[Federal Register Volume 87, Number 51 (Wednesday, March 16, 2022)]
[Proposed Rules]
[Pages 14950-15020]
[FR Doc No: 2022-04670]

Vol. 87

Wednesday,

No. 51

March 16, 2022

Part II

Securities and Exchange Commission

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17 CFR Parts 240, 242, and 249

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

Federal Register / Vol. 87 , No. 51 / Wednesday, March 16, 2022 /
Proposed Rules

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240, 242, and 249

[RELEASE NO. 34-94313; FILE NO. S7-08-22]
RIN 3235-AM34

Short Position and Short Activity Reporting by Institutional
Investment Managers

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (the ``Commission'') is
proposing a new rule and related form pursuant to the Securities
Exchange Act of 1934 (the ``Exchange Act''), including Section
13(f)(2), which was added by Section 929X of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (``DFA''). The proposed rule and
related form are designed to provide greater transparency through the
publication of short sale related data to investors and other market
participants. Under the rule, institutional investment managers that
meet or exceed a specified reporting threshold would be required to
report, on a monthly basis using the proposed form, specified short
position data and short activity data for equity securities. In
addition, the Commission is proposing a new rule under the Exchange Act
to prescribe a new ``buy to cover'' order marking requirement, and
proposing to amend the national market system plan governing the
consolidated audit trail (``CAT'') created pursuant to the Exchange Act
to require the reporting of ``buy to cover'' order marking information
and reliance on the bona fide market making exception in the
Commission's short sale rules. The Commission is publishing the text of
the proposed amendments to the CAT NMS Plan in a separate notice.

DATES: Comments should be received on or before April 26, 2022.

ADDRESSES: Comments should be submitted by any of the following
methods:

Electronic Comments:

     Use the Commission's internet comment form (https://www.sec.gov/rules/submitcomments.htm); or
     Send an email to [email protected]. Please include
File Number S7-08-22 on the subject line.

Paper Comments:

     Send paper comments to: Vanessa A. Countryman, Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.

All submissions should refer to File Number S7-08-22. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
internet website (https://www.sec.gov/rules/proposed.shtml). Comments
are also available for website viewing and printing in the Commission's
Public Reference Room, 100 F Street NE, Washington, DC 20549, on
official business days between the hours of 10:00 a.m. and 3:00 p.m.
Operating conditions may limit access to the Commission's public
reference room. All comments received will be posted without change.
Persons submitting comments are cautioned that the Commission does not
redact or edit personal identifying information from comment
submissions. Commenters should submit only information that they wish
to make available publicly.
    Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's website. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at https://www.sec.gov/ to receive notifications by
email.

FOR FURTHER INFORMATION CONTACT: Timothy M. Riley, Branch Chief;
Patrice M. Pitts, Special Counsel; James R. Curley, Special Counsel;
Quinn Kane, Special Counsel; Jessica Kloss, Attorney Advisor; Brendan
McLeod, Attorney Advisor; and Josephine J. Tao, Assistant Director,
Office of Trading Practices, Division of Trading and Markets,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549, at<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION: The Commission today is proposing for
comment new rule 13f-2 (``Proposed Rule 13f-2'') (17 CFR 240.13f-2) and
related form (``Proposed Form SHO'') (17 CFR 249.333) under the
Exchange Act. Proposed Rule 13f-2 would require certain institutional
investment managers to report, on a monthly basis on new Proposed Form
SHO, certain short position data and short activity data for certain
equity securities as prescribed in Proposed Rule 13f-2.
    The Commission is also proposing for comment a new rule prescribing
a ``buy to cover'' order marking requirement under Regulation SHO
(``Proposed Rule 205'') (17 CFR 242.205), and amendments to the
national market system plan governing the CAT, pursuant to Rules
608(a)(2) [17 CFR 242.608(a)(2)] and 608(b)(2) [17 CFR 242.608(b)(2)]
of the Exchange Act (``Proposal to Amend CAT'') that enable the
Commission to propose amendments to any effective national market
system (``NMS'') plan. For the text of the proposed amendments to the
CAT NMS Plan, please see the Notice of Proposed Amendments to the
National Market System Plan Governing the Consolidated Audit Trail for
Purposes of Short Sale-related Data Collection.\1\
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    \1\ See Notice of the Text of the Proposed Amendments to the
National Market System Plan Governing the Consolidated Audit Trail
for Purposes of Short Sale-related Data Collection, Exchange Act
Release No. 34-94314 (Feb. 25, 2022).
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    Proposed Rule 13f-2, Proposed Form SHO, Proposed Rule 205, and the
Proposal to Amend CAT are hereinafter collectively referred to as the
``Proposals.''

Table of Contents

I. Introduction
II. Background
    A. Enhancing Short Sale Transparency
    B. Existing Short Sale Data
    C. Prior Nonpublic Short Sale Reporting by Certain Investment
Managers to the Commission
    D. Petitions and Commentary Regarding Short Position Disclosure
III. Proposed Rule 13f-2 and Proposed Form SHO
    A. Proposed Form SHO Filing Requirement Through EDGAR
    B. Proposed Form SHO
    C. Publication of Information by the Commission
    D. Reporting Thresholds
    E. Supplementing Current Short Sale Data Available From FINRA
and the Exchanges
    F. Request for Comments
IV. Potential Alternative Approach to Proposed Rule 13f-2 Regarding
How the Information Reported on Proposed Form SHO Is Published by
the Commission
V. Proposed Amendment to Regulation SHO To Aid Short Sale Data
Collection
VI. Proposal to Amend CAT
    A. ``Buy to Cover'' Information
    B. Reliance on Bona Fide Market Making Exception
    C. Request for Comments
VII. Paperwork Reduction Act Analysis
    A. Background
    B. Burdens for Managers Under Proposed Rule 13f-2 and Proposed
Form SHO
    C. Burdens for Broker-Dealers Under Proposed Rule 205
    D. Burdens and Costs Associated With the Proposal To Amend CAT
    E. Collection of Information Is Mandatory
    F. Confidentiality
    G. Request for Comments
VIII. Economic Analysis

    A. Introduction
    B. Economic Justification
    C. Baseline
    D. Economic Effects
    E. Efficiency, Competition and Capital Formation
    F. Reasonable Alternatives
    G. Request for Comments
IX. Regulatory Flexibility Act Certification
X. Consideration of Impact on the Economy
    Statutory Authority and Text of Proposed Rules 13f-2 and 205,
and Form SHO

I. Introduction

    A short sale involves the sale of a security that the seller does
not own, or a sale that is consummated by the delivery of a security
borrowed by, or for the account of, the seller.\2\ Short selling has
long been used in financial markets as a means to profit from an
expected downward price movement, to provide liquidity in response to
unanticipated demand,\3\ or to hedge the risk of a long position in the
same security or a related security.\4\ Short selling has also been
shown to improve pricing efficiency by providing information to the
market.\5\ While short selling can serve useful market purposes, it
also may be used to drive down the price of a security, to accelerate a
declining market in a security, or to manipulate stock prices.\6\
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    \2\ See 17 CFR 242.200(a).
    \3\ Market liquidity is generally provided through short selling
by market professionals, such as market makers, who offset temporary
imbalances in the buying and selling interest for securities. Short
sales effected in the market add to the selling interest of stock
available to purchasers and reduce the risk that the price paid by
investors is artificially high because of a temporary contraction of
selling interest. Short sellers covering their sales also may add to
the buying interest of stock available to sellers. See Amendments to
Regulation SHO, Exchange Act Release No. 61595 (Feb. 26, 2010), 75
FR 11232, 11235 (Mar. 10, 2010) (``Rule 201 Adopting Release'').
    \4\ See Short Sales, Exchange Act Release No. 50103 (July 28,
2004), 69 FR 48008 (Aug. 6, 2004) (``Regulation SHO Adopting
Release'').
    \5\ See, e.g., Phil Mackintosh, How Short Selling Makes Markets
More Efficient, Nasdaq (Oct. 1, 2020), available at https://www.nasdaq.com/articles/how-short-selling-makes-markets-more-efficient-2020-10-01. Efficient markets require that prices fully
reflect all buy and sell interest. Market participants who believe a
stock is overvalued may engage in short sales in an attempt to
profit from a perceived divergence of prices from true economic
values. Such short sellers add to stock pricing efficiency because
their transactions inform the market of their evaluation of future
stock price performance. This evaluation is reflected in the
resulting market price of the security. See Rule 201 Adopting
Release, 75 FR at 11235 n.29 and 30. See generally discussion infra
Part VIII.D.2.
    \6\ See, e.g., Division of Economic and Risk Analysis, Short
Sale Position and Transaction Reporting 6-7 (June 5, 2014) (``DERA
417(a)(2) Study''), available at https://www.sec.gov/files/short-sale-position-and-transaction-reporting%2C0.pdf. (This is a study of
the Staff of the U.S. Securities and Exchange Commission, which
represents the views of Commission staff, and is not a rule,
regulation, or statement of the Commission. The Commission has
neither approved nor disapproved the content of this study and, like
all staff statements, it has no legal force or effect, does not
alter or amend applicable law, and creates no new or additional
obligations for any person.); Rule 201 Adopting Release, 75 FR at
11235 (describing a ``bear raid'' where an equity security is sold
short in an effort to drive down the price of the security by
creating an imbalance of sell-side interest, as an example of
unrestricted short selling that could ``exacerbate a declining
market in a security by increasing pressure from the sell-side,
eliminating bids, and causing a further reduction in the price of a
security by creating an appearance that the security's price is
falling for fundamental reasons, when the decline, or the speed of
the decline, is being driven by other factors''). See generally
discussion infra Part VIII.D.1.
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    The Commission has plenary authority under Section 10(a) of the
Exchange Act to regulate short sales of securities registered on a
national securities exchange, as necessary or appropriate in the public
interest or for the protection of investors. Current regulatory
requirements applicable to short sales of equity securities are
generally found in Regulation SHO, which became effective on January 3,
2005.\7\ Regulation SHO imposes four general requirements with respect
to short sales of equity securities. It requires broker-dealers to
properly mark sale orders as ``long,'' ``short,'' or ``short exempt;''
\8\ before effecting a short sale, to locate a source of shares that
the seller reasonably believes can be timely delivered (commonly
referred to as the ``locate'' requirement); \9\ and to close out
failures to deliver that result from long or short sales.\10\ Further,
Regulation SHO imposes a short sale price test circuit breaker.\11\ In
addition, the Commission adopted an antifraud provision, Rule 10b-21,
to address failures to deliver in securities that have been associated
with ``naked'' short selling.\12\ As discussed below, Proposed Rule
13f-2 would apply to equity securities that are subject to Regulation
SHO in order to be consistent with those requirements.
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    \7\ See Regulation SHO Adopting Release, supra note 4.
    \8\ See 17 CFR 242.200(g). A broker or dealer must mark all sell
orders of an equity security as ``long,'' ``short,'' or ``short
exempt.'' A sell order may only be marked ``long'' if the seller is
``deemed to own'' the security being sold and either (i) the
security to be delivered is in the physical possession or control of
the broker or dealer; or (ii) it is reasonably expected that the
security will be in the physical possession or control of the broker
or dealer no later than the settlement of the transaction. See id. A
person is deemed to own a security only to the extent that he has a
net long position in such security. See 17 CFR 242.200(c). Once
marked as long, short, or short-exempt, the order mark should not be
changed regardless of any subsequent changes in the person's net
position. See OZ Mgmt., Exchange Act Release No. 75445 (July 14,
2015) (settled) (where OZ Management submitted short sale orders to
its executing broker, but identified such sales as long sales to its
prime broker, causing books and records of the prime broker to be
inaccurate), available at https://www.sec.gov/litigation/admin/2015/34-75445.pdf.
    \9\ See 17 CFR 242.203(b)(1) through (2).
    \10\ See 17 CFR 242.204.
    \11\ See 17 CFR 242.201.
    \12\ See Exchange Act Release No. 58774 (Oct. 14, 2008), 73 FR
61666 (Oct. 17, 2008).
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    DFA Section 929X added Section 13(f)(2) of the Exchange Act, titled
``Reports by institutional investment managers,'' which requires the
Commission to prescribe rules to make certain short sale data publicly
available no less frequently than monthly.\13\ Specifically, Section
13(f)(2) provides that the Commission shall prescribe rules providing
for the public disclosure of the name of the issuer and the title,
class, CUSIP number, aggregate amount of the number of short sales of
each security, and any additional information determined by the
Commission following the end of the reporting period. At a minimum,
such public disclosure shall occur every month.\14\
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    \13\ Public Law 111-203, 929X, 124 Stat. 1376, 1870 (July 21,
2010).
    \14\ 15 U.S.C. 78m(f)(2).
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    Proposed Rule 13f-2 is designed to provide greater transparency
through the publication of certain short sale related data to investors
and other market participants by requiring certain institutional
investment managers to report to the Commission, on a monthly basis on
Proposed Form SHO, certain short position data and short activity data
for certain equity securities. More information about the short sale
activity and short positions of institutional investment managers
(``Managers'') \15\ may promote greater risk management among market
participants, and may facilitate capital formation to the extent that
greater transparency bolsters confidence in the markets.
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    \15\ As defined in Section 13(f)(6)(A) of the Exchange Act and
for purposes of Proposed Rule 13f-2, ``institutional investment
manager'' includes any person, other than a natural person,
investing in or buying and selling securities for its own account,
and any person exercising investment discretion with respect to the
account of any other person. As such, the term ``institutional
investment manager'' typically can include investment advisers,
banks, insurance companies, broker-dealers, pension funds and
corporations. See also Instructions to Form 13F.
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    Proposed Rule 205 would establish a new ``buy to cover'' order
marking requirement for certain purchase orders effected by a broker-
dealer for its own account or for the account of another person at the
broker-dealer. The Proposal to Amend CAT would require CAT reporting
firms to report short sale data not currently required that would
enhance regulators' understanding of the lifecycle of a trade--from
order origination, including an order's mark, through order execution
and allocation.

Proposed Rule 205 and the Proposal to Amend CAT are intended to
supplement the short sale data made available to the Commission in
Proposed Form SHO filings by requiring the reporting to CAT of (i)
``buy to cover'' order marking information and (ii) reliance on the
bona fide market making exception in Regulation SHO. The Commission
believes greater transparency of short sale activity and short position
data would improve the Commission's oversight of financial markets and
compliance with existing regulations, as well as facilitate regulators'
ability to reconstruct significant market events, which may, in turn,
improve the Commission's ability to respond to similar events in the
future.\16\ This could, in turn, benefit the public and market
participants by aiding the Commission in more effectively maintaining a
fair and orderly market.
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    \16\ See generally Part VIII.D.1 (discussing how the Commission
could have used the data provided under the Proposals to address
market events such as the recent market volatility associated with
meme stocks, and how the data provided under the Proposals could
have aided the Commission in examining that market event).
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    The Commission believes that the short sale related information
that would be collected under the Proposals, particularly the required
disclosures of Proposed Form SHO and the aggregated data published
pursuant to Proposed Rule 13f-2, would fill an information gap for
market participants and regulators by providing insights into the
lifecycle of a short sale. In contrast to data related to short sales
that is currently collected and published by FINRA and most exchanges,
the aggregated information derived from information reported on
Proposed Form SHO and published pursuant to Proposed Rule 13f-2 would
reflect the timing of increases and decreases in the reported short
positions.\17\ Such aggregated information would help inform market
participants regarding the overall short sale activity by reporting
Managers. The information reported on Proposed Form SHO, along with the
information gleaned through the operation of Proposed Rule 205 and the
Proposal to Amend CAT would help the Commission and SROs to overcome
current challenges in using data from CAT to estimate short positions
and changes in short positions.\18\
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    \17\ See generally infra Part VIII.C.4 (discussing existing
short selling data).
    \18\ See generally infra Parts VIII.B and VIII.C.4.iv
(discussing challenges of extracting short sale information--e.g.,
to estimate positions and to track how those positions change over
time--from CAT).
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    The Commission acknowledges that the Proposals would entail costs
to some market participants--more specifically, compliance costs
associated with determining whether the Manager is required to report
on Proposed Form SHO and, if so, with filing Proposed Form SHO,
pursuant to Proposed Rule 13f-2, and the costs associated with
accommodating the additional order marks, pursuant to Proposed Rule 205
and the Proposal to Amend CAT. Implementing Proposed Rule 13f-2 and
Proposed Form SHO could also reduce certain industry participants'
incentives to gather information about the marketplace and specific
securities. For example, requiring disclosure of short positions could
facilitate copycat trading that, in turn, could limit the profit an
investor may earn using strategies developed in connection with its
marketplace information gathering efforts.\19\ In addition, requiring
disclosure of large short positions, even in an aggregated format,
could make holders of such short positions more susceptible to short
squeezes. To the extent that these circumstances could reduce the value
of marketplace information gathered to develop a short selling
strategy, they could discourage investors from making an effort to
gather marketplace information. A reduction in information collection
could harm price efficiency, which could, in turn, affect capital
allocations and managerial decisions. Aggregating short sale activity
and short position information across all reporting Managers for each
reported equity security prior to publication and publishing such data
on a delay would likely mitigate--though not fully eliminate--the
potential negative economic effects of the reporting requirements and
associated information disclosure of Proposed Rule 13f-2 and Proposed
Form SHO.
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    \19\ See generally infra Parts VIII.C.5 and VIII.F (discussing
the impact of copycat trading strategies on competition).
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    Proposed Rule 13f-2 and Proposed Form SHO are designed to address
the requirements of Section 13(f)(2). In developing Proposed Rule 13f-
2, the Commission recognizes the need to consider the important role
short selling plays in the market as well as the benefits of providing
more disclosure about short selling. For reasons discussed more fully
below, the Commission believes Proposed Rule 13f-2 represents an
appropriate balance by offering increased transparency into the short
selling activities of certain Managers with large short positions
through the dissemination of aggregated information reported on new,
stand-alone, Proposed Form SHO. The information reported on Proposed
Form SHO would provide investors, market participants, and the
Commission with short sale data that supplements what is currently
available, free or on a fee basis, from FINRA and most exchanges.\20\
Proposed Rule 13f-2 and Proposed Form SHO would improve the utility of
information regularly available to the Commission, and made available
as appropriate to self-regulatory organizations (``SROs''), that could
be used to examine market behavior and recreate significant market
events. It would also increase information available to market
participants and could assist in their understanding of the level of
negative sentiment and the actions of short sellers collectively. While
the primary focus of Proposed Rule 13f-2 and Proposed Form SHO is
transparency, the Commission's regular access to the data reported on
Proposed Form SHO would also bolster its oversight of short selling. In
addition, Proposed Rule 205 and the Proposal to Amend CAT would enhance
the information regularly available to the Commission and other
regulators that could be used to oversee short selling and to
reconstruct significant market events. In turn, the Commission's more
accurate and timely reconstruction and response to market events could
contribute to overall investor protections, particularly in times of
increased market volatility.\21\
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    \20\ See infra Parts II.B and VIII.C.4 (discussing short sale
data that is currently available and how that compares to the data
to be reported on Proposed Form SHO).
    \21\ See infra Part VIII.D.1.
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II. Background

A. Enhancing Short Sale Transparency

    In recent years, market volatility associated with short selling
has brought heightened attention to the difference in long and short
position reporting requirements, and, more generally, the lack of
transparency into the circumstances surrounding short sale
transactions.\22\ The Commission has

received requests to increase transparency into short sale related
activity through the adoption of reporting requirements similar to
those currently required by holders of long positions above certain
thresholds.\23\
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    \22\ See, e.g., Letter from Elizabeth King, Corporate Secretary,
NYSE Group, and James M. Cudahy, President and CEO, National
Investor Relations Institute (Oct. 7, 2015, Petition 4-689) (stating
that rulemaking under 929X ``provides an opportunity to implement
meaningful public disclosure standards for short-sale activity,
consistent with that currently required for institutional investment
managers under Section 13(f) of the Exchange Act for long position
reporting''), available at https://www.sec.gov/rules/petitions/2015/petn4-689.pdf [hereinafter ``NYSE Petition'']; Letter from Edward S.
Knight, Executive Vice President, General Counsel and Chief
Regulatory Officer, NASDAQ (Dec. 7, 2015, Petition 4-691)
(requesting that the Commission ``take swift action to promulgate
rules to require public disclosure by investors of short positions
in parity with the disclosure regime applicable to long
positions''), available at https://www.sec.gov/rules/petitions/2015/petn4-691.pdf [hereinafter ``NASDAQ Petition'']. See also Letter
from E. Carter Esham, Executive Vice President, Emerging Companies,
Biotechnology Innovation Organization (BIO) (Mar. 11, 2016)
(applauding reforms to the short disclosure framework proposed in
the NASDAQ Petition and in the NYSE Petition and advocating for the
promulgation of rules to ensure parity between public disclosures
required of investors taking long and short positions), available at
https://www.sec.gov/comments/4-691/4691-5.pdf; Letter from Andrew D.
Demott, Jr., Chief Operating Officer, Superior Uniform Group
(supporting NASDAQ Petition and advocating adoption of disclosure
requirements for short sellers), available at https://www.sec.gov/comments/4-691/4691-10.pdf. Developments in the market with regard
to ``meme'' stocks in early 2021, some of which were widely reported
as involving large short sellers, also highlighted a need for more
consistent and consolidated short sale information. See, e.g.,
Robert Smith, Laurence Fletcher, Madison Darbyshire, Eric Platt and
Hannah Murphy, `Short squeeze' spreads as day traders hunt next
GameStop, Fin. Times (Jan. 27, 2021), available at https://www.ft.com/content/acc1dbfe-80a4-4b63-90dd-05f27f21ceb2; Are ``meme
stocks'' harmless fun, or a threat to the financial old guard?,
Economist (July 6, 2021). See also Sharon Nunn and Adam Kulam,
Short-Selling Restrictions During Covid-19 (Jan. 12, 2021),
available at https://som.yale.edu/story/2021/short-selling-restrictions-during-covid-19 for a discussion of global short
selling regulatory responses to the Covid-19 pandemic.
    \23\ See, e.g., NYSE Petition and NASDAQ Petition, supra note
22. See also Final Report of the 2021 SEC Government-Business Forum
on Small Business Capital Formation (May 2021), available at https://www.sec.gov/files/2021_OASB_Annual_Forum_Report_FINAL_508.pdf
(requesting the Commission act to increase the transparency of short
selling activities).
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    As noted above, Section 13(f)(2) requires the Commission to
prescribe rules to make certain short sale data publicly available no
less frequently than monthly. After carefully considering the possible
economic effects of various approaches, the Commission believes that
publication of aggregated gross short position data of certain
Managers, and certain related activity data, as discussed in more
detail below, would provide valuable transparency to market
participants and regulators.\24\ The Commission believes that the data
resulting from Proposed Rule 13f-2 would help to provide valuable
context to overall short position data currently available by
distinguishing directional short selling of Managers from short sale
activity effected pursuant to hedging as well as that of market makers
and liquidity providers.\25\ In addition, the Commission believes that
the data would provide regulators with a more complete picture of
significant market events by shedding additional light on the potential
role of short selling activity.\26\
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    \24\ See infra Part VIII.D (stating that Proposed Rule 13f-2, in
conjunction with Proposed Rule 205 and the Proposal to Amend CAT,
could help to advance the policy goal of investor protection by
deterring market manipulation, and aid regulators in reconstructing
significant market events and observing systemic risks).
    \25\ See infra Part VIII.C, VIII.D.
    \26\ See infra Part VIII.D.1 (stating that ``because short
positions often take some time to create, the Commission could have
attempted to quickly identify individual short sellers with large
short positions in the various meme stocks in January 2021 based on
the most recent reports; then the Commission could have used the
enhanced CAT data to understand how these short sellers traded
during the heightened volatility.'').
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    In determining the proposed reporting requirements under Proposed
Rule 13f-2 and Proposed Form SHO, the Commission is mindful of concerns
that certain short selling activity can be carried out pursuant to
potentially abusive or manipulative schemes. For instance, market
manipulators may seek to spread false information about an issuer whose
stock they sold short in order to profit from a resulting decline in
the stock's price.\27\ The Commission has previously noted various
other forms of manipulation that can be advanced by short sellers to
illegally manipulate stock prices, such as ``bear raids.'' \28\ As
discussed below, greater transparency into the activities of Managers
holding large short positions in a security could help regulators'
oversight of short selling and deter these and other types of
manipulative short selling campaigns potentially by alerting regulators
to suspicious activity.\29\
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    \27\ See infra Part VIII.D.1 (stating that ``[i]n `short and
distort' strategies, which are illegal, the goal of manipulators is
to first short a stock and then engage in a campaign to spread
unverified bad news about the stock with the objective of panicking
other investors into selling their stock in order to drive the price
down''; stating further that ``[i]f successful, the scheme can drive
down the price, allowing the manipulators to profit when they `buy-
to-cover' their short position at the reduced price.''). See also,
John D. Finnerty, Short Selling, Death Spiral Convertibles, and the
Profitability of Stock Manipulation, SSRN (2005) at n.8, available
at https://www.sec.gov/comments/s7-08-08/s70808-318.pdf (stating
that the posting of ``false notices on electronic bulletin boards in
internet chat rooms is an example of the type of manipulative
behavior that is difficult for regulators to monitor'').
    \28\ Proposed Rule: Short Sales, Exchange Act Release No. 48709,
(Oct. 28, 2003), 68 FR 62972 (Nov. 6, 2003), available at https://www.sec.gov/rules/proposed/34-48709.htm (stating that ``[a]lthough
short selling serves useful market purposes, it also may be used to
illegally manipulate stock prices. One example is the `bear raid'
where an equity security is sold short in an effort to drive down
the price of the security by creating an imbalance of sell-side
interest. Further, unrestricted short selling can exacerbate a
declining market in a security by increasing pressure from the sell-
side, eliminating bids, and causing a further reduction in the price
of a security by creating an appearance that the security price is
falling for fundamental reasons.'').
    \29\ See Part VIII.D.1 (stating that ``if a short and distort
campaign is suspected, then detecting this behavior via the activity
and positions data in Proposed Form SHO would be easier than it
would be using current data. Short and distort campaigns are more
likely to occur in stocks with lower market capitalizations with
less public information. Consequently, among these stocks it may
not, in dollar terms, take a very large short position to reach the
2.5% threshold in securities of smaller reporting issuers or the
$500,000 threshold in securities of non-reporting issuers to report
on Proposed Form SHO. As a result, it is likely that an entity
engaging in such a practice would be required to report Proposed
Form SHO data. Consequently, if short and distort type behavior were
to be suspected, then the Commission would be more likely to
identify individuals with large short positions and could thus
quickly focus any inquiries on entities in an economic position to
potentially profit from manipulation.'').
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B. Existing Short Sale Data

    There are currently multiple sources of public and nonpublic data
related to short sales.\30\ FINRA and most exchanges collect and
publish daily aggregate short sale volume data, and on a one month
delayed basis publish information regarding short sale
transactions.\31\ However, the Commission understands that some
exchanges only make certain data available for a fee. In addition,
FINRA collects and aggregates short interest data \32\ from broker-
dealer member firms, by security, twice each month.\33\

FINRA provides this aggregated short interest data to the appropriate
listing exchange for publication, some of which charge a fee for access
to the data. For over-the-counter (``OTC'') securities, which are not
listed on an exchange, FINRA publishes the aggregated short interest
data itself.\34\ FINRA's aggregation of the short interest data for
each security does not disclose the identity of reporting market
participants or the size of any individual short position.
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    \30\ Additionally, the Commission publishes on its website fail
to deliver data, which can result from both long and short sales,
twice per month for all equity securities. Securities and Exchange
Commission, Fails-to-Deliver Data, available at https://www.sec.gov/data/foiadocsfailsdatahtm. Further, the CAT created pursuant to Rule
613 of Regulation NMS gives regulators, including the Commission,
access to comprehensive information regarding the lifecycle of a
trade--from origination, including an order's mark (i.e., ``long,''
``short,'' or ``short exempt''), through execution and allocation.
See Part VI. Notably, CAT is currently structured to collect
information, but not to disseminate it.
    \31\ This data is transaction by transaction for each security
without identification of the broker-dealer or short seller.
    \32\ See Short Interest -- What It Is, What It Is Not, FINRA
Inv'r Insights (Apr. 12, 2021), available at https://www.finra.org/investors/insights/short-interest (stating that ```short interest'
is a snapshot of the total open short positions in a security
existing on the books and records of brokerage firms on a given
date. Short interest data is collected for all stocks--both those
that are listed and traded on an exchange and those that are traded
over-the-counter (OTC). FINRA and U.S. exchange rules require that
brokerage firms report short interest data to FINRA on a per-
security basis for all customer and proprietary firm accounts twice
a month, around the middle of the month and again at the end of each
month.'').
    \33\ See infra Part VIII.C.4.i. FINRA recently sought comment on
a variety of potential enhancements to its short interest position
program. See FINRA Regulatory Notice 21-19 (June 2021), available at
https://www.finra.org/rules-guidance/notices/21-19. Any such changes
to FINRA rules would be filed with the Commission and published for
notice and public comment, pursuant to Exchange Act Section 19(b)
and Rule 19b-4 thereunder. See also FINRA Rule 4560. Short Interest
Reporting, available at https://www.finra.org/rules-guidance/rulebooks/finra-rules/4560 (requiring FINRA member firms to maintain
a record of total ``short'' positions in all customer and
proprietary firm accounts and to regularly report such information
to FINRA).
    \34\ For stocks traded OTC, FINRA collects and publishes equity
short interest information free on its Over-the-Counter Equities
page, available at https://otce.finra.org/otce/equityShortInterest.
---------------------------------------------------------------------------

C. Prior Nonpublic Short Sale Reporting by Certain Institutional
Investment Managers to the Commission

    In October 2008, the Commission adopted interim temporary Rule 10a-
3T, which required certain institutional investment managers to file
weekly nonpublic reports with the Commission on Form SH regarding their
short sales and positions in Section 13(f) securities, other than
options.\35\ Rule 10a-3T required reporting of short positions that
were either greater than 0.25% of shares outstanding or $10 million in
fair market value. This temporary rule was adopted in the wake of the
2008 financial crisis in response to concerns about high levels of
volatility associated with short selling and was specifically intended
to provide the Commission with information to evaluate whether its
short selling regulations were working as intended.\36\ Rule 10a-3T
remained in effect through July 2009, at which time the Commission
stated that it and its staff were working with several SROs to make
publicly available certain information related to short sale activity,
such as short sale volume and transaction data.\37\
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    \35\ Disclosure of Short Sales and Short Positions by
Institutional Investment Managers, Exchange Act Release No. 58785
(Oct. 15, 2008), 73 FR 61678 (Oct. 17, 2008). The rule extended the
reporting requirements established by the Commission's Emergency
Orders dated September 18, 2008, September 21, 2008, and October 2,
2008, with some modifications. See Emergency Order Pursuant to
Section 12(k)(2) of the Securities and Exchange Act of 1934 Taking
Temporary Action to Respond to Market Developments, Exchange Act
Release No. 58591 (Sept. 18, 2008), 73 FR 55175 (Sept. 24, 2008);
Amendment to Emergency Order Pursuant to Section 12(k)(2) of the
Securities Exchange Act of 1934 Taking Temporary Action to Respond
to Market Developments, Exchange Act Release No. 58591A (Sept. 21,
2008), 73 FR 55557 (Sept. 25, 2008) (amending the September 18, 2008
Emergency Order (``Order'') to clarify certain technical issues and
when the information filed by the institutional investment managers
on a nonpublic basis would be made public by the Commission on a
delayed basis); Amendment to Order and Order Extending Emergency
Order Pursuant to Section 12(k)(2) of the Securities Exchange Act of
1934 Taking Temporary Action to Respond to Market Developments,
Exchange Act Release No. 58724 (Oct. 2, 2008), 73 FR 58987 (Oct. 8,
2008) (extending effectiveness of the Order through October 17,
2008, and stating that the Forms SH filed under the Order would
remain nonpublic to the extent permitted by law).
    \36\ See Disclosure of Short Sales and Short Positions by
Institutional Investment Managers, Exchange Act Release No. 58785
(Oct. 15, 2008), 73 FR 61678 (Oct. 17, 2008).
    \37\ Press Release, Securities and Exchange Commission, SEC
Takes Steps to Curtail Abusive Short Sales and Increase Market
Transparency (July 27, 2009), available at https://www.sec.gov/news/press/2009/2009-172.htm (stating that the Commission and its staff
were working with several SROs to make certain short sale volume and
transaction data available through SRO websites).
---------------------------------------------------------------------------

    Forms SH were nonpublic filings. The Commission's determination to
maintain the confidentiality of the information disclosed on Form SH
was based in part on the concern that requiring public disclosure may
have had the unintended consequence of giving rise to imitative short
selling, thereby exacerbating already extreme levels of market
volatility observed during the 2008 financial crisis.\38\ The
Commission also stated that implementing a nonpublic, rather than
public, disclosure requirement would help to prevent the potential for
sudden and excessive fluctuations of securities prices and disruption
in the functioning of the securities markets that could threaten fair
and orderly markets.\39\ Moreover, the Commission stated at the time
that requiring nonpublic submission of the form may help prevent
artificial volatility in securities as well as further downward swings
that are caused by short selling while also providing the Commission
with valuable information to combat market manipulation.\40\ Just
before interim temporary Rule 10a-3T was set to expire in August 2009,
the Commission stated that it would continue to examine whether
additional measures are needed to further enhance market quality and
transparency, as well as address short selling abuses.\41\
---------------------------------------------------------------------------

    \38\ Amendment to Order and Order Extending Emergency Order
Pursuant to Section 12(k)(2) of the Securities Exchange Act of 1934
Taking Temporary Action to Respond to Market Developments, Exchange
Act Release No. 58724 (Oct. 2, 2008), 73 FR 58987 (Oct. 8, 2008).
    \39\ Id. at 58987.
    \40\ Id.
    \41\ See supra note 37.
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D. Petitions and Commentary Regarding Short Position Disclosure

    NASDAQ, NYSE, and the National Investor Relations Institute, have
previously petitioned the Commission requesting that, pursuant to DFA
Section 929X, it require disclosure of individual short positions
similar to the disclosures required under Section 13(f)(1) or
Regulations 13D and 13G for long-position reporting.\42\ The petitions
also request that ``short position'' or ``short interest'' be
interpreted broadly to capture not only traditional short sales but
also derivative and other transactions having the same economic impact.
Among these petitioners' concerns is that the lack of public disclosure
of individual short positions may facilitate accumulations of
significant positions in an issuer's securities and potentially
compromise investors' ability to accurately evaluate market movements
in those securities.\43\ They further argue that the benefits
associated with requiring individual, public disclosure of short
selling would include allowing investors to more accurately evaluate
market movements and make more informed investment decisions, reducing
manipulative conduct, increasing investor confidence, and improving
issuers' ability to engage with short sellers.
---------------------------------------------------------------------------

    \42\ See supra note 22.
    \43\ Id.
---------------------------------------------------------------------------

    While some market participants have noted instances when public
announcements by short sellers have aided the market in ultimately
discovering the truth behind fraudulent activity,\44\ critics of that
position have countered with ways short sellers may unfairly harm
issuers that are not engaged in fraudulent activity.\45\ Other such
critics of short selling have posited that issuers may be unduly harmed
\46\ even when short sellers suffer through normal market forces.\47\
---------------------------------------------------------------------------

    \44\ See, e.g., Jane Lewis, Jim Chanos: the short-seller who
called Enron, MoneyWeek (Sept. 28, 2018), available at https://moneyweek.com/495688/jim-chanos-the-short-seller-who-called-enronarticle.
    \45\ See, e.g., Duncan Lamont, GameStop: the ethics of short
sellers, Schroders (Jan. 29, 2021), available at https://www.schroders.com/en/insights/economics/are-short-sellers-ethical/;
Ariel D. Multak, The Big Patent Short: Hedge Fund Challenges to
Pharmaceutical Patents and the Need for Financial Regulation, 23
Fordham J. Corp. & Fin. L. 301 (2017), available at https://news.law.fordham.edu/jcfl/wp-content/uploads/sites/5/2018/01/Multak-Note.pdf.
    \46\ See, e.g., Tom Brennan, How Short-Sellers Almost Destroyed
U.S. Banking, CNBC (Aug. 5, 2010), available at https://www.cnbc.com/id/28239960.
    \47\ See, e.g., Alex Rosenberg, When shorting goes wrong: Zulily
crushes the bears, CNBC (Aug. 18, 2015), available at https://www.cnbc.com/2015/08/17/when-shorting-goes-wrong-zulily-crushes-the-bears.html.
---------------------------------------------------------------------------

    In response to requests for comment on the short sale reporting
study required by Section 417(a)(2) of DFA,\48\

one commenter stated that identification of a market participant that
has engaged in a short sale may have the unintended consequence of
exposing investors to the risk of short squeezes.\49\ This commenter
also maintained that individual public disclosure could chill short
selling and thereby deny the marketplace certain resulting benefits,
such as market liquidity, and pricing efficiency.\50\
---------------------------------------------------------------------------

    \48\ Short Sale Reporting Study Required by Dodd-Frank Act
Section 417(a)(2), Exchange Act Release No. 64383 (May 3, 2011), 76
FR 26787 (May 9, 2011). See also DERA 417(a)(2) Study, supra note 6.
The DERA 417(a)(2) Study was a study conducted by Commission staff
in the Division of Economic and Risk Analysis analyzing the
feasibility, costs, and benefits of real-time reporting of short
positions in publicly listed securities.
    \49\ See Letter from Stuart J. Kaswell, Executive Vice President
& Managing Director, General Counsel, Managed Funds Association
(June 22, 2011) (``2011 MFA Letter''), available at https://www.sec.gov/comments/4-627/4627-137.pdf; see also Letter from
Matthew Newell, Associate General Counsel, Managed Funds Association
(Sept. 6, 2019), available at https://www.sec.gov/comments/s7-26-18/s72618-6082119-191807.pdf.
    \50\ In this regard, the commenter in the 2011 MFA Letter stated
that individual public disclosure would cause potential short
sellers to either refrain from or minimize engaging in short sale
transactions, including hedging activity, to avoid triggering any
threshold for requiring individual public disclosure. The commenter
further stated that public disclosure of individual short positions
could be misleading to investors (stating that investors frequently
short a stock for portfolio risk management purposes) and could
potentially enable market participants to reverse engineer a
reporting firm's trading strategies. In addition, the commenter
stated that individual public disclosure could expose market
participants to the risk of a ``short squeeze,'' which may deter
investors from engaging in short selling more generally. 2011 MFA
Letter, supra note 49.
---------------------------------------------------------------------------

    Design of Proposals. As discussed more fully throughout the
release, the Commission believes that Proposed Rule 13f-2 appropriately
balances these competing interests. Proposed Rule 13f-2 would result in
the publication of certain short sale related data, which would provide
additional transparency to market participants, but data would be
aggregated across all reporting Managers for each reported equity
security prior to publication. The Commission believes that publicly
disclosing the identity of individual reporting Managers may not
currently be necessary to advance the policy goal of increasing public
transparency into short selling activity, and that aggregating across
reporting Managers would help safeguard against the concerns noted
above related to retaliation against short sellers, including short
squeezes, and the potential chilling effect that such public disclosure
may have on short selling. Further, by establishing minimum reporting
thresholds, Proposed Rule 13f-2 would apply only to Managers with large
gross short positions in a security, and would not generally apply to
market participants that do not carry large overnight gross short
positions in equity securities.
    Managers that meet a specified reporting threshold, as discussed
below, would be required to file Proposed Form SHO with the Commission
within 14 calendar days after the end of the calendar month. The
Commission would then publish aggregated information derived from data
reported on Proposed Form SHO. The Commission estimates that it will
publish such aggregated information within one month after the end of
the reporting calendar month --e.g., for data reported by Managers on
Proposed Form SHO for the month of January, the Commission would expect
to publish aggregated information derived from such data no later than
the last day of February. This additional time prior to publication of
data by the Commission following receipt of the monthly Proposed Form
SHO reports would be used to aggregate the data received from the
reporting Managers. At this time, the Commission does not intend to
verify the accuracy of the data reported by Managers, but may consider
doing so in the future after assessing whether such verification would
be useful or necessary to enhance the integrity of the data.\51\ The
additional delay prior to publication of the aggregated data would also
help to reduce the risk of imitative trading activity by market
participants and help to protect reporting Managers' proprietary
trading strategies.\52\
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    \51\ See infra Part III.B.4 for a discussion of how technical
errors are to be addressed in filing Proposed Form SHO with the
Commission.
    \52\ See generally infra Parts VIII.C.5 and VIII.F (discussing
``copycat trading'').
---------------------------------------------------------------------------

    As discussed throughout this release, the Commission believes that,
by limiting the reporting requirements to positions exceeding a
reporting threshold and by publishing data on an aggregated and delayed
basis, the structure of Proposed Rule 13f-2 and the information
required to be reported on Proposed Form SHO would likely mitigate many
potential negative effects on the market.

III. Proposed Rule 13f-2 and Proposed Form SHO

A. Proposed Form SHO Filing Requirement Through EDGAR

    Proposed Rule 13f-2 is designed to provide greater transparency
through the publication of certain short sale related data to investors
and other market participants by requiring a Manager to file a report
in a structured data language in two information tables on Proposed
Form SHO, in accordance with the form's instructions (attached below).
Managers would file Proposed Form SHO with the Commission via the
Commission's Electronic Data Gathering, Analysis, and Retrieval system
(``EDGAR'') in an eXtensible Markup Language (``XML'') specific to
Proposed Form SHO (``custom XML,'' here ``Proposed Form SHO-specific
XML''). Managers would have two ways to file Proposed Form SHO or any
amended Proposed Form SHO with the Commission. A Manager could use a
fillable web form the Commission would provide on EDGAR to input
Proposed Form SHO disclosures, which EDGAR would convert to Proposed
Form SHO-specific XML, or, alternatively, a Manager could use its own
software tool to file Proposed Form SHO to EDGAR directly in Proposed
Form SHO-specific XML.
    A Manager would be required to file Proposed Form SHO with the
Commission within 14 calendar days after the end of each calendar month
with regard to each equity security over which the Manager and all
accounts over which the Manager (or any person under the Manager's
control) has investment discretion \53\ collectively meet or exceed a
quantitative reporting threshold. Specifically, a Manager must file a
Proposed Form SHO report:
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    \53\ For purposes of Proposed Rule 13f-2, the term ``investment
discretion'' has the same meaning as in Rule 13f-1(b) under the
Exchange Act. 17 CFR 240.13f-1(b). Proposed Rule 13f-2(b)(2).
---------------------------------------------------------------------------

     With regard to any equity security of an issuer that is
registered pursuant to section 12 of the Exchange Act \54\ or for which
the issuer is required to file reports pursuant to section 15(d) of the
Exchange Act \55\ (a ``reporting company issuer'') in which the Manager
meets or exceeds either (1) a gross short position in the equity
security with a US dollar value of $10 million or more at the close of
regular trading hours \56\ on any settlement date during the calendar
month, or (2) a monthly average gross short position \57\ as a
percentage of shares outstanding in the equity security of 2.5% or more
(``Threshold A''); and
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    \54\ 15 U.S.C. 78l.
    \55\ 15 U.S.C. 78o(d).
    \56\ For purposes of Proposed Rule 13f-2 and Proposed Form SHO,
the term ``regular trading hours'' would have the same meaning as in
Rule 600(b)(77) under the Exchange Act. See, e.g., Proposed Rule
13f-2(b)(5).
    \57\ For purposes of Proposed Rule 13f-2, the term ``gross short
position'' means the number of shares of the reportable equity
security that are held short, without inclusion of any offsetting
economic positions (including shares of the reportable equity
security or derivatives of such security). Proposed Rule 13f-
2(b)(4).
---------------------------------------------------------------------------

     with regard to any equity security of an issuer that is
not a reporting company issuer as described above (a

``non-reporting company issuer'') in which the Manager meets or exceeds
a gross short position in the equity security with a US dollar value of
$500,000 or more at the close of regular trading hours on any
settlement date during the calendar month (``Threshold B'').
    Threshold A and Threshold B are discussed further in Part III.D
below and are referred to herein collectively as the ``Reporting
Thresholds'' (each a ``Reporting Threshold''). For each equity security
for which a Manager meets or exceeds a Reporting Threshold, such
Manager, identifying itself using its name and active Legal Entity
Identifier (``LEI''), if available,\58\ would be required to report
information that is aggregated across accounts over which the Manager,
or any person under the Manager's control, has investment discretion.
If a Manager does not have an active LEI, such Manager would file
Proposed Form SHO using only its name as registered with the Commission
to identify itself.
---------------------------------------------------------------------------

    \58\ LEI is a unique global identifier for legal entities
participating in financial transactions that is currently used in
regulatory reporting to financial regulators, including the
Commission.
---------------------------------------------------------------------------

    Managers that meet a Reporting Threshold would be required to file
Proposed Form SHO with the Commission via EDGAR within 14 calendar days
after the end of the calendar month. Section 13(f)(2) requires that
public disclosure of certain short sale information at a minimum shall
occur every month. The Commission believes that 14 calendar days after
the end of each month provides sufficient time for Managers that meet a
Reporting Threshold to assemble, review, and file the required
information on Proposed Form SHO. Further, the Commission believes that
providing Managers with a reasonable period of time to file complete
and accurate short sale related information in the first instance would
reduce the need for Managers to file amendments to Proposed Form SHO,
as discussed below.
    Consistent with Regulation SHO, Proposed Rule 13f-2 would apply to
equity securities.\59\ As such, the Commission believes that the short
sale related data that would be published by the Commission under
Proposed Rule 13f-2 would provide additional context to market
participants regarding equity securities that are subject to the
requirements of Regulation SHO.
---------------------------------------------------------------------------

    \59\ Regulation SHO applies to equity securities, both exchange-
listed and over-the-counter, as defined in Section 3(a)(11) of the
Exchange Act and Rule 3a11-1 thereunder. See Regulation SHO Adopting
Release, supra note 4.
---------------------------------------------------------------------------

    For purposes of Proposed Rule 13f-2, the term ``investment
discretion'' has the same meaning as in Rule 13f-1(b) under the
Exchange Act.\60\ Rule 13f-1(b)'s definition is comprehensive in that
it covers all accounts over which the Manager, or any person under the
Manager's control, has investment discretion. This same definition of
investment discretion was used by the Commission in adopting interim
temporary Rule 10a-3T in 2008, which required certain Managers to file
weekly nonpublic reports with the Commission on Form SH regarding short
sales and positions,\61\ and is currently used for Form 13F ``long''
position reporting by certain Managers. Because Proposed Rule 13f-2 is
designed to provide greater transparency to investors and other market
participants through the publication of certain short sale related
data, the Commission believes that using the same comprehensive
definition of investment discretion for Manager reporting under
Proposed Rule 13f-2 is likewise appropriate. In addition, Managers that
would be filing reports on Proposed Form SHO are likely experienced
with reporting on Form 13F using this same definition. As discussed
above, Proposed Rule 13f-2 is designed to address the requirements of
Section 13(f)(2) by offering increased transparency into the activities
of certain Managers with large short positions. As such, information
reported by a Manager should include all accounts over which such
Manager has investment discretion.
---------------------------------------------------------------------------

    \60\ 17 CFR 240.13f-1(b). Rule 13f-1 is entitled ``Reporting by
institutional investment managers of information with respect to
accounts over which they exercise investment discretion.''
    \61\ See supra Part II.C.
---------------------------------------------------------------------------

    Proposed Rule 13f-2 would require that a Manager calculate its
``gross short position'' in an equity security in determining whether
it meets a Reporting Threshold. Under Proposed Rule 13f-2, ``gross
short position'' would mean the number of shares of the equity security
that are held short, without inclusion of any offsetting economic
positions, including shares of the equity security or derivatives of
such equity security. The Manager shall report its gross short position
in an equity security without offsetting such gross short position with
``long'' shares of the equity security or economically equivalent long
positions obtained through derivatives of the equity security. A
Manager's gross short position in a security is distinct from its net
short position in such security, and the Commission believes that gross
short position information provides a more complete view of a Manager's
short exposure, especially if coupled with the hedging information that
the Commission is proposing Managers report on Proposed Form SHO, as
discussed below. Requiring reporting of gross short positions would
also likely result in more consistent reporting among Managers.
Specifically, the Commission is concerned that using net short
positions could result in Managers using varying approaches in
determining what ``long'' positions, including equivalent ``long''
positions through derivatives, are appropriate to offset against their
gross short position in determining whether the Manager meets a
Reporting Threshold in the first instance. Consequently, the Commission
believes that using a net short position could result in different
reporting results for otherwise similarly situated Managers in terms of
a gross short position in the equity security.
    The Commission is proposing required Manager disclosures that are
significantly different from currently available data and that would be
useful to both market participants and regulators, with a focus on
addressing data limitations exposed by the market volatility in January
2021.

B. Proposed Form SHO

1. Filing Proposed Form SHO Reports
    Proposed Form SHO is entitled ``Information required of
institutional investment managers pursuant to Section 13(f)(2) of the
Securities Exchange Act of 1934 and rules thereunder.'' Managers would
use Proposed Form SHO for reports to the Commission required by
Proposed Rule 13f-2. A Manager would file a report on Proposed Form SHO
with the Commission within 14 calendar days after the end of each
calendar month with regard to each equity security in which the Manager
meets or exceeds a Reporting Threshold.
    Pursuant to Proposed Rule 13f-2 and Proposed Form SHO, to determine
whether the dollar value threshold described in the first prong of
Threshold A--a gross short position in an equity security of a
reporting company issuer (as described above) with a US dollar value of
$10 million or more at the close of regular trading hours on any
settlement date during the calendar month--is met, a Manager shall
determine its end of day gross short position in the equity security on
each settlement date during the calendar month and multiply that figure
by the

closing price at the close of regular trading hours on the settlement
date.
    To determine whether the second prong of Threshold A--2.5% or
higher monthly average gross short position as a percentage of shares
outstanding in the equity security--is met, the Manager shall (a)
identify its gross short position (as defined in Proposed Rule 13f-2)
in the equity security at the close of each settlement date during the
calendar month of the reporting period, and divide that figure by the
number of shares outstanding in such security at the close of that
settlement date, then (b) add together the daily percentages during the
calendar month as determined in (a) and divide the resulting total by
the number of settlement dates during the calendar month of the
reporting period. The number of shares outstanding of the security for
which information is being reported shall be determined by reference to
an issuer's most recent annual or quarterly report, and any subsequent
update thereto, filed with the Commission.
    To determine whether the dollar value threshold described in
Threshold B--a gross short position in an equity security of a non-
reporting company issuer (as described above) with a US dollar value of
$500,000 or more at the close of regular trading hours on any
settlement date during the calendar month--is met, a Manager shall
determine its end of day gross short position in the equity security on
each settlement date during the calendar month and multiply that figure
by the closing price at the close of regular trading hours on the
settlement date. In circumstances where such closing price is not
available, the Manager would be required to use the price at which it
last purchased or sold any share of that security in determining
whether Threshold B is met.
    The rules to prevent duplicative reporting of Proposed Form SHO are
modeled after those in Form 13F.\62\ More specifically, if two or more
Managers, each of which is required by Proposed Rule 13f-2 to file
Proposed Form SHO for the reporting period, exercise investment
discretion with respect to the same securities, only one such Manager
must report the information in its report on Proposed Form SHO. If a
Manager has information that is required to be reported on Proposed
Form SHO and such information is reported by another Manager (or
Managers), such Manager must identify the Manager(s) reporting on its
behalf in the manner described in Special Instruction 5 to the Proposed
Form SHO instructions. Such information would be reported by Managers
on the ``Cover Page,'' as discussed further below. Duplicative
reporting could result in unnecessary costs to Managers, and could make
the aggregated data published by the Commission less accurate.
---------------------------------------------------------------------------

    \62\ See ``Rules to Prevent Duplicative Reporting'' in the
``General Instructions'' of Form 13F, available at https://www.sec.gov/pdf/form13f.pdf.
---------------------------------------------------------------------------

    The Commission believes that requiring Proposed Form SHO to be
reported via EDGAR would enhance the accessibility, usability, and
quality of the Proposed Form SHO disclosures for the Commission.
Proposed Rule 13f-2 and Proposed Form SHO would improve the quality and
scope of the information regularly available for the Commission's use
in examining market behavior and recreating significant market events.
In addition, Proposed Rule 13f-2 and Proposed Form SHO would expand the
scope of information available to market participants and could thereby
assist in their understanding of the level of negative sentiment and
the actions of short sellers collectively. While the primary focus of
Proposed Rule 13f-2 and Proposed Form SHO is transparency, the
Commission's regular access to the data reported on Proposed Form SHO
would also bolster its oversight of short selling. The Commission's
ability to more accurately and timely reconstruct and respond to market
events could enhance investor protections, particularly in times of
increased market volatility.\63\
---------------------------------------------------------------------------

    \63\ See infra Part VIII.D.1.
---------------------------------------------------------------------------

    Reporting via EDGAR would allow the Commission to download the
Proposed Form SHO disclosures directly, facilitating efficient access,
organization, and evaluation of the reported information, thereby
allowing the Commission to more effectively examine market behavior,
recreate significant market events, and further bolster its oversight
of short selling activity.
    The Commission believes that requiring Proposed Form SHO to be
filed in Proposed Form SHO-specific XML, a structured machine-readable
data language, would facilitate more thorough review and analysis of
the reported short sale disclosures by the Commission, increasing the
efficiency and effectiveness of the Commission's understanding of short
selling and systemic risk. Additionally, most Managers have experience
filing EDGAR forms that use similar EDGAR Form-specific XML-based data
languages, such as Form 13F.\64\
---------------------------------------------------------------------------

    \64\ See Form 13F, available at https://www.sec.gov/pdf/form13f.pdf.
---------------------------------------------------------------------------

2. Confidential Treatment
    The instructions to Proposed Form SHO expressly provide that all
information that would reveal the identity of a Manager filing a
Proposed Form SHO report with the Commission is deemed subject to a
confidential treatment request under Rule 24b-2 (17 CFR 240.24b-2). The
Commission currently plans to publish only aggregated data derived from
information provided in Proposed Form SHO reports. Accordingly,
Proposed Form SHO, by its terms, ensures that information reported on
the form that could reveal the identity of the reporting Manager will
be deemed subject to a confidential treatment request. Pursuant to
Section 13(f) of the Exchange Act, the Commission may prevent or delay
public disclosure of all other information reported on Proposed Form
SHO in accordance with FOIA, Section 13(f)(4)-(5), Rule 24b-2(b) under
the Exchange Act, and any other applicable law.\65\ The Commission
believes that, because the Commission currently plans to publish only
aggregated data derived from information reported on Proposed Form SHO,
it would be unlikely to grant requests for confidential treatment of
the information from which the aggregated data is derived. While it is
possible a person may be able to reverse engineer data in a situation
where only one person was selling short, especially where the short
seller has publicly disclosed that they have a short position in a
specific security, the Commission anticipates that many potential
negative effects on the market or that short seller would likely be
mitigated by the delay in publication of the aggregated data. Further,
the Commission believes that granting a request from a Manager that the
data it provides on a Proposed Form SHO report be excluded from the
aggregated data published by the Commission could affect the integrity
of the data by limiting or possibly excluding relevant information.
This likely would limit the usefulness of the information to the
public. For these reasons, the Commission believes that, on balance,
the public's need for the

aggregated data the Commission would publish likely would justify any
potential harm that disclosing such aggregated disclosure would impose
on the Manager requesting confidential treatment.
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    \65\ Any requests for confidential treatment of the information
reported on Proposed Form SHO should be made in accordance with Rule
24b-2 under the Exchange Act (17 CFR 240.24b-2), should be filed
electronically in accordance with proposed Rule 24b-2(i) and Rule
101(d) of Regulation S-T (17 CFR 232.101(d)), and should provide
enough factual support in the request to enable the Commission to
make an informed judgment as to the merits of the request.
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3. Proposed Form SHO Contents
    Proposed Form SHO consists of two parts: (1) The Cover Page, and
(2) the Information Tables.
    On the Cover Page--
     The Manager shall report certain basic information,
including its name, mailing address, business telephone and facsimile
numbers, as well as the name, title, business telephone and facsimile
numbers of the Manager's contact employee for the Proposed Form SHO
report; and the date the report is filed. The Manager will also provide
its active LEI, if it has one. The Commission believes that this basic
information should be included to identify the reporting Manager and
the calendar month for which the Manager is reporting.
     The Manager shall identify the calendar month (using the
last settlement date of the calendar month) for which the Manager is
reporting. The date should name the month, and express the day and year
in Arabic numerals, with the year being a four-digit numeral (e.g.,
2022).
     The Manager filing the report will include the
representation that ``all information contained herein is true, correct
and complete, and that it is understood that all required items,
statements, schedules, lists, and tables, are considered integral parts
of this form.''
     The reporting Manager shall designate the report type for
the Proposed Form SHO by checking the appropriate box in the ``Report
Type'' section of the Cover Page, and include, where applicable, the
name and active LEI of each other Manager reporting for this Manager.
If the other Manager's active LEI is not available to the reporting
Manager, the reporting Manager shall include only the name of the other
Manager as registered with the Commission. This information will
provide the Commission with a summary of the nature and scope of the
information that the Manager is reporting for the calendar month, as
well as identify other reporting Managers, if applicable.
    [cir] If all of the information that a Manager is required by
Proposed Rule 13f-2 to report on Proposed Form SHO is reported by
another Manager (or Managers), the Manager shall check the box for
Report Type ``FORM SHO NOTICE,'' include on the Cover Page the name and
active LEI (if available) of each of the Other Managers Reporting for
this Manager and omit the Information Tables.
    [cir] If all of the information that a Manager is required by
Proposed Rule 13f-2 to report on Proposed Form SHO is reported in the
report filed by the Manager, the Manager shall check the box for Report
Type ``FORM SHO ENTRIES REPORT,'' omit from the Cover Page the name and
active LEI of each other Manager reporting for this Manager, and
include the Information Tables.
    [cir] If only a part of the information that a Manager is required
by Proposed Rule 13f-2 to report on Proposed Form SHO is reported in
the report filed by the Manager, the Manager shall check the box for
Report Type ``FORM SHO COMBINATION REPORT,'' include on the Cover Page
the name and active LEI of each of the Other Managers reporting for
this Manager, if available, and include the Information Tables.
     If the Manager is filing the Proposed Form SHO report as
an amendment, then the Manager must check the ``Amendment and
Restatement'' box on the Cover Page, and enter the Amendment and
Restatement number.\66\ Each amendment must include a complete Cover
Page and Information Tables. Amendments must be filed sequentially.
This information will provide the Commission with a summary of the
nature and scope of the information that a Manager is reporting for the
calendar month.
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    \66\ See infra Part III.B.4.
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    In reporting information required on Information Tables 1 and 2, as
discussed below, a Manager also must account for and report a gross
short position in an ETF, and activity that results in the acquisition
or sale of shares of the ETF resulting from call options exercises or
assignments; put options exercises or assignments; tendered
conversions; secondary offering transactions; or other activity, as
discussed further below. However, for purposes of Proposed Form SHO
reporting, a Manager, in determining its gross short position in an
equity security, would not be required to consider short positions that
the ETF holds in individual underlying equity securities that are part
of the ETF basket. Not requiring the Manager to consider these short
positions in the underlying equity securities should limit the burden
to reporting Managers in determining whether such Manager meets a
Reporting Threshold in such underlying equity securities, while not
materially affecting the reported gross short position and short
activity data.
    Information Table 1: ``Manager's Gross Short Position
Information''--The information being reported will include gross short
position information regarding transactions that have settled during
the calendar month being reported.
     In Column 1, a Manager shall enter the last day of the
calendar month being reported by the Manager on which a trade settles
(``settlement date''). This information will identify the month being
reported by the Manager.
     In Column 2, a Manager shall enter the name of the issuer
to identify the issuer of the equity security for which information is
being reported.
     In Column 3, a Manager shall enter the issuer's active
LEI, if the issuer has an active LEI. The LEI provides standardized
information that will enable the Commission and market participants to
more precisely identify the issuer of each equity security for which
information is being reported.
     In Column 4, consistent with Section 13(f)(2), a Manager
shall enter the title of the class of the equity security for which
information is being reported.
     In Column 5, consistent with Section 13(f)(2), a Manager
shall enter the nine (9) digit CUSIP number of the equity security for
which information is being reported, if applicable.
     In Column 6, a Manager shall enter the twelve (12)
character, alphanumeric Financial Instrument Global Identifier
(``FIGI'') \67\ of the equity security for which information is being
reported, if a FIGI has been assigned. Like CUSIP, FIGI provides a
methodology for identifying securities.
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    \67\ FIGI is a randomly assigned 12 character, alphanumeric ID
that provides a standardized unique unambiguous identification
framework for financial instruments across all asset classes and
jurisdictions. It is open sourced, freely available, and non-
proprietary.
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     In Column 7, a Manager shall enter the number of shares
that represent the Manager's gross short position in the equity
security for which information is being reported at the close of
regular trading hours on the last settlement date of the calendar month
of the reporting period. The term ``gross short position'' means the
number of shares of the security for which information is being
reported that are held short, without inclusion of any offsetting
economic positions (including shares of the equity security for which
information is being reported or derivatives of such security).
     In Column 8, a Manager shall enter the US dollar value of
the shares reported in Column 7, rounded to the nearest dollar. A
Manager shall report the corresponding dollar value of the

reported gross short position by multiplying the number of shares of
the security for which information is being reported by the closing
price at the close of regular trading hours on the last settlement date
of the calendar month. In circumstances where such closing price is not
available, the Manager shall use the price at which it last purchased
or sold any share of that security. This additional information
regarding the dollar value of the reported short position will provide
additional transparency and context to market participants and
regulators.
     In Column 9, a Manager shall indicate whether the
identified gross short position in Column 7 is fully hedged (``F''),
partially hedged (``P''), or not hedged (``0'') at the close of the
last settlement date of the calendar month of the reporting period. A
Manager shall indicate that a reported gross short position in an
equity security is ``fully hedged'' if the Manager also holds an
offsetting position that reduces the risk of price fluctuations for its
entire position in that equity security, for example, through ``delta''
hedging \68\ (in which the Manager's reported gross short position is
offset 1-for-1), or similar hedging strategies used by market
participants. A Manager shall report that it is ``partially hedged'' if
the Manager holds an offsetting position that is less than the
identified price risk associated with the reported gross short position
in that equity security. This additional hedging information would help
to indicate whether the reported gross short position is directional or
non-directional in nature. More specifically, a short position that is
not hedged could be an indicator that the short seller has a negative
view of the security, believes that the price of the equity security
will decrease, and accepts the market risk related to its short
position. A short position that is fully hedged could be an indicator
that the short seller has a neutral or positive view of the security,
and is engaged in hedging activity to protect against potential market
risk. A short position that is partially hedged could be an indicator
that the short seller has a negative, neutral, or positive view of the
security. Whether the hedge itself is full, partial, or non-existent
might provide further context to market participants regarding the
short sellers' view of the equity security. The Commission believes
that hedging information also can assist with distinguishing position
trading, which typically has corresponding hedging activity, from other
strategies such as arbitrage.
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    \68\ See Brandon Renfro, What is Delta Hedging?, The Balance
(Nov. 4, 2021), available at https://www.thebalance.com/what-is-delta-hedging-5207735.
---------------------------------------------------------------------------

    Information Table 2: ``Daily Activity Affecting Manager's Gross
Short Position During the Reporting Period''--The Manager shall report
the information required by the Proposed Form SHO instructions for each
date during the reporting period on which a trade settles (settlement
date) during the calendar month. The Commission believes that such
daily activity information would provide market participants and
regulators with additional context and transparency into whether, how,
and when reported gross short positions in the reported equity security
are being closed out (or alternatively, increased) as a result of the
acquisition or sale of shares of the equity security resulting from
call options exercises or assignments; put options exercises or
assignments; tendered conversions; secondary offering transactions; and
other activity. The Commission believes that such activity data would
also assist the Commission in assessing systemic risk and in
reconstructing unusual market events, including instances of extreme
volatility.
     In Column 1, a Manager shall enter the date during the
reporting period on which a trade settles for the activity reported.
This will identify the settlement date activity being reported.
     In Column 2, a Manager shall enter the name of the issuer,
consistent with Section 13(f)(2), to identify the issuer of the
security for which information is being reported.
     In Column 3, a Manager shall enter the issuer's active
LEI, if the issuer has an active LEI. The LEI provides standardized
information that will enable the Commission and market participants to
more precisely identify the issuer of each equity security for which
information is being reported.
     In Column 4, consistent with Section 13(f)(2), a Manager
shall enter the title of the class of the security for which
information is being reported.
     In Column 5, consistent with Section 13(f)(2), a Manager
shall enter the nine (9) digit CUSIP number of the equity security for
which information is being reported, if applicable.
     In Column 6, a Manager shall enter the twelve (12)
character, alphanumeric FIGI of the equity security for which
information is being reported, if a FIGI has been assigned. Like CUSIP,
FIGI provides a methodology for identifying securities.
     In Column 7, for the settlement date set forth in Column
1, a Manager shall enter the number of shares of the equity security
for which information is being reported that resulted from short sales
and settled on that date.
     In Column 8, for the settlement date set forth in Column
1, a Manager shall enter the number of shares of the security for which
information is being reported that were purchased to cover, in whole or
in part, an existing short position in that security and settled on
that date. This activity information will allow the Commission and
other regulators to more quickly identify a potential ``short
squeeze,'' which can be evidenced by short sellers closing out short
positions by purchasing shares in the open market. If it appears that a
short squeeze may have occurred through potential manipulative behavior
involving short selling, the Commission could perform further analysis
regarding the squeeze. Increased risk of detection may deter some
market participants seeking to orchestrate a short squeeze.\69\
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    \69\ See infra Part VIII.D.1.
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     In Column 9, for the settlement date set forth in Column
1, a Manager shall enter the number of shares of the security for which
information is being reported that are acquired in a call option
exercise that reduces or closes a short position on that security and
settled on that date. The exercise or assignment of an option position
can reduce or close a short position in the underlying equity security.
     In Column 10, for the settlement date set forth in Column
1, a Manager shall enter the number of shares of the security for which
information is being reported that are sold in a put option exercise
that creates or increases a short position on that security and settled
on that date. Options can be used to create economic short exposure
such that an exercise or assignment of an option could create or
increase a short position in the underlying equity security.
     In Column 11, for the settlement date set forth in Column
1, a Manager shall enter the number of shares of the security for which
information is being reported that are sold in a call option assignment
that creates or increases a short position on that security and settled
on that date. Options can be used to create economic short exposure
such that an exercise or assignment of an option could create or
increase a short position in the underlying equity security.
     In Column 12, for the settlement date set forth in Column
1, a Manager shall enter the number of shares of the security for which
information is being reported that are acquired in a put option
assignment that reduces or closes a short position on that security and

settled on that date. The exercise or assignment of an option position
can reduce or close a short position in the underlying equity security.
     In Column 13, for the settlement date set forth in Column
1, a Manager shall enter the number of shares of the security for which
information is being reported that are acquired as a result of tendered
conversions that reduce or close a short position on that security and
settled on that date. Holders of convertible debt often hold short
positions to hedge their convertible position. When the shares of the
convertible debt are converted, they can reduce or close a short
position in the equity security.
     In Column 14, for the settlement date set forth in Column
1, a Manager shall enter the number of shares of the security for which
information is being reported that were obtained through a secondary
offering transaction that reduces or closes a short position on that
security and settled on that date.\70\ A secondary offering
transaction, sometimes referred to as a ``seasoned'' offering, occurs
when a company sells newly created shares to the market, at a time
subsequent to the company's initial public offering, or ``IPO.''
Purchasing securities in a secondary offering can reduce or close a
short position in the equity security.
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    \70\ Regulation M Rule 105 makes it unlawful, in connection with
an offering of certain equity securities, for any person to sell
short a security that is the subject of an offering and purchase the
offered securities from an underwriter or broker or dealer
participating in the offering if such short sale was effected during
the Rule 105 restricted period. See 17 CFR 242.105(a).
---------------------------------------------------------------------------

     In Column 15, for the settlement date set forth in Column
1, a Manager shall enter the number of shares of the security for which
information is being reported that resulted from other activity not
previously reported in Information Table 2 that creates or increases a
short position on that security and settled on that date. Other
activity to be reported includes, but is not limited to, shares
resulting from ETF creation or redemption activity.
     In Column 16, for the settlement date set forth in Column
1, a Manager shall enter the number of shares of the security for which
information is being reported that resulted from other activity not
previously reported on Information Table 2 that reduces or closes a
short position on that security and settled on that date. Other
activity to be reported includes, but is not limited to, shares
resulting from ETF creation or redemption activity.
    The Commission believes that the information in Columns 9, 12, 13,
14, and 16 is useful in providing the Commission additional context and
transparency into how and when short positions in the reported equity
security are being closed out or reduced.
    The Commission believes that the information in Columns 10, 11, and
15 is useful in providing the Commission additional context and
transparency into how and when short positions in the reported equity
security are being created or increased.
4. Procedures for Filing and Amending Proposed Form SHO
    Managers will have two ways to file Proposed Form SHO or any
amended Proposed Form SHO to the Commission. A Manager can use a
fillable web form provided by EDGAR to input Proposed Form SHO
disclosures that EDGAR will convert to Proposed Form SHO-specific XML
or, alternatively, use its own software tool to file Proposed Form SHO
to EDGAR directly in Proposed Form SHO-specific XML.\71\ If a Manager
uses the web-fillable Proposed Form SHO on EDGAR and encounters a
technical error when filling out the form, such Manager will be
required to correct the identified technical error before being
permitted to file the Proposed Form SHO through EDGAR. If a Manager
uses its own software tool to file a Proposed Form SHO filing to EDGAR
directly in Proposed Form SHO-specific XML, and a technical error is
identified by EDGAR after the filing is sent, such Manager will receive
an error message that the filing has been suspended, and will be
required to correct the identified technical error and re-file the
Proposed Form SHO through EDGAR.\72\
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    \71\ The filing options described for Proposed Form SHO are
consistent with other EDGAR filings that are filed in Form-specific
XML-based languages. See, e.g., Regulation of NMS Stock Alternative
Trading Systems, Exchange Act Release No. 83663, (July 18, 2018), 83
FR 38768 (Dec. 9, 2021) (requiring new EDGAR Form ATS-N to be filed
in an XML-based language specific to that Form).
    \72\ The Commission's XML schema (i.e., the set of technical
rules associated with Proposed Form SHO-specific XML) for Proposed
Form SHO would incorporate validations of each data field on
Proposed Form SHO to help ensure consistent formatting and
completeness. For example, letters instead of numbers in a field
requiring only numbers, would be flagged by EDGAR as a ``technical''
error that would require correction by the reporting Manager in
order to complete its Proposed Form SHO filing. Field validations
act as an automated form completeness check when a Manager files
Proposed Form SHO through EDGAR; they do not verify the accuracy of
the information submitted in Proposed Form SHO filings.
---------------------------------------------------------------------------

    A Manager that determines or is made aware that it has filed a
Proposed Form SHO with errors that affect the accuracy of the
information reported must file an amended Proposed Form SHO within ten
(10) calendar days of discovery of the error. Filing an amended
Proposed Form SHO within 10 calendar days of discovery of the error
would provide Managers with a reasonable period of time to prepare the
Proposed Form SHO amendment, while helping to ensure that accurate
information is received by the Commission in a timely manner.
    To facilitate the Commission's process of aggregating the short
sale related information reported on Proposed Form SHO for publication,
amendments to Proposed Form SHO must restate the Proposed Form SHO in
its entirety. To inform the Commission that the filing is an amendment
of a previously filed Proposed Form SHO, a Manager must check the box
on the Proposed Form SHO Cover Page to indicate that the filing is an
``Amendment and Restatement.'' On the Cover Page of each Amendment and
Restatement filed, a Manager must provide a written description of the
revision being made, explain the reason for the revision, and indicate
whether data from any additional Proposed Form SHO reporting period(s)
(up to the past 12 calendar months) is/are affected by the amendment.
If other reporting periods have been affected, a Manager shall complete
and file a separate Amendment and Restatement for each previous
calendar month so affected, and provide a description of the revision
being made and explain the reason for the revision. As discussed below,
the Commission proposes to provide aggregated data on a rolling twelve-
month basis, with prior months' data updated as necessary to reflect
data from Amendments and Restatements. The Commission proposes to limit
the requirement to file amended Proposed Forms SHO to twelve months to
reduce the burden and cost on Managers.
    If a revision reported in an Amendment and Restatement changes a
data point reported in the Proposed Form SHO that is being amended by
twenty-five percent (25%) or more, the Manager must notify the
Commission staff via the Office of Interpretation and Guidance of the
Division of Trading and Markets (``TM OIG'') at
[email protected] within two (2) business days after filing the
Amendment and Restatement. The Commission believes that a change of 25%
or greater reflects a significant change, particularly for securities
with few Managers reporting Proposed Form SHO data, which, as discussed
below, should be highlighted in the updated aggregated data that will
be published.
    Regardless of the scope of the revision being reported, if the data
being reported in an Amendment and Restatement affects the data
reported on

the Proposed Form SHO reports filed for multiple Proposed Form SHO
reporting periods, the Manager, within two (2) business days after
filing the Amendment and Restatement, must provide the Commission staff
via TM OIG with notice of such occurrence, and provide an explanation
of the reason for the revision. Reporting discrepancies could harm the
integrity of the data being reported on Proposed Form SHO through EDGAR
(and published by the Commission on an aggregated basis as discussed
herein), particularly if such reporting discrepancies go uncorrected.
The Commission believes that requiring a Manager to notify Commission
staff when reporting discrepancies have occurred, with a description of
the revision being made and the reason for the revision, would help
Commission staff determine whether there may be an ongoing or
continuing issue with the integrity of the data being reported by that
Manager.
    Each reporting period, the Commission plans to update prior months'
aggregated Proposed Form SHO data on EDGAR to reflect information
reported in Amendments and Restatements and will add an asterisk (i.e.,
*) or other mark for any updated data for which a Manager notified
Commission staff that it filed an Amendment and Restatement to correct
a data point of 25% or greater to highlight for market participants
that the published aggregated data includes significantly revised data.
The Commission will publish the aggregated Proposed Form SHO data for
the latest reporting period along with aggregated Proposed Form SHO
data for the prior twelve months on a rolling basis. The published
aggregated Proposed Form SHO data will include a disclaimer that the
Commission does not ensure the accuracy of the data being published.

C. Publication of Information by the Commission

    The Commission will publish through EDGAR aggregated information
regarding each equity security reported by all Managers. The Commission
estimates that it will publish such aggregated information within one
month after the end of the reporting calendar month.\73\ The Commission
will use the time following receipt of the monthly forms to aggregate
the data received from the reporting Managers. The Commission does not
plan to verify the accuracy of data elements reported by Managers, but
may consider doing so in the future after assessing whether such
verification would be beneficial. This delay prior to publication will
also help protect reporting Managers' proprietary trading strategies,
thereby reducing the risk of imitative trading activity by the
market.\74\
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    \73\ The Commission notes that publication of the aggregated
information may be delayed for an initial period following
effectiveness of Proposed Rule 13f-2 and Proposed Form SHO.
    \74\ See generally infra Parts VIII.C.5 and VIII.F (discussing
``copycat trading'').
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    Analysis of data filed under temporary Rule 10a-3T showed the mean
duration that short positions were held after the end of the month
ranged from nine (9) to thirteen (13) calendar days, increasing with
higher threshold levels, and the median position was not held into the
following month.\75\ At a Reporting Threshold of $10 million or 2.5% of
shares outstanding, positions were held for a mean of 9.85 calendar
days and a median of 0 calendar days. Therefore, the Commission
believes Managers would close the majority of short positions prior to
publication. Under Proposed Rule 13f-2, the requirement to file
Proposed Form SHO within 14 calendar days after the end of each
calendar month applies to Managers who meet or exceed either Reporting
Threshold.
---------------------------------------------------------------------------

    \75\ See infra Parts III.D.2 and VIII.C.3.v for additional
discussion of analysis of temporary Rule 10a-3T data.
---------------------------------------------------------------------------

    With regard to each individual equity security reported by Managers
on Proposed Form SHO's Information Tables 1 and 2 (discussed above),
the Commission will publish the issuer's name, and active LEI (if the
issuer has an active LEI). The Commission will also publish the equity
security's title of class, CUSIP, and FIGI (if a FIGI has been
assigned). These data points will identify the equity security for
which information is being reported.
    With regard to Proposed Form SHO's Information Table 1, entitled
``Manager's Gross Short Position Information'' (discussed above), the
Commission will publish, as an aggregated number of shares across all
reporting Managers, the number of shares of the reported equity
security that represent the Managers' gross short position at the close
of the last settlement date of the calendar month, as well as the
corresponding US dollar value of this reported gross short position.
The Commission will also publish a summary of the Managers' reported
hedging information with regard to the reported equity security.
Specifically, the Commission will identify the percentage of the
aggregate gross short position for a reported equity security that is
reported as being fully hedged, partially hedged, or not hedged.
    With regard to Proposed Form SHO's Information Table 2, entitled
``Daily Activity Affecting Manager's Gross Short Position during the
Reporting Period'' (discussed above), for each reported equity
security, for each individual settlement date during the calendar
month, the Commission will publish the ``net'' activity in the reported
equity security, as aggregated across all reporting Managers. The net
activity will be expressed by a single identified number of shares of
the reported equity security, and will be determined by offsetting the
purchase and sale activity that is reported by Managers in Columns 7
through 16 of Information Table 2. A positive number of shares
identified would indicate net purchase activity in the equity security
on the specified settlement date, while a negative number of shares
identified would indicate net sale activity.
    The aggregated information published would provide market
participants with additional information beyond what is currently
publicly available, specifically information regarding the scope of
activity during the calendar month by reporting Managers as a group.
Furthermore, by providing the aggregated security-level information
through EDGAR in a structured, machine-readable data language, the
Commission would allow investors and other public data users to
download the aggregated information directly. In each case, the data
could then be analyzed using various tools and applications, thus
potentially removing the need to pay a third-party vendor to search
for, extract, and structure the published information.

D. Reporting Thresholds

1. Threshold Structure
    Setting a reporting threshold level involves a tradeoff between the
interests of gathering and disclosing data, such as short sale related
data, and potential costs to reporting Managers.\76\ A reporting
threshold that is set too low could impose substantial compliance costs
on Managers that tend to have small short positions or are low volume
short sellers, and may only provide incrementally meaningful short sale
related data. A reporting threshold that is set too high might limit
the amount of data provided to regulators and industry participants,
and incentivize Managers to develop trading strategies

designed to avoid having to report their short sale related data
altogether.\77\
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    \76\ These costs to reporting Managers include, for example,
compliance costs of reporting; costs associated with retaliation to
short sellers, including an increased risk of short squeezes; and
market participants reducing their short positions to avoid
disclosure, which can have negative impacts on price discovery and
market efficiency.
    \77\ With regard to reporting thresholds, research has shown
that some short sellers in Europe, for example, avoid crossing the
stated percentage reporting threshold of 0.5% of shares outstanding
by keeping their short positions just under such reporting
threshold. See Eur. Sec. and Mkts. Auth., ESMA Report on Trends,
Risks and Vulnerabilities No. 1, 62-63 (2018), available at https://www.esma.europa.eu/sites/default/files/library/esma50-165-538_report_on_trends_risks_and_vulnerabilities_no.1_2018.pdf.
---------------------------------------------------------------------------

    The Reporting Thresholds are designed to require the filing of
Proposed Form SHO by Managers with substantial gross short positions.
The Reporting Thresholds are structured to make it more difficult for
Managers with substantial gross short positions to avoid disclosure by
trading below a Reporting Threshold, particularly with lower market
capitalization securities. The Reporting Thresholds are based on a
Manager's gross short position in the equity security itself, and do
not include the calculation of derivative positions or long positions
in the equity security. While the proposed rule does not include
derivatives as part of the threshold calculation, the Commission is
proposing to require Managers to report certain changes in their gross
equity short positions derived from acquiring or selling the equity in
connection with derivative activity, such as exercising an option. The
Commission believes this proposed approach balances Managers' reporting
costs with the utility such data provides to regulators.
    Threshold A. The Commission is proposing a two-pronged reporting
threshold structure with regard to any equity security of an issuer
that is registered pursuant to section 12 of the Exchange Act or for
which the issuer is required to file reports pursuant to section 15(d)
of the Exchange Act (a reporting company issuer). Specifically,
Threshold A, identified in Proposed Rule 13f-2(a), is focused on
Managers that, with regard to each equity security of a reporting
company issuer in which the Manager and all accounts over which the
Manager or any person under the Manager's control has investment
discretion, collectively have either (1) a gross short position in the
equity security with a US dollar value of $10 million or more at the
close of regular trading hours on any settlement date during the
calendar month, or (2) a 2.5% or higher monthly average gross short
position as a percentage of shares outstanding in the equity security.
    This two-pronged approach measures the size of the short position
in question relative to both a monetary dollar amount and the number of
shares outstanding. This approach is designed to ensure that a
substantial short position in either a small capitalization security or
a large capitalization security could potentially trigger a reporting
obligation under Threshold A. As noted above, the Reporting Thresholds
are based on a Manager's gross short position in the equity security
itself, and do not include the calculation of derivative positions or
long positions in the equity security. The Commission believes that
this is a simple and straight forward approach for Managers to
determine whether they meet Threshold A that avoids any additional cost
and complexity of including derivative or long positions.
    The Commission believes that requiring reporting of short positions
with a US dollar value of $10 million or more would capture Managers
with substantial short positions, even if such positions are relatively
small compared to the market capitalization of the issuer. To determine
whether this dollar threshold is met, a Manager will be required to
determine its end of day gross short position on each settlement date
during the calendar month and multiply that figure by the closing price
at the close of regular trading hours on the relevant settlement date.
    The Commission believes that using end of day gross short position,
rather than an intraday high gross short position, for example, would
help to prevent Managers engaged in intraday market making strategies
(who do not typically carry large overnight short positions) from
triggering this $10 million threshold.\78\ The use of the end of day
position on any settlement date as opposed to the last settlement date
of the month is designed to prevent a scenario where, for example, a
Manager engages in trading activity on the last day of the month to
avoid reporting altogether.
---------------------------------------------------------------------------

    \78\ See, e.g., Albert J. Menkveld, High frequency trading and
the new market makers, 16 J. Fin. Mkts., 712, 712-740 (2013).
---------------------------------------------------------------------------

    In addition, the Commission believes that requiring the reporting
of short positions with a 2.5% or higher monthly average gross short
position would capture Managers with gross short positions that are
large relative to the size of the issuer, and could therefore have a
significant impact on the issuer. Using a monthly average gross short
position, rather than an end of month gross short position, is also
designed to prevent the scenario where a Manager engages in trading
activity on the last day of the month in order to avoid reporting. To
determine whether this percentage threshold is met, a Manager shall (a)
identify its gross short position in the equity security at the close
of each settlement date during the calendar month, and divide that
figure by the number of shares outstanding in such security at the
close of that settlement date, and (b) add up the daily percentages
during the calendar month as determined in (a) and divide that total by
the number of settlement dates during the calendar month of the
reporting period. The number of shares outstanding of the equity
security shall be determined by reference to an issuer's most recent
annual or quarterly report, and any subsequent update thereto, filed
with the Commission.
    Threshold B. The Commission is separately proposing a single-
pronged reporting threshold structure with regard to any equity
security of a non-reporting company issuer. Specifically, Threshold B,
identified in Proposed Rule 13f-2(a), is focused on Managers that, with
regard to each equity security of a non-reporting company issuer in
which the Manager and all accounts over which the Manager or any person
under the Manager's control has investment discretion, collectively
have a gross short position in the security with a US dollar value of
$500,000 or more at the close of regular trading hours on any
settlement date during the calendar month.
    With regard to an equity security of a non-reporting company
issuer, the Commission understands that the number of total shares
outstanding may not be readily and consistently accessible to Managers.
As such, the Commission has determined that a single-pronged reporting
threshold based on a set dollar value is appropriate for equity
securities of non-reporting company issuers. The Commission believes
that this approach is an efficient way for Managers to determine
whether they meet Threshold B that avoids the potential additional cost
and complexity of locating total number of shares outstanding for a
non-reporting company issuer that might be difficult, or impossible, to
locate.
    Like Threshold A, Threshold B is based on a Manager's gross short
position in the equity security itself, and does not include the
calculation of derivative positions or long positions in the equity
security. As noted above, the Commission believes that this is a simple
and straight forward approach for Managers to determine whether they
meet Threshold B that avoids any additional cost and complexity of
including derivative or long positions.
    The Commission believes that requiring reporting of short positions
with a US dollar value of $500,000 or

more would capture Managers with substantial short positions in an
equity security of a non-reporting company issuer, even if such
positions are relatively small compared to the market capitalization of
the issuer. To determine whether this dollar threshold is met, a
Manager will be required to determine its end of day gross short
position on each settlement date during the calendar month and multiply
that figure by the closing price at the close of regular trading hours
on the relevant settlement date. In circumstances where such closing
price is not available, a Manager would be required to use the price at
which it last purchased or sold any share of that security, which would
be readily available to the Manager, in determining whether Threshold B
is met.
    The Commission believes that using end of day gross short position,
rather than an intraday high gross short position, for example, would
help to prevent market participants engaged in intraday market making
strategies (who do not typically carry large overnight short positions)
from triggering this $500,000 threshold. The use of the end of day
position on any settlement date as opposed to the last settlement date
of the month is designed to prevent a scenario where, for example, a
Manager engages in trading activity on the last day of the month to
avoid reporting altogether.
2. Determination of Reporting Threshold
    As discussed in this section, the Reporting Thresholds are based on
comment letters and analysis of Form SH data collected under Rule 10a-
3T. Rule 10a-3T required reporting of short positions that were either
greater than 0.25% of shares outstanding or $10 million in fair market
value. Comment letters to Rule 10a-3T generally concurred with the
dollar reporting obligation but expressed concerns that the percentage
obligation was too low. Suggestions for a percentage reporting
obligation ranged from 1% to 5% of shares outstanding.\79\
---------------------------------------------------------------------------

    \79\ See, e.g., Seward & Kissel LLP, available at https://www.sec.gov/comments/s7-31-08/s73108-43.pdf, Investment Adviser
Association, available at https://www.sec.gov/comments/s7-31-08/s73108-38.pdf, and Securities Industry and Financial Markets
Association, available at https://www.sec.gov/comments/s7-31-08/s73108-52.pdf.
---------------------------------------------------------------------------

    Threshold A. Based on analysis of Form SH data,\80\ the Commission
believes that a two-pronged threshold of $10 million or 2.5% of shares
outstanding would provide significant coverage of the dollar value of
positions, while limiting the reporting burden on Managers. Panel A of
Table I shows the Reporting Threshold would have captured 89% of the
dollar value of the positions reported by Managers who were required to
report Form SH; Panel B shows that it would have captured 346
Managers.\81\ The reporting burden would not significantly increase
compared to slightly higher threshold levels, while the value of the
positions potentially collected would drop significantly for higher
dollar threshold levels.
---------------------------------------------------------------------------

    \80\ To perform this analysis, Form SH data on daily short
positions for November 2008 through February 2009 were filtered to
remove duplicate and missing observations, weekend or holiday
observations, and positions below the de minimis reporting
threshold. They were matched to Center for Research in Security
Prices, LLC for daily closing prices and Compustat for daily shares
outstanding. The Commission recognizes that the results of an
analysis of Form SH data may not fully reflect the status quo but
that the analysis uses appropriate data currently available to the
Commission for this use. The Form SH data covered a limited time
period, may not be comparable because of subsequent market changes,
and did not represent ``normal'' market conditions as the trading
took place during and after the 2008 financial crisis. Additionally,
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 report.
Further, we believe that many aggregated short positions that we
calculated using Form SH data likely overestimate the actual number
of shares that were short. This is because in many instances the
size of a short position calculated using Form SH data was greater
than 100% of FINRA short interest for the same stock on the same
date. This difference could potentially be explained if arranged
financing, which is not included in the definition of FINRA short
interest, was a large fraction of aggregated Form SH short
positions. According to FINRA, ``arranged financing programs
(sometimes called `enhanced lending' or `short arranging products')
[describe an arrangement in] which a customer [ ] borrow[s] shares
from [its broker's] domestic or foreign affiliate and [then] use[s]
those shares to close out a short position in the customer's
account.'' See FINRA Notice 21-19 available at https://www.finra.org/sites/default/files/2021-06/Regulatory-Notice-21-19.pdf. In addition, this difference could also be explained if
affiliated Managers reported the same short positions on multiple
Form SH filings. Despite the potential overestimate, the Commission
believes that the analysis provides information informative for
selecting the Reporting Threshold because it involves the same type
of entities (Managers) and the same activity (short positions).
Intraday short selling activity could not be examined because the
data field for ``Number of Securities Sold Short'' was populated in
only 7% of observations after filters were applied, likely because
most short selling volumes were below the threshold.
    \81\ Although they were not required to, some Managers submitted
data for positions below the 10a-3T reporting threshold. These were
excluded from the analysis. See Part VIII.C.3.v for additional
discussion. See also infra notes 365-66 and accompanying text.

                            Table I--Various Threshold Levels for Monthly Average Positions and Monthly Maximum Dollar Value
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Greater than
              Greater than (%)               -----------------------------------------------------------------------------------------------------------
                                                  $0          $1M         $5M        $10M        $15M        $20M        $25M        $50M        $100M
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                      Panel A: Percentage of Position Dollar Value
--------------------------------------------------------------------------------------------------------------------------------------------------------
0.0.........................................         100         100         100         100         100         100         100         100         100
0.25........................................         100         100         100         100          98          96          94          88          82
0.5.........................................         100         100          98          95          92          88          85          76          68
1.0.........................................         100         100          96          91          85          81          77          65          54
1.5.........................................         100         100          96          90          83          78          74          60          48
2.0.........................................         100         100          95          90          83          77          72          58          45
2.5.........................................         100         100          95          89          82          77          72          56          43
3.0.........................................         100         100          95          89          82          76          71          55          42
4.0.........................................         100         100          95          89          82          76          71          54          40
5.0.........................................         100         100          95          89          82          76          71          54          39
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                       Panel B: Number of Managers by Position Percentage or Position Dollar Value
--------------------------------------------------------------------------------------------------------------------------------------------------------
0.0.........................................         442         442         442         442         442         442         442         442         442
0.25........................................         442         442         442         442         435         429         425         421         419
0.5.........................................         442         435         406         402         388         380         373         360         355
1.0.........................................         442         433         384         373         348         335         320         294         281
1.5.........................................         442         432         377         362         333         314         293         255         232

2.0.........................................         442         432         374         350         319         297         275         229         202
2.5.........................................         442         432         373         346         312         286         261         210         178
3.0.........................................         442         432         373         345         310         282         255         200         165
4.0.........................................         442         432         372         344         306         277         247         184         142
5.0.........................................         442         432         372         343         303         274         243         174         127
--------------------------------------------------------------------------------------------------------------------------------------------------------
This table reports the coverage of Managers reporting at different threshold levels. Data are from Form SH filings for a 4 month period from 2008 to
  2009. The ``Greater than'' levels are cumulative. Entries are calculated as a percentage of Manager/stock observations for the row or column criteria.
  Rows are monthly average positions as a percentage of shares outstanding and columns are monthly maximum unscaled dollar value of positions as
  determined by the daily closing price in Center for Research in Security Prices, LLC (CRSP). Values in Panel A are average percentages of total
  position dollar value. Values in Panel B are the average number of Managers reporting.

    Threshold B. Based on analysis of OTC Markets data,\82\ the
Commission believes that a threshold of $500,000 would provide
significant coverage of the dollar value of positions, while limiting
the reporting burden on Managers. The $500,000 threshold is also
similar to the median dollar value of 2.5% of the market capitalization
of OTC stocks for which we were able to obtain total shares
outstanding. The median for this set of stocks was approximately
$460,000. The proposed threshold of $500,000 is the rounded median and
is likely greater than 2.5% of the market capitalization of the equity
securities of non-reporting company issuers, assuming such equities
have lower market capitalization than that of reporting company
issuers. The Commission believes that this level provides a reasonable
estimate in the absence of data on the market capitalization for equity
securities of non-reporting company issuers. Table II shows Threshold B
would have captured over 99% of the dollar value of short positions and
15% to 24% of Managers, assuming 1 to 3 Managers had equivalently-sized
short positions in each stock.
---------------------------------------------------------------------------

    \82\ This analysis was performed using data from OTC Markets
Group Inc. available through Wharton Research Data Services, https://wrds-www.wharton.upenn.edu/pages/about/data-vendors/otc-markets-group/. The data were filtered to only include equities that had a
closing price and short interest on September 30, 2020.
Approximately 13% of the data did not have total shares outstanding
available, representing approximately 14% of the dollar value of
short interest. We use these data without shares outstanding as a
proxy for non-reporting issuers. The Commission used September 2020
because that is the most recent date in which a dataset containing
total shares outstanding for a broad set of OTC equities was
available.

                                Table II--Various Threshold Levels for OTC Stocks
----------------------------------------------------------------------------------------------------------------
                                                                % of Short Positions (1  % of Short Positions (3
             Greater than               % of $ Short Interest      Manager per stock)      Managers per stock)
----------------------------------------------------------------------------------------------------------------
$50K.................................                    99.91                    48.08                    35.47
$100K................................                    99.82                    40.38                    27.56
$250K................................                    99.52                    29.70                    21.58
$500K................................                    99.17                    23.72                    15.60
$1M..................................                    98.65                    19.66                    13.03
$5M..................................                    95.30                    10.90                     6.84
$10M.................................                    92.66                     8.76                     3.63
----------------------------------------------------------------------------------------------------------------