NIRI and NYSE call for short position disclosure

The NYSE and NIRI are urging the SEC to force hedge funds to reveal their short positions – something already required in Europe.

In a joint letter to SEC secretary Brent Fields, the NYSE and NIRI call on the regulator to ‘bring light to a less transparent and increasingly consequential corner of the securities market’. The letter asks the SEC to institute a ‘short-sale activity reporting and disclosure regime’, adding that it is not calling on the commission to impose additional restrictions on what ‘has long been a controversial practice’.

At present, the US has no rules in place to compel investors to identify those stocks they are betting will fall. In Europe new regulations came into force in 2012, requiring hedge funds to report short positions as low as 0.2 percent in European stocks to their national regulator. Full disclosure is required when the position reaches 0.5 percent.

In a letter dated October 7, the NYSE and NIRI say pending rule making under the Dodd-Frank Act ‘provides an opportunity to implement meaningful public disclosure standards for short-sale activity, consistent with that currently required for… long-position reporting.’

Currently, hedge funds with more than $100 mn in assets must report their long holdings to the SEC within 45 days of the end of each calendar quarter. No such rule exists for short-selling data, however, and while brokers are paid to provide this data for many big funds, other companies and investors must wait for stock exchanges to publish an official count of how many of a company’s shares are out on loan.

‘We believe it is past time for the commission to require short-position reporting, at least to the same extent as long-position reporting,’ the letter states.

For companies, the benefits of greater transparency on short positions is clear, but David Tawil, a founder of $80 mn New York hedge fund Maglan Capital, tells Bloomberg that such disclosure could encourage copycat investing. ‘Being a fund manager and an investor, you don’t want to give away all of that information so readily, because that’s what makes your investment fund unique,’ he says. ‘If everyone knows what my positions are, they can go ahead and essentially mimic them.’

But the NYSE and NIRI write that greater disclosure would actually benefit investors. ‘We believe that, overall, investors would benefit through augmentation, increased accuracy and increased visibility of the currently available data regarding short sales and positions in individual securities. Importantly, short-sale reporting would allow investors to more accurately evaluate market movements.’