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Securities Law Update
On October 15, 2008, the Securities Exchange Commission (the "SEC") published an interim final rule 10a-3T ("Interim Rule 10a-3T") under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that requires institutional investment managers ("Managers") to file Form SH until August 1, 2009. The SEC originally adopted the Form SH filing requirement in an emergency order on September 18, 2008 (the "Emergency Order") to require Managers to disclose their short positions on a class of securities defined in section 13(f) of the Exchange Act. The Emergency Order was extended on October 2, 2008 until October 17, 2008. Interim Rule 10a-3T went into effect on October 18, 2008. The SEC has solicited comments on Interim Rule 10a-3T, which are due 60 days from the date that SEC Release No. 34-58785 (the "Adopting Release") is published in the Federal Register.
The initial filing under Interim Rule 10a-3T is due on October 24, 2008. Interim Rule 10a-3T modifies several aspects of the Emergency Order Form SH filing requirement. We summarize the modifications in this update.
Weekly Form SH filing due at the end of the following week
Managers must file Form SH on a weekly basis on the last business day of the calendar week immediately following the calendar week during which the Managers effected new short sales on section 13(f) securities, except for options. (Managers may rely on the list of section 13(f) securities found on the SEC website at http://www.sec.gov/divisions/investment/13flists.htm.) This is a change from the Emergency Order, which required the filing to be made on the first business day following the calendar week during which the short positions were effected. For the purposes of filing Form SH, a calendar week runs from Sunday to Saturday ("Reporting Period").
Form SH is nonpublic
Under the original Emergency Order, Form SH was to be made available to the public two-weeks after the filing date. In the order extending the Emergency Order, the SEC determined that Form SH should remain nonpublic, and further clarified in the Adopting Release that Form SH would remain nonpublic. The SEC relied on two exemptions under the Freedom of Information Act ("FOIA") to withhold information reported on Form SH. Those FOIA exemptions cover: (1) trade secrets and privileged or confidential commercial or financial information; and (2) matters that relate to the use by the agency responsible for regulation or supervision of financial institutions. Managers must continue to label Form SH with the phrase "NONPUBLIC" (in bold and capital letters) at the top and bottom of each page of the form.
Short positions established prior to the Emergency Order must be reported
Interim Rule 10a-3T requires Managers to report all short positions on section 13(f) securities, other than options, including those established prior to the effective date of the Emergency Order, September 22, 2008. Under the Emergency Order, short sales transacted before the Emergency Order became effective were not subject to the disclosure requirement.
Transition filings on October 24, 2008 and October 31, 2008
To assist Managers in transitioning from the Emergency Order to Interim Rule 10a-3T, the SEC will allow Managers filing Form SH on October 24, 2008 and October 31, 2008 to exclude the short positions established prior to September 22, 2008. Managers may exclude these short positions if they constitute less than 0.25% of the securities issued and outstanding in that class of securities and the fair market value of the short position in that security was less than $1,000,000 as of September 22, 2008. Beginning with the November 7, 2008 filing, all short positions in section 13(f) securities, including those established prior to the Emergency Order, must be reported.
Information required on Form SH
Interim Rule 10a-3T eliminates certain categories of information on short positions that were required under the Emergency Order. Form SH now requires disclosures concerning, among other things, the identity of Managers that are filing Form SH, the name of the issuer, the CUSIP number, the opening short position (start of day) and the closing short position (end of day), and the number of securities sold short. Form SH no longer requires disclosure of the largest intraday short position, the time such position was established, or the value of securities sold short. Managers must be prepared to submit Form SH in an XML tagged data file by November 7, 2008.
Who must report
As before, Managers who filed or were required to file Form 13F for the previous calendar quarter are subject to the Form SH filing requirement. Managers who exercise investment discretion over accounts holding section 13(f) securities with an aggregate fair market value of at least $100,000,000 are subject to the Form 13F reporting requirement.
Under Interim Rule 10a-3T, Managers must also make a determination on a weekly basis whether they should file Form SH. Managers who have not executed any new short sales in section 13(f) securities during the Reporting Period do not need to file Form SH. Managers are not required to file Form SH if they determine that on each day of the Reporting Period, each of the opening short position, the closing short position, and the number of securities sold short during the day in the section 13(f) securities constitutes less than 0.25% of the securities issued and outstanding in that class of securities, and the fair market value of each position and number of securities sold short is less than $10,000,000.
Exceptions from reporting short positions on Form SH
Interim Rule 10a-3T provides two exceptions from reporting short positions on Form SH for the Managers who determine that they are required to file Form SH for the Reporting Period.
- Managers are not required to report a short position in a section 13(f) security if, on any day of the Reporting Period, the opening short position, the closing short position, or the number of securities sold short during the day in the section 13(f) securities constitutes less than 0.25% of the securities issued and outstanding in that class of securities, and the fair market value of such positions or number of securities sold short is less than $10,000,000. For the purpose of reporting short positions, the SEC increased the threshold on the fair market value from $1,000,000 to $10,000,000. However, as noted above, for Managers opting to exclude short positions effected prior to the Emergency Order from Form SH reporting for the October 24, 2008 and October 31, 2008 filings, the relevant threshold for the exclusion remains $1,000,000.
- Managers are not required to report short positions in section 13(f) securities resulting from riskless principal transactions executed in connection with customer orders to buy or sell section 13(f) securities.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
