By The hedge fund industry is contesting the implementation of new rules that require greater transparency in short sale transactions. However, Securities and Exchange Commission (SEC) Chair Gary Gensler is confident that these regulations will withstand legal scrutiny.
Congress Mandates Transparency
According to Gensler, Congress intervened after the financial crisis and mandated that the SEC create rules to ensure transparency in short selling for investment managers. However, it took the agency nine years to address this congressional mandate. Gensler takes pride in finally taking action.
Understanding Short Sales
A short sale refers to a securities transaction where an investor borrows shares of a company and sells them on the open market, speculating that the price will decrease. The investor can profit if they repurchase the shares at a lower price and repay the loan.
New Disclosure Rules
In October, the SEC approved new rules regarding short selling. One of these rules requires certain fund managers to report their short sales to the SEC within 14 days after the end of each month. The agency would then aggregate and publish this data with a delay, ensuring confidentiality of fund manager information.
Industry Opposition
A coalition comprising industry groups representing hedge funds and other asset managers filed a lawsuit against the SEC. They argue that these new rules would hinder market activities by discouraging short sales, as they believe it would allow the public to track which funds hold specific short positions.
Defending Transparency
Gensler defends the new rules by referring to the 2021 GameStop saga, where retail traders utilized incomplete short sale data to support claims that institutional investors were manipulating the company’s shares through short sales. He asserts that transparency on the short side is necessary, just like the transparency already present on the long side, as mandated by Congress.
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