• On October 13, 2023, the SEC adopted new rules, 17 CFR 240.13f-2 (“Rule 13f-2”) and 17 CFR 249.332 (“Form SHO,” and, collectively, the “Final Rules”), to require certain institutional investment managers to report short position and short activity data for equity securities.
• Rule 13f-2 requires institutional investment managers to file aggregate end-of-month gross short positions as well as daily net trading activity on Form SHO within 14 calendar days after the end of each calendar month if certain thresholds are exceeded.
• As with the original rule proposal, separate reporting thresholds apply to short positions in equities of public reporting companies and nonpublic reporting companies. With respect to public reporting companies, the thresholds are based on monthly average gross short positions rather than whether a daily threshold is exceeded at any time during the previous calendar month, as proposed.
• Unlike the original proposal, the Final Rules do not require institutional investment managers to report short position hedging information with respect to gross end-of-month short positions.
• The Final Rules also do not require institutional investment managers to report granular details on daily trading connected to open short positions, instead only requiring reporting of net changes in short positions.
• The rules also revise the National Market System (NMS) plan governing the Consolidated Audit Trail (CAT) to require broker-dealers to report whether an original receipt or origination of an order to sell an equity security is a short sale for which a market maker is claiming the bona fide market making locate exception. However, the Final Rules removes the “buy to cover” CAT reporting requirements that were proposed.

On October 13, 2023, the U.S. Securities and Exchange Commission (the “SEC” or the “Commission”) adopted new rules, 17 CFR 240.13f-2 (“Rule 13f-2”) and 17 CFR 249.332 (“Form SHO,” and, collectively, the “Final Rules”), under the Securities Exchange Act of 1934 (the “Exchange Act”) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) to require certain institutional investment managers (“Managers”) to report short position and short activity data for equity securities. The Final Rules are designed to provide market surveillance information to the SEC and greater transparency to investors and other market participants.

In the same release, the SEC adopted amendments to the National Market System (the “NMS”) plan governing the Consolidated Audit Trail (the “CAT”) to require market makers to report their use on the bona fide market making exception to the locate requirement under Regulation SHO (the “NMS Amendment”).

Key takeaways include the following:

• New Rule 13f-2 requires institutional investment managers to file aggregate end-of-month gross short positions as well as daily net trading activity on new Form SHO within 14 calendar days after the end of each calendar month if certain thresholds are exceeded.
• As with the initial proposal (the “Proposed Rules”), separate reporting thresholds apply to short positions in equities of public reporting companies and nonpublic reporting companies. With respect to public reporting companies, the Final Rules set the thresholds based on monthly average gross short positions rather than whether a daily threshold is exceeded at any time during the previous calendar month, as proposed.
• Unlike the Proposed Rules, the Final Rules do not require institutional investment managers to report short position hedging information with respect to gross end-of-month short positions.
• The Final Rules do not require Managers to report granular details on daily trading connected to open short positions, instead only requiring reporting of net changes in short positions.
• The NMS Amendment revises the NMS plan governing the CAT to require broker-dealers to report whether an original receipt or origination of an order to sell an equity security is a short sale for which a market maker is claiming the bona fide market making locate exception. However, the Final Rule removes the “buy to cover” CAT reporting requirements that were proposed.

The key provisions of the amendments are further discussed below.

The Final Rules will become effective 60 days following publication of the adopting release in the Federal Register (the “Effective Date”). The compliance date for the Final Rules will be 12 months after the Effective Date. The compliance date for the amendment to the CAT NMS Plan will be 18 months after the Effective Date.

Background

The SEC has plenary authority under Section 10(a) of the Exchange Act to regulate short sales of securities. Section 929X of the Dodd-Frank Act added Section 13(f)(2) of the Exchange Act instructing the SEC to prescribe rules to make certain short sale data available on a monthly basis. In February 2022, the SEC published the Proposed Rules to implement this requirement. Like the Proposed Rules, the Final Rules go beyond the requirements of Section 13(f)(2) to increase transparency to the SEC for market surveillance as well as the public, though the Final Rules pare back the requirements on reporting Managers in several respects.

Rule 13f-2 and Regulation SHO

Reporting Thresholds

Rule 13f-2 requires institutional investment managers to file an updated Form SHO within 14 calendar days after the end of each calendar month for securities where a specified threshold has been exceeded. “Institutional investment manager” is defined broadly as “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.”

The relevant reporting thresholds differ for equity securities that are (i) part of a class of securities that is registered pursuant to section 12 of the Exchange Act or for which the issuer is required to file reports pursuant to section 15 (d) of the Exchange Act (“Reporting Company Securities”) and (ii) equity securities that are not Reporting Company Securities. Specifically,

• For Reporting Company Securities, reporting is required where either:
• the monthly average gross short position for the security at the close of regular trading hours is $10 million or more; or
• the average gross short position at the close of regular trading hours is 2.5% or more of the outstanding shares in the equity security.
• For non-Public Securities, reporting is required where the gross short position in the equity security is $500,000 or more at the close of regular trading hours on any settlement date during the calendar month.

For these purposes, securities over which the Manager or any person the Manager controls has investment discretion must be included in the daily totals. The Final Rules clarify that the gross short position calculations should be done “at the close of regular trading hours” for determining whether a Manager has met or exceeded a threshold.

Form SHO and Reporting Information

Form SHO is divided into three parts: a cover page and two information tables. Information required in each part is as follows:

• Form SHO Cover Page. Managers will be required to report certain basic information including, for both the Manager and its designated contact employee: (i) name; (ii) mailing address; (iii) business telephone number and email; and (iv) non-lapsed Legal Entity Identifier (“LEI”), if any.
• Information Table 1. In Information Table 1, Managers must report their gross short position in both number of shares and rounded to the nearest dollar (USD) as of the close of the last settlement date of the calendar month reporting period.
• Information Table 2. In Information Table 2, Managers must report the net change in their short position for a reported equity security for each individual settlement date during the calendar month reporting period. The net change should reflect offsetting prescribed types of purchase and sale activity.

Both tables also require disclosure of the relevant: (i) settlement date; (ii) issuer name; (iii) issuer LEI; (iv) title of class; (v) CUSIP numbers; and (vi) Financial Instrument Global Identifier (if any has been assigned).

Significantly, the Final Rules do not require Managers to disclose hedging information in Information Table 1, acknowledging concerns raised by industry members that such disclosures would be operationally difficult. The Proposed Rules would have required disclosing gross short positions that are “fully hedged,” “partially hedged” and “not hedged” in Information Table 1.

The Final Rules also reduce the amount of information required for Information Table 2 to just the net change in short position. The Proposed Rules would have required significant granularity, including: (i) the number of shares sold short; (ii) shares purchased to cover an existing short position; (iii) shares purchased in exercised call option contracts; (iv) the number of shares sold in exercised put option contracts; (v) the number of shares sold short in assigned call option contracts; (vi) the number of shares purchased in assigned put option contracts; (vii) the number of shares resulting from tendered conversions; (viii) the number of shares obtained through secondary offering transactions; (ix) other activity that creates or increases the manager’s short position; and (x) other activity that reduces or closes the manager’s short position. Under this Final Rules, this information will be calculated by the Managers themselves, with the result reported as a single number.

For amendments to Form SHO, the filer must describe and explain the reason the revision is being made and indicate whether data from any additional calendar-month reporting periods (up to the past 12 calendar months) are affected by the amendment.

SEC Published Aggregate Information

The Final Rules do not state precisely when the SEC will publish information based on the information collected, but the Commission anticipates publishing such data by the end of the month following the month reported. The adopting release states that the SEC will treat all individual Form SHO reports as confidential under 17 CFR 200.83 and publish the following aggregate data for each reported equity security:

• the aggregate gross short position of all reporting Managers at the close of the last settlement date of the calendar month, as well as the aggregated U.S. dollar value; and
• for each reported equity security, the daily net activity aggregated across all reporting Managers.

CAT NMS Plan

The NMS Amendment extends the NMS plan governing the CAT to require broker-dealers with a reporting obligation to report whether an order to sell an equity security is for a short sale for which a market maker is claiming the bona fide market making exception to the “locate” requirement under Reg. SHO.

Unlike the original proposal, the SEC is not adopting proposed rule 205, which would have required reporting of whether a purchase transaction is a “buy to cover.” Under proposed 205, a broker-dealer would have been required to mark a purchase order as a “buy to cover” if, at the time of order entry, the purchaser had a gross short position in such security in the specific account for which the purchase was being made. The related CAT NMS Plan would have required participants to update their compliance rules to require Industry Members to report “buy to cover” order marking information to CAT.