By Douglas Gillison
(Reuters) – The U.S. Securities and Exchange Commission is set to enact new rules on Friday that would increase transparency of short-selling, launching a new investigation into the controversial stock betting practice amid the GameStop saga.
The rules require investors to report their short positions to the agency and stock lending companies to report that activity to the Financial Industry Regulatory Authority (FINRA), the self-regulatory body that oversees brokers.
The SEC’s five commissioners will first vote Friday morning on proposed rules in late 2021 and early 2022.
Short selling involves borrowing a stock to sell when the price is expected to drop, repurchasing the stock and pocketing the difference. If the price rises, the seller may be exposed to indefinite losses.
The practice has long been divisive, with critics arguing that short sellers try to hurt companies and that short sellers help prevent fraud and corporate malfeasance.
But in the year In 2021, retail investors boosted stock prices in the retailer GameStop amid a congressional investigation that led to heavy losses for hedge funds that shorted the company. After the saga, SEC Chairman Gary Gensler told lawmakers he would increase market transparency.
Beginning at least in 2021, the Justice Department and SEC are also investigating potential fraud around short sellers and the publication of negative research reports.
SEC officials said the new rules will support efforts to police the practice.
Specifically, institutional investors must report total short positions to the SEC monthly and certain “net” short positions on the day they receive trades. The SEC then publishes aggregate stock-specific data on a delayed basis.
Companies and other intermediaries involved in lending stock, as well as certain broker-dealers that lend stock, must report to FINRA information about the loans, such as the name and amount of the stock, collateral, loan dates, and termination dates.
FINRA then publishes most of the information in aggregated, anonymous form the following day. In an agreement with industry, the final rule would delay FINRA’s credit rating by 20 business days.
(Reporting by Douglas Gillison; Editing by Michelle Price and Chizu Nomiyama)