SEC crisis control: increase short disclosure

September 18, 2008

If you needed yet another indicator on just how serious things are right now — beyond the scary story in the WSJ today calling this the worst crisis since the 30s — here’s one: just this week, the SEC has issued three after-hours press releases — one Sunday night, one Monday morning and its latest which was sent out shortly after 8 pm last night.

As opposed to the two earlier releases, which were basically reassuring folks that despite the problem with Lehman, the markets were sound with a capital S, last night’s presser, which quoted Chris Cox, strongly suggested that there would be a significant new rule regarding the disclosure of short positions:

In addition to these initiatives, which will take effect at 12:01 a.m. ET on Thursday, I am asking the Commission to consider on an emergency basis a new disclosure rule that will require hedge funds and other large investors to disclose their short positions. Prepared by the staffs of the Division of Investment Management and the Division of Corporation Finance, the new rule will be designed to ensure transparency in short selling. Managers with more than $100 million invested in securities would be required to promptly begin public reporting of their daily short positions. The managers currently report their long positions to the SEC.”

As the rule stands now, funds with over $100 million are already required to disclose their long positions and options on a quarterly basis on a 13-F (a form that footnoted admittedly pays too little attention to). But there’s a big problem with the forms as evidenced by Greenlight Capital’s most recent one from August. Greenlight’s David Einhorn has been roundly blamed for Lehman’s (LEH) bankruptcy filing and he has been openly talking about his short position for the past year. But if he had not talked openly, you wouldn’t have gotten that from the 13-F, which just shows about $11.5 million in put options. That may be a chunk of change to average investors, but it’s not exactly in the bringing down a major company category.

Last night, my friend Greg Newton described the SEC’s latest action as a bladder control problem. But it also seems to be a bit hastily put together. As I understand it, most of the “evil” short activity takes place in the CDS Market, which is not regulated and, presumably would not be impacted by this rule. (For those unfamiliar with the CDS Market as it relates to this particular issue, there’s a pretty good explainer here.)

After getting the press release last night, I asked SEC spokesman John Nester via email to provide a few more details on exactly how the SEC envisions this working. But I’ve yet to hear back from him. Perhaps they’re working that all out as I type.

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