SEC Adopts Reporting Regime for Short Sales and Positions

The SEC adopted Exchange Act Rule 13f-2 ("Reporting on gross short position and activity information") requiring 'institutional investment managers' to report, on new Form SHO, information as to certain short positions in equity securities and related trading activity.

As previously covered, Rule 13f-2 is intended to provide greater transparency by implementing Section 13(f)(2) ("Periodical and other reports") of the Exchange Act, which requires the SEC to adopt rules "for the public disclosure of [various information as to] short sales of each security and any additional information determined by the Commission . . . At a minimum, such public disclosure shall occur every month."

Key Provisions

Persons Subject to the Reporting Requirement. The reporting requirement applies to "institutional investment managers," as defined in SEA Section 13(f)(6)(A), which "includes 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." If more than one Manager has investment discretion with respect to the same securities, only one Manager is required to report.

Securities Positions as to which Reporting is Required.

• If the issue of the equities is registered under SEA Section 12 or as to which the issuer is required to report under SEA Section 15(d), then the manager must report if its monthly average gross short at the end of regulatory trading hours is either at least $10 million or 2.5% of the shares outstanding; or
• As to other equities, then the Manager must report if has a gross short position of $500,000 or more at the close of any trading day during the calendar month.

The SEC refers to the two above tests as "Threshold A" and "Threshold B," respectively, which is somewhat confusing, as it implies that they are alternative tests. They are not; the first test applies to equity securities of reporting companies, and the second to other companies.

Information to be Reported on Form SHO. Form SHO has two substantive tables that are required to be compiled:

• In "Table 1," for securities as to which reporting is required, the Manager must report its gross short position, by share amount and dollar value
• In Table 2, for each settlement day during the month as to each reportable security, the net amount of the Manager's purchases vs. sales for that day (with net purchase reported as a positive number and sales as a negative). In Table 2, the Manager must also provide information as to whether purchases were made to cover an existing short and information as to the manner in which such securities are purchased or sold; e.g., whether pursuant to an option exercise by or against the Manager, or a secondary transaction.

Reporting Day. Managers must file their reports by the 14th calendar day after the end of each month.

Information to be Made Public by the SEC. The SEC will report both Table 1 and Table 2 information as to each security aggregated across all Managers.

CAT Reporting. Separate from the Form SHO reporting, market makers will be required to report to CAT whether they are selling short pursuant to the bona fide market making exception in Regulation SHO.

Timing. The SEC reported in the accompanying Fact Sheet that the will become "effective" 60 days after publication in the Federal Register. Transactions should become reporting to FINRA one year after the effective date. The SEC should begin public reporting three months after that. The CAT reporting requirement will apply eighteen months after the effective date of the adopting release.

Commissioner Dissents

In dissent, Commissioner Hester M. Peirce argued that the requirements under the adopted rule go well beyond what Congress required and "the issue with this rule is that it does not adequately consider all the costs associated with its implementation. She posed a series of questions that address expenses, the benefits of the rule and the concerns that it may discourage short selling.

In dissent, Commissioner Mark Uyeda argued that revealing short positions could lead to short squeezes and dissuade informed investors from engaging in short selling, thereby undermining market efficiency. He also raised concerns about information security and the potential for leaks.