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NEW YORK ( TheStreet) -- A little-noticed provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act may require large investors to disclose short positions in stocks to the Securities and Exchange Commission, something they are not currently required to do. The language in Section 929X(a) seems fairly clear in requiring the SEC to mandate detailed public disclosure of short interest on a monthly basis via what are known as 13(f) filings. Such filings currently require large investors -- defined as those that manage more than $100 million -- to disclose only their long positions. The proposed new law reads as follows: "The Commission shall prescribe rules providing for the public disclosure of the name of the issuer and the title, class, CUSIP number, aggregate amount of the number of short sales of each security, and any additional information determined by the Commission following the end of the reporting period. At a minimum, such public disclosure shall occur every month." An SEC spokesman declined to comment on the pending legislation. Despite the detailed legislative language about what must be disclosed, there is some question about whether the SEC will find a way to avoid mandating such a disclosure, or whether it will allow short sellers to remain anonymous. "There has been some discussion over the years about mandating disclosure of short positions and at different times the Commission has not been all that receptive to the idea that that's important market information," says Erich Schwartz, a former SEC official who is now a partner at Skadden, Arps, Slate, Meagher & Flom. Indeed, one Washington-based hedge fund lobbyist who spoke on the condition of anonymity said he was fairly confident the reporting requirements would not lead to the identities of short sellers being disclosed. Still, the fact that the disclosures would come via 13(f) filings suggests to Skadden's Schwartz that money managers will be required to disclosure their individual short positions. "That's certainly a likely outcome," he says. It is also an appropriate outcome, according to Harvey Pitt, a former SEC chairman who is now CEO of consultant Kalorama Partners.
"There are any number of discrepancies between the way the law handles long positions and how short positions are handled," Pitt wrote in an e-mail exchange with TheStreet. "The law should not make such distinctions." Disclosure requirements are greater for shareholders owning more than 5% of a company's stock, but a short position of comparable size does not need to be disclosed, Pitt points out. "That strikes me as both bad policy and improper discrimination against long-position holders. There really is no reason that we deprive the markets of this critical information, and it should be changed," he wrote. It is unlikely to be changed without a big fight by hedge funds. Among the arguments they are sure to make is that a disclosure of the identities of short sellers will cause them to be persecuted by the companies they are shorting. Many executives at Lehman Brothers and Bear Stearns blamed short sellers for the downfall of those firms, and well-known short-seller Jim Chanos said of Bear CEO Alan Schwartz, "that f*cker was going to throw me under the bus no matter what,"in an interview with Portfolio magazine. Short sellers including David Einhorn of Greenlight Capital and Bill Ackman of Pershing Square Capital Management have also talked and written publicly about being persecuted by both regulators and companies they shorted, such as Allied Capital ( ALD and MBIA ( MBI - Get Report). A temporary ban on short sales of 799 companies in 2008 was part of an effort by regulators to stave off sharp declines in shares of Goldman Sachs ( GS - Get Report) and Morgan Stanley ( MS - Get Report) that appeared to threaten the ongoing viability of those companies.Large banks, including Citigroup ( C - Get Report), JPMorgan Chase ( JPM - Get Report) and Bank of America ( BAC - Get Report) were also among the companies protected by the ban. Those institutions are all broker-dealers which profit by trading and lending securities to short sellers, and tend to oppose proposed rules that limit short-selling activity. However, some of them reluctantly supported the 2008 short-selling ban as they feared their companies might be taken apart in the panic following Lehman Brothers's bankruptcy filing in September of that year. In addition to its requirements on short sale disclosure, the Dodd-Frank legislation will require broker-dealers to disclose that they may lend out customers' securities for a profit to short sellers. They must also give customers the option of not allowing their securities to be lent.
Short sellers bet against a stock by borrowing it in the hope that the price will go down. They can then buy the stock at the lower price to pay back the lender, and pocket the difference for a profit.
-- Written by Dan Freed in New York.