On October 13, 2023, the U.S. Securities and Exchange Commission (SEC or Commission), adopted Rule 13f-21 (Final Rule) under the Securities Exchange Act of 1934 (Exchange Act) and Form SHO, which for the first time will require institutional investment managers2 (Institutional Investment Managers) to report to the SEC extensive information on certain “large” short positions and short sale activity on a monthly basis.3 The SEC will then use this data to make publicly available aggregate data about short positions and short sale activity in individual securities.
The SEC also adopted an amendment to the national market system plan (NMS Plan) governing the consolidated audit trail (CAT), under which CAT reporting firms must indicate whether an order is a short sale effected by a market maker in connection with bona fide market making activities for which the “bona fide market making exception” to the Regulation SHO “locate” requirement is claimed.4
These new SEC reporting requirements will impose significant operational and compliance burdens on a number of market participants, most notably managers of private funds and family offices, as well as broker-dealers. In certain respects, the new short disclosure requirements are much more substantial and onerous than the current disclosure of long positions by Institutional Investment Managers on Form 13F as well as beneficial ownership reporting on Schedules 13D and 13G. To comply with new Rule 13f-2 and Form SHO, Institutional Investment Managers will need to monitor on a daily basis their short sale activity in equity securities in order to calculate whether their “gross short position” exceeds the identified thresholds, as described further below. In addition, for each equity security in which the gross short position exceeds an applicable threshold, the Institutional Investment Manager will be required to perform onerous calculations to determine, and report, the “net” trading activity in such security on each day of the month.
Summary of Rule 13f-2 and Form SHO
- Rule 13f-2 will require an Institutional Investment Manager to file, within 14 calendar days after the end of each calendar month, a Form SHO report via the Commission’s Electronic Data Gathering, Analysis, and Retrieval system (EDGAR) for
- each equity security that is of a class of securities registered pursuant to Section 12 of the Exchange Act or for which the issuer is required to file reports pursuant to Section 15(d) of the Exchange Act (Reporting Company Issuer) over which the Institutional Investment Manager and all accounts over which it has investment discretion with respect to either (i) a monthly average gross short position at the close of regular trading hours in the equity security with a value of USD $10 million or more5 or (ii) a monthly average gross short position at the close of regular trading hours as a percentage of the issuer’s total shares outstanding of 2.5% or more6
- each equity security that is of a class of securities of an issuer that is not a Reporting Company Issuer over which the Institutional Investment Manager and all accounts over which it has investment discretion with respect to a gross short position with a U.S. dollar value of $500,000 or more at the close of regular trading on any settlement date during the calendar month (notably, and different from the calculation for Reporting Company Issuers, such calculation is not determined based on the monthly average gross short position but rather will be triggered if exceeded on any settlement date during the reporting month)
- Institutional Investment Managers, with respect to short positions in reported equity securities meeting the above-described thresholds, will be required to report on Form SHO information concerning the end-of-month gross short position, as well as detailed information on the Institutional Investment Manager’s daily “net” activity, in each reported equity security.
- The SEC expects that it will make public aggregated information derived from data reported on Form SHO within one month after the end of the reporting calendar month.
Summary of Amendment to the CAT NMS Plan to Report Bona Fide Market Making
As was originally proposed, the amendment to the CAT NMS Plan will require CAT reporting firms to report to the CAT, for the original receipt or origination of an order to sell an equity security, whether the order is a short sale effected by a market maker in connection with bona fide market making activities in the equity security for which the “bona fide market making exception” in Rule 203(b)(2)(iii) of Regulation SHO is claimed.
Key Changes From the Proposing Release
In response to comments received regarding the February 25, 2022, proposing release, the SEC made certain modifications to the proposal.7 The following are key changes.
- Removal of “Buy to Cover” Order Marking: The Commission determined not to adopt proposed Rule 205, which would have required broker-dealers to mark purchase orders as “buy to cover” when purchasing to cover short positions for the broker-dealer’s own account or for the accounts of customers and report such information to the CAT.
- Streamlined Information Tables on Form SHO:
- The Commission determined not to adopt the proposed requirement to report positions as “fully hedged,” “partially hedged,” or “not hedged” on Information Table 1.
- The Commission determined to retain reporting of short position information for each settlement date during the reporting month on Information Table 2. However, it reduced the categories of information that must be provided from 16 to seven, requiring instead that the Institutional Investment Manager report information on the “net” change in its short position. Notwithstanding, populating the Information Table 2 will likely involve an onerous and manual process, including calculating the “net change in short position” on each settlement day by taking into account short sales settling on such day, shares “purchased to cover” settling on such day, as well as shares settling on such day as a result of options exercises and assignments that reduces or closes a short position. The Institutional Investment Manager must, as part of calculating the “net change in short position,” include shares acquired as a result of “tendered conversions” or “obtained through a secondary offering” that reduces or closes a short position on that security and settled on such date.8
- Adjustments to Reporting Thresholds: The dollar value prong of the reporting threshold for equity securities of Reporting Company Issuers will now be based on a monthly average of daily gross short positions rather than the proposed daily calculation. However, for securities of non-Reporting Company Issuers, the dollar value prong of the reporting threshold must be calculated daily (rather than based on a monthly average), and exceeding the threshold on any settlement date during the reporting month will trigger the reporting requirement.
- Amendments Required, but Separate SEC Notification Requirement Removed: The Commission determined not to require an Institutional Investment Manager to separately notify the SEC if a data point reported in an Amendment and Restatement on Form SHO changes a previously reported data point by 25% or more.
- Timing Clarifications: Changes to Rule 13f-2 and in the instructions to Form SHO now clarify that for purposes of determining whether an Institutional Investment Manager meets or exceeds a reporting threshold, an Institutional Investment Manager shall determine its gross short position “at the close of regular trading hours” in the equity security rather than at the “end of day.”
Effective Date
The Final Rule will become effective 60 days after the adopting release is published in the Federal Register (Effective Date). The compliance date for Rule 13f-2 and Form SHO will be 12 months after the Effective Date, at which time Institutional Investment Managers must begin filing Form SHO with the SEC on EDGAR. The SEC will begin publishing aggregated collected data three months later.
The compliance date for the amendment to the CAT NMS Plan, at which time market makers must begin marking orders for short sales as effected pursuant to the “bona fide market making exception” in Rule 203(b)(2)(iii) of Regulation SHO, will be 18 months after the Effective Date (i.e., 20 months after the date the adopting release is published in the Federal Register).
1 17 CFR § 240.13f-2.
2 The term “institutional investment manager” is defined in Section 13(f)(6)(A) of the Exchange Act (15 USC § 78m(f)(6)(A)) to include “any person, other than a natural person, investing in or buying and selling securities for its own account, and any person exercising investment discretion with respect to the account of any other person.” The Commission noted this typically can include broker-dealers, investment advisers, banks, insurance companies, pension funds, and corporations.
3 Short Position and Short Activity Reporting by Institutional Investment Managers, Release No. 34-98738 (October 13, 2023), available here.
4 CAT NMS Plan § 6.4(d)(2)(B)–(D).
5 To determine whether this threshold is met, an Institutional Investment Manager must determine its gross short position at the close of regular trading hours in the equity security on each settlement date during the month and multiply that figure by the closing price at the close of regular trading hours on the settlement date. The Institutional Investment Manager must then add all end of day dollar values during the month and divide that sum by the number of settlement dates in the month to arrive at the “monthly average” for each equity security.
6 To determine whether this threshold is met, the Institutional Investment Manager must (1) determine its gross short position at the close of regular trading hours in the equity security on each settlement day during the month and divide that figure by the number of shares outstanding in such security at the close of regular trading hours on the settlement date and (2) add up the daily percentages during the calendar month as determined in (1) and divide that sum by the number of settlement dated in the month to arrive at a “monthly average” for each equity security the Institutional Investment Manager traded during that month reporting period.
7 For more information, see our March 9, 2022, Sidley Update on the proposing release, available here.
8 Notably, it would appear from the SEC’s instructions that settling purchases from all of the described activity that do not “reduce or close a short position” (e.g., where the Institutional Investment Manager will maintain both long and short positions, including for hedging purposes) should not be included as part of calculating the “net change in short position.”
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