In response to ongoing complaints about activist short-sellers, the Canadian Securities Administrators (CSA) are launching a public consultation to examine whether there’s actually a problem, and if so, what to do about it.
In a new paper, the CSA explores the subject of short sellers who publicly stake out their negative position on a company through social media or other means.
Issuers and others have complained to the regulators that it’s too easy for loudmouthed shorts to publicly attack companies in an effort to drive down their stock prices and generate profits for traders that are short on that stock.
In its paper, the CSA sets out the results of its initial research into the subject, which suggests that activist short-selling campaigns are notably less prevalent in Canada than they are in the U.S.
On average, over the past 10 years, five of every 1,000 listed Canadian companies has faced an activist short campaign, compared with 21 U.S. companies.
That said, the activity has increased over the past five years — usually focused on sectors where there’s perceived overvaluation, such as Canada’s red hot cannabis sector a couple of years ago.
The paper also examines the state of short selling regulation in Canada and the rest of the world.
Critics have long complained that the Canadian approach to short selling generally is too lax. Yet, regulators have defended the Canadian regime and made the case for ensuring that short selling is part of the market as it contributes to market liquidity and price discovery.
Nevertheless, the CSA’s paper invites feedback on whether the short selling rules should be revisited, whether enforcement needs to change, and whether it should be easier for activist shorts to be sued in civil court for damaging conduct.
“In recent years, activist short-selling campaigns have received considerably more attention, and stakeholders have raised concerns about the overall impact of this activity on our markets,” said Louis Morisset, chair of the CSA and president and CEO of the Autorité des marchés financiers (AMF).
“To further inform our analysis, we are seeking comment on issues identified through our research,” he said.
The deadline for responses is March 3, 2021.