Short-Selling and Accredited Investors (§ 413 & § 417)

The legislation requires the SEC to investigate the state of short-selling (including the incidence of the failure to deliver shares sold short) and submit a study to Congress. The study must address the feasibility of real-time short-selling reporting and a pilot program for public companies to have trades of their stock marked in real time as “short,” “market maker short,” “buy,” “buy-to-cover,” or “long.”

What records and reports will the SEC track?

Congress has instructed the SEC to require investment advisers to maintain records and file certain periodic reports detailing the following:

  • total assets under management;
  • types of assets held;
  • use of leverage;
  • counterparty credit risk exposure;
  • trading and investment positions;
  • trading practices;
  • valuation policies and practices;
  • side letters or arrangements treating some investors more favorably than others; and
  • information the SEC deems to be in the public interest or necessary for systemic risk monitoring.

In addition, Congress has revisited the accredited investor standard for individuals and modified the current Regulation D standard promulgated under the Securities Act of 1933 (Securities Act) to exclude the value of a person’s primary residence from the calculation of net worth. After the fourth anniversary of the enactment of the legislation, the SEC is directed to increase the personal net worth standard from the current $1 million and to review, once every four years, the individual accredited investor standard and make any changes necessary for investor protection. Other criteria for the accredited investor determination remain unchanged in the legislation. Nonetheless, the SEC may adjust the accredited investor definition for individuals (excluding the net-worth standard discussed above) for the protection of investors, in the public interest, and in light of the economy. Like a number of other measures in the legislation, the changes to the accredited investor rules reflect Congress’s belief that many Americans did not understand the complexity of their investments and financial arrangements. This may be particularly true of those who qualified as hedge fund or private equity investors on the basis of rising home values that eventually declined sharply.