NASDAQ’s email to SEC’s Brent J. Fields discussing better short seller disclosure/reporting.

NASDAQ Seeks Better Short Seller Disclosure/Reporting

December 7, 2015
Mr. Brent J. Fields Secretary
U.S. Securities and Exchange Commission 100 F Street, NE Washington , DC 20549-1090

Re: Petition for Rule-making to Require Disclosure of Short Positions in Parity with Required Disclosure of Long Positions

Dea r Mr. Fields:

By this Petition, and in accordance with Rule 192 o f the Securities and Exchange Commission (the ··commission ..) Rules of Practice, the Nasdaq, Inc. (”Nasdaq ”), as a public company and o n behalf of our clients who are also public companies, respectfully requests that the Commission, pursuant to Sections 10 and 13 of the Securities Exchange Act of 1934, as amended. and Section 929X of the Dodd-Frank Wall Street Re form and Consumer Protection Act of 2010 (” Dodd-Frank”), take swift action to promulgate rule s to require public disclosure by investors of short position s in par it y with the disclosure regime applicable to long positions, including the ti min g for such disclosure and when updates are required.

To be clear, we are not suggesting limitations or restrictions on short sale activities. There is ample evidence that legitimate short selling contributes to efficient price formation, enhances liquidity, and facilitates risk management. Evidence also shows that short sellers benefit the market and investors in other important ways, including by identifying and ferreting out instances of fraud and other misconduct at public companies.

Nevertheless, there is a serious gap in the regulation of short sellers related to their disclosure obligations. As Congress recognized, it is incongruous that certain investors who accumulate long positions are required to publicly disclose their holdings, but there is no corresponding obligation for short sellers to do so, including synthetic or derivative instruments that allow an investor to profit from a loss in value of the underlying security. This asymmetry has several deleterious effects: it deprives companies of insights into trading activity and limits their ability to engage with investors, the market of information to ensure it functions efficiently and fairly, and investors of information to use to make meaningful investment decisions. The Commission’s Dodd-Frank rulemaking over the last several years has made important enhancements to transparency and deserves credit. However, Dodd-Frank provides the Commission with the mandate to make further enhancements and lift the veil of secrecy behind which short sellers operate .. It must do so.

The obligation of investors to disclose long positions and when they must do it is part of a 47-year old regulatory disclosure regime and stems from amendments to the Securities Exchange Act of 1934 set forth in the Williams Act, adopted by Congress in 1968. As currently enacted, these rules require, among other things, investment managers and funds that own or have discretion over prescribed amounts of equity securities, regardless of whether they are registered with the Commission, to disclose their long positions on Form 13F, Schedule 130 and/or Schedule 13G, depending on the circumstances. Such investors must generally disclose their long positions on Schedule 13F within 45 days of the end of each calendar quarter, subject to delays based on requests for confidentiality. Further, when such investors acquire beneficial ownership of more than five percent of the voting class of a company’s equity securities, they are generally required to file a Schedule 130 with the Commission. This filing must be made within ten days after the five percent threshold is exceeded. 6 However, if such investors are either Qualified Institutional Investors or Passive Investors, they may make such disclosure on Schedule 13G within 45 days of the end of a calendar year, subject to updated disclosure based changes in ownership positions.

There are no comparable public disclosure requirements in the U.S. applicable to the accumulation of short positions. 8 Instead, short sellers can amass short positions secretly, abetted by increased use of derivatives and other synthetic instruments. This is particularly untenable in light of the fact that in recent years, investors with short positions, or derivative equivalents, have taken a more activist role in corporate policy and governance. Because there is no disclosure required of short positions, the investing public and issuers do not know when such circumstances exist or whether the incentives of these investors are inconsistent with corporate policies and objectives. As a result, without full information about short positions maintained by individual market participants, investors and companies are left to speculate on the extent of short activity, to the detriment of market efficiency, price discovery and shareholder engagement. This information deficiency potentially subjects a company’s stock price to trading and volatility based on rumor, speculation and innuendo, not facts or substantive analysis.

Trading in Herbalife Ltd. stock surrounding speculation about the intentions of a well-known short seller is a case in point. As highlighted in a New York Times article, gyrations in the company’s stock price followed the short seller asking a few questions on an analyst call and, in a separate instance, his mere physical presence at an investor conference where he made no mention of the company.  Further, the stock of two companies he mentioned at this conference declined significantly following his comments, even though it was unknown whether he had a position in any of these companies or not. These examples demonstrate why it is so important to lift the veil of secrecy behind which short sellers operate in order to temper speculation and over-reaction by markets to short selling-induced volatility. Without such action, stocks will continue to be buffeted by rumor, speculation and innuendo, and companies, investors and the market will continue to be deprived of important information.

There are other important reasons to increase transparency in this area. Net short positions can have a direct and material impact on trading in securities, including when short positions are established through derivative instruments. Further, enhancing transparency would minimize the opportunity for some market participants to engage in manipulative or abusive conduct that can potentially result from large, undisclosed short interests, particularly where investors have taken a public and vocal role in corporate policy.

NASDAQ Seeks Better Short Seller Disclosure/Reporting

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