January 8, 2009
Let me first commend the staff for the speed at which it operated during the recent liquidity crisis. I appreciate the fact that rules were implemented quickly in an effort to stabilize the markets. However, while I understand the need to gain a greater understanding of short sale activity, I object to the rule in its present form. I object to the rule on two fronts. First, I think it is unlikely to be cost beneficial to investors. The present annual cost to preparers based on the SEC's rough estimates is over $100 million per year. While it is unlikely that this sum will be recouped through enforcement actions each year it is almost certain that, if made permanent, this cost will be passed on to investors in the form of higher fees for service. Given that I would speculate that 99+% of short sellers are engaging in short selling activities within the present rules and regulations, this is a poorly constructed rule that may detect a few bad apples for far too high of a price.
My second objection is more philosophical. With this rule the SEC is penalizing short sellers relative to long-only managers thereby creating a double standard in the rules. Aside from creating a playing field that is not level in which costs are more favorable to long-only managers, this type of rule indirectly condemns short sellers in the court of public opinion. In other words, this rule creates the impression that short selling is inherently bad or that there are more bad apples in the short selling population than in general. I have seen no academic literature or industry research to support such a conclusion. Rather, most experts would agree that short selling provides liquidity and downside pressure on speculative bubbles that are more likely to occur in the absense of short selling.
In conclusion, I recommend simply that short positions be treated like long positions. That is, I would add them to the language of each existing form so that they are reported on the existing forms (e.g., 13f). This reporting would give the SEC an opportunity to see which firms are active in short selling for sweep examinations (if desired). Moreover, I think managers should retain all trading records (i.e., executed trades, memoranda, etc.) for short postions. If this requirement isn't already explicitly stated in the rules, I think it would be an easy one for each manager to accomodate if they're not already doing so. Maintaining all trades allows for forensic testing by the SEC upon examination in which manipuative activity and naked short selling could be detected and penalized. I would also create a form such as a 13d for shorts to indicate when a short position exceeds 5% of a company's value. That could be a red flag for possible manipulation without burdening all short sellers. My last comment is that I would encourage the staff to act quickly in lifting/amending this temporary rule as the implementation costs are piling up. Thank you for your consideration of my comments.