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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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

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

    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

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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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

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

(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

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.

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.

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

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

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

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

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

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

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

receive any comments on the certification as it related to entities
impacted by Rule 13f-2.
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    \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).'').
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    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\
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    \825\ See Molk and Partnoy, supra note 510, describing
impediments that have kept different types of institutional
investment managers from engaging in short selling.
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    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\