Pensions and Investments: House lawmakers flag misinformation’s impact on short selling to SEC
Two House lawmakers asked SEC Chair Gary Gensler on April 9 for more information on how the Securities and Exchange Commission is monitoring the impact of investment-related misinformation on short-selling activity.
In their April 9 letter, first obtained by Politico, Reps. Bill Foster, D-Ill., and Blaine Luetkemeyer, R-Mo., who both serve on the House Financial Services Committee, raised concerns to Gensler about "assertions that some issuers have experienced falling stock prices due to market-moving information that was untrue.”
Though misinformation can be spread through published source reporting, traditional media or social media, “the speed and pseudonymity of social media can frustrate the correction of inaccurate information while also facilitating concurrent, if not coordinated, investing by many retail investors,” the lawmakers wrote. “This presents new and growing challenges to the SEC’s market surveillance.”
The lawmakers specifically asked the SEC to share any information on its efforts to “monitor and address whether market manipulation is occurring, particularly through short selling and the dissemination of potentially false information via social media given the unique challenges of linking market surveillance with these platforms.”
“Market manipulation via the spread of misinformation on social media threatens the transparency and fairness that American investors deserve,” Foster said in a statement. “I’m proud to join Congressman Luetkemeyer in asking the SEC to inform Congress about their efforts to monitor and respond to potential market manipulation so that investors can make financial decisions based on accurate information.”
The lawmakers also ask Gensler to “identify actions the SEC could take upon a determination that short selling coincided with misleading information being fed into the market.”
In October, the SEC adopted a rule aimed at increasing disclosure in short selling, requiring that institutional investment managers report certain short sale-related data to the agency within 14 calendar days at the end of every month. The agency would then publish the data on a slightly delayed basis, aggregated by security and with manager information kept confidential.
The rule applies to institutional investment managers with a short position of at least $10 million, or at least 2.5% of shares outstanding, and money managers with a short position of at least $500,000 in a non-reporting issuer equity security.
Gensler said the rule coincides with a congressional mandate that instructs the SEC to enhance the transparency of short-sale activity.
However, in December, three trade groups sued the SEC over the rule and another rule it finalized that same day related to the disclosure of securities lending data. The latter rule requires parties to securities lending transactions to disclose specific information on those transactions to the Financial Industry Regulatory Authority by the end of the day that the loan is effected or modified; then FINRA must make certain information public by the next business day.
When developing the two rules, the agency disregarded their interconnected nature and took a contradictory approach to regulating interrelated markets, according to the lawsuit from the National Association of Private Fund Managers, Alternative Investment Management Association and MFA, formerly known as the Managed Funds Association.