FINRA Takes on Short Interest Reporting

On June 4, 2021, FINRA published Regulatory Notice 21-19, which requests comment on certain significant proposed changes to short position and stock loan reporting. The proposed changes to Rule 4560 would increase the frequency of short-interest reports from twice a month to weekly or even daily. The change would require clearing firms to report synthetic short exposure – bets made against shares via derivatives – in firm and customer accounts.

The request highlights intensifying scrutiny of short-selling, betting against shares to profit if they fall, amid ongoing volatility in “meme stocks” (so dubbed because they are turned into memes that are easy to share on Reddit and other social media platforms).

FINRA is considering whether amendments to its short interest reporting and dissemination program would be appropriate to improve the regulatory and public utility of the information. FINRA is also considering whether any changes to other aspects of its short sale regulatory program would be beneficial, as discussed below.

The full text of the Notice is available here. To view an up-to-date list of comments, which includes submissions by “Ryan Reynolds” and “Jennifer Lawrence,” click here. FINRA is accepting comments through August 4, 2021.

Publication of Short Interest for Exchange-listed Equity Securities

FINRA is considering consolidating the publication of short interest data that is reported to FINRA for both listed and unlisted securities. If FINRA were to make this change, short interest files for all equity securities would be made available free of charge on the FINRA website and would not require changes to firms’ reporting requirements. In addition, if this change was made, potential changes to the content and timing of publicly disseminated data would apply to listed and unlisted securities (see next slide for more details).

Content of Short Interest Data

FINRA is considering the following changes to reported and disseminated short interest data. In some cases, FINRA is also considering whether the additional data points proposed to be collected should be disseminated publicly or used only for regulatory purposes.

Proprietary and Customer Account Categorization: FINRA is considering requiring firms to segregate the total reportable short interest into two categories—short interest held in proprietary accounts and short interest held in customer accounts. Specifically, firms would be required to specify the short interest held across all proprietary accounts and across all customer accounts (for both retail customer and institutional customer accounts) for each equity security as of the close of the designated reporting settlement date.

Account-level Position Information: Alternatively, FINRA is considering requiring firms to report (for regulatory purposes only; not to be disseminated publicly) short interest position information with more granularity by reporting at the account level for all equity securities.

Synthetic Short Positions: In addition, FINRA is considering requiring firms to reflect synthetic short positions in short interest reports.

Loan Obligations Resulting From Arranged Financing: FINRA is considering requiring members to report as short interest outstanding stock borrows by customers in their arranged financing programs to better reflect actual short sentiment in the stock.

Total Shares Outstanding (TSO) and Public Float: FINRA also is considering including in FINRA-disseminated short interest data, where available, the TSO and public float for securities.

Threshold Security Field: FINRA is considering including in FINRA-disseminated short interest data a new field that would indicate if the security is a threshold security as of the short interest position reporting settlement date. This change would not alter firms’ reporting requirements.

Frequency and Timing of Short Interest Position Reporting and Data Dissemination

FINRA is considering reducing the reporting timeframe to daily or weekly submissions and, to enable FINRA to disseminate the collected information to the marketplace on a timelier basis, such reports also would be due to FINRA in a shorter timeframe following the applicable settlement date. FINRA is also considering reducing the FINRA processing time involved in disseminating short interest data. Currently, FINRA disseminates short interest data for OTC equity securities on the FINRA website seven business days after the designated settlement date, which is five business days after the reports are due from member firms. FINRA is considering reducing this processing time.

Information on Allocations of Fail-to-Deliver Positions

FINRA is considering enhancing its short sale reporting program by adopting a new rule to require members to submit to FINRA (for regulatory purposes only; not for public dissemination) a report of daily allocations of fail-to-deliver positions to correspondent firms pursuant to Rule 204(d) of Regulation SHO.

The proposed allocation report may include fields such as security, identity of correspondent firm, amount allocated to correspondent firm (number of shares), and a few more. According to FINRA, this information would provide them with important supplemental information in support of its Regulation SHO surveillance program.