this, then market participants could attempt to use the activity data
to extract information about the specific trading strategies that short
sellers use to implement their trades. Market participants could then
try to identify similar patterns in the live data and alter their
trading strategies to attempt to profit from any predictability in the
short seller's trading strategy. This behavior would further limit the
benefit to short selling as it may allow other market participants to
game the short seller's trading behavior--increasing the cost of
implementing short selling trading strategies. While the Commission
acknowledges this risk, it believes that the proposed design of the
published activity data would significantly limit this risk. In
particular, the proposed netting of short selling activity across
increases and decreases in short position along with showing only one
number per day per security would mask much of the trading behavior of
individual short sellers while still providing information about
changes in bearish sentiment in the market. For example, Managers may
build or reduce a short position using complex trading strategies
potentially involving transactions on both sides of the market. By
netting trading activity and aggregating across Form SHO filers, market
participants viewing the publicly reported Form SHO data would still
get a view of changes in bearish sentiment while keeping Manager
specific trading strategies hidden.
    The public disclosure requirements may also expose Managers to
retaliation by other market participants.\274\ Although aggregating the
data before releasing it to the public on a delay would provide some
protection to Managers from having their identities uncovered, in
certain cases motivated market participants may still be able to
identify individual investors. For instance, in the case that the
aggregated short position reported to the public is just above the
threshold, one could reasonably assume that only one Manager has a
short position large enough to report, which may facilitate identifying
who that manager is. The Commission believes that even if the
probability of identifying individual short sellers is low, the threat
of this additional exposure to retaliation may disincentivize short
selling. However, the Commission believes that on balance aggregating
the data prior to publishing it provides appropriate protection of
short sellers' identities and trading strategies.
---------------------------------------------------------------------------

    \274\ See 2011 MFA Letter, supra note 49; Owen A. Lamont, Go
Down Fighting: Short Sellers vs. Firms, 2(1) The Rev. of Asset
Pricing Studies 1-30 (2012); Lorien Stice-Lawrence, Yu Ting Wong, Yu
Ting Forester Wong, and Wuyang Zhao, Short Squeezes After Short-
Selling Attacks (November 2021), available at https://ssrn.com/abstract=3849581 or http://dx.doi.org/10.2139/ssrn.3849581.
---------------------------------------------------------------------------

    If specific Managers are identified, issuers might take retaliatory
action against individual short sellers through lawsuits and by
forwarding information to regulators in attempts to precipitate
regulatory investigations, through claims in the media, or by applying
pressure on the shorting firm through business relationships that may
exist outside of trading.\275\ There is also evidence that when short
sellers' positions become public, market participants strive to
orchestrate short squeezes and are successful a significant fraction of
the time.\276\ Short sellers often face lawsuits when they take their
information public or their identities otherwise become known--
regardless of whether the information the short sellers brought forth
was legitimate.\277\ Some issuers have even been known to hire private
investigators in an attempt to uncover the identities of individuals
short selling their stock.\278\ Some short sellers have also expressed
that they have experienced threats to their personal safety after their
short positions were revealed.\279\
---------------------------------------------------------------------------

    \275\ See 2011 letter from Security Traders Association of New
York on the Short Sale Reporting Study Required by Dodd-Frank Act
Section 417(a)(2), available at https://www.sec.gov/comments/4-627/4627-155.pdf.
    \276\ See supra note 274, Stice-Lawrence, Wong, and Zhao (2021)
and Lamont (2021).
    \277\ See Owen A. Lamont, Go Down Fighting: Short Sellers vs.
Firms, 2 (1) The Rev. of Asset Pricing Studies 1-30 (2012).
    \278\ Id.
    \279\ See Lamont (2012) supra note 258; Game Stopped Hearing,
supra note 269 (CEO of Melvin Capital LP stated that after his short
positions were made known, Reddit users made posts and sent personal
text messages that were laced with anti-Semitic slurs and threats of
physical harm to him and others.).
---------------------------------------------------------------------------

    Lastly, even if the identities of the individuals reporting short
selling data remain unknown, publicly disclosing that Managers have
amassed large aggregate short positions may expose the Managers to
increased risk of being the target of predatory strategies such as
short squeezes. The risk of short squeeze increases if market
participants are able to identify the individuals with large short
positions as discussed in Part VIII.D.1. In this case they may be able
to better estimate the capital constraints of the short seller to
identify the likelihood of a squeeze being successful.
    Because reporting information on Proposed Form SHO increases the
costs of short selling, it is possible that short sellers may
strategically select short positions to have an average short position
just below the threshold that requires reporting. However, the risk of
this is mitigated by the way in which the threshold is constructed,
which could make trading around the threshold more costly. For example,
because the threshold is not based on the position at the end of the
month, Managers would not be able to simply reduce their positions at
the end of the month to avoid reporting. Instead, Managers would need
to maintain a position below the Reporting Thresholds throughout the
month to avoid reporting. The size of a short position is often related
to the expected magnitude of the short seller's negative information
with revelations of larger negative information being associated with
larger short positions.\280\ Consequently, to the extent that Managers
may choose to select otherwise sub-optimal short positions to avoid
reaching the reporting threshold, Proposed Rule 13f-2 and Proposed Form
SHO could result in a sub-optimal allocation of capital and may harm
price efficiency. To this end some have argued that stock prices can be
viewed as a weighted average of investor sentiment, if short sellers
limit their positions to avoid disclosure requirements, then stock
prices may skew towards being overvalued.\281\
---------------------------------------------------------------------------

    \280\ See, e.g., supra note 269; Kyle (1985).
    \281\ See, e.g., supra note 267, Miller (1977); Letters on the
Short Sale Reporting Study Required by Dodd-Frank Act Section
417(a)(2) from Investment Company Institute (hereafter ``ICI
Letter'') available at https://www.sec.gov/comments/4-627/4627-141.pdf; Data Explorers Letter; SIFMA Letter available at https://www.sec.gov/comments/4-627/4627-143.pdf (about transaction marking
leading to less short selling). In contrast, some argue that short
selling itself increases the value of assets as it provides demand
for securities lending and allows owners to collect securities
lending fees. From this perspective, restricting short selling may
decrease stock prices by restricting the demand for securities
loans. See Darrell Duffie, Nicolae Garleanu, and Lasse Heje
Pedersen, Securities Lending, Shorting, and Pricing, 66 (2-3) J. of
Fin. Econ. 307-339 (2002). The Commission does not believe that this
effect is the predominate effect of short selling on asset prices,
because the average fee earned from securities lending is usually
very small relative to the average long term stock returns. Thus, it
appears that other economic effects tend to dominate the
relationship between short selling and stock prices and that on net
short selling restrictions lead to stock overvaluation. See also OTC
Markets, Provable Markets, SIFMA, and Chester Spatt letters
(responding to FINRA's regulatory notice 21-19 arguing that short
selling is vital to price efficiency), available at https://www.finra.org/rules-guidance/notices/21-19#. In contrast, others
have argued that absent disagreement, costly short selling can help
correct over-pricing by preventing the uninformed (but not informed
traders) from transacting. This skews the distribution of traders in
the market towards being more informed meaning that markets learn
more from each trade and prices adjust more quickly when uninformed
traders do not trade. See Douglas Diamond and Robert E. Verrecchia,
Constraints On Short-Selling And Asset Price Adjustment To Private
Information, 18 (2) J. of Fin. Econ. 277-311 (1987).

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

    For these reasons, the Commission believes that the Proposals may
increase the costs of short selling and potentially dissuade investors
from engaging in fundamental research and the total amount of short
selling may decrease, though the Commission has designed the Proposals
to mitigate these risks. To the extent that fundamental research
decreases, price efficiency could be harmed as prices would not
necessarily reflect all available relevant information, only that
portion that had been discovered by investors performing fundamental
research. Additionally, Proposed Rule 13f-2 could dissuade options
market makers from holding large short positions and providing
liquidity in options markets and, thus, could harm price efficiency in
equity markets.\282\
---------------------------------------------------------------------------

    \282\ See infra Part VIII.D.3. Research has found a that options
play an important informational role in stock price discovery,
therefore reductions in liquidity in the options market can reduce
the price efficiency in the equity market. See also David Easley,
Maureen O'hara, and Pulle Subrahmanya Srinivas, Option Volume and
Stock Prices: Evidence on Where Informed Traders Trade, 52 (2), THE
JOURNAL OF FINANCE 431-465 (1998).
---------------------------------------------------------------------------

    As with the discussion in Part VIII.D.1, many of the economic
effects articulated in this section relating to the reporting of
Proposed Form SHO could be limited to the extent that the data reported
in Proposed Form SHO contains factual errors. The EDGAR system would
check the data for technical errors, however the accuracy of the data
is dependent on accurate and complete data entry by filers. Thus, the
data reported in Proposed Form SHO could contain errors. To the extent
that these errors exist and meaningfully affect the usability of the
data, the value of the data and the economic benefits and costs
associated with collecting the data would be limited. Additionally, the
benefits and costs are lessened by the proposed delay in the
publication of the data. Furthermore, the proposed data would only be
available for those securities with Managers who have short positions
over the threshold, which in some cases may not be representative of
all short positions, and the number of reporting Managers may change
from month to month.
3. Effect on Market Liquidity
    The effect of the Proposals on liquidity is uncertain. Part V.4.ii,
discusses the possibility that Proposed Rule 13f-2 and Proposed Form
SHO may harm price efficiency by dissuading investors from pursuing
fundamental research and that Proposed Rule 13f-2 and Proposed Form SHO
along with Proposed Rule 205 and the Proposal to Amend CAT may help
price efficiency by increasing transparency with respect to the actions
of large short sellers. To the extent that the Proposals improve price
efficiency, this could also indirectly improve liquidity because market
makers would be subject to less mispricing risk. However to the extent
that Proposed Rule 13f-2 and Proposed Form SHO harm price efficiency,
the opposite may be true. Mispricing risk leads to lower liquidity
because market makers must be compensated, in the form of wider bid ask
spreads, for the potential that there is information relevant to the
firm that has not yet been discovered and may affect prices. Thus if
the rule harms price efficiency it may also harm liquidity. The
opposite is also true. To the extent that the Proposals enhance market
efficiency they may also enhance liquidity by mitigating mispricing
risk.
    Additionally, in the event that an options market maker might have
a short position close to the Reporting Thresholds, the Proposed Rule
13f-2 could dissuade the option market maker from increasing their
short position, which may harm their willingness to provide liquidity
in options markets. Alternatively, Proposed Rule 13f-2 might not result
in option market makers who exceed the Reporting Thresholds changing
their positons, in which case the costs of filing Form 13f-2 (and other
compliance costs) could result in wider spreads if the compliance costs
are large enough.
4. Effect on Corporate Decision Making
    The Commission believes that Proposed Rule 13f-2 and Proposed Form
SHO could have mixed effects on corporate decision making. On the one
hand, research suggests that corporate managers learn from market
reactions to announcements.\283\ Consequently, Proposed Rule 13f-2 and
Proposed Form SHO may provide corporate managers with additional
feedback on their decisions. For instance, projects often take some
time to design and implement after announcement, consequently, even
with the lag in the reporting time for the Proposed Form SHO data, a
corporate manager could review the data around significant
announcements to better understand how the market may view a particular
project or announcement. If large short positions are built shortly
after a corporate announcement, then this may give the signal to
corporate management that the market views that announcement negatively
which may help a manager modify or reverse poor decisions. From this
perspective the Proposals may enhance corporate manager decision
making.
---------------------------------------------------------------------------

    \283\ See, e.g., James B. Kau, James S. Linck, and Paul H.
Rubin, Do Managers Listen to the Market?, 14 (4) J. of Corporate
Fin. 347-362 (2008).
---------------------------------------------------------------------------

    In contrast, short sellers, and particularly large short sellers
with the resources to perform fundamental research, serve as valuable
external monitors of management. If a corporate manager knows that
short sellers are monitoring their actions and financial statements and
are willing to expose wrong-doing, then they are less likely to engage
in fraud or do other things that may hurt the value of the company.
Historically, short sellers have, through doing research, uncovered
fraudulent behavior.\284\ Academic research has also shown that even
the threat of short

selling serves to discipline managers.\285\ As discussed in Parts V.4.i
and V.4.ii, Proposed Rule 13f-2 may discourage Managers from performing
fundamental research. If less fundamental research is performed by
short sellers, then their role as monitors of the firm diminishes. Less
monitoring could lead to higher incidences of fraud as managers feel
that the likelihood of being caught goes down.\286\ Thus, to the extent
that Proposed Rule 13f-2 and Proposed Form SHO discourage fundamental
research it may lead to both an increase in the total amount of
corporate fraud in the economy as well as decrease the fraction of
frauds that are discovered by investors.
---------------------------------------------------------------------------

    \284\ See, e.g., A. Dyck, A. Morse, and L. Zingales, Who Blows
the Whistle on Corporate Fraud?, 65(6) The J. of Fin. 2213-2253
(2010) (using a large sample of fraud cases between 1996 and 2004,
the authors find that short sellers uncovered the fraud in nearly
15% of cases.). See also Cassell Bryan-Low and Suzanne McGee, Enron
Short Seller Detected Red Flags in Regulatory Filings, The Wall
Street J. (Nov. 5, 2001) (discussing an Enron short seller that
detected red flags reviewing, among other things, the company's SEC
filings), available at https://www.wsj.com/articles/SB1004916006978550640, retrieved from Factiva database. Cf. Nessim
Mezrahi, Stephen Sigrist, and Carolina Doherty, More Securities
Class Actions May Rely on Short-Seller Data, Portfolio Media
(January 10, 2022) (authors' ``analysis of 131 Rule 10b-5 securities
class actions indicates that plaintiffs continue to rely on short-
seller research to substantiate fraud-on-the-market claims.''),
available at https://www.law360.com/articles/1453499/more-securities-class-actions-may-rely-on-short-seller-data.
    \285\ See, e.g., Massimo Massa, Bohui Zhang and Hong Zhang, The
Invisible Hand of Short Selling: Does Short Selling Discipline
Earnings Management? 28 (6) The Rev. of Fin. Studies 1701-1736
(2015).
    \286\ See, e.g., Paul Povel, Rajdeep Singh, and Andrew Winton,
Booms, Busts, and Fraud, 20 (4) The Rev. of Fin. Studies 1219-1254
(2007) (linking variations in monitoring intensity to the incidence
rate of financial fraud.).
---------------------------------------------------------------------------

5. Effect of Certain Electronic Filing and Dissemination Requirements
    Proposed Rule 13f-2 and Proposed Form SHO would 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 would require Proposed Form SHO to be
filed on EDGAR in a custom XML-based data language specific to that
Form (``custom XML,'' here ``Proposed Form SHO-specific XML''). The XML
Schema for Proposed Form SHO-specific XML would incorporate validations
of certain data fields on the Form to help ensure consistent formatting
and completeness.\287\ While the field validations would act as an
automated form completeness check when a Manager files a Proposed Form
SHO, the field validations would not be designed to verify the accuracy
of the information filed in Proposed Form SHO filings. EDGAR would
subsequently aggregate the reported information at the equity security
level and release the aggregated data to the public, either on EDGAR or
on the Commission's website.
---------------------------------------------------------------------------

    \287\ See supra Part III.B.4. 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
Proposed 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 Proposed Form SHO-specific XML). To complete the filing, the
filer would need to correct the error and re-file.
---------------------------------------------------------------------------

    The Commission believes these requirements would incrementally
augment the various effects of the short position and activity
disclosures discussed herein by enhancing the accessibility, usability,
and quality of the Proposed 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
Proposed Form SHO, the Commission would be able to access and download
large volumes of Proposed Form SHO disclosures in an efficient manner.
    Similarly, the provision of the aggregated security-level
information at a centralized, publicly accessible location in a
structured, machine-readable data language, would enable investors and
other public data users to download the aggregated information
directly, and the data could then be analyzed using various tools and
applications. If the security-level information were not available at a
centralized location in a structured, machine-readable language, 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.
    The Commission believes requiring the short position and activity
disclosures to be filed in Proposed Form SHO-specific XML would
facilitate more thorough review and analysis of the reported short sale
disclosures by the Commission, which would increase the efficiency and
effectiveness with which the Commission could identify manipulative
short selling strategies--which may also serve as a deterrent to would
be manipulators and thus may help prevent manipulation--and observe
systemic risk. The Commission believes that this outcome would benefit
investors by facilitating the Commission's observation of short selling
and would thus help protect investors and ensure the sufficiency of
information related to short selling in the market.
    The proposed requirement for short sale disclosures to be filed on
EDGAR in Proposed Form SHO-specific XML would result in additional
incremental compliance costs on filing Managers. These direct
compliance costs are detailed in a subsequent section.\288\ Moreover,
to the extent these incremental compliance costs further chill the
incidence of short-selling, the EDGAR and Proposed Form SHO-specific
XML requirements would increase the likelihood of the indirect costs
that are discussed elsewhere in this section.
---------------------------------------------------------------------------

    \288\ See infra Part VIII.D.7.
---------------------------------------------------------------------------

6. Effect on the Securities Lending Market
    As discussed in parts V.4.i and V.4 ii, the Proposals would
increase the cost of short selling, particularly large short
positions--potentially leading to less overall short selling. As
discussed in Part V.3.i, short sellers must borrow shares to open a
short position. When investors borrow shares they pay a borrowing fee
to the owner of the share. These fees can represent a significant
source of revenue for pension funds, mutual funds, and others who
engage in securities lending.\289\ Consequently, to the extent that the
Proposals discourage short selling they may also lower overall
portfolio returns, including for institutional investors that engage in
securities lending.\290\
---------------------------------------------------------------------------

    \289\ See supra note 232.
    \290\ Commenters on the Short Sale Reporting Study Required by
Dodd-Frank Act Section 417(a)(2) argue that increased public short
selling disclosure may result in reduced short selling, thereby
lowering revenues to institutions that maintain long positions in
equities for extended periods (such as pension funds). See, e.g.,
2011 Letter from Alternative Investment Management Association,
available at https://www.sec.gov/comments/4-627/4627-138.pdf.
---------------------------------------------------------------------------

7. Direct Compliance Costs
    The Commission believes that there would be direct costs associated
with Proposed Rule 13f-2, Proposed Form SHO, Proposed Rule 205, and the
Proposal to Amend CAT. These costs include: Managers reporting position
and activity data; broker-dealers updating CAT reporting processes;
amendments to Regulation SHO; and the Commission processing and
releasing the Manager reports through EDGAR.
    The Commission's estimates for Managers' collective direct
compliance costs to capture and report the information required for
Proposed Form SHO range from $54,083,087 to $156,309,500. This range
reflects estimates for the number of managers that would be subject to
the rule's reporting requirement, their data capture costs, and their
reporting costs. The Commission estimates that between 346 and 1,000
managers would be required to file Proposed Form SHO. We based our
lower estimate on the number of Form SH filers above Threshold A. The
actual number of reporting Managers would likely be higher than

our low estimate, because Managers that exercise investment discretion
with respect to accounts holding Section 13(f) securities having an
aggregate fair market value of less than $100 million were not required
to file Form SH,\291\ and lower than our high estimate.\292\ Based on
this estimated range, the Commission estimates that the collective cost
for updating systems to capture the required information would be
between $36,017,735 and $104,097,500 \293\ and the annual total cost
for reporting managers would be between $18,065,352 and
$52,212,000.\294\ Costs could be underestimated to the extent that
wages are higher than those used in the estimation. The initial costs
are likely higher than the lower bound estimates as Managers who may
not file Proposed Form SHO on a monthly basis would still incur the
initial costs. Furthermore, because Manager short positions are fluid,
some Managers would not be required to file a report every month when
they fall below the reporting threshold. As a result of this fluidity,
ongoing costs could be lower than our estimates. Moreover, to the
extent that the number of reportable short positions varies across
Managers, the costs to track and report those positions would also vary
by Manager. And initial costs could also be higher for some Managers
who do not currently report to EDGAR.
---------------------------------------------------------------------------

    \291\ See Table I. See also note 80 (for more information on the
methodology and caveats of using Form SH data).
    \292\ Disclosure of Short Sales and Short Positions by
Institutional Investment Managers, 73 FR at 61686. (This estimate is
similar to the estimate provided). Proposed Form SHO filers filed
weekly reports. As a result, each reporting manager would file fewer
reports because Form SH would be filed monthly. See supra note 124
(for more information on 1,000 Managers was estimated). However,
fewer Managers actually filed Form SH.
    \293\ See supra PRA Table 2 and note 133. The lower range was
calculated using 346 Managers. 20 hours per submission x 346
submissions by Managers each month x 12 months x $217.55 =
$18,065,352. The Commission estimates that 346 Managers would have
been required to file Form SH had Form SH be subject to the same $10
million and 2.5% threshold.
    \294\ See supra PRA Table 1 and note 143. The lower range was
calculated using 346 Managers.
---------------------------------------------------------------------------

    The Commission believes that there could be costs in addition to
the previously stated costs. The Commission estimates that filing
amendments to Proposed Form SHO may take as long to file as the initial
filing, therefore Managers could also incur additional costs up to
$4,351 to file amendments to Proposed Form SHO.\295\ These costs may be
more common for Managers who do not hold short positions often and are
likely to decrease with time as Managers become more experienced with
filing Proposed Form SHO. As part of the filing of Proposed Form SHO,
Managers would need to ensure that there is not duplicative
reporting.\296\ The burden to ensure that there is not duplicative
reporting would likely vary by Manager, as larger Managers with
multiple accounts may be more likely to have duplication issues. As
part of updating systems to comply with the reporting requirements of
Proposed Rule 13f-2, Managers must calculate the market value of the
trade using the official closing price as of the close of regular
trading hours for the trade settlement date in question, which may not
be the fair market value at the time in which the trade occurred.\297\
However, the Commission believes that in most cases this would be a
small burden on Managers as the data needed for the calculation would
be publicly available and the Commission believes that Managers may
already track the end of day fair market value of short sales. Even in
cases that the reportable equity security is not traded on an exchange,
the Commission believes that Managers may be able to calculate the
value of their short positions by using publicly available closing
prices from the OTC Reporting Facility. In circumstances where closing
prices of non-reporting company issuers are not available, the
Commission believes the tracking such information would still not
impose a large burden as a Manager can use the price at which they last
purchased or sold any share of that security, which would be readily
available to the Manager.
---------------------------------------------------------------------------

    \295\ Depending on what amendments are needed the Commission
believes that each amendment could take up to the original 20 hours
to complete, at a cost of $217.55 per hour = $4,351. Id. See also
Form SHO, Special Instructions at 4.
    \296\ See Form SHO, Special Instructions at 6.
    \297\ See Form SHO, Special Instructions at 7. See also PRA
Table 2 in Part VI (for an estimate of these burden hours).
---------------------------------------------------------------------------

    The Commission also believes that there would be costs associated
with tracking short positions in relation to the threshold.\298\
Particularly, Managers must track their average short positions over
the month to be aware if the maximum position exceeds $10 million as
well as if it exceeds the 2.5% threshold, or in the case of equity
securities of a non-reporting company issuer, if it exceeds the
$500,000 threshold. However, the Commission believes that the proposed
Reporting Thresholds would generally lower the burden on Managers as
fewer Managers would be required to report than if the Commission did
not propose a reporting threshold. For example, the Commission believes
that certain types of Managers would not meet a Reporting
Threshold.\299\ However, the Commission believes that the costs
associated with Proposed Rule 13f-2 and Proposed Form SHO would not be
dependent on the type of Manager, with the exception that Managers who
do not currently report to EDGAR may have increased costs associated
with complying with Rule 13f-2. Additionally, certain types of Managers
may be less likely to trigger the threshold, resulting in lower overall
costs for these Managers. Using Form SH data, the Commission estimates
that an average of 442 Managers would have been required to file
Proposed Form SHO each month under the threshold in place during
temporary rule 10a-3T. However, only 346 Managers would be required to
file under the proposed Threshold A.\300\
---------------------------------------------------------------------------

    \298\ Based on the number of registered investment companies
reporting short positions and the number of hedge funds engaged in a
strategy including short selling, we preliminary believe that only a
small fraction of Managers would be likely to have monitoring
responsibilities pursuant to the proposed rule and, given the
proposed reporting thresholds, an even smaller fraction would be
likely to have reporting obligations.
    \299\ See supra Section VIII.C.2 and supra note 185 (for a
discussion on why certain types of managers are more likely to have
reporting requirements).
    \300\ See supra Table I. See also supra note 77 (for more
information on Form SH data).
---------------------------------------------------------------------------

    The Commission understands that the cost of tracking short
positions could be higher for certain types of securities. For example,
tracking the short position in an exchange traded fund as a percent of
shares outstanding would be more difficult as the number of shares
outstanding changes frequently. Additionally, Managers who hold short
positions in non-reporting company issuers may have difficulty
calculating the value of their position, however Managers may use the
last price at which a the Manager traded even though the price may be
stale. The Commission also believes that the cost to track and report
activities information may vary across activity categories. Short
selling and buy to cover activities would likely be the most common
forms of reported activities and would therefore account for the
majority of the costs. However, other categories of reportable
activity, such as option exercises and assignments, tender conversions,
and seasoned market purchases that reduce or close a short position
would be reported less frequently and may require more attention to
file as Managers would have less experience with reporting such
activities.
    Requiring Proposed Form SHO to be filed on EDGAR in Proposed Form
SHO-specific XML would not impose

significant incremental costs on Managers. We expect most Managers who
would be required to file Proposed Form SHO would likely have
experience filing EDGAR forms that use similar EDGAR Form-specific XML
data languages, such as Form 13F. In that regard, we note the process
for filing Proposed Form SHO, as well as the XML-based data language
used for Proposed Form SHO, would be similar to the filing process and
data language used for Form 13F.\301\ We expect that Managers with such
experience that choose to file Proposed Form SHO directly in Proposed
Form SHO-specific XML would incur some compliance costs associated with
doing so.\302\
---------------------------------------------------------------------------

    \301\ See EDGAR Filer Manual (Volume II) version 60 (December
2021), at 9-1 (``EDGAR Filer Manual Volume II'') (describing process
for submitting Form-specific XML filings directly to EDGAR); see
also Form 13F XML Technical Specification, available at https://www.sec.gov/edgar/filer-information/current-edgar-technical-specifications.
    \302\ See supra PRA Table 2 (estimating the ongoing burden for
the Proposed Form SHO-specific XML requirement at two hours per
Manager per filing and two hours per amended filing). Assuming 1,000
Managers filing 12 filings per year would equal 12,000 filings per
year, resulting in 24,000 total annual industry burden hours (12
filings x 1,000 Managers x 2 hours = 24,000) and $6,480,000 in
industry costs for filings per year (24,000 hours * $270 per hour
for a programmer = $6,480,000) attributable to the Proposed Form
SHO-specific XML requirement. In addition, based on an estimate of
420 amended filings per year, the total industry cost for the
Proposed Form SHO-specific XML would be $226,800 for amended filings
(420 amended filings x 2 hours per amended filing x $270 per hour =
$226,800). As such, the total annual industry cost attributable to
the Proposed Form SHO-specific XML requirement (including amended
filings) is $6,706,800 ($6,480,000 for filings + $226,800 for
amended filings = $6,706,800).
---------------------------------------------------------------------------

    In addition, Managers would be given the alternate option of filing
Proposed Form SHO using a fillable web form that would render into
Proposed Form SHO-specific XML in EDGAR, rather than filing directly in
Proposed Form SHO-specific XML using the technical specifications
published on the Commission's website. We expect Managers who do not
have experience filing Form 13F or other EDGAR Form-specific XML
filings would likely choose this option. In that regard, we note that
Managers (i.e., certain ``institutional investment managers'' as
defined by Section 13(f)(6)(A) of the Exchange Act, which may include
entities such as investment advisers, banks, insurance companies,
broker-dealers, corporations, and pension funds) are only required to
file Form 13F if they exercise investment discretion with respect to
accounts holding Section 13(f) securities having an aggregate fair
market value on the last trading day of any month of any calendar year
of at least $100 million.\303\ Of Managers that do not have experience
filing Form 13F, only a subset are subject to other EDGAR Form-specific
XML filing requirements.\304\ For any Managers that choose to file
Proposed Form SHO using a fillable web form, whether or not they have
prior experience with filing forms in EDGAR Form-specific XML, we do
not believe the Proposed Form SHO-specific XML requirement (i.e., the
requirement to place the collected information in a fillable web form
provided by EDGAR, rather than in an HTML or ASCII document to be filed
on EDGAR as is required for most other EDGAR forms) would impose any
additional compliance costs.\305\
---------------------------------------------------------------------------

    \303\ See 17 CFR 240.13f-1(a).
    \304\ For example, registered brokers or dealers that are
subject to the reporting requirements set forth in 17 CFR 240.17h-2T
must file Form 17H either electronically or in paper. Those that
choose to file electronically must file Form 17H partially in EDGAR
Form-specific XML. Insurance companies may offer variable contracts
that are registered under the Investment Company Act of 1940, and
would thus be required to file annual reports on Form N-CEN in EDGAR
Form-specific XML as well as, in some cases, monthly portfolio
information on Form N-PORT in EDGAR Form-specific XML. Corporations
may make exempt offerings and be required to file Form 1-A, Form C,
or Form D in EDGAR Form-specific XML either in part or in full,
depending on the nature of the offering.
    \305\ See 17 CFR 232.101(a)(1)(iv); 17 CFR 232.301; EDGAR Filer
Manual Volume II at 5-1 (requiring EDGAR filers generally to use
ASCII or HTML for their filed documents, subject to certain
exceptions).
---------------------------------------------------------------------------

    The Commission is cognizant of the burdens Managers experienced of
submitting Form SH in compliance with temporary Rule 10a-3T and has
designed Proposed Rule 13f-2 and Proposed Form SHO to attempt to reduce
those burdens. First, commenters on the temporary Rule 10a-3T stated
that the 0.25% threshold was too low.\306\ The two-pronged threshold in
Proposed 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 41% of positions
reported under Rule 10a-3T would be required to report given the higher
threshold in Proposed Rule 13f-2 and Proposed Form SHO, while still
collecting 89% of the dollar value.\307\ Additionally the proposed
threshold could 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.
Second, many commenters believed that weekly reporting was overly
burdensome.\308\ The short selling information required by Proposed
Rule 13f-2 and Proposed Form SHO would be reported less frequently
(monthly rather than weekly) and would involve reporting end of month
positions rather than daily positions. Third, Managers would have more
time to compile and file the Proposed Form SHO reports than they had to
compile Form SH.
---------------------------------------------------------------------------

    \306\ See Temporary Rule 10a3-T 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).
    \307\ See supra 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 end user when filed making the
data hard to work with.
    \308\ See supra note 306 (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 could offset some or all of these
cost reductions. In particular, Proposed Rule 13f-2 and Proposed Form
SHO would require reporting additional information such as information
on buy-to-cover activity and other activity that changes short
positions. In addition, Proposed Rule 13f-2 and Proposed Form SHO would
require that the information on activity include daily records and not
be subject to its own threshold.\309\ Also, unlike the Form SH required
under Rule 10a-3T, the Proposed Form SHO that would be required by
Proposed Rule 13f-2 would feature an XML Schema that would incorporate
technical validations of certain data fields on the Form, and would
flag technical errors and require the filer to correct the technical
errors before successful submission on EDGAR. However, because the
field validations contemplated by Proposed Rule 13f-2 and Proposed Form
SHO would be limited to technical errors (e.g., letters

instead of numbers in a field requiring only numbers) that we believe
would be straightforward to resolve, we do not believe such
resubmission costs would be significant. Finally, the rule could 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.
---------------------------------------------------------------------------

    \309\ Rule 10a-3T required 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, 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 supra note 80 for
more information on short volume in Form SH data.
---------------------------------------------------------------------------

    In connection with Proposed Rule 205, the Commission estimates that
broker-dealers would have an initial technology cost to update order
marking systems of $170,000 for each of the 1,218 broker-dealers with a
total maximum initial cost to all broker-dealers of $207,060,000. This
estimate likely significantly overstates the actual costs as many
broker-dealers use third party order management systems.\310\ In this
case the operator of the third party order manager system would update
their system and then apply it to all customers reducing the cost
significantly. The Commission estimates that all but 126 of the broker-
dealers use third party order management systems. In this case the
direct compliance costs for these 126 broker-dealers would be
$12,420,000. The remaining broker-dealers would likely incur costs in
the form of higher fees from the third party order management firms to
account for their additional costs. However, these would be
significantly lower than the costs to adjust a system from scratch as
the costs would be divided among all clients of the third party order
management firm. Additionally, the Commission believes that that some
broker-dealers already track their customer's buy to cover orders.
Therefore, the initial cost from the rule are likely to be lower than
the upper bound estimate.
---------------------------------------------------------------------------

    \310\ See supra PRA Table 4.
---------------------------------------------------------------------------

    Additionally, the Commission estimates an upper bound that each
instance of marking an order ``buy to cover'' would take approximately
0.5 seconds, assuming that this takes as long as a short sale mark took
in 2003, which would lead to an ongoing annual burden of 7,107 hours
per broker-dealer and a total burden of 8,652,750 hours.\311\ This
figure is likely an overestimate in light of technological advancements
since 2003. Therefore, the Commission estimates a lower bound for this
burden of 721,000 hours or 592 hours per broker-dealer, assuming that
computing speed has increased by at least 12 times since 2007.\312\
Further, to the extent that some broker-dealers already track their
customer's buy to cover orders, the on-going costs of this requirement
would be low.
---------------------------------------------------------------------------

    \311\ See supra PRA Table 3.
    \312\ According to an industry performance evaluations for
server processors, computing speed has increased by at least 12
times since 2007 (the earliest year in the data). The Commission
believes that computing performance has increased by a greater
amount since 2003. The Commission re-estimated the processing burden
using a factor of 12 (as a conservative estimate of improvements in
processing speed). Dividing the estimated burden per broker-dealer
of 7,107 hours by 12 yields a burden per broker-dealer of
approximately 592 hours per broker-dealer and a total burden of
721,063 hours. See Year on Year Performance (for server processors),
PassMark Software Pty. Ltd., available at https://www.cpubenchmark.net/year-on-year.html.
---------------------------------------------------------------------------

    The 25 Plan Participants would face costs associated with the
Proposal to Amend CAT, as they would be required to engage the Plan
Processor to modify the Central Repository to accept and process new
short sale data elements on order receipt and origination reports.
Additionally the Commission estimates an external cost of $3,904 per
participant or $101,520 total to compensate the Plan Processor for
staff time required to make the initial necessary programming and
systems changes.\313\ However, these initial costs could be higher if
the Commission underestimated the time and wages necessary for
programming and systems changes for the plan processor to accept and
process new data elements. Furthermore, the Commission believes that
Proposal to Amend CAT would not impose additional ongoing cost to
participants beyond those costs already accounted for in existing
Paperwork Reduction Act estimates that apply for Rule 613 and the CAT
NMS Plan approval order.\314\
---------------------------------------------------------------------------

    \313\ See supra note 143.
    \314\ See supra Part VII.D.4.a (for more information on costs
for CAT Plan Participants).
---------------------------------------------------------------------------

    The Commission believes that the proposed Proposal to Amend CAT
would impose a one-time cost to Industry Members.\315\ These costs
would depend on whether implementing Proposed rules 6.4(d)(ii)(D) and
(E) would involve creating additional fields in the order origination
report, or if it is implemented within existing fields.
---------------------------------------------------------------------------

    \315\ See supra Part VII.C.1 (for a discussion of the PRA
burdens associated with the Proposal to Amend CAT).
---------------------------------------------------------------------------

    The Commission recognizes that costs would 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,\316\ 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. The Commission estimates that the 126 insourcing
Industry members would incur an aggregate one-time cost of $1,890,000
or $15,000 individually to update software and hardware to facilitate
reporting the new buy to cover elements to CAT.\317\ Additionally, 60
insourcing Industry members would incur an aggregate cost of $900,000
or $15,000 individually to update systems to facilitate reporting the
new bona fide market making exception elements to CAT.\318\ However,
these cost could be lower if the Commission is overestimating the
number of insourcing industry members, in particular, the additional
cost could drive some insourcing industry members to begin to
outsource. The Commission believes that ongoing costs associated with
reporting the newly required information to CAT would 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 would 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.
---------------------------------------------------------------------------

    \316\ See supra note 172.
    \317\ See supra Part VI.D.4.c (for a breakdown of PRA costs
related to the Proposal to Amend CAT).
    \318\ Id.
---------------------------------------------------------------------------

    For Industry Members that outsource, the Commission believes that
implementation costs would be far lower because the service bureaus
that provide them with order handling systems and regulatory data
reporting services would adapt those systems on their customers'
behalf. The Commission estimates that the 1,092 outsourcing Industry
Members would incur a onetime-aggregate expense of $1,092,000 or $1,000
individually to update hardware and software to facilitate reporting
the new buy to cover elements to CAT.\319\ Additionally, 44 outsourcing
industry members would incur an aggregate one-time cost of $44,000 or
$1,000 individually to update systems to facilitate reporting the new
bona fide market making exception elements to CAT.\320\ However, these
costs could be higher if some

current insourcing industry members begin to outsource as a result of
the increased costs, which would 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 would
be passed to their Industry Member customers.
---------------------------------------------------------------------------

    \319\ Id.
    \320\ Id.
---------------------------------------------------------------------------

    Although, the Proposed Rule 205 and the Proposal to Amend CAT to
add buy to cover would impose costs on broker-dealers who are CAT
Reporters, the Commission believes they would be less costly than
previous related proposals, such as the ``open/close indicator'' in the
original CAT NMS plan proposal.\321\ The originally proposed CAT NMS
Plan would have included an ``open/close indicator,'' which could be
used to identify orders buying to cover short positions. However,
several commenters stated that an ``open/close indicator'' would be
overly burdensome, with one commenter stating that such burdens would
be, in part, the result of ``the lack of a clear definition of the term
[open/close] for equity transactions,'' and the indicator was not
adopted.\322\ By contrast, Proposed Rule 205 includes a clear
definition of when a ``buy to cover'' indicator would be required to be
reported.\323\ In addition, reporting buy to cover on some buy orders
is a narrower requirement than reporting an ``open/close indicator'' on
all buy and sell orders. Specifically, aside from focusing only on some
buy orders, Proposed Rule 205 is designed to rely solely on information
within the broker-dealer \324\ and the Proposal to Amend CAT would
require reporting on order receipt and order origination reports only.
---------------------------------------------------------------------------

    \321\ See supra note 101. See also supra Parts VII.C, VII.D.4.b,
and VII.4.c.
    \322\ See supra Part V.A (for more discussion on the original
CAT NMS Plan proposal that would have included an ``open/close
indicator'').
    \323\ See supra note 104.
    \324\ One commenter on the CAT NMS Plan Notice stated that
including an ``open/close indicator'' indicator for equities would
require ``involve parties other than CAT Reporters, such as buy-side
clients, OMS/EMS vendors, and others.'' See supra note 101.
---------------------------------------------------------------------------

8. Risk of Circumvention Through Derivatives
    The Commission believes that the risk that Managers may attempt to
circumvent the reporting requirement by trading derivatives may be
high, particularly for stocks with liquid options.\325\ The risk may
also increase if a robust single-stock futures market develops over
time.\326\ Indeed, Proposed Rule 13f-2 and Proposed Form SHO could be a
catalyst for growth in derivatives markets as short sellers look for
new avenues to take the economic equivalent of short positions while
avoiding these proposed disclosures.
---------------------------------------------------------------------------

    \325\ See supra note 202, R. Battalio, and P. Schultz, (2011),
Grundy, Lim, and Verwijmeren (2012).
    \326\ See supra note 202, Jiang, Shimizu, and Strong (2019).
---------------------------------------------------------------------------

    The Reporting Thresholds in Proposed Rule 13f-2 are on a Manager's
gross short position in the equity security itself, and does not
included the calculation of derivative positions. Consequently a
Manager seeking to build a large short position while avoiding
reporting their positions on Proposed Form SHO could hold a short
position just below a Reporting Threshold and use derivatives to take
positions above that threshold.\327\ Using derivatives to circumvent
the short selling reporting 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 Proposed Form SHO information articulated in Part V.4.i and
V.4.ii 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 threat of
circumvention through options may be minimal. However, academic
research has shown that investors have used options to circumvent other
short selling restrictions, thus there is a significant risk that there
would be some attempt to circumvent the rule using derivatives,
particularly in stocks with liquid options markets.\328\
---------------------------------------------------------------------------

    \327\ Recently proposed rule 10B-1 would require reporting of
swap positions above a certain threshold. Prohibition Against Fraud,
Manipulation, or Deception in Connection with Security-Based Swaps;
Prohibition against Undue Influence over Chief Compliance Officers;
Position Reporting of Large Security-Based Swap Positions, Exchange
Act Release No. 93784; available at https://www.sec.gov/rules/proposed/2021/34-93784.pdf. There is no reporting requirement for
large options positions or other derivatives.
    \328\ See supra note 202.
---------------------------------------------------------------------------

E. 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.\329\ 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.\330\ 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 to profit from that information. As discussed in Part
V.4.ii, more transparency in short selling would improve the amount of
information that investors have to value a stock--increasing price
efficiency. However, it could also disincentivize fundamental research
which would harm price efficiency by limiting the amount of total
information has been discovered. Overall the impact of the Proposals on
price efficiency is uncertain.
---------------------------------------------------------------------------

    \329\ See Eugene F. Fama, Efficient Capital Markets a Review of
Theory and Empirical Work, The Fama Portfolio 76-121 (2021).
    \330\ See supra note 281.
---------------------------------------------------------------------------

    Additionally, Rule 205 and the CAT amendment would increase the
efficiency with which the Commission accesses and performs analysis
relating to bona-fide market making data or buy to cover data for
regulatory or enforcement purposes. Currently, the Commission does not
have an efficient means to determine buy to cover transactions. The
Commission could, in theory, estimate buy to cover information using
existing CAT data. However, constructing positions for a broad set of
traders from CAT is inefficient and due to CAT lacking all information
relative to an investor's position--e.g., options assignments--could
result in incomplete results.\331\ Additionally, the amendment to CAT
would 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.\332\
---------------------------------------------------------------------------

    \331\ See supra Parts VIII.C.5.iv and VIII.F.1.i (for further
analysis of the use of CAT data to estimate buy to cover
transactions).
    \332\ See supra Parts V.B and Part VIII.C.4 (for a further
discussion of the inefficiencies of existing data with regards to
oversight and enforcement of rules relating to bona fide market
making).
---------------------------------------------------------------------------

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, then investors owning the asset have an
advantage in gathering information due to the reduced cost of acting on
whatever information that

they gather.\333\ By increasing the cost of short selling for managers
above the Reporting thresholds, as discussed in Part VIII.D.1 and
VIII.D.2, the rule may increase the advantage that investors who own
the asset have over those who do not in terms of gathering information
with the overall result being that investors not owning the asset may
experience lower returns relative to those owning the asset due to
increased cost of acting on negative information.
---------------------------------------------------------------------------

    \333\ See Dixon (2021), supra note 242.
---------------------------------------------------------------------------

    Relatedly, fund performance is a key determinate of investor flows.
The Commission believes that the proposal could harm competition for
fund flows among 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. Thus Managers
specializing in uncovering overpriced stocks may find themselves at a
competitive disadvantage relative to managers who do not use short
selling in terms of their ability to compete for fund flows.
    The Commission believes that Proposed Rule 205 and the Proposal to
Amend CAT would not alter significantly the competitive landscape for
broker-dealer services. For smaller broker-dealers the direct costs
associated with complying with Rule 205 and the CAT amendment would
likely be borne by the larger entity that they contract with for the
relevant services. Since many of the compliance costs are fixed, the
increased expense to any one smaller broker-dealer would likely be
relatively small and come in the form if increased costs for services
from the entity that they contract with.\334\ Because larger broker-
dealers enjoy economies of scale, they should be able to absorb the
costs associated with compliance more easily. Consequently, the
Commission believes that the effect of Rule 205 and the CAT amendment
would have minor impacts on broker-dealer competition.\335\
---------------------------------------------------------------------------

    \334\ See supra Part VIII.D.7 (for a discussion of direct
compliance costs).
    \335\ See also supra note 244, CAT Proposing Release (where the
Commission discusses the implementation of CAT and its effect on
broker-dealer competition).
---------------------------------------------------------------------------

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.\336\ 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 ensures an
optimal allocation of capital across firms. Thus, to the extent that
the Proposals discourage short selling, as discussed in Part VIII.D.1
and VIII.D.2, it may lead to the overpricing of some stocks and the
underpricing of others.\337\ 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.
---------------------------------------------------------------------------

    \336\ A firm's external cost of finance is known as the weighted
average cost of capital (WACC). It is simply the weighted average of
the firm's cost of equity and the firm's cost of debt. Cost of
equity (COE) is simply the return required by investors to assume
the risks of owning the stock, computed as COE = (dividends per
share/market cap) plus dividend growth rate. In this computation,
market cap is simply the number of shares outstanding multiplied by
the current stock price. If the stock price decreases, then
mechanically the firm's COE would go up. See, e.g., R.A. Brealey,
S.C. Myers, F. Allen, and P. Mohanty, Principles of Corporate
Finance, Tata McGraw-Hill Education (2012).
    \337\ See supra note 267, 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.\338\ 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 proposed capital
investments--particularly low value projects as the Proposals my dampen
the market's ability to respond to negative information.
---------------------------------------------------------------------------

    \338\ 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 Proposed Form SHO along with the negative
economic effects detailed in Part VIII.D.1, VIII.D.2, and VIII.D.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 13f-2.\339\ Thus, to the extent that the costs associated with
Proposed 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.
---------------------------------------------------------------------------

    \339\ 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, the Proposals may have a positive influence on capital
formation if they limit short selling based fraud. Specifically, in one
type of fraud, investors holding convertible debt would short sell a
stock in an attempt to drive down the price and then convert their debt
to equity to cover their short positions at the 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 would engage in this sort of fraud.
    Proposed Rule 13f-2 may also affect capital formation through
investor confidence. Some Commenters have suggested that short selling,
and in particular a lack of short selling disclosure leads some
investors to have less confidence in financial markets,\340\ although
the results may be mixed. The Commission believes that improving short
selling transparency would strengthen investor confidence which could
help make investors more willing to invest, resulting in the promotion
of capital formation.\341\
---------------------------------------------------------------------------

    \340\ See NASDAQ, OTC Markets, and CFA Institute letters (in
response to FINRA's short selling proposal) available at https://www.finra.org/rules-guidance/notices/21-19#comments.
    \341\ See Exchange Act Release No. 61595 (Feb. 26, 2010), 75 FR
11232, at 297 (Mar. 10, 2010), available at http://www.sec.gov/rules/final/2010/34-61595fr.pdf.

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

F. Reasonable Alternatives

1. Alternative Approaches
i. Releasing Aggregated CAT Data
    As an alternative to collecting, aggregating, and publishing
Proposed Form SHO, the Commission could amend the CAT NMS Plan to
collect additional information so that the Commission or the Plan
Processor could aggregate and publish CAT Data.\342\ Specifically, the
Commission could retain proposed Rule 205 and the amendment to the CAT
NMS plan requiring the reporting of bona fide market making and buy to
cover information to CAT and then use CAT data to have either the
Commission or the Plan Processor provide short selling information to
the public. This alternative would effectively eliminate the thresholds
for reporting. This alternative could not be implemented until the CAIS
system in CAT is fully operational. Currently it would be extremely
difficult to map Firm Designated IDs ``FDIDs''--which are currently
broker-dealer specific--to individual Managers on a large scale.
However this functionality is anticipated once the CAIS system is fully
operational.
---------------------------------------------------------------------------

    \342\ This alternative presumes that the Customer and Account
Information System ``CAIS'' system in CAT is operational, thus
allowing the Commission to track trades of individual traders.
---------------------------------------------------------------------------

    CAT data currently contains a short sale mark and also provides the
identities of the individuals transacting. Consequently the Commission
or the Plan Processor could aggregate information on the number of
short sales that Managers engage in from CAT 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 positions, such
as purchasing a put option, or writing a call option.\343\ 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.\344\
---------------------------------------------------------------------------

    \343\ In this alternative, however, CAT would not contain the
information on option expirations or assignments.
    \344\ FINRA's process of gathering and validating short interest
data takes approximately two weeks. See supra note 221.
---------------------------------------------------------------------------

    The alternative would result in lower benefits than Proposed Rule
13f-2 and Proposed Form SHO. For each trading day, the alternative
would involve publishing the net change in short sale positions engaged
in by Managers.\345\ The data published under this alternative would
have significant overlap with the data that would be published under
Proposed Rule 13f-2 and Proposed Form SHO. One difference between this
alternative and the current data proposed to be collected in Proposed
Form SHO and published by the Commission is that 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,\346\ 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. In addition, the
alternative would not permit the publication of information on the
percentage of positions that are fully or partially hedged. 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
Proposed Rule 13f-2 and Proposed Form SHO.
---------------------------------------------------------------------------

    \345\ This contrasts with the Proposed Rule 13f-2 which requires
reporting based on the settlement date which is normally two
business days after the transaction day.
    \346\ 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. 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 would be less additive than under Proposed Rule 13f-2 and
Proposed Form SHO.
    This alternative would also mitigate some of the concerns
associated with Managers being exposed to increased risk of short
squeezes or other retaliation as discussed in Part VIII.D.1 and
VIII.D.2. This reduced risk would come because 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 the proposal with regard to less overall short selling or
fundamental research that are described in Part VIII.D.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. While it would result in the same costs for
Industry Member reporting as those associated with Proposed Rule 205
and the Proposal to Amend CAT, 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.
    As previously stated, the drawback to this alternative relative to
the existing proposal is that 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 lack

transactions outside of the purview of CAT that may affect short
positions. Thus the data provided by this rule would always be
estimates of total short positions, which could be quite 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.
    The Commission could also consider two variations of this
alternative. The first, which can be referred to as the minimalist
approach, would not include Proposed Rule 205 and the Proposal to Amend
CAT and instead would provide Manager short selling statistics based on
existing CAT data.\347\ The advantage to this variation is that it
would provide additional information about the short selling activity
and positions of Managers, compared to what is currently available,
while requiring no additional resources from Industry Members except,
perhaps, those passed on from an increase in resources for the Plan
Processor to build out processing capacity--if the Plan Processor is
chosen to aggregate reports and if it currently lacks such capacity. An
additional drawback to this variation relative to the alternative above
is that it would further limit the data that regulators have access to.
Thus the benefits to having bona fide market making and buy to cover
information described throughout Part VIII.D would not occur.
---------------------------------------------------------------------------

    \347\ Once again, this variation and the following variation
presume that the CAIS system is fully operational.
---------------------------------------------------------------------------

    Lastly, a larger expansion of CAT could achieve at least the same
data value as in Proposed Rule 13f-2 and Proposed Form SHO. For
example, CAT could expand to require the reporting of all the
information currently proposed to be collected in Proposed Form SHO.
Specifically, the Commission could expand CAT to include data on
account positions, including short selling positions as well as hedging
information associated with those positions. In addition, CAT could be
expanded to capture information on changes in those positions, options
assignments, options exercises, secondary offering purchases,
conversions, and other position changes. Under this approach,
regulators would have access to the same data as if Managers filed
Proposed Form SHO but for all short sellers, not only the subset of
Managers reporting on Proposed Form SHO. This approach would also
result in additional information available to regulators not collected
in the Proposed 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 lot of new information on CAT report types that
don't exist today and for Participants who would have to implement
changes and work out technical specifications for new types of CAT
reports. Further, more Industry Members would report this information
to CAT compared to Managers require to report information on Proposed
Form SHO. It would be a major undertaking for both the Plan Processor
as well as for 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 Proposed Rule 13f-2 and Proposed Form SHO.
    Further, if the Commission were to expand CAT to collect additional
information beyond what would be captured by the Proposal to Amend CAT
and Proposed Rule 205, such as position information, then these
additional expansions would incur significant direct costs.
ii. 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 their existing process to ensure that in
continues in perpetuity. This alternative would have no additional
costs to market participants, but would substitute a Commission mandate
for the publication of the short interest data.
    Similarly, the Commission could require FINRA to publish a version
of their short interest information that specifically identifies the
aggregate short interest of Managers--separate from other short
interest. To accomplish this, reporting broker-dealers would separately
report in their reports to FINRA the short positions that originate
from Managers. FINRA would then compile both total short interest, as
they currently do, 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 may be less expensive than the
existing proposal as it would only require a modification of an
existing process. This alternative would not provide the Commission
with the positions of any identified Managers or any Manager-specific
activity data, nor would it provide information on which positions are
fully or partially hedged, thus the benefits and risks associated with
these data articulated throughout Part VIII.D would decline.
    The Commission also expects that data on Manager short interest in
addition to total short interest would likely not provide 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.\348\ Thus, while the alternative
that requires FINRA to produce separate short interest data for
Managers would reduce costs to market participants relative to the
existing proposal, it also may not provide the market or regulators a
significant incremental benefit relative to existing short selling
data.
---------------------------------------------------------------------------

    \348\ 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.
---------------------------------------------------------------------------

iii. Broker-Dealer Reporting to EDGAR on Behalf of Managers
    The Commission could modify the existing proposal to allow broker-
dealers to file Proposed Form SHO reports with the Commission on behalf
of Managers. This alternative may reduce costs as it could concentrate
reporting with broker-dealers that have significant experience
collecting and providing such information--increasing operational
efficiency.\349\ 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 prime broker would either need to report
based on its limited information, which may lead to less complete data,
or to gather additional information from the Manager about potential
activity associated with another prime broker.\350\ Reporting only
information known by one prime broker could also result in less
information if a Manager that

otherwise would have exceeded the threshold for reporting does not
exceed the threshold at one or more prime brokers. Requiring additional
data collection may increase complexity and costs as Managers and
broker-dealers would need to develop systems by which a Manager
provides information about their activity with other prime brokers to
their reporting broker. Or, the Commission could allow 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.
---------------------------------------------------------------------------

    \349\ See MFA Letter, supra note 306 (p. 3 for 10a-3T).
    \350\ 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.
---------------------------------------------------------------------------

iv. Harmonization With European Disclosure Requirements
    The Commission could also explicitly craft Proposed Rule 13f-2 and
Proposed Form SHO to be consistent with European disclosure
requirements. 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.\351\
Under the SSR, the trading entity reports to the regulator when their
net short position reaches the initial threshold of 0.2% of the share
capital of the company, and in 0.1% up and down increments
thereafter.\352\ The threshold for reporting to the regulator recently
was lowered to 0.1%.\353\ Net short positions are computed taking into
account relevant derivative positions such as options. If the net short
position reaches 0.5% of the share capital of the company, then the
reported short position is made public with the identity of the short
seller revealed. New filings are required to be made whenever the short
position increases or decreases by 0.1% of the share capital of the
firm. In the EU, trading entities must submit their data to the
regulator by 3:30 p.m. on the following trading day.\354\ Trading
entities accomplish public disclosure via a central website operated or
supervised by the relevant competent authority.\355\
---------------------------------------------------------------------------

    \351\ See European Parliament and the Council of the European
Union, Regulation No. 236/2012 (Mar. 24, 2012), available at https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2012:086:0001:0024:en:PDF (The SSR was
adopted by the European Parliament and the Council of the European
Union on March 14, 2012 and became effective on November 1, 2012.).
    \352\ Id. (at Article 5(2)).
    \353\ The threshold was temporarily lowered in March 2020 in
response to the COVID-19 pandemic. In October 2021, the change
became permanent. See European Union, Commission Delegated
Regulation No. 236/2012, Register of Commission Documents, available
at https://ec.europa.eu/transparency/documents-register/detail?ref=C(2021)6815⟨=en&utm_source=Cleverreach&utm_medium=emai
l&utm_campaign=Update%20Shareholder%20Activism&utm_content=Mailing_13
052681.
    \354\ Id. (at Article 9(2)).
    \355\ 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, when short sale information is
made public, and when new reports have been issued. The advantage to
this alternative would be that managers who engage in short selling in
both the United States and in Europe would face similar regulations in
both places--which may decrease the cost of compliance with both
regulations.\356\
---------------------------------------------------------------------------

    \356\ 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.
---------------------------------------------------------------------------

    The EU structure whereby individual short sellers' names are made
public may raise the risk that investors may gather less fundamental
information relative to the existing proposal as the risk of
retaliation towards short individual sellers may increase, as well as
the ability for market participants to engage in copy-cat strategies
that decrease the profitability of gathering information.\357\
---------------------------------------------------------------------------

    \357\ 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).
---------------------------------------------------------------------------

    The EU data is more timely than what is considered in this proposal
as the forms are posted publicly immediately after receipt by the
regulator, potentially facilitating greater price discovery but at the
cost of lowering the value of gathering information. Further, the EU
guidelines do not provide activity data. Thus, market participants
could not learn from an analysis of how short selling positions change
over time. For instance, firm managers could only see the size of net
short positions and thus may be hindered in their ability to learn from
when short sellers built their positions and whether the building of a
short position was in response to a specific manager action or firm
announcement.
2. Data Modifications
i. Release Proposed Form SHO Data in Alternative Formats
    The Commission could release the information included in Proposed
Form SHO in a different manner. This alternative could take one of
several forms. For example, the Commission could release each Proposed
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 stripped. 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 Proposed Form SHO
report, such as, for example, publish the number of entities underlying
the aggregated data, publish aggregations of the various categories of
changes in short positions, or publish increases in short positions
separate from decreases.
    In the first alternative, the Commission could release Proposed
Form SHO as filed, allowing all market participants to know the
identities of short sellers--similar to the EU regulation discussed
above. This would increase the information that market participants
have to evaluate sentiment in the market. For example, 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.\358\ In addition, all the
detailed information on daily short activities across the various
activity categories could reveal trading strategies, particularly if
the Manager is identified. This information would also allow market
participants to better manage risk by allowing them to manage their
exposure to Managers with large short positions. Additionally,
releasing the names of large short sellers would further increase the
likelihood that the short seller would be the victim of a short
squeezes or other retaliatory actions as described in Part VIII.D.1.
---------------------------------------------------------------------------

    \358\ See supra Part VIII.F.1.iv (discussion in section).
---------------------------------------------------------------------------

    Similarly, the Commission could publicly release individual
Proposed Form SHO filings with identification information stripped from
the released data. This alternative would allow 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 Proposed Rule
13f-2, improving price efficiency.
    However, the indirect costs of this alternative would be greater
than for Proposed Rule 13f-2 and Proposed 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 may increase the
risk of copycat trading which eats into the profits of acquiring
information. It may 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 thus increasing this risk to short sellers. 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 the current proposal,
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.\359\ If market participants were able
to back out the identities of individual short sellers, then the risk
of retaliation or short squeezes would increase relative to Proposed
Rule 13f-2 and Proposed Form SHO.
---------------------------------------------------------------------------

    \359\ 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 258.
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 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
Proposed 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.
Adding this information may also increase the risk of short squeezes or
other retaliatory actions in the case where there were very few
reporters of Proposed Form SHO. In the Form SH data collected under
Temporary Rule 10a-3T, 32% of stocks had only one Manager reporting a
position per month.\360\ 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 squeeze.
---------------------------------------------------------------------------

    \360\ See supra note 80 (for more information on methodologies
and caveats for using Form SH data).
---------------------------------------------------------------------------

    The Commission could collect Proposed Form SHO data as proposed but
in the data made public, the Commission could aggregate at the issuer
level as opposed to the security level. Aggregating at the issuer level
would allow users of the data a simpler view into overall short selling
for the whole firm. However, computing this aggregation introduces
complexity, as different share issues sometimes have different prices
or voting rights, thus it may not make economic sense to aggregate all
short selling data across all share classes for the same issuer. This
effect would decrease the information content of the data with respect
to bearish sentiment, which decreases what market participants could
learn from the data, but also would make it more difficult for market
participants to copycat short selling strategies.
    As another alternative, the Commission could release statistics on
the Proposed Form SHO filings aggregated across Managers but not netted
across the various activity categories. This would allow market
participants to not only see the extent of the position changes of
large short sellers but also how they achieve their position changes,
including whether they create or cover positions in the equities market
or by options exercises, for example. The Commission believes that such
information could risk revealing trading strategies, even if aggregated
across Managers, particular if Managers have correlated strategies. As
a result, this would be more costly to Managers than Proposed Rule 13f-
2 and would dissuade fundamental research more. On the other hand,
while such information is of more regulatory value, by publicly
releasing more detailed activity data, some market participants may
benefit from learning the various ways that short sellers change their
positions.
    Similarly, the Commission could collect Proposed Form SHO data as
proposed but publicly release the daily aggregate increases in short
positions separately from the daily aggregate decreases in short
positions as opposed to daily net changes to short positions as
currently proposed. 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.
ii. 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 Proposed
Form SHO to also disclose their derivatives positions on underlying
equity securities in derivatives such as options and total-return swaps
as an alternative to the existing proposal which does not directly
collect information on derivatives.
    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. Consequently, the information would aid market participants
in gauging bearish sentiment in a security relative to Proposed Rule
13f-2 and Proposed Form SHO. 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.
    Requiring options data to be reported on Proposed Form SHO would
increase the compliance costs to Managers of reporting on Proposed Form
SHO. 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 may also be duplicative
of other derivatives reporting requirements. For instance, recently
proposed Rule 10B-1 requires individuals, or groups of individuals, who
own security-based swaps that exceed a certain threshold to report
certain information to the SEC, which information would be made
publicly available.\361\
---------------------------------------------------------------------------

    \361\ See Exchange Act Release No. 93784 (Dec. 15, 2021),
available at https://www.sec.gov/rules/proposed/2021/34-93784.pdf.
---------------------------------------------------------------------------

iii. Report Net Short Positions Instead of the Gross Position With
Hedging Information
    The Commission could require managers reporting Proposed Form SHO
data to report net short positions instead of gross short positions.
Net short positions would take into account any hedging the Manager
engages in. For instance, a Manager that has a large long position in
options that is largely hedged using short sales in equities is not
taking an economically significant short position in the security.
Fully hedged short positions are less likely to be manipulative in
nature, or to pose systemic risk. Consequently, the Commission could
limit reporting to only Managers whose economic short positions surpass
the thresholds. Doing so would limit the amount of data collected by
the Commission and would thus reduce the cost of the alternative
relative to Proposed Rule 13f-2 but also reduce somewhat the value of
the data in terms of using it to reconstruct 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 may have previously appeared to have been
hedged, and thus low risk, may no longer be as hedged as previously
supposed, and in this case, large short positions that were initially
hedged may become systemically important as the hedge breaks down due
to unforeseen extreme market events. In this case, it would be useful
for the Commission to have information on large hedged short positions
largely to aid in reconstruction of market events. This alternative
would limit what the public and the Commission could learn from large
hedged positions relative to the Proposed Rule 13f-2 and Proposed Form
SHO. For instance, the alternative would preclude a comparison of total
short interest with reported large hedged short positions, which may
provide additional information to the market about the activities of
large, though perhaps non-information based, traders.
    Additionally, the Commission could require Managers to report the
delta value of their hedged positions rather than providing an
indicator for whether a position is fully or partially hedged.\362\
This alternative could have some of the same advantages as the other
alternatives in this section. If the Commission published this
information aggregated across Managers, then market participants would
have a clearer view into economic--i.e. unhedged--short positions than
is provided by the Proposed Rule 13f-2 and Proposed Form SHO. The cost
of this alternative is an increased reporting burden for Managers as
they would be required to compute for the report delta value of their
hedge. However, knowing information about the delta of short seller's
hedge can provide information about how vulnerable a short seller, or
short sellers, may be to a short squeeze. If this information was not
made public by the Commission, however, it would allow the Commission
an improved view into individual short sellers with potentially risky
short positions without raising those concerns.
---------------------------------------------------------------------------

    \362\ Delta is a ratio that measures the change in the value of
short position when the value of the long position changes. For
example, a delta of one means that a $1 increase in value of the
short position results in a $1 decline in value of the long
position.
---------------------------------------------------------------------------

3. Threshold Modifications
    As an alternative to Threshold A's two-pronged threshold, the
Commission could require reporting Proposed Form SHO at either higher
or lower thresholds--or no threshold. When soliciting comments for
Temporary Rule 10a3-T, commenters suggested thresholds ranging from 1%
to 5%.\363\ When selecting thresholds, the fundamental economic
tradeoff is the value of the data versus the cost of collecting the
data.
---------------------------------------------------------------------------

    \363\ See supra note 79 (for links to specific comment letters).
---------------------------------------------------------------------------

    Alternative thresholds that are lower than Threshold A or Threshold
B specified in Proposed Rule 13f-2 or an alternative that would not
contain a threshold would produce more data as more entities would be
required to report. In the Form SH data collected under Temporary Rule
10a-3T, the threshold of $10 million or 2.5% would collect 89% of the
dollar value of the short positions required to be reported.\364\
Therefore, the increase in coverage from a lower threshold would be low
relative to the coverage in the proposed Threshold A. Notwithstanding
the low potential for an increase in coverage, the Commission
recognizes that this increased coverage could increase benefits. For
example, this additional data from the alternative would enhance the
benefits to the Proposed Form SHO data articulated above relative to
Proposed Rule 13f-2 and Proposed Form SHO. Specifically, it would
provide market participants with a clearer view of Manager bearish
sentiment than the current proposal provides for as more managers would
be required to report the data, making the data more comprehensive. A
lower threshold would also allow the Commission to more easily
reconstruct significant market events where short selling is involved
and enhance Commission oversight of short selling--again because the
data would be more comprehensive.
---------------------------------------------------------------------------

    \364\ See supra Table I. See also supra note 81.
---------------------------------------------------------------------------

    A lower or no threshold would increase the cost of reporting
Proposed Form SHO data in terms of direct costs associated with
Managers compiling and submitting the required data thorough EDGAR and
in the indirect costs associated with revealing short sellers'
information. In the Form SH data collected under temporary Rule 10a-3T,
the number of reporting Managers for the de minimis threshold of 0.25%
of shares outstanding or $10 million was 442, compared to 346 for the
$10 million or 2.5% threshold in Threshold A of the proposed rule.\365\
Additionally, Managers would likely be required to file reports for
more securities, which would also increase compliance costs. Indirect
costs include increased risk of copycat short selling strategies, which
lead to herding and increased volatility, and short sellers engaging in
strategic behavior to short sell just underneath Threshold A, which
leads to lower price efficiency.\366\ In some cases a lower threshold
would decrease the indirect costs associated with the proposed rule
because it would be harder to identify individual short positions from
aggregate reporting if there are many entities reporting, thus lowering
the chances that a given security would only have one Manager reporting
a short position.\367\ This effect may not be universally true,
however. In particular, at thresholds just lower than proposed
Threshold A, the number of securities where only one entity

reported Form SH increases.\368\ This result implies that there are a
number of securities for which only one short seller held a significant
short position at a level lower than the current cutoff. In these
cases, lowering the threshold may increase the risk of identifying
individual short sellers.
---------------------------------------------------------------------------

    \365\ Id.
    \366\ See supra notes 271 and 353 (for research documenting this
behavior in Europe).
    \367\ See supra notes 257 and 278 (with accompanying text for
more information on risks of identifying individual short sellers).
    \368\ According to Form SH data, 32% of securities would have
only one Manager reporting at or above the currently proposed
threshold of $10 Million and 2.5%. If the percent threshold was
reduced to 1% along with the $10 million threshold the number of
securities with only one Manager reporting would increase to 35%.
See also supra note 81.
---------------------------------------------------------------------------

    Conversely, raising the proposed Threshold A lowers many of the
costs associated with providing Proposed Form SHO data as fewer
entities would be required to report. It also limits somewhat the value
of the data--again as the reported data would reflect a smaller portion
of overall short positions. For example, in the Form SH data, a
threshold of 5% or $25 million suggested in comment letters reduce the
coverage to 71% of dollar value of short positions compared to 89% in
the proposed rule.\369\ Higher thresholds may 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 for
Form SH data 41% of reported securities would reflect one Manager with
a short position at a threshold of $25 million and 5% compared to 24%
of reported securities for the proposed Threshold A.\370\
---------------------------------------------------------------------------

    \369\ See SIFMA letter (discussing Temporary Rule 10a3-T). See
also supra Table I. See also supra note 81.
    \370\ See note 80 (for more information on methodologies and
caveats for using Form SH data).
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    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 lower 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% to 8.76%.\371\
Similarly, under the same assumptions, lowering the threshold to
$50,000 would increase the number of short positions captured to
48.08%.
---------------------------------------------------------------------------

    \371\ See supra Table II (analysis within table).
---------------------------------------------------------------------------

    As another alternative to the proposed Threshold A, the Commission
could establish a threshold based on one of the thresholds in Proposed
Rule 13f-2--short position as a percent of shares outstanding or the
dollar value of the short position. The advantage of this alternative
is that it may reduce compliance costs by simplifying reporting
requirements. Additionally it would lower overall compliance costs due
to fewer entities being required to report as entities that may meet
one threshold may not meet another and thus may not be required to
report. An alternative including only the 2.5% threshold would have a
bigger impact than an alternative including only the $10 million
threshold. Commission analysis based on Form SH data suggests that 342
Managers would meet the $10 million threshold and 160 Managers would
meet the 2.5% threshold, compared to 346 in Proposed Rule 13f-2.
    The alternative of requiring a threshold based only on short
positions as a percent of shares outstanding would largely eliminate
reporting in larger securities. Short sellers will hit the 2.5%
threshold in stocks with market capitalization below $400 million
before they hit the $10 million dollar threshold. For stocks with
market capitalization above $400 million, short sellers will hit a $10
million dollar threshold before hitting the 2.5% threshold.
Consequently, if the Commission required reporting based only on the
percent of shares outstanding, then there would be fewer reports of
Proposed Form SHO 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, generally because larger market
capitalization stocks tend to be more well-established and harder to
manipulate.\372\ Conversely, if the Commission required reporting based
only on the dollar threshold, then there would be fewer reports among
stocks with lower market capitalizations. Smaller market capitalization
stocks tend to be easier to manipulate and less stable. Thus, less
visibility into the actions of short sellers among smaller market
capitalization stocks may mitigate somewhat the benefits of reduced
manipulative behavior among these stocks articulated in Part VIII.D.1.
---------------------------------------------------------------------------

    \372\ See, e.g., Carole Comerton-Forde, T[amacr]lis J.
Putni[ncedil][scaron], Stock Price Manipulation: Prevalence and
Determinants, 18 (1) Rev. of Fin. January 2014, Pages 23-66,
available at https://doi.org/10.1093/rof/rfs040 (for evidence on
small and less liquid stocks higher exposure to manipulative
behavior by investors).
---------------------------------------------------------------------------

    As another alternative, the Commission could structure the
Reporting Thresholds to include the nominal economic value of short
derivative positions. Specifically, reporting on Proposed 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. 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 Proposed Form SHO.\373\ Making it more difficult to
circumvent the reporting requirements using derivatives may also
decrease strategic, and sub-optimal, trading around the Reporting
Thresholds which leads to lower price efficiency.\374\ However,
increasing the amount of information that is provided in Proposed Form
SHO may increase copycat activity that leads to herding and increased
volatility. Conversely, increasing the reports may dilute the
information and reduce the amount of herding. This alternative could
also result in some 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.\375\
Additionally, while valuing short positions in most equities is fairly
straight forward, 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 Managers short exposure in derivatives would be
significantly more

complicated than Proposed Rule 13f-2 and Proposed Form SHO.
---------------------------------------------------------------------------

    \373\ See supra Part VIII.D.8.
    \374\ See supra Part VIII.D.1 (for further discussion on
strategic trading around the threshold and how the rule is designed
to reduce it).
    \375\ Industry practices may change with regard to security-
based swaps in the case of the adoption of proposed Rule 10B-1,
which would require persons with large positions in security-based
swaps to track all related securities. See Exchange Act Release No.
93784 at 23 (stating that ``proposed Rule 10B-1 would require public
reporting of, among other things: (1) Certain large positions in
security-based swaps; (2) positions in any security or loan
underlying the security-based swap position; and (3) positions in
any other instrument relating to the underlying security or loan or
group or index of securities or loans'') available at https://www.sec.gov/rules/proposed/2021/34-93784.pdf.
---------------------------------------------------------------------------

    An alternative could also involve requiring the thresholds to be
based on activity and not just positions. 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 may 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 may 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
may be concentrated enough in time to not trigger a Reporting Threshold
based on average position over the prior month as is currently
stipulated in the proposal. While this activity information may be
helpful in flagging unusual short selling activity as the Commission
could conceivably build reports based on existing CAT data that would
be more effective at detecting such behavior and Proposed Rule 13f-2
would identify these activities if the market participant exceeds the
Reporting Thresholds.
    The Commission could measure the thresholds as of the last
settlement day of the month rather than on any day of the month, as in
the $10 million prong, or as the average position over the month, as in
the 2.5% prong for Threshold A and the $500,000 threshold in Threshold
B. This alternative would have the advantage of simplifying compliance
with Proposed Rule 13f-2 and Proposed Form SHO and thus may reduce
compliance costs. In the Form SH data, end of month thresholds reduced
the number of reporting Managers for the $10 million threshold from 342
to 247, and for the 2.5% threshold from 160 to 127.\376\ It would also
line the Reporting Thresholds up with the positions reported in
Proposed Form SHO whereas a Manager's reported information on Proposed
Form SHO under Proposed Rule 13f-2 could be below the Reporting
Thresholds.\377\ This alternative may also invite more strategic
trading around the end of the month than the proposal, 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.
---------------------------------------------------------------------------

    \376\ See supra Table I.
    \377\ For example, a Manager's position could exceed the $10
million threshold on the 7th of the month but be below $10 million
and 2.5% on the last settlement day of the month.
---------------------------------------------------------------------------

    Instead of Threshold B, the Commission could require the two prong,
$10 million maximum position or 2.5% average position, reporting
threshold for short positions in an equity security of a non-reporting
company issuer that is required for equity securities of reporting
company issuers. This approach may 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
to the size of the issue to ensure capturing positions that are
relatively large whereas the proposed Threshold B imposes a flat
threshold that could result in some relatively large positions not
being filed on Proposed Form SHO.
    However, this alternative would increase the burden for Managers as
information for non-reporting issuers can be hard to find, making
threshold calculations difficult. In particular, information for the
number of shares outstanding can be difficult to obtain for non-
reporting issuers and when it is available it is often stale and
inaccurate. This could lead to problems with the calculations for the
2.5% threshold. Because the alterative would require knowing shares
outstanding of such securities each day, this alternative would
effectively impose new recordkeeping costs on Managers as Managers
would need to track daily changes in shares outstanding in order to
assess the 2.5% threshold. Further, there are multiple sources from
which Managers can obtain shares outstanding for securities in 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.
    Additionally, the Commission could enhance record keeping
requirements associated with the alternative where Threshold A applies
to all securities to require Managers to record and report on Form SHO
the source of data used to calculate shares outstanding in relation to
determining compliance with Threshold A. This could improve the quality
of the information reported in the Proposed 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 may
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 impose
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.
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 proposed by the rule.
Specifically, the Commission could require reporting at frequencies
that are shorter than a month. For example, the Commission could
require reporting daily, weekly, bi-weekly, 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