The Securities and Exchange Commission (SEC) adopted a new rule and form requiring certain persons to report short sale-related data to the SEC, which will in turn publish aggregate data. The SEC also adopted related amendments to the CAT NMS Plan to capture short sales effected by market makers in connection with bona fide market making activities.

On October 13, 2023, the SEC adopted Rule 13f-2 under the Securities Exchange Act of 1934 (Exchange Act) and Form SHO. The new rule and form will require institutional investment managers (as defined below) that meet certain thresholds to report short position data and short activity data for equity securities. In addition, the SEC amended the national market system (NMS) plan governing the consolidated audit trail (CAT) to require the reporting to the CAT of reliance on the bona fide market making exception in Regulation SHO (CAT Amendments).

The effective date of Rule 13f-2, Form SHO is January 2, 2024, and the compliance date is 12 months later (on or around January 1, 2025). The SEC will begin to publish aggregate data about three months later (approximately April 2025). The effective date for the CAT Amendments is also January 2, 2024, but the compliance date is July 1, 2025.

KEY TAKEAWAYS

• Who has to report? Rule 13f-2 and Form SHO apply to “institutional money managers” as defined in Section 13(f)(6)(A) of the Exchange Act. The term typically can include brokers and dealers, investment advisers, banks, insurance companies, pension funds, and corporations.
• What securities transactions are reportable? Rule 13f-2 and Form SHO will capture information regarding (1) equity securities that are of a class of securities that is registered pursuant to Section 12 of the Exchange Act or for which the issuer of that class of securities required to file reports pursuant to Section 15(d) of the Exchange Act (Reporting Company Issuer) and (2) equity securities that are of a class of securities of an issuer that is not a Reporting Company Issuer. In either case, the institutional money manager and all accounts over which the institutional money manager (or any person under the institutional money manager’s control) would have to have investment discretion with respect to a monthly average gross short position that meets or exceeds a prescribed reporting threshold.
• What are the reporting thresholds? The reporting thresholds for a Reporting Company Issuer are (1) a monthly average gross short position at the close of regular trading hours in the equity security with a US dollar value of $10 million or more or (2) a monthly average gross short position at the close of regular trading hours as a percentage of shares outstanding in the equity security of 2.5% or more. For a non-Reporting Company Issuer, the reporting threshold is a gross short position in the equity security with a US dollar value of $500,000 or more at the close of regular trading hours on any settlement date during the calendar month.
• What is the reporting requirement? For each reported equity security, an institutional money manager will report (1) end-of-month gross short position in the equity security at the close of regular trading hours on the last settlement date of the calendar month and (2) each individual settlement date during the calendar month, the “net” activity in the reported equity security, which includes activity in derivatives, such as options.
• When are reports due and when is aggregate data published? Form SHO is required to be reported within 14 days after the end of the month. The SEC will publish aggregate data about a month later.

BACKGROUND

As discussed in the adopting release, Section 929X of the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA) added Section 13(f)(2) of the Exchange Act. That section requires that the SEC adopt rules to make certain short sale data publicly available on, at least, a monthly basis. In particular, Exchange Act Section 13(f)(2) requires that the SEC

prescribe rules for the public disclosure of the name of the issuer and the title, class, CUSIP number, aggregate amount of the number of short sales of each security, and any additional information determined by the Commission following the end of the reporting period. At a minimum, such public disclosure shall occur every month.

Although the DFA was adopted in 2010, the SEC did not propose a rule under Section 13(f)(2) of the Exchange Act until February 2022.

Scope of Persons Covered by Final Rule 13f-2 – Institutional Investment Managers

As discussed above, Rule 13f-2 applies to any “institutional investment manager” as defined in Section 13(f)(6)(A) of the Exchange Act. That definition 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. As explained by the SEC, the term typically can include brokers and dealers, investment advisers, banks, insurance companies, pension funds, and corporations.

The term “investment discretion” has the same meaning as in Exchange Act Rule 13f–1(b). That rule cross references the definition of investment discretion in Section 3(a)(35) of the Exchange Act. Under that section

A person exercises “investment discretion” with respect to an account if, directly or indirectly, such person (A) is authorized to determine what securities or other property shall be purchased or sold by or for the account, (B) makes decisions as to what securities or other property shall be purchased or sold by or for the account even though some other person may have responsibility for such investment decisions, or (C) otherwise exercises such influence with respect to the purchase and sale of securities or other property by or for the account as the [SEC], by rule, determines, in the public interest or for the protection of investors, should be subject to the operation of the provisions of this chapter and the rules and regulations thereunder.

Rule 13f–1(b) also provides that “[a]n institutional investment manager shall also be deemed to exercise ‘investment discretion’ with respect to all accounts over which any person under its control exercises investment discretion.”

Scope of Reportable Securities and Thresholds

Under Rule 13f-2, an institutional investment manager must file a report on Form SHO with the SEC within 14 calendar days after the end of each calendar month regarding the following:

• Reporting Company Issuers: Each equity security of a Reporting Company Issuer over which the institutional investment manager and all accounts over which the institutional investment manager (or any person under the institutional investment manager’s control) has investment discretion with respect to either
  • a monthly average gross short position at the close of regular trading hours in the equity security with a US dollar value of $10 million or more; or
  • a monthly average gross short position at the close of regular trading hours as a percentage of shares outstanding in the equity security of 2.5% or more (Threshold A).
• Non-Reporting Company Issuers: Each equity security of a non-Reporting Company Issuer over which the institutional investment manager and all accounts over which the institutional investment manager (or any person under the institutional investment manager’s control) has investment discretion with respect to a gross short position in the equity security with a US dollar value of $500,000 or more at the close of regular trading hours on any settlement date during the calendar month (Threshold B).

For both thresholds, the term “equity securities” is defined by reference to Exchange Act Section 3(a)(11) of the Exchange Act and Rule 3a11-1 thereunder.

Further, “Gross Short Positions” under both thresholds would be defined to mean

the number of shares of the equity security that are held short as a result of short sales as defined in Rule 200(a) of Regulation SHO) without inclusion of any offsetting economic positions such as shares of the equity security or derivatives of such equity security.

Response to Comments

In response to comments, the SEC refused to (1) exclude exchange-traded funds; (2) include fixed-income securities; (3) categorically exclude options, warrants, and other convertibles from the rule, as some come within the meaning of an equity security; (4) categorically include all derivatives, including those that do not come within the meaning of an equity security; (5) create a list of specific securities that would be reportable; (6) limit the scope of the rule to Reporting Company Issuers; (7) raise or lower the percentage or dollar amounts in Threshold A; (8) base the reporting threshold on a single metric; or (9) use the same metrics for Reporting Company Issuers and non-Reporting Company Issuers. The SEC also refused to allow for netting between long and short positions.

Cross Border Application

In terms of cross border issues, the SEC noted that

[S]ection 13(f)(2)’s cross-border reach is based on the territorial approach that the [SEC] has applied when crafting rules to implement other provisions of the Exchange Act. Consistent with that territorial approach … the [SEC] examines the relevant statutory provision to determine the domestic conduct that is covered by the provision. The [SEC] understands section 13(f)(2), by its terms, to apply to any institutional investment manager already subject to U.S. reporting requirements. This indicates that the relevant domestic conduct under section 13(f)(2) is being an institutional investment manager operating in the U.S. securities markets such that the investment manager is subject to filing reports with the Commission. Thus, when that relevant domestic conduct is present here in the United States, section 13(f)(2)’s regulatory reporting obligation will generally apply.

Form SHO, Timing of Reporting, and Publication by SEC

The final rule requires that institutional investment managers file the required short sale data information on Form SHO through EDGAR using an eXtensible Markup Language (XML) specific to Form SHO. Form SHO would have to be filed within 14 calendar days after the end of each calendar month. The SEC estimates that it will publish aggregated data derived from Form SHO reports within one calendar month after the end of the reporting calendar month.

Form SHO Contents

Form SHO consists of a cover page with instructions and other relevant information and information tables. Of note, the instructions outline the reporting methodology when one more than one institutional investment manager with a reporting obligation exercises investment discretion with respect to the same securities (only one reports but all must be identified).

The form also contains instructions for calculating the reporting the thresholds (e.g., end-of-day dollar values, how to arrive at the monthly average and percentage threshold), how to file amendments (entire form must be restated), and how the information tables should be filled.

Importantly, Form SHO makes clear that all information included in a Form SHO report is deemed subject to a confidential treatment request under 17 CFR 200.83.

Form SHO also requires that the filing institutional money manager include the following information:

• The period date of the report (month/day/year)
• Whether the report is an amendment and restatement and the amendment number
• A description of the amendment and restatement, reason for the amendment and restatement, and which additional Form SHO reporting period(s) (up to the past 12 calendar months), if any, is/are affected by the amendment and restatement
• The below information about the institutional money manager filing the report:
  • Name
  • Mailing address
  • Business telephone number
  • Business email
  • Non-lapsed Legal Entity Identifier (LEI)
  • Contact employee
  • Name and title
  • Date filed

The filing institutional money manager has to represent that “all information contained herein is true, correct and complete, and that it is understood that all required items, statements, schedules, lists, and tables, are considered integral parts of this form.”

Finally, the form contains two information tables. Information Table 1 contains the monthly gross position report and has the following eight data fields: (1) Settlement Date (month end); (2) Issuer Name; (3) Issuer LEI; (4) Title of Class; (5) CUSIP Number; (6) FIGI; (7) End of Month Gross Short Position (Number of Shares); (8) End of Month Gross Short Position (rounded to the nearest USD)

Information Table 2 contains the daily activity affecting the institutional money manager’s gross short position during the reporting period and has the following seven data fields: (1) Settlement Date (month end); (2) Issuer Name; (3) Issuer LEI; (4) Title of Class; (5) CUSIP Number; (6) FIGI; and (7) Net Change in Short Position (Number of Shares)

Amendments to CAT

Finally, the SEC is adopting an amendment to CAT to require that CAT reporting firms report to the CAT for the original receipt or origination of an order to sell an equity security, whether the order is a short sale effected by a market maker in connection with bona fide market making activities in the equity security for which the bona fide market making exception in Rule 203(b)(2)(iii) of Regulation SHO is claimed.

This change amends Section 6.4(d)(ii) of the CAT NMS Plan to add a new paragraph (E).

IMPLICATIONS

Along with the securities lending reporting requirements that the SEC adopted the same day and which we discussed in a prior report, new Rule 13f-2 and Form SHO will require a significant operational and back office build for impacted parties in order to collect relevant data fields that will be packaged into monthly reports.

Order management systems, whether developed internally or sourced from third-party vendors, that do not already track the data elements required by Rule 13f-2 and Form SHO may have to be revised to do so.

In addition, because the SEC is seeking to avoid duplicative reporting, large institutional money managers may need to develop new processes and mechanisms to ensure uniform reporting.

While the SEC’s delay in reporting aggregate data is meant to alleviate concerns regarding the ability to reconstruct real-time short positions, the concerns over reconstruction of short positions may be more problematic under the SEC’s securities lending rule, which has a next-day public dissemination requirement for securities loan data, which can often be a proxy for short sale activity.

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