Goldman Sachs Participates in SEC Roundtable on Securities Lending and Short Sales
Goldman Sachs was invited to participate in the SEC’s roundtable on Securities Lending and Short Sales on September 29-30, 2009. In addition to participating in the roundtable, Goldman Sachs has publicly stated its views regarding short selling and regulatory actions to address abusive or "naked" short selling in public comment letters to the SEC. Copies of our written submissions at the roundtable and comment letters are linked below.
In summary, our views on short selling and the SEC’s regulatory actions are as follows:
Goldman Sachs Supports Measures to Address Abusive or "Naked" Short Selling: Goldman Sachs supports measures to address naked short selling or other types of short selling abuses that adversely impact the security and integrity of our capital markets.
Regulated Short Selling Plays an Important Role in Markets: We support legitimate short selling as a necessary and essential part of efficient capital markets. There are important benefits derived from legitimate, regulated short selling. Short selling enhances liquidity and pricing efficiency in the markets. Short selling adds to the selling interest available to buyers and often offsets temporary imbalances between supply and demand, which contributes to the maintenance of fair and orderly markets. Short sellers also add liquidity when they purchase shares to cover their short sales.
The SEC Has Been Effective at Targeting and Dramatically Reducing Security Fails where Potential Abuses May Have Existed: The SEC implemented Rule 204 T in October 2008 and it was made permanent in July 2009, requiring mandatory close outs on T+4 for fails-to-deliver resulting from the short sale of equity securities, and on T+6 for market makers and long sellers. The SEC appropriately focused on the clearance and settlement process where evidence of abusive short selling was most likely to appear. According to a U.S. Government Accountability Office ("GAO") report issued in May 2009, 99.9% of equities trades now settle on time, further evidence of the effectiveness of Rule 204. Additionally, FINRA has begun to publish monthly short sale reports and will begin to publish daily reports before the end of the year.
The SEC Should Consider Adopting the Updated Prime Brokerage No-Action Letter: An existing industry proposal would create a mechanism for brokers to communicate information concerning clients’ order mismarking and failures to obtain locates. Strengthening the communication channel will serve to alert the brokers of situations where clients did not obtain locates for their short sales or did not have sufficient inventory for their long sales. This will serve to reduce future fails while exposing potential abuses such as order mismarking, which the pre-borrow solution will not detect. In addition, this approach avoids the negative impact on liquidity and costs that can arise from a pre-borrow or hard locate requirement. Finally, such a solution would be easier to implement than the pre-borrow or hard locate solutions. The updated prime brokerage proposal was discussed in the May 2008 comment letter from the Securities Industry and Financial Markets Association ("SIFMA") to the SEC.
New "Tick Test" Rules Should Only be Considered in a Targeted Manner - Broad Implementation Could Have Unintended Negative Consequences to Market Liquidity and Efficiency : Some have advocated further regulatory steps such as a pricing test. Given the actions of the SEC to implement Rule 204T, we continue to believe that the evidence does not support the need for a short sale price test relative to the negative cost to market liquidity and efficiency . If the SEC decides to adopt such a test, it should be targeted to individual securities and triggered at times when the market is most vulnerable to potential manipulative short selling as evidenced by the security's stock price. If the SEC deems a tick test is required, then we believe a security circuit breaker test in combination with the Alternative Uptick Rule is likely to have the least unintended consequences for market liquidity and efficiency.
The Office of Economic Analysis ("OEA") Should Study Any Remaining Fail Data Before the SEC Considers New Rules: OEA has not published any studies pertaining to security fails-to-deliver since Rule 204 was finalized in July 2009. The small percentage of remaining fails-to-deliver that are not addressed through the above regulatory reforms should be examined to isolate possible themes that may give the SEC and the market better insight into potential abuses and remedies without damaging market liquidity and efficiency.
SEC Maintains Emergency Powers for Extraordinary Events: We believe that the above structure would satisfy the SEC's goals of combating potential short selling abuses and restoring investor confidence, yet would maintain the efficiency and global competitiveness of the U.S. capital markets. In the event that market conditions unfolded that the SEC deemed extraordinary, it continues to have powers to impose emergency measures to protect markets and the investing public. Such measures should be reserved for extraordinary periods and should not become the regulatory norm. See Section 12(k)(2) of the Securities Exchange Act of 1934.
Goldman Sachs Comments and Material on Short Selling, Pre-borrow & Hard Locates:
>> Goldman Sachs Letter to the SEC, Re: Proposed Measures to Restrict Short Selling – File No. S7-08-09, June 19, 2009 [PDF, 1MB]
>> Goldman Sachs Letter to the SEC, Re: Amendments to Regulation SHO: Reopening of Comment Period and Supplemental Request for Comment – File No. S7-08-09, September 21, 2009 [PDF, 310 KB]
>> Leslie S. Nelson, SEC Securities Lending and Short Sale Roundtable, The Future of Securities Lending and Potential Regulatory Solutions: Market Evolution; SEC’s Role; Assessing any Regulatory Gaps, September 29, 2009
>> William J. Conley, SEC Securities Lending and Short Sale Roundtable, Controls on "Naked" Short Selling: Examination of Pre-Borrow and Hard Locate Requirements, September 30, 2009