US SEC to finalize rules increasing transparency of short selling market

By Douglas Gillison

(Reuters) - The U.S. Securities and Exchange Commission is set on Friday to adopt new rules that will increase transparency of short-selling, the controversial practice of betting against stocks that drew new scrutiny amid the GameStop saga.

The rules will require investors to report their short positions to the agency and for companies that lend out shares to report that activity to the Financial Industry Regulatory Authority (FINRA), a self-regulatory body that polices brokers.

The SEC's five commissioners will vote on the rules, which were first proposed in late 2021 and early 2022, on Friday morning.

Short selling involves borrowing a stock to sell it in the expectation the price will fall, repurchasing the shares and pocketing the difference. Should the price rise, the seller can be exposed to potentially unlimited losses.

The practice has long been divisive, with critics accusing short sellers of trying to hurt companies and short sellers arguing that they help root out fraud and corporate misconduct.

But it drew scrutiny from Congress in 2021 when retail investors drove up the price of shares in retailer GameStop, causing heavy losses for hedge funds that had shorted the company. In the wake of the saga, SEC chair Gary Gensler told lawmakers he would increase the transparency of the market.

Since at least 2021, the Justice Department and the SEC have also been investigating potential manipulation by short sellers and hedge funds around the publication of negative research reports.

SEC officials said the new rules would support its efforts to police the practice.

Specifically, institutional investors would have to report gross short positions to the SEC monthly and certain "net" short activity for individual dates on which trades settle. The SEC would then publish aggregate stock-specific data on a delayed basis.

Companies and other intermediaries involved in lending stock, as well as certain broker-dealers who borrow stocks, would have to report information about the loans, such as the name and volume of the stock, collateral, loan dates and termination dates to FINRA.

FINRA would then publish most of this data on an aggregate anonymized basis the following day. In a concession to industry, the final rule would see FINRA delay release of loan amounts by 20 business days.

(Reporting by Douglas Gillison; editing by Michelle Price and Chizu Nomiyama)