SEC Short Sale Disclosure Rules & Upcoming Compliance Date

Key Takeaways:

• The SEC adopted Rule 13f-2 and the corresponding Form SHO that requires institutional investment managers ("Managers") to report certain short position and short activity data for equity securities on a month-to-month basis if certain thresholds are met.
• The compliance date for Rule 13f-2 and the related Form SHO is January 2, 2025.

On October 13, 2023, the SEC adopted Rule 13f-2 and related Form SHO pursuant to the Securities Exchange Act of 1934 (the "Exchange Act"). Rule 13f-2 seeks to address Congress' directive under Section 929X of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") to provide more transparency in short selling. The new rule and related form will cause significant changes to short selling disclosure obligations for Managers.

Who has to file a Form SHO under Rule 13f-2?

Rule 13f-2 requires that all Managers file reports with respect to a security if the short sale position in that security exceeds certain thresholds (see below). The definition of "institutional investment manager" is the same as in Schedule 13F, which extends beyond registered investment advisers and has been interpreted broadly.¹

What securities are in the scope of Rule 13f-2?

The term "equity securities" within the meaning of Rule 13f-2 is defined broadly and includes securities issued by both public and private companies. In addition to common and preferred stock, "equity securities" also include: (i) securities that are exercisable, convertible or exchangeable for an equity security, and (ii) securities that are traded exclusively outside of the U.S. (including securities listed on non-U.S. exchanges). Thus, the universe of securities within the scope for Rule 13f-2 is substantially larger than the definition of "securities" used in Schedule 13F.²

What must be disclosed in Form SHO under Rule 13f-2?

Rule 13f-2 requires a Manager to file a Form SHO if it exceeds one of the thresholds described below during a calendar month. Thus, a Manager must make a monthly determination on a security-by-security basis. The threshold depends on whether the short position is related to an equity of a reporting or non-reporting entity.

Reporting Issuer

For equity securities of issuers that (i) have a class of equity securities registered under Section 12 of the Exchange Act or (ii) are required to file reports under Section 15(d) of the Exchange Act, the relevant threshold is either:

• A monthly average³ gross short position with a U.S. dollar value of $10 million or more at the close of regular trading hours during the calendar month; or
• A monthly average⁴ gross short position equal to 2.5% or more of the shares outstanding.

Non-Reporting Issuer

For equity securities of issuers that are non-reporting companies, the relevant threshold is a gross short position with a U.S. dollar value of $500,000 or more at the close of any settlement date during the calendar month.

For purposes of the above thresholds, gross short position is determined without any netting against long or derivative positions within the same security.

Exclusions. There are two important exclusions with respect to calculation of these thresholds⁵:

• Managers that take short positions in exchange-traded funds ("ETFs") do not need to include securities held by the ETF when calculating if the threshold has been met; and
• Short positions established through derivatives do not count towards the thresholds.

What are the details of Form SHO?

A reporting Manager must file a Form SHO report via the EDGAR system within 14 calendar days after the end of each calendar month with regard to equity securities that exceed any of the relevant thresholds above. The Form SHO consists of a cover page and two information tables and reports applicable short position information over which the Manager, and any person under the Manager's control, has investment discretion.

Table 1 reports the number of shares of the reported equity security representing the Manager's gross short position at the close of the last settlement date of the calendar month and the corresponding U.S. dollar value of this reported gross short position. Table 2 reports information relating to the daily activity affecting the Manager's applicable gross short positions during the reporting period.⁶ In Table 2, Managers must take into account certain prescribed types of purchase and sale activity (including short sales, exercise of trading of options, shares obtained through secondary offerings or tendered conversions, or other activity that increases, reduces or closes a short position, such as shares resulting from exchange-traded funds creation or redemption activity).

Any errors that affect the accuracy of the information reported on the Form SHO must be amended within 10 calendar days of discovery of such error.

What will the SEC do with the information reported under Rule 13f-2?

Form SHO filings themselves are confidential, but the SEC intends to publish the aggregate short position information regarding each individual equity security reported by Managers on the Form SHO within one month after the end of each calendar month. This information is intended to supplement the current short sale transaction information provided by major U.S. stock exchanges and the Financial Industry Regulatory Authority ("FINRA"). The first such reporting is expected to be issued in April of 2025.

Footnotes

1.Under Schedule 13F and Rule 13f-2, an "institutional investment manager" is an entity that either invests in, or buys and sells, securities for its own account. The definition also includes a natural person or entity that exercises investment discretion over the account of any other natural person or entity. SEC, Frequently Asked Questions about Form 13F.

2.Schedule 13F only reports equity securities of a registered class pursuant to section 12 of the Exchange Act.

3.The monthly average here is determined by the Manager's gross short position at the close of regular trading hours in the equity security on each settlement date during the calendar month, multiplied by the closing price at the close of regular trading hours on the settlement date ("end of day dollar value"). The Manager will then add all end of day dollar values during the calendar month and divide that sum by the number of settlement dates in the month. Adopting Release at n. 164, pg. 55.

4.To determine the monthly average here, a Manager will need to (a) determine its gross short position at the close of regular trading hours in the equity security on each settlement date during the calendar 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 (b) add up the daily percentages during the calendar month as determined in (a) and divide that sum by the number of settlement dates in the month. Adopting Release at n. 165, pg. 56.

5.Adopting Release at pgs. 24 and 36.

6.This "net" activity will be expressed by a single identified number of shares of the reported equity security, and will reflect offsetting purchase and sale activities by Managers. A positive number will indicate net purchase activity in the equity security, whereas a negative number will indicate net sale activity in the equity security. Adopting Release pg. 15.

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.