CSA Consultation Paper 25-403 Activist Short Selling

March 24, 2021

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CSA Consultation Paper 25-403 Activist Short Selling 

Letter Summary:

The CSA’s consultation paper is intended to gather comments on concerns raised relating to activist short selling, which is where one takes a short position and then publicly shares information or analysis likely to have a negative effect on the security’s price. The CSA has been examining this issue closely and its research findings are set out in the paper, discussing activist short selling in Canada to date as well as concerns identified about such activity, in contrast to those who feel too much regulatory intervention will detract from the price discovery process and legitimate short selling activities. The CSA research indicates that most short sellers behind campaigns targeting Canadian issuers are well-established and based in the U.S, with anonymous short sellers accounting for less than 20% of the activist short sellers targeting Canadian issuers since 2010. While currently most Canadian jurisdictions do not have specific requirements relating to activist short selling, there are existing prohibitions such as those against market manipulation, misleading statements, and fraud.  Short selling as a trading activity is also regulated by IIROC. Unlike some jurisdictions (e.g. the EU), there are no requirements to report publicly on the short position of individual accounts.  A number of consultation questions are posed, seeking data on the nature and extent of activist short selling in Canada, as well as comments with respect to potential remedial actions.

Overview of the Council’s Comments:

As stakeholders who professionally function in this subject matter, we genuinely appreciate the analytical rigour, context, explanation, and the specialist dataset employed in the research and content of this Consultation Paper. We believe any incremental regulatory response to the problematic activities under discussion must target the problematic activities in isolation and not serve as any sort of general deterrent to short sellers, or to short selling generally. To do otherwise could have wide-ranging and systemic negative consequences for Canadian capital markets.

Key Points

1. The systemic capital markets benefit of a robust environment for short selling are well-established

2. Activist short sellers often contribute to market efficiency 

3. Policy and regulatory solutions must be grounded in robust analysis

4. Securities regulators already possess remedies to address the problematic behaviours and activities under consideration. 

Responses to select Consultation Questions

• We interpret from the data presented that many activist short sellers are legitimately attempting to improve price discovery and contribute to market efficiency in cases of overvalued securities. 

• It is important for the marketplace in aggregate to hold issuers accountable, sometimes through direct questioning and, where appropriate, the presentation and dissemination of data in support of these questions and related contradictory statements. In our view, it is not appropriate to by-default hold issuers and short sellers, or other market participants that generally exist at arms-length to an issuer to the same standard of accuracy when making statements about an issuer. 

• While we recognize the impact of social media on financial markets is beyond the scope of the Consultation Paper, the prevalence of such tools raises the question of the need for a standardized definition of “dissemination”, this time in the context of activist short selling activities.

• We believe that ongoing regulatory oversight of securities lending data in combination with existing regulatory tools could serve as a potentially useful deterrent for problematic behaviour and activities.

• It would be helpful for further examination by regulators if they had regularized and ongoing transparency into securities lending transactions and inventories of shares that are available for lending, both widely across Canadian issuers, and particularly in issuers then subject to activist short selling campaigns. 

• We see no evidence of specific Canadian market vulnerability to activist short selling.

• We believe that a regulatory requirement for a positive locate (confirming a mutually understood reasonable expectation of borrow) may be necessary for the Canadian markets, similar to the U.S. and the E.U., for short sales, and not just those where there has been a prior extended failed trade.

• We believe the case has not been firmly established for public disclosure of short positions, and that regulators should focus on gaining transparency into transactional and position data for regulatory purposes and further study, including securities lending data.

• We are not of the view that activist short sellers should be subject to specific incremental regulation. 

• We believe regulators need the data, enforcement resources, personnel, and tools to enable them to triage issues quickly and concentrate resources on cases of problematic activity or behaviour.