Hedge funds will have to start sharing significantly more information about their short-sale transactions with the Securities and Exchange Commission, setting up another clash between the industry and Wall Street’s main regulator.
The SEC finalized rules on Friday that require hedge funds and other big investors to report gross short positions in certain stocks at the end of each month, and details on related trading activity — including in derivatives — on a more regular basis. The agency would then aggregate positioning in equities across funds and publish that with a delay.
Reporting will generally be triggered if a hedge fund reaches a $10 million average short position during the reporting month, or a 2.5% gross short position relative to total shares outstanding. The SEC did away with a reporting requirement tied to a potential daily trigger.
“Given past market events, it’s important for the commission and the public to know more about short sale activity in the equity markets, especially in times of stress or volatility,” SEC Chair Gary Gensler said in a statement.
Short selling has long been a fixture of the US equity market, but the practice has grown more controversial. The SEC has faced pressure to increase scrutiny after retail traders banded together via social media in January 2021 and bought up shares in companies like GameStop Corp.
Gensler has resisted calls from critics encouraging a major overhaul of short-sale rules, though he has repeatedly said the $26 trillion private-funds market lacks adequate transparency. The plans voted on Friday by the agency’s five commissioners are the latest in a string of new regulations that require hedge funds to share more information with the regulator. The industry has pushed back on many of them.
According to the SEC, the new short-sale reporting will help inform the market and regulators about overall short-sale activity. The new regulations are also meant to help distinguish between hedging activity by businesses and bets against a company.
Hester Peirce, one of the commission’s two Republicans, warned that the new, sensitive data held by the SEC could attract hackers seeking to tap into juicy private financial information. Jack Inglis, chief executive officer of the Alternative Investment Management Association, a hedge fund and private equity trade group, expressed similar concerns.
The Managed Funds Association said it appreciated the SEC’s decision to make short-seller data available publicly in an aggregated way. However, the trade group expressed disappointment that the rule would place “burdensome and costly” requirements, rather than using data that’s already collected.