Regulators consult on short-selling rules

Despite a lack of evidence of harm attributable to short-selling, the Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) are considering possible reforms to the short-selling rules, citing persistent negative perception in parts of the market.

The CSA and IIROC published a joint notice that seeks further feedback on the short-selling regime and areas of possible change, including the rules regarding pre-borrowing requirements, reporting of failed trades, transparency of short positions and mandatory close-out/buy-in requirements.

The consultation on possible reforms to short-selling regulation comes despite an apparent lack of hard evidence that the existing regime is deficient. Instead, regulators are primarily responding to a perception that the short-selling rules in Canada are weaker than in other markets.

In their joint paper, the CSA and IIROC stress that they believe the existing regulatory framework meets global standards for short-selling regulation, and they haven’t received evidence of “specific issues arising from activist short-selling campaigns that would justify a regulatory response.”

Alongside the joint CSA-IIROC notice, the provincial regulators issued a separate notice detailing the results of a consultation launched last year into the phenomenon of activist short-selling.

That paper followed a review by the regulators that didn’t uncover any evidence of widespread market abuse involving activist shorts.

In Thursday’s notice, the CSA indicated that the responses it received on that paper didn’t do much to provide evidence of actual harm, but that the perception there’s a problem persists.

“The comments highlighted that stakeholders such as issuers, law firms and related industry groups continued to see activist short-selling in a negative light, with many believing that problematic conduct permeates this type of activity and that additional regulatory measures are necessary,” the CSA’s notice said.

The consultation also found support for activist shorts.

Among other things, supporters maintain that activist shorts can uncover corporate misconduct, and that short-sellers serve as a check on the long-only bias that often afflicts markets.

According to the CSA’s notice, supporters of activist shorts also stressed the need for any regulatory action to be based on evidence of actual harm from the current regime.

The regulators echoed that position, saying, “We agree that, to the extent any regulatory measures are considered, such measures should be tied to evidence of problematic conduct with activist short-selling and consideration be given to potential impacts on the activity, including any unintended consequences on market efficiency and the price discovery process.”

Still, given the negative perception among some on Bay Street, the regulators are once again seeking feedback on possible regulatory action.

The deadline for submissions is March 8, 2023.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.