When the DoddFrank Wall Street Reform and Consumer Protection Act ("Dodd-Frank" or, the "Act") was passed in 2010, many commentators focused on the breadth of the legislation. Yet one of the underappreciated aspects of Dodd-Frank was the extent to which it passed responsibility for a large number of rulemakings and studies back to the Securities and Exchange Commission (the "SEC" or, t he "Commission") and the Staff of its various divisions. While many of these rulemakings, as well as several studies that the Act required the Commission to undertake, have generated a great deal of sustained interest over time as the Commission has completed those projects, the Commission has yet to complete all of its required work. One such required rulemaking under Dodd-Frank, which has rec ently begun t o garner more widespread attention, directed the Commission to expand the current inves t ment pos it ion reporting required under Section 13(f) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), to include short sale positions.
That required rulemaking, which can be found in Dodd-Frank Section 929X, amended Exchange Act Section 13(f) to require the Commission to "prescribe rules providing for the public disclosure of the name of the issuer and the title, class, CUSIP number, aggregate amount of the number of short sales of eac h security, and any additional information determined by the Commission following the end of the report ing period," with the further direction that, "[a]t a minimum, such public disclosure shall occur every mont h. "1 While this provision has been part of existing law for more than ten years, the Commission has never acted on it. Recent events, however, including Congressional hearings related to the volatility of t rading in GameStop, Inc. ("GameStop"),2 and the unraveling of Archegos Capital Management,3 have brought renewed focus to Section 929X. Moreover, what was once a long list of mandatory SEC rulemakings required by Dodd-Frank has become a much shorter list, with Section 929X remaining as one of only three mandatory rulemakings for which the Commission has yet to put forth a rulemaking proposal.4 And, while the SEC's unified regulatory agenda has during several recent periods indicated that the SEC's Division of Trading and Markets was "considering recommending that the Commission propose rules t o implement section 929X(a) of the Dodd-Frank Act," such consideration had been characterized as a "Long-Term Action" until the most recently released agenda, issued on June 11, 2021, which changed it s status to the "Proposed Rule Stage," with a targeted Notice of Proposed Rule-Making by November 2021.5
These recent events highlight and underscore the likelihood that the SEC will introduce rulemaking concerning short sale position disclosure for institutional investment managers in the near future.
Recent SEC Efforts to Amend Rule 13f-1
After many years in which the current reporting requirements of Rule 13f-1 had gone unchanged, on July 10, 2020, the Commission issued a proposed rulemaking to adjust upward the report ing t hres holds for Exchange Act Section 13(f) reporting.6 That proposal was met with significant pushback from commenters, and was ultimately abandoned by the Commission. At the time of the propos al, t he S EC acknowledged in a footnote that they had previously "received petitions for rulemakings regarding ot her aspects of Form 13F," including one cited proposal asking the Commission to "consider requiring periodic public disclosure of short-sale activities of managers on Form 13F."7 At that time, however, the Commission said that they believed that "it is appropriate to propose changes to the scope of managers required to file reports on Form 13F before considering other potential amendments to the Form."8
Among the critics of the SEC's July 2020 13(f) proposal were Senators Tammy Baldwin (D-WI), S herrod Brown (D-OH), Jack Reed (D-RI), and Chris Van Hollen (D-MD), who co-signed an October 22, 2020 letter to then SEC Chair Jay Clayton that called on the SEC t o "Withdraw Proposal that Undermines Transparency." The Senators noted that, "While proposing an unprecedented 3,400% increase in the Form 13F reporting threshold, the Commission ignores several ways to improve transparency and provide more information to investors and market participants. For example, the Commission fails to acknowledge the required rulemaking under Section 929X of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Wall Street Reform Act), which directed the Commissio n t o require Form 13F filers to report short sales each month."9 Chair Clayton subsequently acknowledged during questioning before the Senate Banking Committee in November 2020 that the Commission was abandoning this proposal,10 and Congressional calls for the SEC to take up its required rulemaking under Dodd-Frank Section 929X appeared temporarily to have lost any momentum heading into a change in administrations.
Renewed Congressional and SEC Focus on 929X and Short Sale Reporting Legislation
With the new administration, and recent events concerning trading in GameStop and the losses suffered by Archegos Capital, Congressional and Commission focus appears to have shifted back towards expanding the scope of reporting obligations under Section 13(f).
Congressional calls for action began shortly after the change in administration, and were initially prompted by interest in the volatility around trading in GameStop. For example, on January 29, 2021, Senator Elizabeth Warren (D-MA) sent a letter to SEC Commissioner (and then Acting Chair) Lee asking a number of pointed questions about the SEC's response to volatility in the trading of GameS t op. 11 In a February 25, 2021 response letter later made public by Senator Warren, then Chair Lee wrote, "I believe the Commission should consider requiring increased disclosure of short -selling to regulators and the general public as well as completion of the Dodd-Frank mandate for a rule under Section 929X of Dodd Frank."12
Subsequently, on March 17, 2021, the House Financial Services Committee ("HFSC") held the second of three hearings on trading in the securities of GameStop, titled, "Game Stopped? Who Wins and Los es When Short Sellers, Social Media, and Retail Investors Collide, Part II." In a memorandum released prior to the hearing, the HFSC Majority Staff took up the baton from then Acting SEC Chair Lee's February 25, 2021 letter by noting the fact that the Commission had yet to undertake any action with respect to Section 929X.13 Specifically, the HFSC Majority Staff noted that "929X(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) requires the Commission to `...prescribe rules providing for the public disclosure of the name of the issuer and the title, class, CUSIP number, aggregat e amo unt of the number of short sales of each security, and any additional information determined by the Commission following the end of the reporting period.'" The HFSC Majority Staff memorandum then went on t o not e that "The SEC has not engaged in this rulemaking to date."14
Perhaps motivated by the lack of engagement by the Commission on the issue to date, on May 3, 2021, the HFSC released for discussion several bills in connection with their third GameStop-related hearing, which was held on May 6, 2021.15 While none of these bills have yet to be sponsored or formally introduced, one of the noticed draft bills, titled "Capital Markets Engagement and Transparency Act of 2021," proposes modifying Exchange Act Section 13(f) to:
- Redefine the scope of Section 13(f) to apply to "covered securities," a new defined term which would expand the current coverage from any equity security of a class described in Exchange Act Section 13(d)(1) to also include any "direct or indirect short interest or position in an equity security," as well as any "direct or indirect derivative interest or position in an equity security";
- Increase the frequency of Section 13(f) reporting by requiring Form 13F reports to be filed "not later than 5 business days after the end of each month with the Commission in such form as t he Commission may prescribe by rule";
- Require the Commission to "conduct a study to evaluate the standards and criteria used to determine whether confidential treatment shall apply" to Form 13F reports filed by institutional investment managers; and
- Require the Commission, within two years of the enactment of the proposed Act, to "issue rules to improve the transparency of equity ownership positions by reducing the use of confidential treatment" for positions required to be reported on Form 13F, including by limiting "the duration of such confidential treatment" and "the number or types of securities for which such treatment applies."16
Whether or not spurred to speak to the issue by this draft legislation, SEC Chair Gens ler s ubsequently addressed the possibility of future rulemaking in his prepared testimony before the HFSC in the May 2021 GameStop-related hearings. In that testimony, Chair Gensler wrote, "While FINRA and t he ex changes currently publish or make available certain short sale data, Congress directed the SEC under t he Dodd Frank Act to publish rules on monthly aggregate short sale disclosures. In addition, Dodd-Frank provided authority to the SEC to increase transparency in the stock loan market. I've directed SEC Staff to prepare recommendations for the Commission's consideration on these issues."17
Similarly, when Chair Gensler was asked by Representative Alma Adams (D-NC) if he thought Form 13F filings should be expanded to include derivatives, Chair Gensler replied, "I do think that Congress anticipated this by giving authority to the SEC to do that. I think these derivatives are what's known in this case [Archegos] as total return swaps, being included in those filings would be positive. I can't speak on behalf of the Commission...but I've asked Staff to prepare recommendations to the five-member Commission to use that authority that the SEC has. I also think that there might be other updates that we should do beyond just derivatives as well."18
Similarly, when Chair Gensler was asked by Representative William Timmons (R-SC) if he believes that it is necessary for short sellers to disclose their short positions on Form 13F filings, and whet her s uch a requirement could lead to regulatory overreach, Chair Gensler replied, "Congress anticipated and gave authorities to the SEC to, on a monthly basis, require aggregate information in the short -selling mark et. FINRA [...] already publishes some information on a bi-weekly basis.19 I think that transparency is positive to markets, and I've asked Staff to put forward recommendations to our five-member Commission. It was actually a mandate from Congress. It wasn't a `may,' it was a `shall.' So, we're going to lean in and follow Congress's mandate from 12 years ago."20
Possible Expansion of Swap Reporting Under Exchange Act Sections 13(d) and 16
As with possible regulatory activity in the context of Exchange Act Section 13(f), recent Commission actions suggest that the SEC may also be interested in revising the definition of beneficial owners hip for purposes of Exchange Act Sections 13(d) and 16 in order to expand the scope of reporting required under those provisions to cover additional types of swap positions.21
For example, Chair Gensler remarked in his prepared testimony for the most recent GameStop hearings that, "[u]nder Dodd-Frank, Congress gave the SEC rulemaking authority to extend beneficial ownership reporting requirements to total return swaps and other security-based swaps."22 As wit h Dodd-Frank's direction to the SEC concerning monthly aggregate short sale disclosures, Chair Gensler not ed t hat he had directed the SEC Staff to "consider recommendations for the Commission about whether t o inc lude total return swaps and other security-based swaps under new disclosure requirements, and if s o how. " 23 Similarly, when asked by Representative Anthony Gonzales (R-OH) during the recent GameStop hearings whether greater than 5% beneficial ownership reporting should be "triggered instead by exposure, as opposed to outright ownership," and whether that would have solved the problems that arose with Archegos, Chair Gensler replied, "I think you raised a very good point. Congress ant icipated this and in reforms passed 12 years ago [in] the Dodd-Frank Act [...] gave authority to the SEC with certain conditions, with authority to bring what's called security-based swaps into these regimes, this five and ten percent disclosure. I've asked Staff to try to prepare recommendations for the full commission. I think this Archegos circumstance where this family office had well in excess of t hos e numbers shows some of the market-based and systemic-based reasons why, even if they didn't have the vote, it was an important set of exposures."24
Chair Gensler's comments have been borne out by the Commission's recently released regulatory agenda, which separately introduced for the first time an entry titled "Disclosure Regarding Beneficial Ownership and Swaps."25 Pursuant to this agenda item, the Division of Corporation Finance and the Division of Trading and Markets have been identified as "considering recommending that the Commission propose amendments to enhance market transparency, including disclosure related to beneficial ownership of interests in security-based swaps."26 While the Commission has yet to provide any detailed gloss on the form of this separate agenda item, it is possible, and probably likely, that any proposed rulemaking in this space will serve as a complement to proposed legislation under 929X.
Given the direction given to the Commission in the language of Section 929X, its place on the diminishing list of SEC rulemakings required by Dodd-Frank that have not yet been acted upon, the focus on expanding short position disclosure in recent Congressional hearings (whether through changes to Section 13(f) reporting or the expansion of beneficial ownership reporting), and the recent stat ements of SEC Chair Gensler (referring to the required rulemaking as a "mandate," noting that he had directed Commission Staff to put forward recommendations, and remarking that the Commission is going to "lean in" to this issue), some form of rulemaking to require institutional investment managers to disclose additional information regarding their short positions should be expected. Whether such a rulemaking will mirror the concerns of the draft discussion bill drafted by the Majority Staff of the HFSC remains t o be seen, but that draft stands as a marker that may have some influence on the Commission Staff's thinking.
Any proposed rulemaking by the SEC will be subject to a notice and comment period, and parties who will be impacted by any resulting legislation are well advised to consider in advance any potent ial c oncerns that such legislation might raise for their business, and to assess whether such concerns should be raised with the Commission, whether in advance of, or in connection with, a formal notice and comment period.27