On December 8, 2022, the Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) jointly issued Staff Notice 23-329 – Short Selling in Canada (the Notice). The purpose of the Notice is to provide an overview of the existing regulatory regime with respect to short selling and request public feedback on specific areas for regulatory consideration.
Short selling involves the sale of borrowed securities at the current market price, with the expectation of buying them back later at a lower price, in order to settle the trade and make a profit. While there are many legitimate reasons to sell short, such as hedging and speculation, there are also concerns that the practice can be used as a means to artificially drive an issuer’s stock price down for an ulterior motive.
The Notice begins by outlining the regulatory framework currently in place surrounding short selling, which allows IIROC to monitor and supervise potentially inappropriate short selling practices. Although the CSA and IIROC believe that Canada’s regulatory regime is consistent with principles published by the International Organization of Securities Commissions to effectively regulate short selling, they acknowledge that short selling is not without controversy and that some issuers perceive the regime as too permissive. As a result, the Notice seeks to provide a discussion on key topics related to short selling, in order to elicit discussion and invite public input on the regime.
One key topic discussed is public transparency requirements regarding short selling activities. While IIROC publically discloses short positions in a report released bimonthly, there are no regulatory or public reporting requirements to disclose information on an individual account such as those used in the European Union and Australia. Comments on this topic are mixed, with some believing that more extensive reporting would be beneficial, whereas others caution that additional transparency could have unintended consequences, such as leading to group behaviour further depressing an issuer’s stock price. The CSA and IIROC are currently reviewing international initiatives, while also looking for public comment to determine if more extensive disclosure would be beneficial to market participants.
While the CSA and IIROC maintain that Canada’s regulatory framework is generally consistent with effective regulation of short selling, they acknowledge input from various stakeholders in relation to the regime. They therefore seek to discuss and address some of these topics, in order to receive feedback on ways to improve regulation of short selling in Canada. Given the importance that short selling has in the capital markets, and the various approaches taken in jurisdictions outside of Canada, it will be interesting to see if any changes are made to the current regime in response to this Notice and comments.
The author would like to thank Katie Helou and Fiona Sarazin for their significant contribution to this article.