. See 
S3 Letter, at 5.
    \698\ See supra Part VII.C.4.
---------------------------------------------------------------------------

e. Comparison to Rule 10a-3T Costs
    The Commission is cognizant of the burdens Managers experienced of 
filing Form SH in compliance with temporary Rule 10a-3T and has 
designed Rule 13f-2 and Form SHO to attempt to reduce those burdens. 
First, commenters on the temporary Rule 10a-3T stated that the 0.25 
percent threshold was too low.\699\ The two-pronged threshold in 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 28 percent of positions reported under 
Rule 10a-3T will be required to report given the higher threshold in 
Rule 13f-2 and Form SHO, while still collecting 78 percent of the 
dollar value.\700\ Additionally the threshold might 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.\701\ Second, many commenters believed that 
weekly reporting was overly burdensome.\702\ The short selling 
information required by Rule 13f-2 and Form SHO will be reported less 
frequently (monthly rather than weekly) and will involve reporting end 
of month positions rather than daily positions. Third, Managers will 
have more time to compile and file the Form SHO reports than they had 
to compile Form SH.
---------------------------------------------------------------------------

    \699\ See Temporary Rule 10a-3T 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).
    \700\ See Proposing Release at Economic Analysis 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 the end user when filed, making the data hard to work with.
    \701\ This example assumes the equity is from a reporting 
company. Thresholds for non-reporting companies are triggered 
following a single day in which the short sale position exceeds 
$500,000. See supra Part II.A.3
    \702\ See supra note 697 for 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.
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    Notwithstanding these cost-reducing differences, the Commission 
does recognize that other differences might offset some or all of these 
cost reductions. In particular, Rule 13f-2 and Form SHO will require 
that the information on activity include daily records if the Manager 
exceeds a position threshold that month rather than include daily 
records if the Manager exceeds an activity threshold that week.\703\ 
Also, unlike the Form SH required under Rule 10a-3T, the Form SHO that 
will be required by Rule 13f-2 will feature an XML schema that will 
incorporate technical validations of certain data fields on the Form, 
and will flag technical errors and require the filer to correct the 
technical errors before successful submission on EDGAR. However, 
because the field validations implemented by Rule 13f-2 and Form SHO 
will be limited to technical errors (e.g., letters instead of numbers 
in a field requiring only numbers) that will be straightforward to 
resolve, such resubmission costs will not be

[[Page 75171]]

significant. Finally, the rule might 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.
---------------------------------------------------------------------------

    \703\ Rule 10a-3T required institutional investment 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, 73 FR 61678 (Oct. 17, 2008), 
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 Proposing Release note 
80 at 14963 for more information on short volume in Form SH data.
---------------------------------------------------------------------------

f. Other Compliance Costs
    One commenter stated that the Commission should consider that ``the 
sheer number and complexity of the Proposals, when considered in their 
totality, if adopted, would impose staggering aggregate costs, as well 
as unprecedented operational and other practical challenges.'' \704\ 
But, consistent with its long-standing practice, the Commission's 
economic analysis in each adopting release considers the incremental 
benefits and costs for the specific rule--that is the benefits and 
costs stemming from that rule compared to the baseline. In doing so, 
the Commission acknowledges that in some cases resource limitations can 
lead to higher compliance costs when the compliance period of the rule 
being considered overlaps with the compliance period of other rules. In 
determining compliance periods, the Commission considers the benefits 
of the rules as well as the costs of delayed compliance periods and 
potential overlapping compliance periods.
---------------------------------------------------------------------------

    \704\ NAPFM Letter 3.
---------------------------------------------------------------------------

    In this regard, some commenters mentioned the proposals which 
culminated in the recent adoptions of Rule 10c-1a, Beneficial Ownership 
Reporting, Private Fund Advisers, Settlement Cycle Adopting Release, 
and May 2023 SEC Form PF Amending Release.\705\ The Commission 
acknowledges that there are compliance dates for certain requirements 
of these rules that overlap in time with the final rule, which may 
impose costs on resource constrained entities affected by multiple 
rules.\706\
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    \705\ See supra note 499. As stated above, commenters also 
specifically suggested the Commission consider potential overlapping 
compliance costs between the final rule and certain proposing 
releases. See supra note 505. These proposals have not been adopted 
and thus have not been considered as part of the baseline here. To 
the extent those proposals are adopted in the future, the baseline 
in those subsequent rulemakings will reflect the regulatory 
landscape that is current at that time.
    \706\ See supra notes 500-504 (summarizing compliance dates).
---------------------------------------------------------------------------

    However, we do not think these increased costs from overlapping 
compliance periods will be significant for several reasons. First, the 
number of Managers who will also be subject to one or more of these 
recently adopted rules could be limited; we estimate that 252 to 1000 
Managers may be required under the final rules to report on new Form 
SHO, and of those, depending on their activities, only a portion may 
also be required to comply with one or more of the recently adopted 
rules raised by commenters (and even fewer may need to comply with more 
than one of those other rules).\707\ In addition, commenters' concerns 
about the costs of overlapping compliance periods were raised in 
response to the proposal and as discussed above, we have taken steps to 
reduce costs of the final rule.\708\ Finally, although the compliance 
periods for these rules overlap in part, the compliance dates adopted 
by the Commission are generally spread out over more than a two-year 
period from 2023 to 2026.\709\
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    \707\ For example, broker-dealers who need to report on Form SHO 
under Rule 13f-2 will also need to comply with Settlement Cycle 
Adopting Release but may not need to comply with the requirements of 
any of the other recently adopted rules.
    \708\ The final rule mitigates costs relative to the proposal in 
three ways. First, the reporting threshold for the U.S. dollar 
value-based prong for reporting company issuer securities is being 
adopted as a monthly average, rather than the daily end-of-day 
calculation that was proposed. See supra Part II.A.3.b. Second, Form 
SHO is being adopted without the proposed requirement to report 
hedging classifications in Information Table 1, and includes a 
streamlined Information Table 2, which reduces the form's complexity 
and the granularity of the information reported. See supra Parts 
II.A.4.d.iii, II.A.4.d.iv. Third, proposed Rule 205 and related CAT 
reporting requirements are not adopted. See supra Part III.B.
    \709\ For example, compliance periods for the May 2023 SEC Form 
PF Amending Release and the Settlement Cycle conclude by mid-2024 
while reporting under the final rule will be required by the end of 
2024 at the earliest. Similarly, certain compliance deadlines for 
Rule 10c-1a extend into early 2026. See supra notes 500-504.
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7. Effect of Certain Electronic Filing and Dissemination Requirements
    Rule 13f-2 and Form SHO will 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 will require Form SHO to be filed on EDGAR in a custom XML-
based data language specific to that Form (``custom XML,'' here ``Form 
SHO-specific XML''). The XML schema for Form SHO-specific XML will 
incorporate validations of certain data fields on the Form to help 
ensure consistent formatting and completeness.\710\ While the field 
validations will act as an automated form completeness check when a 
Manager files a Form SHO, the field validations will not be designed to 
verify the accuracy of the information filed in Form SHO filings. EDGAR 
will subsequently aggregate the reported information at the equity 
security level and release the aggregated data to the public on EDGAR. 
These requirements will incrementally augment the various effects of 
the short position and activity disclosures discussed herein by 
enhancing the accessibility, usability, and quality of the 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 Form SHO, the Commission will be able to 
access and download large volumes of Form SHO disclosures in an 
efficient manner. To the extent that the efficiencies derived from the 
centralized filing of the Form SHO disclosures facilitate more rapid 
Commission response to potential market manipulation, investors could 
indirectly benefit from the fact that such practices are detected, and 
possibly addressed, earlier than might otherwise be the case.
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    \710\ See supra Part II.A.4.b. 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 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 Form SHO-specific XML). To complete the filing, 
the filer would need to correct the error and re-file.
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    One commenter agreed with the Commission's proposal to require 
Managers to provide Form SHO in EDGAR in a Form SHO-specific XML.\711\ 
Another commenter stated that ``XML is a widely used language and 
therefore implementation and maintenance would keep costs low and 
efficiency high.'' \712\
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    \711\ See Comment Letter from Aaron Franz, available at https://www.sec.gov/comments/s7-18-21/s71821-20120685-272855.pdf (``This 
form and forum are ideal for reporting purposes. Further, since the 
Form SHO is proposed to be published in XML format it should be easy 
for Managers to automate the process of filling and filing the Form 
SHO.'').
    \712\ ``[XML] would also allow for easy parsing and review of 
the data. The costs shouldn't vary very much between managers as the 
SHO form should be uniform for all managers, which means they will 
all use similar implementations to conform to its usage.'' Anonymous 
Comment Letter (Apr. 4, 2022), available at https://www.sec.gov/comments/s7-08-22/s70822-20122297-278355.htm.
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    Similarly, the provision of the aggregated security-level 
information at a centralized, publicly accessible location in a 
structured, machine-readable data language, will enable investors and 
other public data users to download the aggregated information

[[Page 75172]]

directly, and the data might then be analyzed using various tools and 
applications. Placing the security-level information someplace other 
than a centralized location in a structured, machine-readable language 
would mean that 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.
    Requiring the short position and activity disclosures to be filed 
in Form SHO-specific XML will facilitate more thorough review and 
analysis of the reported short sale disclosures by the Commission, 
which will 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.
    The requirement for short sale disclosures to be filed on EDGAR in 
Form SHO-specific XML will result in additional incremental compliance 
costs on filing Managers. These direct compliance costs are detailed in 
a subsequent section.\713\ Moreover, to the extent these incremental 
compliance costs further chill the incidence of short-selling, the 
EDGAR and Form SHO-specific XML requirements will increase the 
likelihood of the indirect costs that are discussed elsewhere in Parts 
VII.C.2, VII.C.3, VII.C.4, and VII.C.6.
---------------------------------------------------------------------------

    \713\ See supra Part VIII.C.6.
---------------------------------------------------------------------------

    Some commenters expressed concerns with regard to the risks of 
cyber criminals accessing non-public Form SHO data.\714\ Although the 
SEC is not exempt from cyberattacks, the Commission is pursuing several 
actions to protect SEC data and strengthen the EDGAR system as 
described above. The Commission recently deployed security and 
modernization enhancements focusing on technology upgrades to the EDGAR 
system.\715\ The Commission recognizes that the Rule collects sensitive 
information and that, while the likelihood of a data breach is low, the 
costs of a data breach could be substantial. These costs include but 
are not limited to the following: trading losses that could occur due 
to the revelation of private trading strategies or economic positions 
which may enable identifying and trading opportunistically around such 
strategies, such as facilitating a short squeeze; business disruptions 
that could occur if the data breach results in temporary system down 
time; data breach response costs as market participants must devote 
resources to determining how to respond to the data breach; and 
reputational harm to individual Managers and the broker-dealers that 
employ them. While the potential costs of a breach, to the extent that 
one occurs, could be severe, RNSAs, ATSs, and SROs, are currently 
subject to existing requirements designed to improve the resiliency and 
oversight of securities market technology infrastructure, such as 
Regulation Systems Compliance and Integrity (``Regulation SCI'') (17 
CFR 242.1000 through 242.1007). Adherence to such regulations can 
reduce the probability of a data breach and mitigate the costs 
associated with a breach, should it occur.
---------------------------------------------------------------------------

    \714\ See MFA Letter, at 8 and Two Sigma Letter, at 5.
    \715\ See Annual Report on SEC website Modernization Pursuant to 
Section 3(d) of the 21st Century Integrated Digital Experience Act 
(Dec. 2022), available at https://www.sec.gov/files/21st-century-idea-act-report-2022-12.pdf.
---------------------------------------------------------------------------

    As stated previously, one commenter stated that the LEI and the 
FIGI of issuers is ``not commonly provided'' in other holding reports 
and would therefore cause Managers to incur additional costs.\716\ 
While LEIs are widely used in the global financial markets (for 
example, the Commission currently requires funds to identify themselves 
with LEIs in portfolio holding reports on Form N-PORT),\717\ we agree 
that there are costs associated with obtaining and maintaining LEIs. 
Currently, U.S. entities may obtain an LEI for a one-time fee of $60 
and an annual renewal fee of $40.\718\
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    \716\ MFA Letter, at 9.
    \717\ Item A.1.d and Item A.2.c of Form N-PORT. See also Item 
B.1.d of Form N-CEN (requiring funds to disclose their LEIs on 
annual reports); 17 CFR 242.903(a) (requiring security-based swap 
participants to report LEIs to swap data repositories). 
Additionally, other U.S. and foreign regulators require firms to 
identify themselves with LEIs. For example, Commodity Futures 
Trading Commission (CFTC) regulations require counterparties to 
swaps, including interest-rate swaps, to report their LEIs. See 17 
CFR 45.6 (CFTC LEI requirement for parties to swap transactions).
    \718\ A U.S. entity can currently obtain and renew an LEI from 
one of eleven LEI operating units. See Get an LEI: Find LEI Issuing 
Organizations, Glob. Legal Entity Identifiner Found., available at 
https://www/gleif.org/en/about-lei/get-an-lei-find-lei-issuing-organizations (2003). One LEI operating unit currently discloses an 
initial fee of $60 and a renewal fee of $40. See Frequently Asked 
Questions, Fees, Payments & Taxes, Bloomberg LEI, available at 
https://lei.bloomberg.com/docs/faq#what-fees-are-involved (2023).
---------------------------------------------------------------------------

    FIGIs also are widely used in the financial markets, and the 
Commission recently added FIGI as an optional securities identifier on 
Form 13F.\719\ Further, FIGIs, which are automatically assigned and are 
retrievable and redistributable without licensing restrictions and at 
no cost,\720\ are not expected to result in compliance costs for 
reporting persons. Lastly, firms can use identifier mapping tables, and 
thus likely would not need new technology systems to accept LEIs and 
FIGIs.\721\ However, the Commission recognizes that Managers who do not 
currently use those identifiers and who do not already have identifier 
mapping capabilities in their data systems would incur one-time costs 
to build such functionality.
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    \719\ Special Instruction 11.b.iii of Form 13F. Based on 
Commission staff analysis of Form 13F filings in EDGAR, at least 500 
unique filers have included FIGIs on their Form 13F filings since 
the amendments to Form 13F became effective on January 3, 2023. As 
of the second quarter of 2022, 1 billion FIGIs had been assigned to 
financial instruments. Financial Instrument Global Identifier 
Newsletter Q2 2022, OpenFIGI (June 30, 2022), available at https://www.openfigi.com/about/news/2022/6/30/financial-instrument-global-identifier-newsletter-q-2-2022.
    \720\ Allocation Rules for the Fin. Instrument Glob. Identifier 
(FIGI) Standard (Object Mgmt. Grp. & Am. Nat'l Comm. X9, amended 
2022) section 1.2.1, available at https://www.openfigi.com/assets/local/figi-allocation-rules.pdf (``FIGI Allocation Rules''); 
Symbology, OpenFIGI, available at https://www.openfigi.com/about/symbology. FIGI is an open-source, non-proprietary data standard for 
the identification of financial instruments across asset classes. 
FIGI Allocation Rules sections 1.1.1, 1.2.1, 1.4.1. The Share Class 
level FIGI is assigned to equities and funds, and enables users to 
link multiple FIGIs for the same instrument to obtain an aggregated 
view for that instrument across all countries globally. Id. section 
1.4.3.
    \721\ FIGI allows users to link various identifiers for the same 
security to each other, which includes mapping the FIGI of a 
security to its corresponding CUSIP number. See Financial Instrument 
Global Identifier, OMG Standards Dev. Org. (2023), available at 
https://www.omg.org/figi/.
---------------------------------------------------------------------------

8. Potential Increased Use of Derivatives
    The Commission recognizes the risk that the benefits of Form SHO 
data could be diminished to the extent that Managers avail themselves 
of economically similar arrangements. For example, Managers might 
consider trading derivatives in place of engaging in short selling, 
particularly for stocks with liquid options.\722\ Benefits might 
similarly be diminished if a robust single-stock futures market 
develops over time.\723\ Indeed, Rule 13f-2 and its accompanying Form 
SHO might be a catalyst for growth in derivatives markets if short 
sellers were to look for avenues to take the economic equivalent of 
short positions that did not require similar disclosures.
---------------------------------------------------------------------------

    \722\ See supra note 527, R. Battalio, and P. Schultz (2011), 
Grundy, Lim, and Verwijmeren (2012). One commenter agreed that this 
is a likely outcome. See Better Markets Letter at 9-10.
    \723\ See supra note 527, Jiang, Shimizu, and Strong (2019).
---------------------------------------------------------------------------

    The Reporting Thresholds in Rule 13f-2 are based on a Manager's 
gross short position in the equity security itself, and do not consider 
derivative

[[Page 75173]]

positions. Consequently, a Manager seeking to build a large short 
position without incurring a reporting obligation might hold a short 
position just below a Reporting Threshold and use derivatives to take 
positions that effectively rise above that threshold.\724\ One 
commenter stated that this may be viewed as regulatory arbitrage.\725\
---------------------------------------------------------------------------

    \724\ While combining short positions with derivatives may allow 
a Manager not to trigger the Reporting Thresholds, using options may 
trigger a report to FINRA's LOPR. See supra note 78.
    \725\ See Law and Finance Professors Letter, at 3.
---------------------------------------------------------------------------

    Using derivatives to establish an economically equivalent short 
position that does not include a reporting obligation 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 Form SHO information articulated in 
Parts VIII.C.1 and VII.C.2 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 
likelihood that Managers will seek to employ alternative arrangements 
through options may be minimal. However, academic research has shown 
that investors have used options as an alternative means to obtain 
short-like economic exposure when short selling is restricted, thus 
there is a significant risk that there will be some attempt to employ 
alternative arrangements using derivatives, particularly in stocks with 
liquid options markets.\726\
---------------------------------------------------------------------------

    \726\ See supra note 527.
---------------------------------------------------------------------------

D. 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.\727\ 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.\728\ 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 in order to profit from that information.\729\ As 
discussed in Part VIII.D.2, more transparency in short selling will 
improve the amount of information that investors have to value a 
stock--increasing price efficiency. However, it might also 
disincentivize fundamental research which may harm price efficiency by 
limiting the amount of total information has been discovered, and thus, 
limiting the amount of information incorporated into stock prices. 
Overall, the impact of the adopted rule and CAT amendment on price 
efficiency is uncertain.\730\
---------------------------------------------------------------------------

    \727\ See Eugene F. Fama, Efficient Capital Markets a Review of 
Theory and Empirical Work, The Fama Portfolio 76-121 (2021).
    \728\ See supra note 624.
    \729\ See supra Part VIII.C.2 for discussion of short selling 
motivation.
    \730\ See supra Part VIII.C.2 for discussion of price efficiency 
effects.
---------------------------------------------------------------------------

    Additionally, the CAT amendment will 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.\731\
---------------------------------------------------------------------------

    \731\ See supra Part VIII.B.3 for a further discussion of the 
inefficiencies of existing data with regards to oversight and 
enforcement of rules relating to bona fide market making. In 
examinations and enforcement matters, the Commission has used 
broker-dealer trade blotters in combination with other regulatory 
data to consider whether conditions were met for the use of BFMM 
locate exemptions.
---------------------------------------------------------------------------

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, investors owning the asset have an advantage 
in gathering information due to the reduced cost of acting on whatever 
information that they gather.\732\ The final rule may increase this 
advantage since it will increase the cost of short selling for Managers 
above the Reporting Thresholds, as discussed in Parts VIII.C.1 and 
VIII.C.2. Relatedly, fund performance is a key determinate of drawing 
investor flows. The Commission believes that Rule 13f-2 and Form SHO 
might harm competition for fund flows between 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.
---------------------------------------------------------------------------

    \732\ See Dixon (2022), supra note 581.
---------------------------------------------------------------------------

    The Commission believes that the CAT amendment will not alter 
significantly the competitive landscape for broker-dealer services. 
Because small broker-dealers are likely to use a service bureau to 
report their CAT data,\733\ the Commission believes that implementation 
costs will be borne by service bureaus and are likely to be recovered 
across many service bureau-client broker-dealers. Individual small 
broker-dealers may face expenses in configuring service bureau software 
packages, but these expenses are likely to be one-time and modest 
because the bulk of implementation activities will have been performed 
by the service bureau.\734\ Because larger broker-dealers that self-
report CAT Data enjoy economies of scale, they should be able to absorb 
the costs associated with compliance more easily, and they may choose 
to contract with a service bureau if implementation is unusually 
burdensome due to the operation of multiple legacy order-handling 
systems.
---------------------------------------------------------------------------

    \733\ See Rule 613 Adopting Release for the Commission 
discussion of CAT costs to broker-dealers.
    \734\ See supra Part VIII.C.6 for a discussion of compliance 
costs.
---------------------------------------------------------------------------

    In addition, as stated above, some commenters requested the 
Commission consider interactions between the economic effects of the 
proposed rule and other recent Commission rules, as well as practical 
realities such as implementation timelines.\735\ As discussed above, 
the Commission acknowledges that overlapping compliance periods may in 
some cases increase costs.\736\ This may be particularly true for 
smaller entities with more limited compliance resources.\737\ This 
effect can negatively impact some competitors because these entities 
may be less able to absorb or pass on these additional costs, making it 
more difficult for them to remain in business or compete. However, the 
final rule mitigates overall costs relative to the proposal,\738\ and 
we do not believe these increased compliance costs will be significant 
for most Managers.\739\ We therefore do not expect the risk of negative 
competitive effects from increased compliance costs due to simultaneous 
compliance periods to be significant.
---------------------------------------------------------------------------

    \735\ See supra Part VIII.C.6.
    \736\ See id.
    \737\ But see supra Part VII.B.2 and infra Part IX (the 
Commission anticipates that the type of Manager that will trigger a 
reporting threshold likely already has sophisticated information 
technology and the ability to automate reporting; and that the 
reporting thresholds will not apply to a significant number of small 
Managers).
    \738\ See supra note 706 and accompanying text.
    \739\ See supra Part VIII.C.6.f.
---------------------------------------------------------------------------

3. Capital Formation
    One of the primary roles of the securities markets is to allocate 
capital

[[Page 75174]]

(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. 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 helps to ensures 
an optimal allocation of capital across firms. Thus, to the extent that 
the adopted rule and CAT amendment discourage short selling, as 
discussed in Parts VIII.C.1 and VIII.C.2, it may lead to the 
overpricing of some stocks and the underpricing of others.\740\ 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.
---------------------------------------------------------------------------

    \740\ See supra note 624, 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.\741\ 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 capital investments--
particularly low value projects as the rule may attenuate the market's 
ability to respond to negative information.
---------------------------------------------------------------------------

    \741\ 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 Form SHO along with the negative economic 
effects detailed in Parts VIII.C.1, VIII.C.2, and VIII.C.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 SHO.\742\ Thus, 
to the extent that the costs associated with 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.
---------------------------------------------------------------------------

    \742\ 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, adopted Rule 13f-2, Form SHO, and the CAT amendment 
may have a positive influence on capital formation if they 
disincentivize short selling that takes place in connection with 
securities fraud. For example, in one type of fraud, investors holding 
convertible debt would engage in a manipulation including short sales 
of a stock in an attempt to drive down the price artificially in order 
to convert their debt to equity and cover their short positions at a 
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 will 
engage in this sort of fraud. More generally, to the extent that 
enhanced oversight of short sale activity deters manipulative activity 
such as short squeezes and associated price bubbles stemming from short 
squeezes, price efficiency may be enhanced, which in turn, could 
further promote capital formation.
    Rule 13f-2 may also affect capital formation through investor 
confidence. Some commenters on FINRA's short interest proposal 
suggested that short selling, and in particular a lack of short selling 
disclosure, leads some investors to have less confidence in financial 
markets.\743\ One commenter, however, stated that, ``Rule 13f-2 will 
not promote greater risk management among market participants, and 
hence, not bolster confidence in the markets by providing greater 
transparency,'' because investors already use aggregate short interest 
data from FINRA, the exchanges, and data vendors for risk management 
purposes.\744\ As discussed throughout this release, the Commission, 
however, believes that the data from Form SHO and the amendment to CAT 
will provide information that is additive to these and other data 
sources and will therefore improve short selling transparency and 
strengthen investor confidence, which might increase investment 
activity and, in turn, promote capital formation.
---------------------------------------------------------------------------

    \743\ See letters from NASDAQ, OTC Markets, and CFA Institute in 
response to FINRA's short interest proposal) available at https://www.finra.org/rules-guidance/notices/21-19#comments.
    \744\ See SBAI Letter, at 3.
---------------------------------------------------------------------------

E. Reasonable Alternatives

1. Alternative Approaches
a. Releasing Aggregated CAT Data
    As an alternative to collecting, aggregating, and publishing Form 
SHO, the Commission considered amending the CAT NMS Plan to collect 
additional information so that the Commission or the Plan Processor 
could aggregate and publish CAT Data. This alternative would 
effectively eliminate the thresholds for reporting.\745\
---------------------------------------------------------------------------

    \745\ See Proposing Release, at 15003.
---------------------------------------------------------------------------

    CAT data currently contains a short sale mark and, as part of the 
implementation of the Customer Account Information System (CAIS), will 
also provide the identities of those transacting. Consequently, the 
Commission or the Plan Processor could aggregate information on the 
number of short sales that Managers engage in from CAT, assuming that 
the Commission or the Plan Processor could determine that a transaction 
is by or on behalf of a Manager, 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 exposure, such as purchasing a put 
option, or writing a call option.\746\ 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

[[Page 75175]]

exercises and assignments. This inaccuracy could also result in the 
market-wide short position estimate being less accurate than current 
short interest data.\747\
---------------------------------------------------------------------------

    \746\ In this alternative, however, CAT would not contain the 
information on option expirations or assignments.
    \747\ FINRA's process of gathering and validating short interest 
data takes approximately two weeks. See supra note 561.
---------------------------------------------------------------------------

    The alternative would result in lower benefits than those from Rule 
13f-2 and the disclosures Form SHO requires. The data published under 
this alternative would have significant overlap with the data that 
would be published under Rule 13f-2 and Form SHO. However, again 
assuming that the Commission or the Plan Processor could determine that 
a transaction is by or on behalf of a Manager, 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,\748\ 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. 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 adopted Rule 
13f-2 and Form SHO.
---------------------------------------------------------------------------

    \748\ 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.\749\ 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 data would be less additive than the data 
provided that will be provided by adopted Rule 13f-2 and Form SHO.
---------------------------------------------------------------------------

    \749\ Adopted Rule 13f-2 requires reporting based on the 
settlement date, which is normally two business days after the 
transaction day.
---------------------------------------------------------------------------

    This alternative would mitigate some of the concerns associated 
with Managers being exposed to increased risk of short squeezes or 
other retaliation as discussed in Parts VIII.C.1 and VIII.C.2. This 
reduced risk stems from the fact that 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 
Rule 13f-2 and Form SHO with regard to less overall short selling or 
fundamental research that are described in Part VIII.C.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. One commenter agreed that releasing CAT data 
with short sale information would be less costly for Managers than 
Proposed Form SHO.\750\ While it would result in the same costs for 
Industry Member reporting as those associated with the CAT amendment, 
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.
---------------------------------------------------------------------------

    \750\ See SBAI Letter, at 2.
---------------------------------------------------------------------------

    There are several drawbacks to this alternative relative to the 
existing proposal. First, 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 exclude transactions outside of the purview 
of CAT that may affect short positions. Thus, the data provided under 
this alternative would always be estimates of total short positions, 
which could be 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.
    A larger expansion of CAT could achieve at least the same data 
value as in Rule 13f-2 and Form SHO.\751\ For example, CAT could expand 
to require the reporting of all the information that will be collected 
in adopted Form SHO. Specifically, the Commission could expand CAT to 
include data on account positions, including short selling positions 
associated with those positions. In addition, CAT could be expanded to 
capture information on changes in those positions. Under this approach, 
regulators would have access to the same data as if Managers filed Form 
SHO but for all short sellers, not only the subset of Managers 
reporting on Form SHO. This approach would also result in additional 
information available to regulators not collected in 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 significant 
amount of new information on CAT report types that do not exist today 
and for Participants who would have to work out technical 
specifications and implement changes for new types of CAT reports. 
Further, more Industry Members would report this information to CAT 
than Managers who, under the final rule, would be required to report 
information on Form SHO. It would be a major undertaking for both the 
Plan Processor and 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 adopted Rule 13f-2 and Form SHO.
---------------------------------------------------------------------------

    \751\ See Proposing Release, at 15004.
---------------------------------------------------------------------------

    Further, if the Commission were to expand CAT to collect additional 
information beyond what would be captured by the amendment to CAT, such 
as position information, then these additional expansions would impose 
significant direct costs to CAT-reporting firms.

[[Page 75176]]

a. 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 FINRA's existing process to ensure that it 
continues in perpetuity.\752\ This alternative would have no additional 
costs to market participants but would substitute a Commission mandate 
for the publication of the short interest data. Several commenters 
expressed support for the use of FINRA to satisfy DFA requirements in 
lieu of Rule 13f-2 and Form SHO.\753\ The commenters' support is 
motivated by familiarity with current FINRA short reporting 
requirements and costs that would not be incurred to comply with Rule 
13f-2 and Form SHO.
---------------------------------------------------------------------------

    \752\ See Proposing Release, at 15004.
    \753\ See, e.g., AIMA Letter, at 8; ICI Letter, at 51; Ropes & 
Gray Letter, at 4; Two Sigma Letter, at 9.
---------------------------------------------------------------------------

    Similarly, the Commission could require FINRA to publish a version 
of its short interest information that specifically identifies the 
aggregate short interest of Managers--separate from other short 
interest.\754\ To accomplish this, reporting broker-dealers would 
separately include in their reports to FINRA the short positions that 
originate from Managers. FINRA would then compile both total short 
interest, as it currently does, 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 might have been less 
expensive than the existing proposal as it would have only required a 
modification of an existing process. Since this alternative would not 
have provided the Commission with the positions of any identified 
Managers or any Manager-specific activity data, the benefits and risks 
associated with these data articulated throughout Part VIII.D would 
decline. In addition, it would not have distinguished Managers with 
large positions from other Managers. Therefore, neither market 
participants nor regulators would know what share of short interest was 
concentrated among Managers with large positions. As discussed above in 
Part VIII.C.1, Managers often accumulate large short sale positions 
based on fundamental market research or other factors that differ from 
investors with smaller positions, the latter of which are more likely 
shorting for hedging or smaller-scale speculative purposes. Therefore, 
this alternative would have provided less transparency into the short 
sale market relative to the Rule 13f-2 and Form SHO because it would 
not have revealed the degree to which short interest was concentrated 
among Managers with large positions.
---------------------------------------------------------------------------

    \754\ See Proposing Release, at 15004.
---------------------------------------------------------------------------

    The Commission also expects that data on Manager short interest in 
addition to total short interest would have likely not provided 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.\755\ Thus, while the alternative 
that requires FINRA to produce separate short interest data for 
Managers would have reduced costs to market participants relative to 
the existing proposal, it also might not have provided the market or 
regulators a significant incremental benefit relative to existing short 
selling data.
---------------------------------------------------------------------------

    \755\ 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. Commenters 
questioned the use of Form SH data in this and other contexts. See 
supra Box 1: Use of Form SH Data for responses to comments on the 
use of these data.
---------------------------------------------------------------------------

b. Broker-Dealer Reporting to EDGAR on Behalf of Managers
    The Commission could adopt a modified rule that allows broker-
dealers to file Form SHO reports with the Commission on behalf of 
Managers.\756\ This alternative might reduce costs as it could 
concentrate reporting with broker-dealers that have significant 
experience collecting and providing such information--increasing 
operational efficiency. 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 reporting prime broker may not know 
whether the sum of the manager's positions exceeds either of the 
thresholds and thus whether reporting is necessary. Thus, the reporting 
broker would need to gather additional information from the Manager 
about activity associated with other prime broker(s).\757\ In the 
absence of such information gathering, the reporting broker may 
mistakenly not report Form SHO for a Manager whose position with that 
particular reporting broker is under the threshold, but over the 
threshold when positions across brokers are combined. Requiring 
additional data collection of a Manager's short positions by the 
reporting broker might increase complexity and costs as Managers and 
broker-dealers would need to develop systems by which a Manager 
provides information to its reporting broker about its activity with 
other prime brokers. Alternatively, the Commission could permit 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.
---------------------------------------------------------------------------

    \756\ See Proposing Release, at 15004.
    \757\ 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.
---------------------------------------------------------------------------

c. Harmonization With European Disclosure Requirements
    The Commission could also craft Rule 13f-2 and Form SHO to be 
consistent with European disclosure requirements.\758\ 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.\759\ Under the SSR, a 
natural or legal person holding a short position is required to report 
to the relevant regulator when its short position (``net short 
position''), computed by taking into account relevant derivative 
positions such as options, if any, reaches the initial threshold of 0.2 
percent of the issued share capital of the company, and in 0.1 percent 
up and down increments thereafter.\760\ The threshold for reporting to 
a regulator recently was lowered to 0.1 percent.\761\ If the net short 
position reaches 0.5 percent of the share capital of the company, then 
the relevant market regulator reports the net short position to the 
public with the identity of the short seller revealed.

[[Page 75177]]

New filings are required to be made whenever the net short position 
increases or decreases by 0.1 percent of the share capital of the 
company. In the EU, trading entities must submit their data to the 
relevant regulator by 3:30 p.m. on the following trading day.\762\ 
Trading entities accomplish public disclosure via a central website 
operated or supervised by the relevant competent authority.\763\
---------------------------------------------------------------------------

    \758\ See Proposing Release, at 15005.
    \759\ See European Parliament and Council Regulation 236/2012, 
2012 O.J. (L 86) 1, available at https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2012:086:0001:0024:en:PDF. The SSR 
was adopted on Mar. 14, 2012 and its provisions had applicability 
dates of Mar. 25 and Nov. 1, 2012.
    \760\ Id. at Article 5(2).
    \761\ The threshold was temporarily lowered in Mar. 2020 in 
response to the COVID-19 pandemic. See ESMA Decision of 16 Mar. 
2020, ESMA 70-155-9546, available at https://www.esma.europa.eu/sites/default/files/library/esma70-155-9546_esma_decision_-_article_28_ssr_reporting_threshold.pdf. In September 2021, the 
change was adopted on a permanent basis. See European Union, 
Commission Delegated Regulation 2022/27, art. 1, 2022 O.J. (L 6) 9, 
available at https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32022R0027.
    \762\ Id. at Article 9(2).
    \763\ 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, the timing for when short sale 
information is made public, and the timing for when new reports have to 
be issued. This alternative would provide directional information about 
short positions because only net short positions are required to be 
reported; would likely impose lower compliance costs to Managers; \764\ 
would likely raise the risk of abusive practices towards short sellers; 
would likely increase Managers' ability to evade the threshold; and 
would lower the detail of the data the Commission receives relative to 
the data from adopted Form SHO.
---------------------------------------------------------------------------

    \764\ For Managers operating in both the EU and the US, these 
costs may be lower.
---------------------------------------------------------------------------

    One advantage of this alternative would be likely lower compliance 
costs for Managers that engage in short selling in both the EU and 
US.\765\ By only needing one set of compliance systems in place to 
satisfy both rules, Managers might enjoy lower costs to comply in both 
systems. Additionally, Managers might face lower costs to track and 
report net short positions. Moreover, in connection with Regulation SHO 
compliance, some Managers already track net positions on an aggregation 
unit basis.\766\ Thus, the computation of net positions for such 
Managers might be less costly than that of gross short positions as 
required by Rule 13f-2. However, for other Managers who are not 
currently aggregating positions on a net basis, costs of tracking may 
be higher under this alternative than under Rule 13f-2.
---------------------------------------------------------------------------

    \765\ 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.
    \766\ See supra note 263.
---------------------------------------------------------------------------

    This alternative also could have some negative consequences. The EU 
data are timelier than data available under adopted Rule 13f-2, since 
the forms are posted publicly immediately after receipt by the 
regulator, which potentially facilitates greater price discovery. 
However, this comes at the cost of increasing the possibility of 
revealing short sellers' proprietary information and its associated 
risks, including short squeezes and copycat trading. Additionally, the 
EU structure, whereby individual short sellers' names are made public, 
might raise the risk of retaliation towards short individual sellers, 
as well as the ability for market participants to engage in copycat 
strategies that decrease the profitability of gathering information. As 
a result of these costs to short sellers, investors may not be able to 
gather as much fundamental information as under the final rule.\767\ 
One commenter,\768\ however, stated that a recent study has found that 
the EU's regulation finds no evidence that the disclosure requirements 
have resulted in increased coordination or have resulted in short 
sellers being targeted for short squeezes.\769\
---------------------------------------------------------------------------

    \767\ 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).
    \768\ See Better Markets Letter, at 13.
    \769\ See Charles M. Jones, Adam V. Reed, and William Waller, 
Revealing Shorts an Examination of Large Short. Position 
Disclosures, 29 Rev. of Fin. Studies 3278, 3282 (2016).
---------------------------------------------------------------------------

    Another potential consequence of this alternative would be 
adjusting position sizes to evade the Reporting Threshold. Multiple 
studies found evidence that short sales in the EU are clustered below 
the threshold, suggesting that investors are trying to conceal their 
positions to protect their underlying investment strategies.\770\ Thus, 
short sellers may adjust their positions to either increase their long 
exposure or reduce their short exposure, leading to loss of price 
efficiency. The Commission believes that since there are benefits to 
short sale activity, including increased price efficiency, then there 
would likely be increased costs to disclosing manager identities, since 
this would reduce short sale activity.
---------------------------------------------------------------------------

    \770\ 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); Mazzacurati, Julien, The Public Disclosure of Net Short 
Positions, European Securities and Markets Authority (ESMA), Trends, 
Risks, Vulnerabilities (TRV) Report No. 1, 2018.
---------------------------------------------------------------------------

    By reporting net short positions, rather than gross short position, 
the Commission and the public would not receive information about 
large, but hedged, short positions. For instance, the alternative would 
allow \771\ a comparison of total short interest with reported large 
hedged short positions, which might provide additional information to 
the market about the activities of large, though perhaps non-
information based, traders. While hedged short positions are less 
likely to be manipulative in nature, or to pose systemic risk, large 
short positions are still potential sources of systemic risk. One 
commenter stated that using thresholds based on net short positions 
would allow market makers that carry large gross short positions for 
market making purposes rather than directional trading strategies to 
avoid having to submit Form SHO and incur its associated costs. 
According to the commenter, since net positions of market makers tend 
to be close to zero, including market maker gross positions in the 
public release of Rule 13f-2 data could be misleading to market 
participants (assuming that those market participants did not 
understand what data Rule 13f-2 will and will not provide).\772\ The 
Commission believes, however, that market makers will rarely if ever be 
required to report their short positions because the dollar-value 
threshold of Rule 13f-2 was increased from the proposal's $10 million 
on a single trading day to a $10 million daily average over the course 
of a month. It is the Commission's understanding that markets makers 
are highly unlikely to hold a gross short position averaging $10 
million over the course of trading month.
---------------------------------------------------------------------------

    \771\ This comparison, however, would be different than that of 
comparing Form SHO data to short interest data.
    \772\ See HSBC Letter 2, at 3.
---------------------------------------------------------------------------

    A reporting requirement for only net short positions would reduce 
the value of Rule 13f-2 data for use in reconstructing 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 were previously judged to have 
been hedged, and thus low risk, may no longer have been hedged. In 
addition, large short positions with hedges that have been 
significantly weakened or broken due to unforeseen extreme market 
events, may have become systemically important. In such cases, it would 
be useful for the Commission to have information on large short 
positions, regardless of perceived net short position, in order to

[[Page 75178]]

aid in the reconstruction of market events. This is a loss of value 
compared to adopted Rule 13f-2 and Form SHO, which are triggered by 
large gross short positions.
    Further, the EU regulations provide activity data if positions 
change by 0.1 percent or more. Thus, market participants could only 
learn about measured positions changes, rather than position changes of 
all sizes. As an example, there may be times where the public may be 
interested in seeing the reaction to a corporate announcement, but this 
may be limited if Managers do not adjust short positions above the 0.1 
percent threshold to trigger reporting.
2. Data Modifications
a. Release Proposed Form SHO Data in Alternative Formats
    The Commission could release the information included in Form SHO 
in a different manner. This alternative could take one of several 
forms.\773\ For example, the Commission could release each 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 removed. 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 Form SHO report, such as 
publishing the number of entities underlying the aggregated data or 
publishing increases in short positions separate from decreases.
---------------------------------------------------------------------------

    \773\ See Proposing Release, at 15005.
---------------------------------------------------------------------------

    In the first alternative, the Commission could release Form SHO as 
filed, allowing all market participants to see the identities of short 
sellers--similar to the EU regulation discussed above. This would 
increase the information that market participants have to evaluate 
sentiment on particular equities in the market. In particular, for some 
market participants, this information would also allow market 
participants to better manage risk by allowing them to manage their 
exposure to Managers with large short positions. There are also 
potential costs to this alternative. One potential result from this 
alternative is that 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.\774\ 
In addition, the detailed information on daily short activity could 
reveal not just market sentiment, but trading strategies of individual 
Managers. Additionally, releasing the names of large short sellers 
would further increase the likelihood that the short seller would be 
the victim of a short squeeze or other retaliatory actions as described 
in Part VIII.C.1.
---------------------------------------------------------------------------

    \774\ See supra Part VIII.F.1.iv.
---------------------------------------------------------------------------

    Similarly, the Commission could publicly release individual Form 
SHO filings with identification information removed from the released 
data. This alternative would provide market participants a clearer view 
into the activities of large short sellers, potentially improving their 
ability to learn from the actions of large short 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 Rule 13f-2, improving price 
efficiency.
    However, the indirect costs of this alternative would be greater 
than for Rule 13f-2 and 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, even without naming the short 
sellers, might increase the risk of copycat trading which reduces the 
profits of acquiring information. It might 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. 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 under the final rule, 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.\775\ If market participants were able to uncover the 
identities of individual short sellers, then the risk of retaliation or 
short squeezes would increase relative to Rule 13f-2 and Form SHO.
---------------------------------------------------------------------------

    \775\ 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 622. 
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 (1) 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 
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. However, 
adding this information might also increase the risk of short squeezes 
or other retaliatory actions in the case where there are very few 
reporters of Form SHO. In the Form SH data collected under temporary 
Rule 10a-3T, 32 percent of stocks had only one Manager reporting a 
position per month.\776\ 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 short squeeze.
---------------------------------------------------------------------------

    \776\ See Proposing Release, at 14963 for more information on 
methodologies and caveats for using Form SH data. See also supra Box 
1: Use of Form SH Data for responses to comments on the use of these 
data.
---------------------------------------------------------------------------

    Similarly, the Commission could collect Form SHO data but publicly 
release the daily aggregate increases separately from the daily 
aggregate decreases in short positions as opposed to daily net changes 
to short positions as adopted in Form SHO. 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.
b. 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 adopted 
Form SHO to also disclose their derivatives positions on underlying 
equity securities such as options and

[[Page 75179]]

total-return swaps as an alternative to Form SHO as adopted, which does 
not directly collect information on derivatives.\777\ This alternative 
refers only to options and other derivative securities for which their 
transactions do not fit the definition of a short sale under Rule 
200(a) of Reg SHO.
---------------------------------------------------------------------------

    \777\ See Proposing Release, at 15006.
---------------------------------------------------------------------------

    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.\778\ Consequently, the information would aid market 
participants in gauging bearish sentiment in a security relative to 
Rule 13f-2 and Form SHO, as adopted. 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.
---------------------------------------------------------------------------

    \778\ One commenter argued including derivatives for Rule 13f-2 
would give a more complete picture of Managers' positions. See 
NASDAQ Letter, at 3.
---------------------------------------------------------------------------

    Requiring options data to be reported on Form SHO would increase 
the compliance costs to Managers of reporting on Proposed Form SHO. One 
commenter stated that the inclusion of derivatives, warrants, 
convertible debt, and ETFs would be costly.\779\ Adopted Rule 13f-2 
will compel Managers to track their gross short positions in individual 
equities in a month. Tracking of ETFs for the purposes of adopted Rule 
13f-2 is the same as tracking any equity security with the exception of 
tracking shares outstanding, which might be marginally more costly. 
Additionally, securities that may be used to change a gross short 
position, such as options or convertible debt, are unaffected by Rule 
13f-2 unless they are used in a manner that changes gross short 
position in an equity security.\780\ The alternative discussed here 
would require explicit tracking and reporting of such securities.
---------------------------------------------------------------------------

    \779\ See MFA Letter, at 12.
    \780\ Such as a Manager exercising a call option to buy equity, 
and thus decreasing the Manager's gross short position, if any.
---------------------------------------------------------------------------

    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. Requiring derivative position information might also be 
duplicative of other derivatives reporting requirements.
3. Threshold Modifications
    As an alternative to the adopted Form SHO Thresholds, the 
Commission could require reporting Form SHO at either higher or lower 
thresholds--or no threshold.\781\ Commenters to the Proposal Release 
expressed a range of opinions on the thresholds, some of whom supported 
increasing the thresholds and others decreasing the thresholds relative 
to Proposed Form SHO.\782\ When selecting thresholds, the fundamental 
economic tradeoff is the value of the data versus the cost of 
collecting the data. Alternative thresholds that are lower than 
Threshold A or Threshold B specified in Rule 13f-2 or an alternative 
that would not contain a threshold would produce more data as more 
entities would be required to report.
---------------------------------------------------------------------------

    \781\ See Proposing Release, at 15007.
    \782\ Furthermore, in response to a solicitation of comments on 
Temporary Rule 10a-3T, commenters suggested thresholds generally 
ranging from 1% to 5%. See Proposing Release, at 14963 n.79 for 
links to specific comment letters.
---------------------------------------------------------------------------

    Commission analysis of Form SH data collected under temporary Rule 
10a-3T indicates that the gross short position thresholds in adopted 
Form SHO for Threshold A, equal to daily averages of $10 million or 2.5 
percent of shares outstanding, would have collected more than three-
quarters (78.5 percent) of the dollar value of short positions.\783\ 
Therefore, an alternative that lowers the threshold might lead to only 
a minor increase in coverage relative to the adopted thresholds in Form 
SHO. Nevertheless, the Commission recognizes that even a relatively 
small increase in coverage could increase benefits. For example, such 
an alternative would provide market participants with a clearer view of 
Manager bearish sentiment compared to adopted rule and form, as more 
Managers would be required to report the data, making the data more 
comprehensive.
---------------------------------------------------------------------------

    \783\ Commenters questioned the use of Form SH data in this and 
other contexts. See supra Box 1: Use of Form SH Data for responses 
to comments on the use of these data.
---------------------------------------------------------------------------

    A lower threshold would also enhance Commission oversight of short 
selling and allow the Commission to more easily reconstruct significant 
market events involving short selling--again because the data would be 
more comprehensive. One commenter stated that reducing or eliminating 
the reporting thresholds to Form SHO would provide additional benefits, 
since unknown, hidden short positions pose risks to investors and the 
markets. Reducing or eliminating reporting thresholds would reveal the 
identity of all holders of short sale positions, thereby reducing these 
risks.\784\
---------------------------------------------------------------------------

    \784\ See Better Markets Letter, at 12.
---------------------------------------------------------------------------

    However, a lower or no threshold would increase the cost of 
reporting Form SHO data in terms of compliance costs associated with 
Managers compiling and filing the required data thorough EDGAR and in 
the indirect costs associated with revealing short sellers' 
information. Evidence of this increase in aggregate reporting costs can 
be seen through an analysis of Form SH data. For example, if the 
reporting thresholds of adopted Form SHO were reduced from average 
daily gross position of 10 million or 2.5 percent of shares outstanding 
to $5 million or 1 percent of shares outstanding, the number of 
reporting Managers would rise from 252 to 314. Furthermore, the 
increase in the share of gross short sale dollar volume covered by 
reporting Managers would rise from 78.5 percent to 88.6 percent. In 
addition, Managers would likely be required to file reports for more 
securities, which would further increase compliance costs. Indirect 
costs include increased risk of copycat short selling strategies, which 
can lead to herding and increased volatility, and short sellers 
engaging in strategic behavior to build short positions just underneath 
the threshold, which would lead to lower price efficiency.\785\
---------------------------------------------------------------------------

    \785\ See supra Part VIII.F.1.iv for discussion of this behavior 
in Europe.
---------------------------------------------------------------------------

    In some cases, a lower threshold would decrease the indirect costs 
associated with adopted rule because it would be harder to identify 
individual short positions from aggregate reporting if there are many 
entities reporting.\786\ This effect may not be universally true, 
however. In particular, at thresholds just below Threshold A, the 
number of securities in which only one entity reported Form SH 
increases.\787\ This result implies that there are a number of 
securities for which only one short seller held a short position at a 
level lower than the current cutoff. In these

[[Page 75180]]

cases, lowering the threshold might increase the risk of identifying 
individual short sellers.
---------------------------------------------------------------------------

    \786\ See supra Part VIII.C.1 and Part VIII.E.1 with 
accompanying text for more information on risks of identifying 
individual short sellers.
    \787\ According to Form SH data, 39% of securities would have 
only one Manager reporting at or above the threshold of $10 million 
average daily and 2.5% average daily of shares outstanding. If the 
percent threshold was reduced to 1% average daily of shares 
outstanding along with the $10 million average daily threshold the 
number of securities with only one Manager reporting would increase 
to 41%.
---------------------------------------------------------------------------

    In contrast, alternatives that would raise the reporting threshold 
would lower many of the costs associated with providing Form SHO data, 
since fewer entities would be required to report. It would also limit 
somewhat the value of the data--again as the reported data would 
reflect a smaller portion of overall short positions. One means of 
increasing the threshold would be to require that both thresholds in 
Threshold A (i.e., both daily averages of $10 million and 2.5 percent 
of shares outstanding) be reached before a Manager is required to file, 
instead of either threshold. Another alternative would be to increase 
one or both of thresholds in Threshold A but continue to require only 
one of them be reached before a Manager is required to file Form SHO. 
This decline in aggregate reporting costs can be seen with an analysis 
of Form SH data, which show that increasing the Form SHO daily average 
thresholds from 2.5 percent and $10 million to 5 percent and $25 
million would reduce the number of reporting Managers from 252 to 165. 
In addition, it would reduce the percentage of short sale dollar volume 
covered by reporting Managers from 78.5 percent to 58.4 percent.
    Higher thresholds, however, might 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 of Form 
SH data, if the Form SHO thresholds rose from an average daily position 
of $10 million or 2.5 percent of share outstanding to $25 million or 5 
percent of shares outstanding, the share of reported securities with 
only one Manager would rise from 39.3 percent to 48.4 percent.\788\
---------------------------------------------------------------------------

    \788\ See Proposing Release, at 14963 for more information on 
methodologies and caveats for using Form SH data.
---------------------------------------------------------------------------

    Another alternative would be to raise the percent threshold from 
2.5 percent to 5 percent, as suggested by one commenter,\789\ without 
altering the $10 million threshold. Commission analysis of Form SH data 
indicates that this would only reduce the number of reporting Managers 
from 252 to 247. However, further analysis reveals that there could be 
a substantial loss of transparency into stocks with less than a $400 
million market capitalization. Since stocks with market caps exceeding 
$400 million will always trigger the $10 million threshold before the 
2.5 percent trigger (2.5 percent of $400 million = $10 million), 
raising the 2.5 percent to 5 percent will not impact the number of 
large positions reported in stocks with market caps exceeding $400 
million. However, stocks with market caps under $400 million will 
always trigger the 2.5 percent threshold before the $10 million 
threshold. Thus, raising the 2.5 percent threshold to 5 percent without 
altering the $10 million threshold would result in fewer smaller stock 
positions being reported. Furthermore, analysis of Form SH data 
indicates that for stocks that are specifically sensitive to the 2.5 
percent threshold (i.e., stocks in which all reportable short sale 
positions are under $10 million and therefore only trigger the 2.5 
percent threshold), raising the threshold to 5 percent would reduce the 
number of reportable stocks from 131 to 30, a decline of about 77 
percent. Thus, Form SH data analysis indicates that while raising the 
threshold from 2.5 percent to 5 percent might only result in a small 
reduction in the number of reporting Managers, it could nevertheless 
lead to a significant loss of transparency in small stocks (stocks with 
market capitalizations under $400 million).
---------------------------------------------------------------------------

    \789\ See supra note 120 and associated discussion.
---------------------------------------------------------------------------

    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 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 percent to 8.76 
percent.\790\ Similarly, under the same assumptions, lowering the 
threshold to $50,000 would increase the number of short positions 
captured to 48.08 percent.
---------------------------------------------------------------------------

    \790\ See Proposing Release, at Table II (analysis within 
table).
---------------------------------------------------------------------------

    As another alternative to the proposed Threshold A, the Commission 
could establish a threshold based on one rather than both of the 
thresholds in Rule 13f-2, i.e., either the average daily dollar short 
position or the percent of shares outstanding.\791\ The advantage of 
this alternative is that it might reduce compliance costs by 
simplifying reporting requirements. One commenter stated that the two-
prong threshold for reporting companies was, ``overly and unnecessarily 
complex.'' \792\ In addition, the commenter said that using a 
percentage-based threshold was more costly to Managers, in part because 
it can be burdensome to obtain data on shares outstanding, which serves 
as the denominator in the calculation of the percentage-based 
threshold.\793\ Another commenter, however, stated that, relative to 
percentage-based threshold, ``compliance with a dollar value threshold 
typically requires significant manual processes and more difficult 
system buildouts.'' \794\ The Commission acknowledges that a dollar-
value threshold might be somewhat less complicated for some Managers, 
but nevertheless believes that data tracking the number of shares 
outstanding are generally readily available, and that it is 
straightforward to calculate an average daily gross short position as a 
percentage of outstanding shares.
---------------------------------------------------------------------------

    \791\ See Proposing Release, at 15008 for discussion of this 
alternative with the $10 million threshold as proposed, not as 
adopted.
    \792\ See MFA Letter, at 13
    \793\ See Proposing Release, at 15008.
    \794\ See ICI Letter, at 9.
---------------------------------------------------------------------------

    The Commission also acknowledges that using a single threshold for 
Threshold A would lower compliance costs, primarily because fewer 
entities would be required to report. However, choosing which of the 
two thresholds to drop would impact which positions are more likely to 
trigger the remaining threshold. For example, an alternative that 
retained only the $10 million daily average threshold would decrease 
the likelihood of small cap positions being reported, since these firms 
reach the 2.5 percent threshold before the $10 million threshold.\795\ 
Smaller market capitalization stocks tend to be easier to manipulate 
and less stable. Thus, an alternative that excludes the 2.5 percent 
threshold would result in less visibility into the actions of short 
sellers among smaller market capitalization stocks and may undermine 
the ability of Rule 13f-2 to reduce manipulative behavior among these 
stocks, as articulated in Part VIII.C.1.
---------------------------------------------------------------------------

    \795\ Short positions in stocks with market capitalizations 
below $400 million will trigger the 2.5% threshold before they 
trigger the $10 million threshold.
---------------------------------------------------------------------------

    Commission analysis of Form SH data suggest that an alternative 
that includes only the 2.5 percent threshold would result in a 
substantial reduction in the number of reporting Managers relative to 
the two-prong threshold in adopted Rule 13f-2. More specifically, 
switching from the adopted Form SHO thresholds of $10 million daily 
average or 2.5 percent of shares outstanding to a single prong 
threshold of 2.5 percent would cause the number of reporting Managers

[[Page 75181]]

under Form SH to fall from 252 to 115. Furthermore, it would 
drastically reduce the share of covered short sale volume of reporting 
Managers from 78.5 percent to 16 percent. One commenter stated that 
excluding the dollar-based threshold and solely using a threshold of 5 
percent or more, ``. . . would allow the Commission to achieve its 
objectives without imposing unnecessary complexity on advisers and 
other reporting Managers.'' \796\ Form SH data, however, indicate that 
this would reduce the number of reporting Managers from 252 to 55 and 
the share of covered short sale volume from 78.5 percent to 9 percent.
---------------------------------------------------------------------------

    \796\ See ICI Letter at 9.
---------------------------------------------------------------------------

    More generally, the alternative of requiring a threshold based only 
on short positions as a percent of shares outstanding would largely 
eliminate reporting in larger securities. Note that for stocks with 
market capitalization above $400 million, short sellers reach the $10 
million threshold before the 2.5 percent threshold. Furthermore, for 
large cap stocks, generally defined as having a market capitalization 
exceeding $10 billion, short position would have to be more than $250 
million in order to trigger the 2.5 percent threshold. Consequently, an 
alternative in which the Commission required reporting based only on 
the percent of shares outstanding would result in fewer Form SHO 
reports 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. This is because larger market capitalization stocks, which are 
more well-established than small cap stocks, are more likely to be 
shorted due to general pessimism about the macroeconomy and less likely 
to be targeted as part of manipulative strategy in comparison to small 
cap stocks.\797\
---------------------------------------------------------------------------

    \797\ See, e.g., Carole Comerton-Forde & T[amacr]lis J. 
Putni[ncedil][scaron], Stock Price Manipulation: Prevalence and 
Determinants, 18:1 Rev. of Fin. 23-66 (2014), available at https://doi.org/10.1093/rof/rfs040 (for evidence on small and less liquid 
stocks higher exposure to manipulative behavior by investors). See 
also discussion in supra Part VIII.C.1.
---------------------------------------------------------------------------

    As another alternative, the Commission could structure the 
Reporting Thresholds to include the nominal economic value of short 
derivative positions. Specifically, reporting on 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.\798\ 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 Form SHO.\799\ Making it more difficult to circumvent the 
reporting requirements using derivatives might also decrease strategic, 
and sub-optimal, trading around the Reporting Thresholds which leads to 
lower price efficiency.\800\ However, increasing the amount of 
information that was disclosed on publicly released Form SHO may 
increase copycat activity that leads to herding and increased 
volatility. Conversely, incorporating derivatives in Form SHO reports 
may dilute the information filed by Managers relative to the case where 
only equity gross short positions are included, thereby reducing the 
amount of herding. This alternative could also result in 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. Additionally, while valuing short positions in 
most equities is fairly straightforward, 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 Manager's short 
exposure in derivatives would be significantly more complicated than 
Adopted Rule 13f-2 and Form SHO.
---------------------------------------------------------------------------

    \798\ See Proposing Release, at 15008 (discussing this 
alternative with the $10 million threshold as proposed, not as 
adopted).
    \799\ See supra Part VIII.C.8.
    \800\ See supra Part VIII.C.1 for further discussion on 
strategic trading around the threshold and how the rule is designed 
to reduce it.
---------------------------------------------------------------------------

    An additional alternative could also involve requiring reporting 
thresholds to be based on activity and not just positions.\801\ 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 might 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 might 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 
is concentrated enough in time might not trigger a reporting threshold 
based on average position over the prior month under the final rule. 
While this activity information may be helpful in flagging unusual 
short selling activity, the Commission could conceivably build reports 
based on existing CAT data \802\ that would be more effective at 
detecting such behavior and Rule 13f-2 would identify these activities 
if the market participant exceeds the Reporting Thresholds.
---------------------------------------------------------------------------

    \801\ See Proposing Release, at 15009.
    \802\ In particular, because such an analysis would not involve 
estimating a position for the Manager, the limitations of CAT are 
less important.
---------------------------------------------------------------------------

    As an alternative, the Commission could measure the thresholds as 
of the last settlement day of the month rather than using the $10 
million average daily prong or 2.5 percent average daily prong for 
Threshold A and the $500,000 threshold over any single day for 
Threshold B.\803\ This alternative would have the advantage of 
simplifying compliance with Rule 13f-2 and Form SHO and thus may reduce 
compliance costs. Form SH data analysis indicates that using last 
settlement day of the month instead of average daily thresholds for 
Threshold A would only result in a marginal increase in the number of 
reporting Managers, from 252 to 256. However, the Commission is 
concerned that this alternative might also invite more strategic 
trading around the end of the month than adopted Form SHO, which is 
structured to prevent trading around the threshold. For

[[Page 75182]]

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.
---------------------------------------------------------------------------

    \803\ See Proposing Release, at 15009 (discussing this 
alternative with the $10 million threshold as proposed, not as 
adopted).
---------------------------------------------------------------------------

    Instead of Threshold B, the Commission could require the same two 
prong, $10 million or 2.5 percent daily average gross position 
reporting threshold for short positions in equity securities of non-
reporting company issuers, as well as for equity securities of 
reporting company issuers.\804\ This approach might 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 and to the size of the issuance to ensure capturing 
positions that are relatively large whereas the Threshold B imposes a 
flat threshold that could result in some relatively large positions, in 
terms of daily average gross position of percentage of shares 
outstanding, not being filed on Form SHO.
---------------------------------------------------------------------------

    \804\ See Id.
---------------------------------------------------------------------------

    However, this alternative would increase the burden for Managers as 
information for non-reporting company issuers can be hard to find, 
making threshold calculations difficult. In particular, information on 
the number of shares outstanding can be difficult to obtain for non-
reporting company issuers and when it is available it is often stale 
and inaccurate. This could lead to problems with the calculations for 
the 2.5 percent threshold. One commenter stated that a single 
percentage-based threshold level applied to both reporting and non-
reporting company issuers, ``. . . would mitigate unnecessary 
operational and cost burdens on managers, including complexities from 
monitoring and reporting with up to three separate thresholds.'' \805\ 
However, this alternative would require Managers to know the number of 
shares outstanding in non-reporting companies for each trading day for 
their short positions, and would therefore effectively impose new 
recordkeeping costs on Managers. Further, there are multiple sources 
from which Managers can obtain shares outstanding for securities of 
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. One concern is that Managers would try to game 
different data sources in order to avoid having to report Form SHO.
---------------------------------------------------------------------------

    \805\ See ICI Letter, at 9.
---------------------------------------------------------------------------

    The Commission could enhance record keeping requirements associated 
with this alternative by requiring Managers to record and report on 
Form SHO the source of data used to calculate shares outstanding.\806\ 
This could improve the quality of the information reported in 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 might 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 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.
---------------------------------------------------------------------------

    \806\ See Proposing Release, at 15009.
---------------------------------------------------------------------------

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 mandated by the rule. 
Specifically, the Commission could require gross short position 
assessment and reporting (assuming at least one of the thresholds had 
been crossed) at frequencies that are shorter than a month.\807\ For 
example, the Commission could require reporting daily, weekly,\808\ 
biweekly, 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 for the 
prior period (e.g., one week, or two weeks). This could result in an 
increase in the number of Managers that report, since it is likely that 
some Managers hold short positions that cross a Form SHO threshold for 
the alternative time frequencies (e.g., one week) but not for the 
entire month. These Managers may be required to report with more 
frequent disclosures relative to Adopted Form SHO.
---------------------------------------------------------------------------

    \807\ See Proposing Release, at 15009. In this alternative, the 
thresholds would conform to the reporting period, such that the 2.5% 
and $10 million daily average thresholds would be calculated over 
the alternative shortened time period.
    \808\ Many commenters on temporary Rule 10a-3T stated that 
weekly reporting was overly burdensome. 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.
---------------------------------------------------------------------------

    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 and 
short squeezes, but also improve price efficiency. One commenter stated 
that a study of the EU's short sale disclosure policy, which requires, 
``immediate public disclosure of large short positions,'' finds no 
evidence of increased manipulation or short squeezes.\809\ However, 
multiple studies have found evidence that the EU's policy has result in 
short sellers seeking to avoid disclosure by accumulating positions 
slightly under the threshold, which could result in a loss price 
efficiency.\810\ Furthermore, one commenter stated that increasing the 
disclosure delay to 45 days would help prevent copycat trading and 
short squeezes.\811\ The Commission

[[Page 75183]]

recognizes that there are benefits and costs to more timely disclosure, 
and believes that the two week delay incorporated in adopted Form SHO 
effectively balances these costs and benefits.
---------------------------------------------------------------------------

    \809\ See Better Markets Letter, at 13 and Charles M. Jones, 
Adam V. Reed, and William Waller, Revealing Shorts an Examination of 
Large Short. Position Disclosures, 29 Rev. of Fin. Studies 3278, 
3282 (2016).
    \810\ See supra note 770.
    \811\ See MFA Letter at 4.
---------------------------------------------------------------------------

    The Commission could also consider different reporting windows for 
Managers who meet the threshold short positions to report on Form 
SHO.\812\ The current proposal requires Managers to report on 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 file the data on Form SHO and may need to build costlier 
procedures to ensure compliance with the reporting requirement.\813\ A 
mitigating factor would be 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.
---------------------------------------------------------------------------

    \812\ See Proposing Release, at 15010.
    \813\ See Seward & Kissel LLP Letter (discussing Temporary Rule 
10a-3T) 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.\814\ 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.\815\ 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.\816\ 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.
---------------------------------------------------------------------------

    \814\ See Proposing Release, at 15010.
    \815\ One commenter stated that the ``. . . proposed data 
framework will not provide timely insight for the SEC to act given 
that it is monthly data with 14 days delay after month end.'' See 
SBAI Letter, at 2. The Commission recognizes that removing the 14-
day delay would increase its ability to monitor and respond more 
rapidly to market events stemming from short sale activity. However, 
as discussed elsewhere in this release, the delay is in part 
necessary to review and validate the data, and may also serve to 
reduce the likelihood of short squeeze and copycat behavior.
    \816\ One commenter stated that the public dissemination of Rule 
13f-2 data should be increased from 14 days to 45 days in order to 
provide additional protection against exposure of trading 
strategies, which could be used as part of a replication strategy or 
to facilitate a short squeeze. See MFA Letter, at 4. More generally, 
the commenter believes that since the amendments would provide only 
``limited marginal benefits,'' reducing the cost of compliance, 
including the risk of exposing the identities of investment managers 
and their proprietary trading strategies, is warranted.
---------------------------------------------------------------------------

b. Report Form SHO in Inline XBRL
    The adopted rule would require Form SHO to be filed in Form SHO-
specific XML, a structured, machine-readable data language. As an 
alternative, the Commission might require 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.\817\ 
Compared to the adopted Form SHO, the Inline XBRL alternative for 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 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 
adopted Form SHO, this alternative would impose greater initial 
implementation costs (e.g., licensing Inline XBRL filing preparation 
software) upon reporting persons that have no prior experience 
structuring data in Inline XBRL.\818\ By contrast, because many 
Managers that would be Form SHO filers would likely have experience 
structuring filings in a similar EDGAR Form-specific XML data language, 
such as in the context of filing Form 13F, the Form SHO-specific XML 
requirement will likely impose lower implementation compliance costs on 
Form SHO filers than an Inline XBRL requirement would impose.
---------------------------------------------------------------------------

    \817\ See Proposing Release, at 15010.
    \818\ 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).
---------------------------------------------------------------------------

IX. Regulatory Flexibility Act Certification

    The Regulatory Flexibility Act (``RFA'') \819\ 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 final regulatory flexibility analysis of rules it is 
adopting, to determine the impact of such rulemaking on ``small 
businesses'' unless the Commission certifies that the rule would not 
have a significant economic impact on a substantial number of ``small 
entities.'' \820\
---------------------------------------------------------------------------

    \819\ 5 U.S.C. 601 et seq.
    \820\ In response to the Commission's request for comment, 
commenters provided general predictions without empirical data to 
support their assessments that Proposed Rule 13f-2, Proposed Form 
SHO, and the Proposed CAT Amendments would have a significant 
economic impact on a substantial number of ``small entities.'' See 
supra note 324 and accompanying text.
---------------------------------------------------------------------------

    Certification for Rule 13f-2 and 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 17 CFR 240.0-10 \821\ 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 Rule 13f-2 and 
related Form SHO, therefore, the Commission has determined that the 
definition of the term ``small business'' found in 17 CFR 275.0-7(a) 
\822\ under the Investment Advisers Act of 1940 \823\ is more 
appropriate to the functions of institutional managers such as the 
Managers with reporting obligations under Rule 13f-2. The definition 
will help ensure that all persons or entities that might be Managers 
subject to reporting requirements under Rule 13f-2 will be included 
within a category addressed by the Rule 0-7(a) definition.
---------------------------------------------------------------------------

    \821\ Rule 0-10.
    \822\ Rule 0-7(a).
    \823\ 15 U.S.C. 80b-1 et seq.
---------------------------------------------------------------------------

    Therefore, for purposes of this rule 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 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.\824\ The Commission did not

[[Page 75184]]

receive any comments on the certification as it related to entities 
impacted by Rule 13f-2.
---------------------------------------------------------------------------

    \824\ Rule 0-7(a), supra note 822. 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 Rule 13f-2, Managers are not required to report on Form SHO 
unless they meet or exceed a specified Reporting Threshold. Managers 
with a gross short interest position in an equity security of a 
reporting company issuer will be subject to a two-pronged reporting 
threshold structure: a monthly average gross short position in the 
equity security with a U.S. dollar value of $10 million or more; or a 
monthly average gross short position as a percentage of shares 
outstanding in the equity security of 2.5 percent or more (Threshold 
A). Managers with a gross short interest position in an equity security 
of a non-reporting company issuer will be subject to a single-pronged 
reporting threshold structure: 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). While the parameters of the Reporting Thresholds under 
Rule 13f-2 relate to the number and dollar value of shares of short 
positions, rather than assets under management, the Commission 
nevertheless anticipates that application of the Reporting Thresholds 
will result in 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, a monthly average 
gross short position in the equity security with a U.S. dollar value of 
$10 million or more for reporting company issuer securities represents 
forty 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 percent of 
their respective assets under management in a short position in a 
single security. Further, many types of 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 deter small 
entities (with less than $25M of assets under management) from 
investing over $10M (greater than 40 percent) of their assets in a 
single short position, and therefore prevent them from triggering the 
first prong of Threshold A.\825\
---------------------------------------------------------------------------

    \825\ See Molk and Partnoy, supra note 510, 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 derivatives and similar transactions that create economic 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 Rule 13f-2 has been met.\826\ 
Further, the Commission estimates, based on an analysis of US common 
stocks,\827\ that Managers that qualify as small entities under Rule 0-
7(a) would not meet the 2.5 percent monthly average reporting threshold 
for securities representing over ninety-eight percent (98 percent) of 
the overall market value.\828\
---------------------------------------------------------------------------

    \826\ 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.'').
    \827\ A small entity, with less than $25M in assets under 
management, is not 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 US equities. See 
also Stock Market Size Categories (2021), available at https://stockmarketmba.com/sizecategories.php (calculating approximately 
three percent (3%) of the US stock market consists of common stocks 
of companies with less than $2B in market capitalization (i.e., 
small-cap and micro-cap stocks) and stating that micro-cap companies 
are generally too small for even most large institutional investment 
managers to invest in).
    \828\ An analysis by Commission of the daily dataset of the 
Center for Research in Security Prices (``CRSP'') showed that for 
the month of Oct. 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 \829\--less than twenty-five percent have less than $50M in 
assets under management.\830\ 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.\831\ 
Further, the Commission certified in the Proposing Release 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 requested written comments 
regarding this certification and did not receive any. Additionally, and 
as described above, the adopted dollar-value based prong of Threshold A 
for reporting company issuer securities is based on a monthly average 
rather than a daily calculation, likely capturing fewer Managers than 
would have been required to report under the proposed daily dollar-
value prong of Threshold A, so it is even less likely that small 
entities will be required to report on Form SHO as adopted.
---------------------------------------------------------------------------

    \829\ See Molk and Partnoy, supra note 510, at 846.
    \830\ 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/.
    \831\ 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 Rule 13f-2 will 
not have a significant economic impact on a substantial number of small 
entities, as defined under Rule 0-10, for purposes of the RFA.
    Certification for the Amendment to CAT. The amendment to the CAT 
NMS Plan will 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), 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 use of the 
exception to 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.\832\ None of the national 
securities exchanges registered under section 6 of the Exchange Act 
that will be subject to the amendments are ``small entities'' for 
purposes of the RFA. In addition, FINRA is not a ``small entity.'' 
\833\ 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

[[Page 75185]]

exception pursuant to Rule 203(b)(2)(iii) of Regulation SHO and reports 
to the CAT will 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. Given the above estimates it is possible, but unlikely, that in 
the future a small entity may come within scope of the Amendment to 
CAT, because such firms are likely to exceed $500,000 in total capital 
or be affiliated with a person that is not a small entity.
---------------------------------------------------------------------------

    \832\ 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).
    \833\ See 13 CFR 121.201.
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission certifies that the 
Amendment to CAT will not have a significant economic impact on a 
substantial number of small entities for purposes of the RFA.

X. Other Matters

    Pursuant to the Congressional Review Act,\834\ the Office of 
Information and Regulatory Affairs has designated these rules as a 
``major rule,'' as defined by 5 U.S.C. 804(2).
---------------------------------------------------------------------------

    \834\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

    If any of the provisions of these final rules, or the application 
thereof to any person or circumstance, is held to be invalid, such 
invalidity shall not affect other provisions or application of such 
provisions to other persons or circumstances that can be given effect 
without the invalid provision or application.

Statutory Authority

    The Commission is adopting the rule and form contained in this 
document under the authority set forth in the Exchange Act [15 U.S.C. 
78a et seq.], particularly sections 3, 10(b), 12, 13(f), 15, (d), 
23(a), 35A, 36 thereof [15 U.S.C. 78c, 78j(b), 78l, 78m(f), 78o(d), 
78w(a), 78ll, and 78mm], and Public Law 111-203, 929X, 124 Stat. 1376 
(2010). The Commission is amending the CAT NMS Plan pursuant to the 
Exchange Act, particularly Sections 2, 3, 5, 6, 11A, 15, 15A, 17(a) and 
(b), 19, and 23(a) thereof [15 U.S.C. 78b, 78c, 78e, 78f, 78k-1, 78o, 
78o-3, 78q(a) and (b), 78s, and 78w(a)], and Rules 608(a)(2) and (b)(2) 
thereunder.

List of Subjects in 17 CFR Parts 240 and 249

    Reporting and recordkeeping requirements, Securities.

Text of Amendments

    In accordance with the foregoing, the Commission is amending 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 authority citation for part 240 is amended by removing the 
sectional authority for Sec.  240.13f-2(T) to read in part as follows:

    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, 78j-4, 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, 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; and 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 (referenced in 17 CFR 249.332), 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 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 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 with respect to either:
    (i) A monthly average gross short position at the close of regular 
trading hours in the equity security with a U.S. dollar value of $10 
million or more; or
    (ii) A monthly average gross short position at the close of regular 
trading hours as a percentage of shares outstanding in the equity 
security of 2.5 percent or more; and
    (2) Each equity security that is of a class of securities that is 
not registered pursuant to section 12 of the Exchange Act or for which 
the issuer of that class of securities 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 with respect to 
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.
    (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 17 CFR part 232 
(Regulation S-T). The Commission will publish, on an aggregated basis, 
certain information regarding each equity security reported by 
institutional investment managers on Form SHO and filed with the 
Commission via EDGAR.
    (b) For the purposes of this section:
    (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 Sec.  240.3a11-1 (Rule 3a11-1).
    (3) The term investment discretion has the same meaning as in Sec.  
240.13f-1(b) (Rule 13f-1(b)).
    (4) The term gross short position means the number of shares of the 
equity security that are held short as a result of short sales as 
defined in 17 CFR 242.200(a) (Rule 200(a) of Regulation SHO), without 
inclusion of any offsetting economic positions such as shares of the 
equity security or derivatives of such equity security.
    (5) The term regular trading hours has the same meaning as in 17 
CFR 242.600(b)(77) (Rule 600(b)(77)).

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

0
3. 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
4. Add Sec.  249.332 to read as follows:


Sec.  249.332  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 17 CFR 
240.13f-2 (Rule 13f-2).

0
5. Add Form SHO referenced in Sec.  249.332.


[[Page 75186]]


    Note: Form SHO is attached as Appendix A to this document. Form 
SHO will not appear in the Code of Federal Regulations.


    By the Commission.

    Dated: October 13, 2023.
J. Matthew DeLesDernier,
Deputy Secretary.

    Note:  The following appendix will not appear in the Code of 
Federal Regulations.

Appendix A--Form SHO

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 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 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 
either (A) a monthly average gross short position at the close of 
regular trading hours in the equity security with a value of $10 
million or more, or (B) a monthly average gross short position at 
the close of regular trading hours as a percentage of shares 
outstanding in the equity security of 2.5 percent or more; and (2) 
each equity security that is of a class of securities 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 with respect to 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 included in a Form SHO report is deemed subject 
to a confidential treatment request under 17 CFR 200.83. 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.

Instructions for Calculating Reporting Threshold

    A Manager shall file a report on Form SHO:
    <bullet> 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 is required to file reports 
pursuant to section 15(d) of the Exchange Act (a ``reporting company 
issuer'') in 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 that are a monthly 
average gross short position at the close of regular trading hours 
in the equity security with a U.S. dollar value of $10 million or 
more, or (2) the Manager and all accounts over which the Manager or 
any person under the Manager's control has investment discretion 
that are a monthly average gross short position at the close of 
regular trading hours as a percentage of shares outstanding in the 
equity security of 2.5 percent or more (``Threshold A'').
    <bullet> with regard to each equity security that is of a class 
of securities of an issuer that is not a reporting company issuer as 
described above (a ``non-reporting company issuer''), when the 
Manager and all accounts over which the Manager or any person under 
the Manager's control has investment discretion that are 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 gross 
short position at the close of regular trading hours in the equity 
security (as defined in Rule 13f-2) 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 (``end of 
day dollar value''). The Manager shall then add all end of day 
dollar values during the calendar month and divide that sum by the 
number of settlement dates in the month to arrive at a ``monthly 
average'' for each equity security the Manager traded during that 
calendar month reporting period.
    To determine whether the dollar value threshold described in 
Threshold B above is met, a Manager shall determine its gross short 
position at the close of regular trading hours in the equity 
security (as defined in Rule 13f-2) 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) determine its 
gross short position at the close of regular trading hours in the 
equity security (as defined in Rule 13f-2) on each settlement date 
during the calendar month, and divide that figure by the number of 
shares outstanding in such security at the close of regular trading 
hours on the settlement date, and (b) add up the daily percentages 
during the calendar month as determined in (a) and divide that sum 
by the number of settlement dates in the month to arrive at a 
``monthly average'' for each equity security the Manager traded 
during that calendar month 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., 
2023).
    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

[[Page 75187]]

12 calendar months) is/are affected by the Amendment and 
Restatement.
    b. 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.
    4. Present the Cover Page information in the format and order 
provided in the form, including the non-lapsed Legal Entity 
Identifier (``LEI''), if any, of the Manager filing the Form SHO 
report. 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 non-lapsed 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 non-lapsed 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 
Non-Lapsed 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 non-lapsed 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. 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 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:
    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 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 U.S. 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.
    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 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. Net Change in Short Position (Number of Shares). 
For the settlement date set forth in Column 1, enter the net change 
in short position (represented as a number of shares) reflecting how 
the reported gross short position in shares of the security for 
which information is being reported are being closed out--or 
increased--as a result of the acquisition or sale of shares of that 
equity security, by taking into account:
    (1) Short sales of the security that settled on that date.
    (2) Shares of the security that were purchased to cover, in 
whole or in part, an existing short position and settled on that 
date.
    (3) Shares of the security that were acquired in a call option 
exercise that reduces or closes a short position on that security 
and settled on that date.
    (4) Shares of the security that were sold in a put option 
exercise that creates or increases a short position on that security 
and settled on that date.
    (5) Shares of the security that were sold in a call option 
assignment that creates or increases a short position on that 
security and settled on that date.
    (6) Shares of the security that were acquired in a put option 
assignment that reduces or closes a short position on that security 
and settled on that date.
    (7) Shares of the security for which information is being 
reported that were acquired as a result of the tendered conversions 
that reduces or closes a short position on that security and settled 
on that date.
    (8) Shares of the security that were obtained through a 
secondary offering transaction that reduces or closes a short 
position on that security and settled on that date. Such secondary 
offering purchases must be reported whether they occurred outside or 
within the restricted period of Rule 105 of Regulation M, 17 CFR 
242.105, which prohibits purchasing offering shares within the 
restricted period after selling short.
    (9) Shares of the security 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, or that reduces 
or closes a short position on that security and settled on that 
date.
    (10) Activity other than (1) through (9) above that creates or 
increases, or reduces or closes, a short position on that security, 
including, but 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.

[[Page 75188]]

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 Number:---------------------------------------------
Business Email:--------------------------------------------------------
Non-Lapsed Legal Entity Identifier
 (``LEI''):------------------------------------------------------------
Contact Employee:------------------------------------------------------
Name and Title:--------------------------------------------------------
Business Telephone Number:---------------------------------------------
Business Email:--------------------------------------------------------
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 Non-Lapsed LEI of each of the Other Manager(s) 
Reporting for this Manager:
    [If there are no entries in this list, omit this section.]

Name:------------------------------------------------------------------
Non-Lapsed LEI:--------------------------------------------------------

[Repeat as necessary.]

                                               Information Table 1--Manager's Monthly Gross Short Position
--------------------------------------------------------------------------------------------------------------------------------------------------------
           Column 1                Column 2          Column 3          Column 4          Column 5          Column 6         Column 7         Column 8
--------------------------------------------------------------------------------------------------------------------------------------------------------
Settlement Date (Month End)..  Issuer Name.....  Issuer LEI......  Title of Class..  CUSIP Number....  FIGI...........  End of Month     End of Month
                                                                                                                         Gross Short      Gross Short
                                                                                                                         Position         Position
                                                                                                                         (Number of       (rounded to
                                                                                                                         Shares).         nearest USD).
--------------------------------------------------------------------------------------------------------------------------------------------------------

(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
--------------------------------------------------------------------------------------------------------------------------------------------------------
Settlement Date.................  Issuer Name.......  Issuer LEI........  Title of Class....  CUSIP Number......  FIGI..............  Net Change in
                                                                                                                                       Short Position
                                                                                                                                       (Number of
                                                                                                                                       Shares).
--------------------------------------------------------------------------------------------------------------------------------------------------------

(Repeat as Necessary)

[FR Doc. 2023-23050 Filed 10-31-23; 8:45 am]
BILLING CODE 8011-01-P


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