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

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

    As the Commission acknowledged in the Proposing Release, and
continues to acknowledge, the information required under former Form SH
differs from that required under Form SHO. However, the Commission
continues to believe that Form SH is an appropriate basis for Form SHO
burden estimates. Form SH involved the same type of entities (Managers)
and the same activity (short positions) as Form SHO. While recognizing
that the information required under former Form SH differs from that
required under Form SHO, the Commission continues to believe that both
forms require the reporting of short sale-related data of similar depth
and complexity.\444\ Notably, Rule 13f-2 requires monthly reporting if
certain conditions are met, as opposed to the weekly reporting required
by Form SH for Managers that effected short sales within the preceding
week,\445\ which is anticipated to decrease the overall volume of
reports required to be filed by Managers under Form SHO in comparison
to Form SH.
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    \444\ Under Form SH, Managers who met the applicable threshold
and effected a short sale in a section 13(f) security in the
preceding week were required to file a report identifying the open
short position, closing short position, largest intraday short
position, and the time of the largest intraday short position, for
that security during each calendar day of the prior week. See
Emergency Order Pursuant to Section 12(k)(2) of the Securities
Exchange Act of 1934 Taking Temporary Action To Respond to Market
Developments, Exchange Act Release No. 58591 (Sept. 18, 2008), 73 FR
55175, 55176 (Sept. 24, 2008).
    \445\ See id.
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    As such, and since the Commission did not receive comments citing
alternative sources of data that commenters believed would result in
more accurate Form SHO burden estimates, the Commission continues to
believe that Form SH is an appropriate basis for which to estimate Form
SHO burdens. The Commission continues to estimate that the burden
associated with preparing and filing Form SHO in EDGAR will be
approximately 20 hours per filing, consistent with the corresponding
burdens for former Form SH, and consistent with estimates in the
Proposing Release.\446\ Accordingly, the Commission estimates that the
burden associated with preparing and filing Form SHO across all
managers collectively is approximately 240,000 hours per year.\447\
---------------------------------------------------------------------------

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

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

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

    \449\ The $251.36 wage rate reflects current estimates of the
blended hourly rate for an in-house compliance attorney ($425), a
senior programmer ($386) and in-house compliance clerk ($82).
$251.36 is based on the following calculation: (($425) + ((($386 +
$82) / 2) x 10)) / 11) = $251.36. The estimated proportion of
compliance attorney (1/11th) to senior programmer and in-house
compliance clerk (10/11th) time burden is based on commenter input
and computation of the estimated burden for the filing of Form 13F-
HR. See Electronic Submission of Applications for Orders, Exchange
Act Release No. 93518 (Nov. 4, 2021), 86 FR 64839 (Nov. 19, 2021) at
64860-61 (``Electronic Submission of Applications for Orders''). The
$425 per hour and $386 per hour figures for a compliance attorney
and a senior programmer, respectively, are based on salary
information for the securities industry compiled by the Securities
Industry and Financial Markets Association's Office Salaries in the
Securities Industry 2013 (``SIFMA Report''), modified by Commission
staff to account for an 1,800-hour work year and inflation, and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits, and overhead. The $82 per hour figure for a compliance
clerk is based on salary information from the SIFMA Report, modified
by Commission staff to account for an 1,800-hour work-year and
inflation, and multiplied by 2.93 to account for bonuses, firm size,
employee benefits, and overhead. See also Form PF; Event Reporting
for Large Hedge Fund Advisers and Private Equity Fund Advisers;
Requirements for Large Private Equity Fund Adviser Reporting,
Release No. IA-6297, 88 FR 38146, 38195-98 (June 12, 2023).
    \450\ 20 hours per filing x 1,000 filings by Managers each month
x 12 months x $251.36 per hour = $60,326,400.
    \451\ See Electronic Submission of Applications for Orders, 86
FR 64859 (stating that ``[c]ommenters stated that the advances in
technology have made the process of completing and filing Form 13F
highly automated, reducing the time and external costs to managers
in complying with this requirement.'').
---------------------------------------------------------------------------

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

    \452\ Most Managers will be familiar with other EDGAR Form-
specific XML data languages, the use of which is required for the
filing (by Managers that exercise investment discretion with respect
to accounts holding 13(f) securities having an aggregate fair market
value on the last trading day of any month of any calendar year of
at least $100 million) of Form 13F. See Frequently Asked Questions
About 13F, available at https://www.sec.gov/divisions/investment/13ffaq.htm. The Commission estimates that all of the 1,000 Managers
estimated to file Form SHO each month will do so directly using the
structured XML-based data language rather than the fillable web form
provided by EDGAR.
    \453\ See XBRL Letter; Comment from An Investor (Apr. 4, 2022),
available at https://www.sec.gov/comments/s7-08-22/s70822-20122297-278355.htm. Comments regarding the use of XML are addressed in Part
II.A.4.
    \454\ The 2-hour estimated burden is consistent with similar
estimates for the use of structured XML data formats for the filing
of Form N-CR and Form 24F-2. See Money Market Fund Reforms; Form PF
Reporting Requirements for Large Liquidity Fund Advisers; Technical
Amendments to Form N-CSR and Form N-1A, Exchange Act Release No. 34-
97876 (July 12, 2023), 88 FR 51404, 51514 (Aug. 3, 2023); see also
Securities Offering Reform for Closed-End Investment Companies,
Exchange Act Release No. 88606 (Apr. 8, 2020), 85 FR 33290, 33329
n.439 (June 1, 2020) (stating that ``[w]e assume that the burden of
tagging Form 24F-2 in a structured XML format would be 2 hours for
each filing.'').
    \455\ The $386 per hour figure for a senior programmer is based
on salary information from the SIFMA Report. 2 hours x $386 = $772.
    \456\ 2 hours per filing x $386 per hour x 1,000 filings each
month x 12 months = $9,264,000.
---------------------------------------------------------------------------

    Also consistent with the estimates in the Proposing Release, the
Commission estimates that approximately 3.5 percent of the Managers
that file Form SHO each month will also file an amended Form SHO,
resulting in an additional burden and cost for an estimated 35 Managers
each month.\457\ The additional burden could take up to the original 20
hours to process and file, as it will require the filing of an entirely
new Form SHO.\458\ The associated wage rate for filing the amended Form
SHO is consistent with the cost of expertise required to file the
original Form SHO, estimated to be $251.36 per hour.\459\ The
Commission also estimates that each amended Form SHO will be filed
directly using a structured XML-based data language, resulting in a
corresponding additional burden of 2 hours of work by a programmer per
amended Form SHO filing. The Commission did not receive any comments
regarding the estimated percentage of Managers that will file an
amended Form SHO each month, or the costs and burden estimates of
filing an amended Form SHO.
---------------------------------------------------------------------------

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

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

    Consistent with estimates in the Proposing Release, in addition to
the costs associated with the reporting burden, Managers could incur an
initial technology-related burden of 325 hours, at an hourly estimated
wage rate of $366,\460\ for an estimated total cost of $118,950 per
Manager,\461\ to update their current systems to capture the required
information and automate and facilitate the completion and filing of
Form SHO. The Commission generally believes that the type of Managers
that will trigger a Reporting Threshold will likely have sophisticated
technologies and be able to implement systems to help automate the
reporting requirements of Rule 13f-2. As discussed in the Proposing
Release, the estimate of 325 initial technology-related burden hours
for Managers filing Form SHO was based on the estimated initial filing
burden (325 hours) for large hedge fund advisers to fulfill amendments
to the reporting requirements for Form PF,\462\ and is similar to the
initial technological infrastructure-related burden (355 hours) for the
proposed security-based swap position reporting requirements of
proposed Rule 10B-1(a).\463\ While Managers most likely have other
existing reporting obligations, the Commission recognizes that Managers
may need to update their systems to ensure timely and accurate filing
of the specific information required under Form SHO.
---------------------------------------------------------------------------

    \460\ The Commission estimates that, of a total estimated burden
of 325 hours, approximately 195 hours will most likely be performed
by compliance professionals and 130 hours will most likely be
performed by programmers working on system configuration and
reporting automation. Of the work performed by compliance
professionals, we anticipate that it will be performed equally by a
compliance manager at a cost of $360 per hour and a senior risk
management specialist at a cost of $416 per hour. Of the work
performed by programmers, we anticipate that it will be performed
equally by a senior programmer at a cost of $386 per hour and a
programmer analyst at a cost of $280 per hour. ((($360 per hour x
0.5) + ($416 per hour x 0.5)) x 195 hours) + ((($386 per hour x 0.5)
+ ($280 per hour x 0.5)) x 130 hours) / 325 = $366. See Form PF;
Event Reporting for Large Hedge Fund Advisers and Private Equity
Fund Advisers; Requirements for Large Private Equity Fund Adviser
Reporting, Release No. IA-6297 (May 3, 2023), 88 FR 38146, 38195
(June 12, 2023). See also SIFMA Report.
    \461\ 325 initial technology-related burden hours x $366 per
hour = $118,950.
    \462\ See Form PF; Event Reporting for Large Hedge Fund Advisers
and Private Equity Fund Advisers; Requirements for Large Private
Equity Fund Adviser Reporting, Release No. IA-6297 (May 3, 2023), 88
FR 38146, 38195 (June 12, 2023). (The Commission recognizes that
adopted Rule 13f-2 will cover persons other than large hedge fund
advisers, and that large hedge fund advisers may generally be more
accustomed to existing Commission reporting requirements than some
other persons that will be covered by adopted Rule 13f-2.).
    \463\ See Rule 10B-1 Proposal.
---------------------------------------------------------------------------

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

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

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

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

C. Burdens and Costs Associated With the Amendment to CAT

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

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

2. Use of Information
    As discussed above, reporting of certain short sale information to
the CAT provides valuable information for the Commission and other
regulators in investigations and reconstruction of market events.
Requiring Industry Members to identify short sales for which they are
claiming the BFMM locate exception will provide the Commission staff
and other regulators an additional tool to determine whether such
activity qualifies for the exception, or instead is indicative of, for
example, proprietary trading instead of bona fide market making.
3. Respondents
a. National Securities Exchanges and National Securities Associations
    The respondents for the amendment to CAT include the 25 Plan
Participants (the 24 national securities exchanges and one national
securities association (FINRA)).\468\
---------------------------------------------------------------------------

    \468\ The Participants are: BOX Options Exchange LLC; Cboe BZX
Exchange, Inc.; Cboe BYX Exchange, Inc.; Cboe C2 Exchange, Inc.;
Cboe EDGA Exchange, Inc.; Cboe EDGX, Inc.; Cboe Exchange, Inc.;
Financial Industry Regulatory Authority, Inc.; Investors Exchange
Inc.; Long-Term Stock Exchange, Inc.; MEMX, LLC; Miami International
Securities Exchange LLC; MIAX PEARL, LLC; MIAX Emerald, LLC; NASDAQ
BX, Inc.; NASDAQ GEMX, LLC; NASDAQ ISE, LLC; NASDAQ MRX, LLC; NASDAQ
PHLX LLC; The NASDAQ Stock Market LLC; New York Stock Exchange LLC;
NYSE MKT LLC; and NYSE Arca, Inc., NYSE Chicago Stock Exchange,
Inc., NYSE National, Inc.

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

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

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

4. Total Initial and Annual Reporting and Recordkeeping Burdens
    The Commission received comments regarding the costs and burdens of
the proposed amendments to CAT generally \473\ but did not receive
specific comments regarding the Proposing Release's PRA estimates
related to the proposed CAT amendments. General comments regarding
costs and burdens of the proposed CAT amendments are addressed in Part
IV. The Commission's total burden estimates in this Paperwork Reduction
Act section reflect the total burden on all Participants and Industry
Members. The burden estimates per Participant or Industry Member are
intended to reflect the average paperwork burden for each Participant
or Industry Member, but some Participants or Industry Members may
experience more burden than the Commission's estimates, while others
may experience less. The burden figures set forth in this section are
based on a variety of sources, including Commission staff's experience
with the development of the CAT and estimated burdens for other
rulemakings. Because the CAT NMS Plan applies to and obligates the
Participants and not the Plan Processor, the Commission believes it is
appropriate to estimate the Participants' external cost burden based on
the estimated Plan Processor staff hours required to comply with the
proposed obligations.\474\ Put another way, pursuant to the Amendment
to the CAT NMS Plan, the Participants will be obligated to make changes
to the CAT, but the CAT is managed by the Plan Processor pursuant to
contractual agreement, and so the Participants will be required to
engage the Plan Processor to make any required changes.
---------------------------------------------------------------------------

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

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

    \475\ The estimated 300 hours of Plan Processor staff time
include 200 hours by a Senior Programmer, 40 hours by a Senior
Database Administrator, 40 hours for a Senior Business Analyst, and
20 hours for an Attorney. The Commission estimates that the initial,
one-time external expense for Participants will be $113,800 =
(Senior Programmer for 200 hours at $386 an hour = $77,200) +
(Senior Database Administrator for 40 hours at $379 an hour =
$15,160) + (Senior Business Analyst for 40 hours at $305 an hour =
$12,200) + (Attorney for 20 hours at $462 an hour = $9,240).
---------------------------------------------------------------------------

    The Commission continues to believe that other Paperwork Reduction
Act burdens that will apply to the Participants, including ongoing
burdens and external expenses for the Plan Processor's acceptance and
processing of the new data elements, are already accounted for in the
existing Paperwork Reduction Act estimate that applies for Rule 613 and
the CAT NMS Plan Approval Order, submitted under OMB number 3235-
0671.\476\ The prior Paperwork Reduction Act analysis incorporates any
other potential Paperwork Reduction Act burdens for the Participants,
because the existing Paperwork Reduction Act analysis accounts for
initial and ongoing costs for, among other things, operating and
maintaining the Central Repository, including the cost of systems and
connectivity upgrades or changes necessary to receive and consolidate
the reported order and execution information from Participants and
their members, the cost to store data and make it available to
regulators, the cost of monitoring the required validation parameters,
and management of the Central Repository.\477\ In addition, the
Commission anticipates that each exchange and national securities
association will file one Form 19b-4 filing to implement updated
Compliance Rules. While such filings may impose certain costs on the
exchanges, those burdens are already accounted for in the comprehensive
Paperwork Reduction Act Information Collection submission for Form 19b-
4.\478\ The Commission does not expect the baseline number of 19b-4
filings to increase as a result of the Amendment to CAT, nor does it
believe that the incremental costs exceed those costs used to arrive at
the average costs and/

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

    \476\ See CAT NMS Plan Approval Order, 81 FR 84911-43; see also
OMB Control No. 3235-0671, 85 FR 37721 (June 23, 2020) (notice of
submission of request for approval of extension).
    \477\ See CAT NMS Plan Approval Order, 81 FR 84918.
    \478\ See OMB Control No. 3235-0045 (Aug. 19, 2016), 81 FR 57946
(Aug. 24, 2016) (Request to OMB for Extension of Rule 19b-4 and Form
19b-4 PRA).
---------------------------------------------------------------------------

b. Broker-Dealer Burdens
    The Commission anticipates that certain Industry Members will have
initial, one-time burdens and costs relating to the Amendment to CAT,
to update systems and processes as necessary to capture and report use
of the BFMM locate exception to CAT. The Commission has estimated these
initial burdens and costs below.
    The Amendment to CAT will impose an ongoing annual burden relating
to, among other things, personnel time to monitor each broker-dealer's
reporting of the required data and the maintenance of the systems to
report the required data and implementing changes to trading systems
that might result in additional reports to the Central Repository.
However, the Commission estimates that the ongoing burden imposed by
the Amendment to CAT related to reporting to the CAT is already
accounted for in the existing information collections burdens
associated with Rule 613 and the CAT NMS Plan Approval Order submitted
under OMB number 3235-0671.\479\ Specifically, the CAT NMS Plan
Approval Order takes into account requirements on broker-dealer members
to comply with the CAT NMS Plan, including the requirement to maintain
the systems necessary to collect and transmit information to the
Central Repository,\480\ provides aggregate burden hour and external
cost estimates for the broker-dealer data collection and reporting
requirement of Rule 613, and did not quantify the burden hours or
external cost estimates for each individual component of the broker-
dealer's data collection and reporting responsibility.\481\ The
Amendment to CAT will not require any Industry Member to submit new
reports to the CAT, but to add limited additional information to
existing reports in certain circumstances for certain Industry Members.
The Commission does not believe that this will alter the estimates of
ongoing burden and external costs in the existing Paperwork Reduction
Act Analysis and the ongoing burden associated with these new
collection requirements are accounted for in the existing Paperwork
Reduction Act Analysis.
---------------------------------------------------------------------------

    \479\ See CAT NMS Plan Approval Order, 81 FR 84911-43. While
there is no recordkeeping requirement related to reporting use of
the BFMM locate exception, brokers or dealers should be prepared to
monitor for compliance with conditions and maintain records
documenting such compliance. See Regulation SHO Adopting Release,
48011 n.27 (``As with any rule, broker-dealers relying on [an]
exception should be prepared to monitor for compliance with its
conditions, and maintain records documenting such compliance.'').
There would be a minimal additional ongoing burden for such brokers
or dealers to record that they have determined such eligibility for
each transaction reported to CAT.
    \480\ See, e.g., CAT NMS Plan Approval Order, 81 FR 84930.
    \481\ See CAT NMS Plan Approval Order, 81 FR 84930.
---------------------------------------------------------------------------

    The Amendment to CAT will impose additional burdens on Industry
Members that trade equity securities and rely upon or plan to rely upon
the BFMM locate exception. Based on an analysis of data reported to the
CAT in May 2023, and specifically the identification of all unique CAT
Reporters that were identified as equity market makers (including
different classes of market makers such as ``designated'' or ``lead''
market makers, and secondary liquidity providers), approximately 100
CAT Reporters will be subject to the new reporting obligation. Some
broker-dealers that rely upon this exception may retain records
regarding their eligibility for this exception for specific orders or
for orders originated by specific desks or units of their business.
    Regarding the obligation to report the BFMM locate exception
information to the CAT, the Commission believes that it is appropriate
to divide the 100 Industry Members, i.e., the CAT reporters listed as
equity market makers in CAT as of May 2023, that will be required to
report this information into two categories: (i) Industry Members that
report directly to the CAT; and (ii) Industry Members that use third-
party reporting agents for CAT reporting. For purposes of this
Paperwork Reduction Act analysis, the Commission estimates that of the
100 Industry Members that will be required to report this information,
58 Industry Members will be reporting this information directly to the
CAT, and 42 Industry Members will be reporting this information through
third-party reporting agents. The Commission believes this is a
reasonable estimation because the majority of Industry Members that are
identified as market makers in the CAT have developed their own systems
and technology to report directly to the CAT. The Commission believes
that the majority of market makers handle reporting themselves because
they likely submit a sufficient number of reportable events. The
Commission did not receive any comments regarding the estimated number
of broker-dealers that would be required to report for the original
receipt or origination of an order to sell an equity security whether
the order is a short sale effected by a market maker in connection with
bona-fide market making activities in the security for which the
exception in Rule 203(b)(2)(iii) of Regulation SHO is claimed, or about
the estimated proportion of insourcing vs. outsourcing Industry
Members. As such, the Commission is keeping the proportion of
insourcing vs. outsourcing Industry Members the same as in the
Proposing Release, but reflective of the estimated 100 broker-dealers
rather than 104 broker-dealers from the Proposing Release.
    The Commission estimates that the 58 insourcing Industry Members
that report directly to the CAT will incur an initial, aggregate, one-
time burden of 15,080 hours, or that each of these CAT Reporters will
incur an initial, average one-time burden of 260 hours, and that each
of these 58 insourcing Industry Members will incur an initial,
aggregate, one-time external expense of approximately $870,000 for
software and hardware to facilitate reporting of the new data elements
to CAT, or that each insourcing Industry Member will incur an initial,
average one-time external expense of approximately $15,000.\482\ The
Commission did not receive any comments about the cost and burden
estimates for insourcing Industry members.
---------------------------------------------------------------------------

    \482\ The Commission is basing this figure on the estimated
burden and external costs for a broker-dealer that handles orders
subject to customer specific disclosures required by Rule 606(b)(3)
to update their systems to capture the data and produce a report to
comply with Rule 606. See Disclosure of Order Handling Information,
Exchange Act Release No. 84528 (Nov. 2, 2018), 83 FR 58338, 58383
(Nov. 19, 2018). This is a reasonable proxy for estimating the
burdens and costs associated with updating data capture systems for
reporting purposes here because in both rulemakings broker-dealers
were required to update in-house data reported for pre-existing
reporting obligations.
---------------------------------------------------------------------------

    The Commission estimates that the 42 outsourcing Industry Members
that use third-party reporting agents to report to the CAT will incur
an initial, aggregate, one-time burden of 420 hours, or that each of
these outsourcing Industry Members will incur an initial, one-time
burden of 10 hours on average, and that these 42 outsourcing Industry
Members will incur an initial, aggregate, one-time external expense of
approximately $42,000 for software and hardware to facilitate reporting
use of the BFMM locate exception to CAT, or that each outsourcing
Industry Member will incur an initial, average one-time external
expense of approximately $1,000.\483\

The Commission did not receive any comments about the cost and burden
estimates for outsourcing Industry Members.
---------------------------------------------------------------------------

    \483\ The Commission believes that the estimated burden and
external costs for outsourcing Industry Members is reasonable
because the burden on individual Industry Members should be
significantly lower than insourcing Industry Members because of the
difference in how these firms report to the CAT. Outsourcing
Industry Members will not be required to change internal CAT
reporting systems, but instead will be responsible for making any
updates necessary for CAT reporting agents to report this
information to the CAT. The outsourcing Industry Members will have
external costs associated with paying CAT reporting agents for any
additional fees relating to the change, but because CAT reporting
agents can report on behalf of numerous outsourcing Industry Members
at the same time, the costs of any updates to their systems can be
distributed amongst outsourcing Industry Members.
---------------------------------------------------------------------------

    As discussed above, the Commission continues to believe that the
ongoing burden associated with reporting to the CAT is already
accounted for in the existing information collections burdens
associated with Rule 613 and the CAT NMS Plan Approval Order submitted
under OMB number 3235-0671.\484\ Because this information is already
collected and maintained by market makers that engage in equity trading
and claim the exception pursuant to 17 CFR 240.17a-3 (``Rule 17a-3 of
the Exchange Act''), there is no new ongoing burden associated with
collecting or recording the information necessary to effectuate CAT
reporting of this new element.
---------------------------------------------------------------------------

    \484\ See supra n.476.

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

D. Collection of Information Is Mandatory

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

E. Retention Period of Recordkeeping Requirement

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

F. Confidentiality

    As discussed above, Rule 13f-2 requires certain Managers to file
monthly in EDGAR, on Form SHO, certain short sale volume data and short
interest position data. However, the Commission will aggregate the
information reported by Managers on Form SHO prior to publication to
protect the identity of reporting Managers.
    To the extent that the Commission receives--through its examination
and oversight program, through an investigation, or by some other
means--records or disclosures from a broker-dealer that relate to or
arise from the Rule that are not publicly available, such information
will be kept confidential, subject to the provisions of applicable law.
    With respect to the Amendment to CAT, Rule 613, and the CAT NMS
Plan, information collected and electronically provided to the Central
Repository will only be available to the national securities exchanges,
national securities association, and the Commission. Further, the CAT
NMS Plan includes policies and procedures designed to ensure the
security and confidentiality of all information submitted to the
Central Repository, and to ensure that all SROs and their employees, as
well as all employees of the Central Repository, shall use appropriate
safeguards to ensure the confidentiality of such data. The Commission
will receive confidential information pursuant to this collection of
information, and such information will be kept confidential, subject to
the provisions of applicable law.

VIII. Economic Analysis

A. Introduction

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

    The Commission is mindful of the economic effects that may result
from the adoptions of Rule 13f-2, Form SHO, and the amendment to CAT,
including the benefits, costs, and the effects on efficiency,
competition, and capital

formation.\486\ The Commission recognizes that the adoptions might
impose significant compliance costs on market participants. Requiring
Managers \487\ to report large positions and short sale activity will
likely impose significant initial and ongoing costs on Managers. The
amendment to CAT will also impose compliance costs on broker-dealers.
The Commission is cognizant of these costs and has modified the
Proposals in a way that is intended to reduce the burdens incurred by
market participants without sacrificing the transparency that is
expected to result from the adoption of the Proposals. Modifications
from the proposed rule and form that are likely to reduce reporting
costs to Managers relative to the Proposals include: revising a key
reporting threshold based on a monthly average calculation instead of a
daily calculation, which is expected to reduce the number of reporting
entities; streamlining the reporting requirements of Forms SHO; not
adopting the ``buy to cover'' CAT reporting requirement; and not
adopting Rule 205. Overall, the Commission has sought to balance the
costs of the adoptions against the benefit to transparency that will be
provided to regulators and the public.
---------------------------------------------------------------------------

    \486\ Exchange Act section 3(f) requires the Commission, when it
is engaged in rulemaking pursuant to the Exchange Act and is
required to consider or determine whether an action is necessary or
appropriate in the public interest, to consider, in addition to the
protection of investors, whether the action would promote
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f). In addition, Exchange Act section 23(a)(2) requires the
Commission, when making rules pursuant to the Exchange Act, to
consider among other matters the impact that any such rule would
have on competition and not to adopt any rule that would impose a
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Exchange Act. See 15 U.S.C.
78w(a)(2).
    \487\ See infra note 506 and the accompanying discussion in the
text on the definition of ``Manager''.
---------------------------------------------------------------------------

    The Commission recognizes that the adoptions may lead to tradeoffs
in market quality, with a risk of negative effects on price efficiency.
A potential reduction in market manipulation through improved
regulatory oversight stemming from the adoptions may have a positive
impact on market quality. Furthermore, the adoptions will provide
market participants with improved transparency into short selling
activity, which might also lead to improved price efficiency. On the
other hand, Rule 13f-2 and the disclosures Form SHO requires will
increase the costs and risks of implementing large short positions,
which might reduce price efficiency by reducing short selling and the
positive effects of such short selling. Furthermore, public disclosure
of information resulting from Rule 13f-2 and Form SHO might facilitate
short squeezes, which in turn might also reduce market quality.\488\
---------------------------------------------------------------------------

    \488\ See infra Part VII.C.1. The Commission expects that for
many securities, a limited number of Manager positions may surpass
the reporting requirement thresholds. Given the eventual public
release of the aggregate position sizes, there is a risk that other
market participants will be able to potentially identify the
Managers with large short positions and orchestrate short squeeze
efforts against them (should they seem vulnerable against a short
squeeze). Nevertheless, the Commission maintains the ability of
identifying such behavior using CAT data, which could mitigate
initiation of such behavior.
---------------------------------------------------------------------------

    The Commission has considered the economic effects of the adoptions
and wherever possible, has quantified their likely economic effects.
The Commission is providing both a qualitative assessment and
quantified estimates of the adopted rule and CAT amendment's economic
effects where feasible. The Commission has received comments on the
Proposals and has addressed commenters' concerns with the economic
analysis. The Commission has incorporated data and other information to
assist it in the analysis of the economic effects of the adoptions.
However, as explained in more detail below, because the Commission does
not have, and in certain cases does not believe it can reasonably
obtain data that may inform the Commission on certain economic effects,
the Commission is unable to quantify certain economic effects. Further,
even in cases where the Commission has some data, quantification is not
practicable due to the number and type of assumptions necessary to
quantify certain economic effects, which render any such quantification
unreliable. Our inability to quantify certain costs, benefits, and
effects does not imply that the Commission believes such costs,
benefits, or effects are not significant.
    The Commission is adopting the Manager reporting and disclosures to
implement the statutory mandate of section 929X of the Dodd-Frank Act.
Accordingly, many of the costs and benefits of Rule 13f-2 and Form SHO
stem from the Commission's implementation of the statutory mandate. In
addition, the Commission is exercising discretion in its design and
implementation of Rule 13f-2 and Form SHO and recognizes that this
discretion has economic effects. Specifically, the Commission is using
this discretion to ensure that the disclosures are additive to
currently available data and will be useful to both market participants
and regulators, with a focus on addressing data limitations exposed by
market events, especially the market volatility in January 2021.
Additionally, the Commission is adopting a Proposed CAT amendment in
order to address such data limitations outside of the context of the
statutory mandate of section 929X.
    The Commission has access to several sources of data that provide
some short selling information, one of which is CAT. CAT data can be
used by regulators for regulatory purposes, including analysis and
reconstruction of broad-based market events; in market analysis in
support of regulatory decisions; in market surveillance,
investigations, and other enforcement activities. At times, these
regulatory functions can benefit from information on short sale
positions of market participants and how these positions change over
time. CAT does not include data that can be used to track such
positions, and as discussed further above, Commission staff experience
in reconstructing the events of January 2021 provided insights into the
challenges of using existing CAT data for this purpose. Other existing
data sources, including public data sources, are also limited for these
purposes as well as for informing members of the public and market
participants. Specifically, current data fail to distinguish the type
of trader engaged in short selling or identify individual short
positions, as well as the fluctuation in those positions, even for
regulatory use. Furthermore, current data do not track the use of the
bona fide market maker exemption when short selling without the
``locate''.\489\ The adopted rule will serve to increase the
Commission's awareness and understanding of short sale activity by
Managers with large short sale positions by requiring reporting of
their reliance on the bona fide marker maker locate exception. The
adopted amendment will serve the Commission in its regulatory capacity.
---------------------------------------------------------------------------

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

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

    Existing data sources fail to accurately represent economic short
positions of Managers due to several limitations.\490\ While FINRA
publishes aggregate short interest on a bimonthly basis, these data do
not reflect the timing with which short positions expand or shrink in
the two-week period between reporting dates.\491\ Some other data
sources report daily short sale volume \492\ without distinguishing
between short sale transactions that affect economic short positions
and short sale transactions meant for purposes such as liquidity
provision or hedging of long positions. As such, these existing short
volume data may not be combined with the bimonthly short interest data
to construct aggregate daily short positions of any particular Manager.
Securities lending data, bolstered by the recently adopted 17 CFR
240.10c-1a (``Exchange Act Rule 10c-1a''), will offer a clearer picture
of the relationship between short interest and securities being lent;
\493\ however, this does not allow the Commission or the public to
observe and monitor large short positions of Managers.\494\ No existing
data identify short positions of individual traders. Even though some
regulatory data, e.g., CAT data, identify short transactions of
individual traders, they may not be utilized to reconstruct short
positions because economic short positions may change in the absence of
any short sale transactions. Thus, the Commission is adding to the
existing data sources to further illuminate the short selling
market.\495\
---------------------------------------------------------------------------

    \490\ One commenter stated that the data reported from Form SHO
would only provide very limited additional relevant insight relative
to FINRA short interest data. See SBAI Letter at 2. The Commission
reiterates that Form SHO data are additive to existing data,
including FINRA short interest data. More specifically, publicly
released Form SHO data will indicate which equities have large short
positions held by institutional investment managers. This is
different from seeing large short interest, which may indicate many
smaller positions, including those held by retail investors. Large
short positions accumulated by Managers are often based on
fundamental research, in contrast to smaller positions which more
likely stem from hedging or arbitrage strategies. Therefore,
information on the magnitude of aggregate large short positions,
especially in relation to overall short interest, may highlight the
degree to which short sales of a particular security are
concentrated among Managers guided by fundamental research relative
to hedging or arbitrage strategies. Thus, Form SHO will provide
novel information on short sale behavior relative to other short
sale data sources.
    \491\ FINRA requires all members to report settled short
positions in equities of all customer and proprietary accounts twice
per month. According to the schedule it has adopted, FINRA publishes
the short sale data about a week after each reporting due date. See,
e.g., Short Interest Reporting, available at https://www.finra.org/filing-reporting/regulatory-filing-systems/short-interest.
    \492\ FINRA reports daily off-exchange short sale volume data
that aggregate, for each exchange-listed security, short sale
transactions reported to a FINRA TRF or ADF. See Short Sale Volume
Data, FINRA, available at https://www.finra.org/finra-data/browse-catalog/short-sale-volume-data. Registered exchanges also report
daily short sale volume aggregated at the security level, often
charging a fee. See, e.g., TAQ Group Short Sales & Short Volume, New
York Stock Exchange, available at https://www.nyse.com/market-data/historical/taq-nyse-group-short-sales.
    \493\ Specifically, one will be able to look at a particular
securities lending data to see if changes in short interest
correspond to many smaller lending transactions or a smaller
quantity of large securities loans, which may indicate market
sentiment towards the particular company. However, it is impossible
to discern whether these securities loans are being borrowed by
numerous short sellers or instead concentrated among a small number
of large short sellers. This information will be covered by Rule
13f-2 if the short seller(s) crosses the Report Thresholds. In
addition, unlike FINRA short interest data, Rule 13f-2 data will
incorporate Managers that are not FINRA members. Furthermore, while
fees are required to access exchanges' short volume and short
transaction data, market participants will not have to pay a fee to
view publicly released Form SHO data.
    \494\ Unlike the Commission, however, the public will observe
anonymized, aggregated data covering gross short sale positions of
Managers that exceed at least one of the Reporting Thresholds.
    \495\ One commenter stated that Form SHO data collected by the
Commission would not fully capture the short selling market. See
SBAI Letter at 3. The Commission has not stated that Form SHO data
provides a complete perspective of the short selling market.
However, Form SHO data will reveal large short positions of
Managers, which is not readily available from any other data source.
---------------------------------------------------------------------------

    These data limitations inhibit regulators from performing functions
such as market surveillance and market reconstruction. For example, the
Commission does not have regular access to information about Managers
who hold large short positions, even if those positions are held for a
long period of time. If the positions are sufficiently large and prices
move against the positions, the Commission currently cannot efficiently
assess the risk that these positions impose on the market more
broadly.\496\ Further, with existing data, the Commission may have
difficulty reconstructing significant market events, thereby inhibiting
the Commission from quickly understanding market events and providing
efficient market oversight.
---------------------------------------------------------------------------

    \496\ See infra Part VIII.C.1 for discussion of how the
Commission might use Form SHO data for understanding market events.
---------------------------------------------------------------------------

B. Baseline

    The baseline against which the costs, benefits, and the effects on
efficiency, competition, and capital formation of the final rule are
measured consists of the current state of the equity market, current
practices of Managers and broker-dealers, and the current regulatory
framework. The economic analysis considers existing regulatory
requirements, including recently adopted rules, as part of its economic
baseline against which the costs and benefits of the final rule are
measured.\497\
---------------------------------------------------------------------------

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

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

    Several commenters requested the Commission consider interactions
between the economic effects of the proposed rule and other recent
Commission proposals.\498\ Commenters indicated there could be
interactions between this rulemaking and five proposals \499\ that have
since been adopted: Rule 10c-1a,\500\ Beneficial Ownership
Reporting,\501\ Private Fund Advisers,\502\ Settlement Cycle,\503\ and
the May 2023 SEC Form PF Amending Release.\504\ These rules were not
included as part of the baseline in the Proposing Release because they
were not adopted at that time. In response to commenters, this economic
analysis considers potential economic effects arising from any overlap
between the compliance period for the final amendments and each of
these recently adopted rules.\505\
---------------------------------------------------------------------------

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

investment advisers exercising investment discretion over client
assets, including investment company assets such as mutual funds, ETFs,
and closed-end funds; banks and bank trust corporations offering
investment management services; pension fund managers; firms, including
broker-dealers and insurance companies, managing corporate or employee
investment assets; and individuals exercising investment discretion
over the accounts of others. Also, as a result of the definition of
Manager, the set of Managers excludes natural persons buying and
selling securities only for their own account but does include natural
persons exercising discretion over the account of another person.\508\
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    \506\ See also Exchange Act section 3(a)(35) defining when a
person exercises ``investment discretion'' with respect to an
account.
    \507\ See section 2(a)(8) of the Investment Company Act. The
term ``company'' in the Exchange Act ``ha[s] the same meaning[ ] as
in the Investment Company Act of 1940.'' Exchange Act section
3(a)(19).
    \508\ To the extent that a natural person exercising discretion
over the account of another person has a short position exceeding
the thresholds, that natural person would be subject to the costs
associated with Rule 13f-2 and the Form SHO. We expect such a
natural person would likely use the fillable web form provided by
EDGAR to input Form SHO disclosures. Few Managers that are natural
persons would be likely to have short positions large enough to
exceed the threshold. See infra Part VIII.C.6 for more information
on Managers' costs.
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    Notwithstanding the broad statutory definition of Manager, it is
the Commission's understanding that only a fraction of Managers is
believed to engage in short selling and fewer still engage in any
substantial short selling. Registered broker-dealers' market making
operations, for example, engage in short selling but, with the
exception of option market makers, generally do not hold large
positions overnight. The Commission is also aware, for example, that
advisers to both hedge funds and registered investment companies engage
in short selling to varying degrees. However, with the exception of
hedge funds, institutional investors are viewed as ``largely absent''
from the short selling portion of the financial markets.\509\ Using
actual investment strategies employed by registered investment
companies \510\ as a proxy for the number of Managers in the public
fund markets engaged in short selling, the number of such Managers is
likely to be relatively small. A Division of Economic and Risk Analysis
White Paper survey of all mutual fund Form N-SAR filings in 2014 found
that ``[w]hile 64 percent of all funds were allowed to engage in short
selling, only 5 percent of all funds actually did so.'' \511\ As of
December 2022, there were 7,164 registered investment companies with
total equity positions valued at approximately $14.7 trillion. Of
those, 138 funds had short positions with a total short position value
of approximately $15 billion. Of the funds with short positions, only
15 funds held positions equal to or greater than $10 million.\512\
Additionally, according to an analysis of publicly available Form PF
data, approximately sixteen percent of single-strategy hedge funds
employ strategies involving short selling.\513\
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    \509\ Peter Molk Frank Partnoy, Institutional Investors as Short
Sellers?, 99 B.U. L. Rev. 837, 839 (2019). Molk and Partnoy's paper
``identif[ies] the regulatory and other barriers that keep key
categories of institutions, specifically, mutual funds, insurance
companies, pension funds, banks, sovereign wealth funds, endowments,
and foundations, from acquiring significant short positions.'' Id.
at 844.
    \510\ As of Dec. 20212, there were 9,050 mutual funds (excluding
money market funds) with approximately $22,652 billion in total net
assets, 2,819 ETFs organized as an open-end fund or as a share-class
of an open-end fund with approximately $5,910 billion in total net
assets, 680 registered closed-end funds with approximately $363
billion in total net assets, 701 unit investment trusts with
approximately $2,184 billion in total net assets, and 15 variable
annuity separate accounts registered as management investment
companies on Form N-3 with $237 billion in total net assets.
Estimates of the number of registered investment companies and their
total net assets are based on an analysis of Form N-CEN filings as
of July 31, 2023. For open-end management funds, closed-end funds,
and management company separate accounts, total net assets equals
the sum of monthly average net assets across all funds in the sample
during the reporting period. See Item C.19.a (Form N-CEN). For UITs,
we use the total assets as of the end of the reporting period, and
for UITs with missing total assets information, we use the
aggregated contract value for the reporting period instead. See Item
F.11 and F.14.c in Form N-CEN.
    \511\ Daniel Deli et al., Use of Derivatives By Registered
Investment Companies at 8, DERA White Paper (2015), available at
https://www.sec.gov/files/derivatives12-2015.pdf.
    \512\ This is based on an analysis of data provided by
registered investment companies to the Commission on Form N-PORT
filings received through July 31, 2023.
    \513\ As of 2022 Q4, there are 1,107 hedge funds out of 6,553
Equity Single-Strategy hedge funds (excluding fund-of-funds hedge
funds) that employ short selling in an Long/Short and Short Bias
strategy. Assets under management (AUM) in these types of hedge
funds total approximately $1.165 trillion. 2022 Q2 Private Fund
Statistics, Division of Investment Management Analytics Office,
available at https://www.sec.gov/divisions/investment/private-funds-statistics.shtml. Data includes both U.S. and non-U.S. domicile
hedge funds managed by SEC-registered investment advisers with at
least $150 million in private fund assets under management. The data
do not include hedge funds that were classified as multi-strategy on
Form PF. These hedge funds could employ short selling as part of
their multi-strategy. Data for non-U.S. domicile hedge funds with an
equity short-bias strategy is not publicly available for 2022 Q2. In
this case the last publicly available values were used (7 funds with
a total AUM of $1 billion) from 2019 Q3. As of the end of 2021,
hedge fund assets totaled approximately $4 trillion. Global Hedge
Fund Industry Assets Top $4 Trillion for the First Time, Reuters
(Jan. 20, 2022) (retrieved from Factiva database).
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    While information about Managers' investments other than from funds
managed by investment advisers is limited, the Commission understands
that such other Managers, other than options market makers due to their
routine use of hedging transactions, do not frequently establish short
positions that would be large enough to be subject to the rule's
reporting requirement.\514\ One possible proxy for the number of
Managers that might potentially have a reporting obligation is a
fraction of the number of Managers reporting positions on Form 13F
because such persons by definition manage accounts holding section
13(f) securities having an aggregate fair market value of at least $100
million, making such Managers more likely to have the resources to
engage in short selling that exceeds Rule 13f-2's thresholds. As of
March 31, 2023, 8,551 Managers \515\ with investment discretion over
approximately $38.79 trillion reported holdings on Form 13F in Section
13(f) securities.\516\ The Commission also believes that registered
investment advisers, particularly those managing hedge funds, are the
primary Managers likely to be affected by Rule 13f-2. Though the
Commission lacks data to quantify the exact number affected parties,
the Commission estimates that the total number of Managers with
reporting obligations will be between 252 and 1,000.\517\
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    \514\ For example, according to Molk and Partnoy ``insurance
companies generally are not active short sellers. Short selling by
insurance companies is used almost exclusively to hedge positions,
and generally is not used with respect to equity positions at all.''
Supra note 509, at 850. See also Molk and Partnoy discussion about
banks and trusts. ``Trust administrators . . . have a history of
adopting conservative investment strategies. Although shorting can
be used to reduce risk when matched with similar long positions,
using short selling as an income generation tool is not consistent
with the overall conservative investment tradition.'' Id. at 854.
    \515\ A portion of these filings are Form 13Fs filed to declare
that the filer's holdings are reported on another filer's Form 13F.
Thus, not all 8,551 Managers' Form 13Fs represent unique holdings.
    \516\ The statistic is computed by the Commission from data
filed on Form 13F.
    \517\ See supra Part VII.B.1 for more information on the
estimates of how many Managers would have reporting obligations. The
Commission estimated the number of reporting Managers using the
short sale activity of Managers that submitted Form SH. Only
Managers that exercised investment discretion over accounts with
aggregate fair market values of at least $100,000,000 in securities
described in Rule 13f-1(c) under the Exchange Act, and effected
short sales of those securities, were required to file Form SH.
Given that Managers included in the Form SH data may be a subset of
Managers with obligations under Rule 13f-2, the estimate of 252
Managers is likely lower than the number who will ultimately report
Form SHO. However, the Commission lacks data to better estimate the
universe of Managers with obligations under 13f-2. See also infra
Part VIII for a discussion of the applicability of Form SH data to
estimating the number of Managers affected by Rule 13f-2.
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2. Short Selling
    Short selling is a widely used market practice, which allows
investors to

profit if an asset declines in value or to hedge risks. Market
participants can build an economic short position using traditional
means (i.e., borrowing shares and selling them into the market to buy
back later) or they can gain short exposure using derivatives. This
section provides an overview of the current state of obtaining short
exposure to equities and the different means of short selling--i.e.,
traditional means and using derivatives.
a. Short Selling Equities
    A short sale is the sale of a security that the seller does not own
or any sale that is consummated by the delivery of a security borrowed
by, or for the account of, the seller.\518\ In general, short selling
is used to profit from an expected downward price movement, to provide
liquidity in response to unanticipated demand, or to hedge the risk of
an economic long position in the same security or in a related
security.\519\ To short sell a stock, the short seller borrows shares
of a stock from a lender--typically a long-term investor such as a
mutual fund or pension fund--and sells those shares into the market.
Later, the short seller purchases the same number of shares and returns
them to the lender. The profit on the transaction for the short seller
is the difference between the price at which the shares were initially
sold and the price at which the investor re-purchased the shares--less
any fees such as securities lending fees. If the price of the stock
goes down then this difference will be positive and the short seller
will make money. Short selling contributes to price efficiency when
short sellers trade to incorporate negative information into stock
prices.
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    \518\ See Rule 200(a) of Regulation SHO, 17 CFR 242.200(a). See
also Regulation SHO Adopting Release.
    \519\ One commenter supported this statement, stating that short
selling provides liquidity and is an important hedging tool. See
SBAI Letter at 2.
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    In addition to short selling based on negative sentiment, market
participants also short sell to hedge existing positions. Hedging is a
particularly potent motive to short sell a stock for options market
makers who can hedge the risk of writing a call option by short selling
the underlying stock in the stock market. Other investors use short
selling to hedge out an unwanted component of a stock's return. For
example, an investor who wants to buy a particular stock to trade on
stock specific information but does not want to expose itself to
industry risk can hedge industry risk by short selling an industry
index ETF while purchasing the underlying security. Market makers also
use short selling extensively to maintain two sided quotes in the
temporary absence of inventory. Lastly, traders may use short selling
as part of algorithmic trading strategies attempting to benefit from
temporary pricing anomalies. While short selling to trade on
information or to hedge generally results in short positions that are
held for some time, registered broker-dealers engaged in market making
operations and algorithmic technical traders generally close their
positions by the end of the day and thus their short positions
generally do not show up in existing measures of short interest.\520\
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    \520\ See infra Part VIII.B.4.i for a discussion of existing
short interest data.
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    Short selling generally entails more risk than holding a long
position. At worst, a buyer of a long position can lose its entire
investment. This is not true for a short seller. If the stock price
increases from the short sale price, the investor loses money and since
prices could potentially rise indefinitely, the short seller could lose
more than the value of its original investment. Additionally, margin
requirements for short selling are typically 150 percent--including the
proceeds of the short sale plus an additional 50 percent of the value
of the short position.\521\ If the stock price goes up, the investor
may receive a margin call, which would require the investor to commit
additional assets to meet margin requirements. To protect itself from
losses, if an investor is unable to meet margin requirements, the
broker-dealer may close the short position at a significant loss to the
short seller. These dynamics can make it difficult for investors to
maintain short positions in highly volatile stocks.
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    \521\ Regulation T specifies that in most situations margin
requirements for equity short sales must be 150%. See 12 CFR 220.12.
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    Short selling is facilitated by the securities lending market.
Borrowing shares generally occurs two days after the short sale is
executed. This is because stock market transactions normally settle two
business days after the transaction occurs, while securities lending
transactions settle on the same day.\522\ Consequently, a short seller
(or its broker-dealer) will gauge the ability to borrow shares prior to
executing the short sale, referred to as obtaining a ``locate,'' but
would actually borrow the share on the day that it is required to
deliver the share to settle the stock market transaction.
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    \522\ On Feb. 15, 2023, the Commission adopted a rule to shorten
the settlement cycle to one business day; compliance by broker-
dealers will be required as of May 28, 2024. See Settlement Cycle
Adopting Release.
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    Short selling is prevalent in equity markets in general. A common
ratio used to capture the amount of short selling is the short interest
ratio, which measures the fraction of shares sold short at a given
point in time divided by the total shares outstanding for that
security. Figure 1 below presents the time series average for short
interest outstanding for equities with different characteristics. This
Figure shows that short interest tends to be higher for small-cap
stocks than for mid- or large-cap stocks.\523\
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    \523\ One commenter stated that biotechnology companies, 90% of
which have market capitalizations that would qualify as small-cap or
micro-cap stocks, face an outsized proportion of short positions.
See infra note 593.
---------------------------------------------------------------------------

    Another way to measure the prevalence of short selling in financial
markets is by analyzing the fraction of transactions that involve a
short seller. Short sellers are involved in nearly 50 percent of
trading volume, while only about 2 percent of shares outstanding are
held short in the U.S. equity markets.\524\ This average volume of
short selling tends to be much higher than the typical changes in short
interest,\525\ suggesting that a significant fraction of short selling
volume is reversed very quickly. Such short selling is indicative of
the fact that short selling is a key component of modern market making
strategies and technical algorithmic trading.\526\
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    \524\ See DERA 417(a)(2) Study. Figure F.1 in the DERA 417(a)(2)
Study (showing that the level of short selling as a percentage of
trading volume grew from 2007 to 2013 to about 50%). See also D.
Rapach, M.C. Ringgenberg, and G. Zhou, Short Interest and Aggregate
Stock Returns, J. of Fin. Econ. 46-65 (2016).
    \525\ The Commission analyzed trading volume for common shares
during the year 2019. This analysis revealed that the average common
share during this period traded approximately 5% of shares
outstanding each week, with approximately half of all trades
involving short sellers. Consequently, total short selling volume
amounts to approximately 5% of shares outstanding every two weeks
for a typical stock. In contrast, from 2015 through 2019, absolute
changes in short interest approximately every two weeks have equaled
about a half of a percent of shares outstanding. Thus, the total
amount of short selling volume occurring is an order of magnitude
larger than the changes in short interest over the same time period.
These statistics suggest that the majority of short selling
transactions likely do not involve long term traders building short
positions. Additionally, the correlation coefficient for bimonthly
changes in short interest and short selling volume in 2019 is only
about 0.018. This low correlation suggests that the economic forces
driving total short selling volume and changes in short interest are
likely different.
    \526\ See infra Part VIII.C.3 for a more detailed discussion of
short selling and liquidity provision.
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BILLING CODE 8011-01-P

[GRAPHIC] [TIFF OMITTED] TR01NO23.000

BILLING CODE 8011-01-C
b. Taking Short Positions Via Derivatives
    Trading in derivatives affects short selling in two key ways.
First, derivatives offer investors an alternative means to express
negative sentiment rather than short selling the stock. For instance,
an investor wishing to profit from the decline of a security's value
can also trade in various derivative contracts, including options and
security-based swaps. Providing evidence of this alternative means of
short selling, academic research shows that investors do indeed use
options as an alternative means to obtain short-like economic exposure
when standard short selling is restricted.\527\
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    \527\ See Robert Battalio and Paul Schultz, Regulatory
Uncertainty and Market Liquidity: The 2008 Short Sale Ban's Impact
on Equity Option Markets, 66 J. of Fin. 2013-2053 (2011); B.D.
Grundy, B. Lim, and P. Verwijmeren, Do Option Markets Undo
Restrictions on Short Sales? Evidence from the 2008 Short-Sale Ban,
106 J. of Fin. Econ. 331-348 (2012). See also G.J. Jiang, Y.
Shimizu, and C. Strong, Back to the Futures: When Short Selling is
Banned (2019), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3420275.

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    Among the most popular derivative contracts are options,
specifically put and call options. Call options give the owner of the
option the right but not the obligation to purchase a stock at a
specific price on a future date. Put options are similar but give the
owner of the option the right but not the obligation to sell a stock at
a specific price at a future date. In a put option the seller of the
option is taking a long position in the underlying security while the
purchaser of the put is taking a short position. The opposite is true
for a call option.
    In addition to options, convertible securities (in which the
security can be converted into an equity security) and security-based
swaps can be used to create the same economic exposure as a short
position.\528\ Convertible debt securities offer the owner a stream of
payments and the ability to convert the security into equity should the
owner's strategy deem this beneficial.\529\ Security-based swaps
include total-return swaps in which two counterparties agree to
exchange or ``swap'' payment with each other as a result of changes in
a security characteristic, such as its price.\530\ As with options, in
each of these derivative contracts one party is inherently long and the
other party is inherently short. These derivatives, and other more
exotic derivatives, tend not to be as standardized as options, and are
traded over-the-counter. Security-based swap transactions are reported
to and publicly disseminated by security-based swap data
repositories.\531\
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    \528\ On Sept. 19, 2019, the Commission approved the
``Recordkeeping and Reporting Requirements for Security-Based Swap
Dealers, Major Security-based Swap Participants, and Broker-
Dealers'' which established a regulatory regime for security-based
swaps under Title VII of the Dodd-Frank Act. See Recordkeeping and
Reporting Requirements for Security-Based Swap Dealers, Major
Security-Based Swap Participants, and Broker-Dealers, Exchange Act
Release No. 87005 (Sept. 19, 2019), 84 FR 68550 (Dec. 16, 2019),
available at https://www.sec.gov/rules/final/2019/34-87005.pdf.
    \529\ Convertible debt securities are also employed in hedging
strategies whereby the equity is sold short while the convertible
security of that equity is held long.
    \530\ On July 9, 2012, the Commission approved rules and
definitions of Security based swaps. See 17 CFR parts 230, 240, and
241; Further Definition of ``Swap,'' ``Security-Based Swap,'' and
``Security-Based Swap Agreement''; Mixed Swaps; Security-Based Swap
Agreement Recordkeeping, Commodity Futures Trading Commission and
Securities and Exchange Commission, 77 FR 48208 (Aug. 13, 2012),
available at https://www.sec.gov/rules/final/2012/33-9338.pdf.
    \531\ See, e.g., 2015 Regulation SBSR Adopting Release, supra
note 97; Security-Based Swap Data Repository Registration, Duties,
and Core Principles, Exchange Act Release No. 74246 (Feb. 11, 2015),
80 FR 14437 (Mar. 19, 2015); Regulation SBSR--Reporting and
Dissemination of Security-Based Swap Information, Exchange Act
Release No. 78321 (July 14, 2016), 81 FR 53545 (Aug. 12, 2016)
(``2016 Regulation SBSR Adopting Release''). See also Order
Approving Application for Registration as a Security-Based Swap Data
Repository, 86 FR 8977 (Feb. 10, 2021), available at https://www.sec.gov/rules/other/2021/34-91798.pdf.
---------------------------------------------------------------------------

    In addition to providing an alternative means of expressing a
bearish sentiment, trading in derivatives frequently leads to related
trading in the stock market as derivatives' counterparties seek to
hedge their risk. For example, an options market maker who sells a put
has taken on long exposure to the underlying security and may hedge
this position by opening a short position in the underlying security.
Thus, option market makers who sell large quantities of put options may
amass large short positions in the underlying equities to hedge their
options exposure.
3. Current Short Selling Regulations
    The Commission adopted Regulation SHO \532\ to update short sale
regulation in light of numerous market developments since short sale
regulation was first adopted in 1938 and to address concerns regarding
persistent failures to deliver and potentially abusive ``naked'' short
selling.\533\
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    \532\ See Regulation SHO Adopting Release.
    \533\ In a ``naked'' short sale, the seller does not borrow or
arrange to borrow the securities in time to make delivery to the
buyer within the standard two-day settlement cycle. As a result, the
seller fails to deliver securities to the buyer when delivery is due
(also known as a ``failure to deliver'').
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    In adopting Regulation SHO, the Commission recognized that short
sales can provide important pricing information \534\ and liquidity to
the market.\535\ However, the Commission was also concerned with the
negative effect that failures to deliver may have on shareholders and
the markets. For example, large and persistent failures to deliver may
deprive shareholders of the benefits of ownership, such as voting and
lending, and sellers that fail to deliver securities on settlement date
may attempt to use their failures to engage in trading activities to
improperly depress the price of a security.
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    \534\ Efficient markets require that prices fully reflect all
buy and sell interest. Market participants who believe a stock is
overvalued may engage in short sales in an attempt to profit from a
perceived divergence of prices from true economic values. Such short
sellers add to stock pricing efficiency because their transactions
inform the market of their evaluation of future stock price
performance. This evaluation is reflected in the resulting market
price of the security. See Exchange Act Release No. 48709 (Oct. 28,
2003), 68 FR 62972 (Nov. 6, 2003), available at https://www.sec.gov/rules/proposed/34-48709.htm#P179_15857.
    \535\ Market liquidity is generally provided through short
selling by market professionals, such as market makers, who offset
temporary imbalances in the buying and selling interest for
securities. Short sales effected in the market add to the selling
interest of stock available to purchasers, and reduce the risk that
the price paid by investors is artificially high due to a temporary
contraction of selling interest. Short sellers covering their sales
also may add to the buying interest of stock available to sellers.
See Exchange Act Release No. 48709 (Oct. 28, 2003), 68 FR 62972
(Nov. 6, 2003), available at https://www.sec.gov/rules/proposed/34-48709.htm#P179_15857.
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    Due to continued concerns regarding failures to deliver, and to
promote market stability and preserve investor confidence, the
Commission has amended Regulation SHO on several occasions. For
example, the Commission eliminated certain original exceptions to
Regulation SHO's close-out requirements,\536\ strengthened those same
close-out requirements by adopting Rule 204,\537\ and reintroduced a
short sale price test restriction by adopting Rule 201.\538\ In
addition, the Commission adopted a targeted antifraud rule, Rule 10b-
21, to further address failures to deliver in securities

that have been associated with ``naked'' short selling.\539\
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    \536\ As initially adopted, Regulation SHO included two major
exceptions to its then existing close out requirements: the
``grandfather'' provision and the ``options market maker''
exception. Due to continued concerns regarding failures to deliver,
and the fact that the Commission continued to observe certain
securities with failures to deliver that were not being closed out
consistent with its then existing close out requirements, the
Commission eliminated the ``grandfather'' provision in 2007 and the
``options market maker'' exception in 2008. See Exchange Act Release
No. 56212 (Aug. 7, 2007), 72 FR 45544 (Aug. 14, 2007) (eliminating
the ``grandfather'' provision to Regulation SHO's close out
requirement), available at https://www.sec.gov/rules/final/2007/34-56212fr.pdf; Exchange Act Release No. 58775 (Oct. 14, 2008), 73 FR
61690 (Oct. 17, 2008) (eliminating the ``options market maker''
exception to Regulation SHO's close out requirement), available at
https://www.sec.gov/rules/final/2008/34-58775fr.pdf.
    \537\ In 2008, the Commission adopted 17 CFR 242.204T
(``temporary Rule 204T''), and in 2009 adopted Rule 204. Rule 204
further strengthens Regulation SHO's close out requirements by
making those requirements applicable to failing to deliver results
from sales of all equity securities, while reducing the time-frame
within which failures to deliver must be closed out. See Exchange
Act Release No. 60388 (July 27, 2009), 74 FR 38266 (July 31, 2009),
available at https://www.sec.gov/rules/final/2009/34-60388fr.pdf.
    \538\ In 2004, the Commission initiated a year-long pilot to
study the removal of short sale price tests for approximately one-
third of the largest stocks. After review of the pilot's data, the
Commission proposed the elimination of all short sale price tests.
In June 2007, the Commission adopted a rule that eliminated all
short sale price tests, including Rule 10a-1, a predecessor to
Regulation SHO. The rule became effective in July 2007. In 2010, the
Commission reinstituted a short sale price test restriction by
adopting Rule 201. See Exchange Act Release No. 61595 (Feb. 26,
2010), 75 FR 11232 (Mar. 10, 2010), available at https://www.sec.gov/rules/final/2010/34-61595fr.pdf.
    \539\ Rule 10b-21 is an antifraud provision that supplements
existing antifraud rules, including 17 CFR 240.10b-5 (``Rule 10b-
5''), and was adopted to further evidence the liability of short
sellers. Specifically, Rule 10b-21 applies to short sellers,
including broker-dealers acting for their own accounts, who deceive
specified persons about their intention or ability to deliver
securities in time for settlement, while failing to deliver
securities by settlement date. Among other things, the rule
highlights the specific liability of short sellers who deceive their
broker-dealers about their source of borrowable shares for purposes
of complying with Regulation SHO's locate requirement, or who
misrepresent to their broker-dealers that they own the shares being
sold and subsequently fail to deliver shares. See supra note 14,
available at https://www.sec.gov/rules/final/2008/34-58774.pdf.
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    Regulation SHO requires broker-dealers to properly mark sale orders
as ``long,'' ``short,'' or ``short exempt,'' to locate a source of
shares prior to effecting a short sale (also known as the locate
requirement), and to close out failures to deliver that result from
long or short sales. In addition, if the price of an equity security
has experienced significant downward price pressure, Regulation SHO
temporarily restricts the price at which short sales may be effected.
    Regulation SHO imposes certain recordkeeping obligations on broker-
dealers. However, the Commission does not have market-wide information
on how often the bona fide market making exception is used.
Furthermore, bona fide market making information is not reported on a
regular basis, instead the Commission must request bona fide market
making records on a broker-dealer by broker-dealer basis.\540\
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    \540\ See supra Part IV.B for a discussion on the use of the
bona fide market making locate exception.
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    In addition, regulations currently do not require market
participants to record, report, or track when short sellers ``buy to
cover'' their short sales. This makes it difficult for regulators to
assess compliance with Rule 105 and with close out requirements in Rule
204.
4. Existing Short Selling Data
    There are several sources of short selling data that are available
both publicly and for regulatory purposes. In general, these data
sources lack information about levels of and the timing of changes in
economic short positions for specific Managers in specific securities.
Some sources report aggregate short positions at the security level,
but their content is not granular enough to further the understanding
of short selling strategies. Other sources provide granular short
volume information, but they are unable to distinguish short
transactions that impact short positions from those that do not and do
not contain all activity that can change short positions. Some
regulatory data sources report short transactions at the individual
investor level, but using these data to estimate short positions would
be significantly inaccurate and inefficient.
a. Bimonthly Short Interest Data
    One of the primary data sources for aggregate short selling data is
the bimonthly short interest data collected by FINRA.\541\ FINRA
collects aggregate short interest information in individual securities
on a bimonthly basis as the total number of shares sold short in a
given stock as of the middle and end of each month. Then the exchange
that lists the given stock, or FINRA itself in the case of OTC stocks,
distributes the collected data.\542\ FINRA computes short interest
using information it receives from its broker-dealer members pursuant
to FINRA Rule 4560 reflecting all trades cleared through clearing
broker-dealers.\543\ FINRA Rule 4560 requires generally that broker-
dealers that are FINRA members report ``short positions'' in customer
and proprietary firm accounts in all equity securities twice a month
through FINRA's web-based Regulation Filing Applications (RFA)
system.\544\ FINRA defines ``short positions'' for this purpose simply
as those resulting from ``short sales'' as defined in Rule 200(a) of
Regulation SHO under the Exchange Act.\545\ Member firms must report
their short positions to FINRA regardless of position size.\546\ The
process of gathering and validating short interest data takes
approximately two weeks.\547\ Thus the data are available with
approximately a two week lag.
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    \541\ See DERA 417(a)(2) Study at 17-18, supra note 6.
    \542\ See Short Interest--What It Is, What It Is Not, FINRA
Inv'r Insights (Apr. 12, 2021), available at https://www.finra.org/investors/insights/short-interest.
    \543\ Id. (Short interest for a listed security at any date
reported by FINRA is ``a snapshot of the total open short positions
in a security existing on the books and records of brokerage firms
on a given date.'').
    \544\ FINRA Rule 4560 excludes short sales in ``restricted
equity securities,'' as defined in Securities Act Rule 144, from the
reporting requirement.
    \545\ See FINRA Rule 4560(b)(1).
    \546\ See FINRA Market Regulation Department, General for Short
Interest Reporting Instructions (Dec. 18, 2008) (reporting
instructions to FINRA member firms), available at https://www.finra.org/Industry/Compliance/RegulatoryFilings/ShortInterestReporting/P037072.
    \547\ See DERA 417(a)(2) Study at 17-18, supra note 6.
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    FINRA short interest data are widely available and are used by
academics and other market participants.\548\ Furthermore, these short
interest data are found to predict future stock and market returns over
the monthly and annual horizons, suggesting that the bimonthly short
interest data capture the economic short selling based on fundamental
research.\549\ However, these data face two major limitations. First,
the information does not provide insight into the timing with which
short positions are established or covered over the two-week reporting
period. This precludes the possibility of understanding the behavior of
aggregate economic short selling in the two weeks leading up to the
reporting date.\550\ Second, given that short interest is aggregated at
the security-level, the aggregation does not provide an understanding
of certain aspects of the underlying short selling activity. For
example, the data cannot inform on whether short sentiment is broadly
or narrowly held or held by persons with larger positions. The data
also does not inform on the extent to which short interest has been
hedged.
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    \548\ See supra note 491. FINRA and the listing exchanges make
these data publicly available with biweekly updates.
    \549\ See, e.g., Peter N. Dixon and Eric K. Kelley, Business
Cycle Variation in Short Selling Strategies: Picking During
Expansions and Timing During Recessions, 57(8) J. of Fin. and
Quantitative Analysis 3018-3047 (2022); see also Ekkehart Boehmer,
Zsuzsa R. Huszar, and Bradford D. Jordan, The Good News in Short
Interest, 96 (1) Journal of Financial Economics 80-97 (2010);
Stephen Figlewski, The Informational Effects of Restrictions on
Short Sales: Some Empirical Evidence, 16 (4) J. of Fin. and
Quantitative Analysis 463-476 (1981).
    \550\ For example, the public will not have information on
stock-specific volatility in real-time that may relate to short
selling of the particular stock. Such volatility may be explained,
though only through assumption, once the bimonthly short interest
data becomes available. Assumption is necessary because the data are
still not at the daily level.
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b. Short Selling Volume and Transactions From SROs
    Since 2009, many SROs have been publishing two short selling data
sets, including same day publication of daily aggregated short sale
volume in individual securities \551\ and publication of short sale
transaction information on no more than a two-month delay.\552\

Some SROs make the historical daily short volume data available to
market participants for a fee.\553\ The fact that market participants
and academic users pay these subscription fees indicate that these data
are utilized. In addition to these daily short volume data, several
SROs provide intraday short sale transaction information for the orders
that execute on their respective venues. As an example, FINRA provides
information from FINRA's Trade Reporting Facility (``TRF'') and
Alternative Display Facility (``ADF'') \554\ (the TRF and ADF are
together referred to herein as ``FINRA's Reporting Facilities'').
Overall, these different sources of daily and intraday short volume
data provide greater, though different, levels of granularity relative
to the bimonthly short interest observations discussed earlier.
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    \551\ See Short Sale Volume and Transaction Data, available at
https://www.sec.gov/answers/shortsalevolume.htm (showing hyperlinks
to the websites where SROs publish this data). See also supra note
492. See, e.g., FINRA's Daily Short Sale Volume Files (which provide
aggregated volume by security on all short sale trades executed and
reported to a FINRA reporting facility during normal market hours).
See FINRA Information Notice, Publication of Daily and Monthly Short
Sale Reports (Sept. 29, 2009), available at https://www.finra.org/sites/default/files/NoticeDocument/p120044.pdf.
    \552\ See FINRA's Monthly Short Sale Transaction Files (which
provide detailed trade activity of all short sale trades reported to
a consolidated tape. See supra note 492. See also Short Sale Volume
and Transaction Data, available at https://www.sec.gov/answers/shortsalevolume.htm. Additional transaction data has been available
at various times, including transaction data from the Regulation SHO
Pilot, which has been discontinued by most exchanges in July 2007
when the uptick rule was removed. See Exchange Act Release No. 55970
(June 28, 2007), 72 FR 36348 (July 3, 2007), available at https://www.sec.gov/rules/final/2007/34-55970.pdf. The Pilot data comprised
short selling records available from each of nine markets: American
Stock Exchange, Archipelago Exchange, Boston Stock Exchange, Chicago
Stock Exchange, NASD, Nasdaq Stock Market, New York Stock Exchange,
National Stock Exchange, and the Philadelphia Stock Exchange. See
SEC Division of Trading and Markets, Regulation SHO Pilot Data FAQ,
available at https://www.sec.gov/spotlight/shopilot.htm#pilotfaq.
    \553\ See, e.g., TAQ Group Short Sale & Short Volume, New York
Stock Exchange, available at https://www.nyse.com/market-data/historical/taq-nyse-group-short-sales (for short sale data relating
to all NYSE owned exchanges). See Short Sale Volume and Transaction
Reports from Nasdaq Trader, available at https://nasdaqtrader.com/Trader.aspx?id=shortsale (for short sale data for Nasdaq exchanges);
see also Short Sale Daily Reports, Chicago Board Options Exchange
(for Cboe exchanges), available at https://datashop.cboe.com/us-equity-short-volume-and-trades.
    \554\ Each TRF provides FINRA members with a mechanism for the
public reporting of transactions effected otherwise than on an
exchange. See FINRA, Market Transparency Trade Reporting Facility,
available at https://www.finra.org/Industry/Compliance/MarketTransparency/TRF/.
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    Despite offering higher granularity than bimonthly short interest
data, these existing short volume data provided by the SROs, including
FINRA, have a number of limitations. First, the data do not provide
insight into the activities of either individual traders, or different
trader types. Consequently, it is not possible with existing short
selling data provided by the SROs to separate trading volume associated
with market makers, algorithmic traders, investment managers, or other
trader types. Form SHO will address this limitation by providing data
on the gross short sale positions and activity of investment managers
with large short sale positions.
    Additionally, the data do not provide insight into activities that
may reduce exposure, making the use of these data to estimate investor
sentiment fraught with potential bias. Moreover, these data provide
information only on short sales, whereas short positions could also
change because investors can increase or decrease their positions in
ways other than short selling the stock. For example, investors can
increase their short positions by exercising put options and delivering
borrowed shares or by delivering borrowed shares when they are assigned
call options. Investors can reduce their short positions in an equity
when they, for example, ``buy to cover'' their positions, purchase
shares in a secondary offering,\555\ convert bonds to stock, or redeem
ETF shares containing the equity. As a result, the short selling volume
and transactions data cannot easily explain changes in short interest,
exposing a gap between these two types of existing data.
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    \555\ See supra note 285.
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    Aggregate short selling statistics and short selling transactions
data have different lags with which they are available. Aggregate short
selling volume statistics are usually made available by the SROs by the
end of the following business day. For the transactions data, the lag
can be much longer, and in some cases the data are released with a one-
month lag--implying that some short selling transactions data are not
available for two months.\556\
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    \556\ For example, a short sale transaction that takes place in
late June could be released in a dataset in the month of August.
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    There is also a concern that these data may over-represent the
total volume of short sales occurring in the market. This is because
Regulation SHO provides specific criteria regarding what is a long
sale.\557\ If a market participant is unclear whether its trade will
meet all the requirements at settlement to be marked a long sale, then
it may choose to mark the trade as short to not run afoul of Regulation
SHO requirements, even if the trade is likely an economic long
sale.\558\
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    \557\ See Rule 200(g) of Regulation SHO specifies when an order
can be marked as long. See also Part IV.B; Regulation SHO Adopting
Release. An economic long sale is a sale of an owned, not borrowed,
security.
    \558\ See 2009 letter from Securities Industry and Financial
Markets Association (``SIFMA'') commenting on an alternative short
sale price test, expressing concern that compliance with Regulation
SHO short selling marking requirements ``will result in a
substantial over-marking of orders as ``short'' in situations where
firms are, in fact, ``long'' the securities being sold.'' Letter
from Securities Industry and Financial Markets Association (``SIFMA
Letter''), available at https://www.sec.gov/comments/s7-08-09/s70809-4654.pdf.
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c. Securities Lending
    Securities lending data provide information on stock loan volume,
lending costs, and the percentage of available stock out on loan. In
the equity market, a primary reason for end borrowers to engage in a
securities loan is to facilitate a short sale,\559\ leading to a close
correlation between information about certain loan volumes and short
interest. Therefore, some market participants use securities lending
data as a measure of short sale positions.\560\ Since the proposing
release, the Commission has adopted Rule 10c-1a. Below, we describe the
baseline securities lending data--commercial securities lending data as
well as forthcoming Rule 10c-1a data.\561\
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    \559\ One reason for this is that the ``permitted purpose
requirement'' of the Board of Governors of the Federal Reserve
System's Regulation T, which broadly governs the lending activities
of broker-dealers, specifies that a broker dealer may generally
borrow or lend U.S. securities from or to a (non-broker-dealer)
customer solely ``for the purpose of making delivery of the
securities in the case of short sales, failure to receive securities
required to be delivered, or other similar situations,'' unless an
exemption applies. See 12 CFR 220.10(a).
    \560\ Some research has used stock lending data as a proxy for
actual short sales. See, e.g., Oliver Wyman, The Effects of Short
Selling Public Disclosure of Individual Positions on Equity Markets,
Alternative Investment Management Association (Feb. 2011), available
at https://www.managedfunds.org/industry-resources/industry-research/the-effects-of-short-selling-public-disclosure-of-individual-positions-on-equity-markets/.
    \561\ While the adoption of Rule 10c-1a occurred before the
adoption of Rule 13f-2, and Rule 10c-1a has certain intermediate
compliance dates related to FINRA rulemaking that precede Rule 13f-2
compliance dates, we expect that the reporting and publication of
Rule 13f-2 information will occur before the reporting and
publication of Rule 10c-1a information. See supra Part VI and infra
note 585. Rule 10c-1a is thus part of the baseline for Rule 13f-2,
but significant aspects of Rule 10c-1a will be implemented later.
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i. Commercial Securities Lending Data
    The securities lending industry appears to use commercial
securities lending data widely,\562\ though these data are generally
available only by subscription.\563\ The use of commercial

security lending data as proxy for economic short interest has several
limitations. These include the fact that commercial vendors of the
securities lending data often impose access restrictions via give-to-
get models. In addition, the data are not comprehensive and are based
on voluntary contributions, which leads to self-selection bias. In this
setting, the entities contributing data are mindful of whether other
entities can access the data. As such, participation rates in data
sharing reflects strategic considerations that may lower the extent of
data shared by each entity, reducing the information content of the
pool of data collected by each vendor.
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    \562\ Several commercial entities sell data on securities
lending to clients. See, e.g., 2011 Letter from Data Explorers
(hereafter ``Data Explorers Letter'') in response to the request for
comment relating to the proposed study of the cost and benefits of
short selling required by Dodd Frank Act section 417(a)(2) available
at https://www.sec.gov/comments/4-627/4627-152.pdf. As some
commenters have stated, stock lending facilitates short selling.
See, e.g., Speech by Chester Spatt, former Chief Economist of the
SEC (Apr. 20, 2007), available at https://www.sec.gov/news/speech/2007/spch042007css.htm. The information sold by vendors may include
volume of loans, lending costs, and the percentage of available
stock out on loan.
    \563\ See DERA 417(a)(2) Study at 22-23. See also Rule 10c-a,
Part IX.B.5.
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    The data for securities lending is potentially biased \564\--either
containing information about the wholesale market or the customer
market, but not both, making it difficult for a given market
participants to obtain comprehensive security lending information from
one source. Furthermore, even the cumulative data provided by vendors
is still not be comprehensive, primarily because it is based on
voluntary data contributions.\565\ The reliance on voluntary data
contributions increases the likelihood that data are missing in a non-
random manner which can introduce biases into the data. To this end,
the existing data accessible by an individual market participant may
not accurately proxy short selling activity.
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    \564\ For example, while the Commission believes that certain
currently available securities lending data products may be biased
due to missing observations, the extent of the biases cannot be
quantified as the data that would be needed to assess the extent of
the bias are missing.
    \565\ Voluntary data contributions are provided either through