SEC Adopts New Reporting Regime for Short Sales

On October 13, 2023, the Securities and Exchange Commission (the “SEC”) adopted a new disclosure regime that requires investors to report information about certain short sales to the SEC.¹ New Rule 13f-2 under the Securities Exchange Act of 1934 (the “Exchange Act”) will require “institutional investment managers” that engage in short sales of “equity securities” in excess of certain thresholds to file new Form SHO with the SEC monthly. Form SHO will be confidentially filed with the SEC and will include detailed information about short sales in certain equity securities. The SEC will aggregate the reported information by security and publicly disclose only that aggregated information (without identifying any investors) monthly. The key elements of new rule are summarized below.

• Compliance Dates for Investors. Investors will need to begin complying with Rule 13f-2 and filing Form SHO in late 2024 or early 2025, depending on when the final rule is published in the Federal Register.
  • Specifically, investors will need to begin complying with the new reporting regime twelve months after the Rule becomes effective. Rule 13f-2 will be effective 60 days after it is published in the Federal Register.

• Persons Subject to Reporting Obligations. Entities trading for their own account and all persons with investment discretion over accounts of others will need to file Form SHO if they hold short sale positions exceeding the thresholds described below.

  Rule 13f-2 requires all “institutional investment managers” to file reports with respect to a security if the short sale position in that security exceeds certain thresholds. The definition of “institutional investment manager” is the same definition used for purposes of Schedule 13F, which extends beyond registered investment advisers, and has been interpreted broadly to capture “an entity that either invests in, or buys and sells, securities for its own account … [such as] corporations and pension funds that manage their own investment portfolios [and] a natural person or an entity that exercises investment discretion over the account of any other natural person or entity.”² That will include, among others, entities that are not registered with the SEC as investment advisers or otherwise. Also, an “institutional investment manager” will need to file Form SHO even if its holdings of “Section 13(f) securities”³ do not exceed the reporting thresholds in Rule 13f-1.

• Securities That Are In-Scope. Rule 13f-2 addresses short sales of “equity securities” issued by both public and private companies. “Equity securities” is broadly defined and includes, in addition to common and preferred stock, securities convertible, exercisable or exchangeable for an equity security.

  In addition to U.S. listed equity securities, Rule 13f-2 requires that short sales of other equity securities, such as equity securities of privately held companies and equity securities of companies that are only traded outside the United States, be taken into account when calculating if reporting thresholds are met and, if so, are subject to reporting. As such, the universe of securities that are in scope for Rule 13f-2 is substantially broader than “Section 13(f) securities.”

• Reporting Thresholds. Whether or not an investor is required to file Form SHO would be determined each month on a security-by-security basis. The relevant thresholds are:
  • Reporting companies. For equity securities of issuers that are SEC-reporting companies,⁴ either:
    • a monthly average⁵ 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
      • To determine the monthly average, an institutional investment manager will need to “determine its gross short position at the close of regular trading hours in the equity security (as defined in Rule 13f-2) on each settlement date during the calendar month and multiply that figure by the closing price at the close of regular trading hours on the settlement date (‘end of day dollar value’). The Manager shall 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 to arrive at a ‘monthly average’ for each equity security the Manager traded during that calendar month reporting period”⁶
    • a monthly average gross short position equal to 2.5% or more of the shares outstanding.
      • To determine the monthly average, an institutional investment manager will need to “(a) determine its gross short position at the close of regular trading hours in the equity security (as defined in Rule 13f-2) 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 to arrive at a ‘monthly average’ for each equity security the Manager traded during that calendar month reporting period.”⁷
  • Non-reporting companies. For equity securities of other issuers, 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. Notably, this threshold appears to apply to securities of non-reporting companies that are listed on non-U.S. exchanges, which may have significant trading volumes and market capitalization.
  • Exclusions. There are two important exclusions with respect to calculation of these thresholds:
    • short positions established through derivatives would not be counted towards these thresholds; and
    • investors that take short positions in ETFs would not need to include securities held by the ETF in its portfolio when calculating if the threshold has been met.
• Form SHO.
  • Deadline. Investors would be required to file reports with the SEC fourteen calendar days after the end of each month.
  • Content. Reports would include detailed information about short positions in securities for which the reporting person has exceeded the relevant threshold, including, among other things, the size of the gross short position at the end of the month and information regarding short sales and acquisitions of the relevant security for each settlement date during the calendar month.
    • In a welcome change from the SEC’s proposal, Form SHO does not require reporting persons to identify if a position is hedged. The SEC also reduced the amount of detail that needs to be provided regarding daily short-selling activity, requiring reporting persons to report their daily net change in the short position rather than breaking out that activity by several prescribed types of transactions, as was initially proposed.
  • Confidentiality. Form SHO filings will be confidential.
  • Public reporting by the SEC. The SEC plans to report aggregated data regarding short sales within one month following the end of the reporting calendar month, with the first report being published three months after investors are required to begin filing Form SHO. The aggregated information would be reported for each security and include the gross short position at the end of the month and daily net activity for each settlement date during the calendar month.

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