On February 25, 2022, the SEC proposed a new requirement for certain institutional investment managers to report short sale information to the SEC on a monthly basis. The SEC would then publicly disclose aggregate data about large short positions, including daily short sale activity data, for individual equity securities. Certain data, including the identities of such managers and individual short positions, would remain confidential.
The SEC believes this increased transparency would allow market participants to better understand short sale activity, including the timing of increases and decreases in reported positions. It acknowledged that increased disclosure could facilitate copycat trading, make holders of short positions susceptible to retaliation, including short squeezes, and have a potential chilling effect on short selling; however, the SEC believes that limiting public disclosure to aggregate information across all managers, on a delayed basis, would likely mitigate these potential negative consequences. Additionally, it believes the reported information would help it perform its oversight role and help protect investors, including by increasing deterrence of manipulative short selling.
Comments on the short sale proposal are due by the later of 30 days after publication in the Federal Register or April 26, 2022.
Who Has to Report?
Investment advisers, banks, trustees, insurance companies, broker-dealers, pension funds, family offices, corporations and any natural person who exercises investment discretion over the account of another person that engages in short sales could be required to file new Form SHO.
Specifically, new Rule 13f-2 would require that any "institutional investment manager" with "investment discretion" -- including accounts of any person under its control -- over any equity security file a Form SHO if the manager engages in short sales of such security that collectively meet or exceed the quantitative thresholds described below. The terms "institutional investment manager" and "investment discretion" would have the same meanings as used for Form 13F. The former includes any person, other than a natural person, investing in or buying and selling securities for its own account, and any person, including a natural person, exercising investment discretion with respect to the account of any other person.
What are the Thresholds for Reporting?
Reporting is required with respect to a calendar month where the manager (including accounts of any person under its control) has:
- A gross short position in any equity security of an SEC-reporting company of U.S. $10 million or more at the close of regular trading hours on any settlement date during the calendar month;
- A monthly average gross short position as a percentage of shares outstanding in an equity security of an SEC-reporting company of 2.5% or more; or
- A gross short position in any equity security of a non-SEC reporting company of U.S. $500,000 or more at the close of regular trading hours on any settlement date during the calendar month.
Reporting would be made on a "gross" basis, without any offsetting economic positions such as shares held long or derivatives, in order to provide a more complete view of short exposure and avoid inconsistent reporting of offsetting positions.
To avoid duplicate reporting, one manager may report for other managers where they exercise investment discretion over the same securities – as permitted for Form 13F.
Confidential Reporting by Manager
New Rule 13f-2 would require a covered manager to file Form SHO within 14 calendar days after the end of each month for which the manager is required to file such a report via Edgar in an XML format, using either an SEC fillable web form or the manager's own software tool.
The information a manager would report would include:
- The name of the eligible security;
- End of month gross short position information; and
- Daily trading activity that affects a manager's reported gross short position for each settlement date during the calendar month reporting period.
The SEC would treat all information on Form SHO that would reveal the identity of a manager as deemed covered by a confidential treatment request.
Public Reporting by SEC
The SEC would expect to publish the following aggregated data by the end of the month, i.e., within one month after the end of the reporting month, based on information reported in filed Form SHOs:
- The issuer's name and other identifying information related to the issuer;
- The aggregated gross short position across all reporting managers in the reported security at the close of the last settlement date of the calendar month of the reporting period, as well as the corresponding dollar value of this reported gross short position;
- The percentage of the reported aggregate gross short position that is reported as being fully hedged, partially hedged, or not hedged; and
- For each reported settlement date during the calendar month reporting period, the "net" activity in the reported security, as aggregated across all reporting managers.
The SEC's proposal includes a new Rule 205 that would establish a new "buy to cover" order marking requirement for certain purchase orders effected by a broker-dealer for its own account or for the account of another person at the broker-dealer. Also, in a separate proposal, the SEC is proposing to amend the rules relating to the consolidated audit trail of the national market system.
Collectively, these amendments would require broker-dealers to collect and submit additional data on purchases to cover short sales as well as assertion of Regulation SHO's bona fide market making exceptions. The SEC believes this data would provide it with greater visibility into market activity related to short selling, thus aiding it in reconstructing market events, particularly during volatile markets, and identifying potentially abusive trading practices.
The SEC also reopened the comment period for Rule 10c-1, which was proposed last November to increase the transparency and efficiency of the securities lending market by requiring any person that loans a security on behalf of itself or another person to report the material terms of those securities lending transactions and related information to a registered national securities association.
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.