Enhancing Short Sale Disclosures: SEC Rule 13f-2 and Form SHO Reporting

The Securities and Exchange Commission (SEC) recently adopted a new Rule 13f-2, as well as an amendment to the NMS Plan which governs the consolidated audit trail (CAT).

• New Rule 13f-2: Under the new rule, “managers” that meet or exceed certain specified reporting thresholds are required to report, on a monthly basis using Form SHO via EDGAR, specified short position data and short activity data for equity securities.

• CAT NMS Plan Updates: CAT firms will indicate whether an order is a short sale effected by a market maker with bona fide market making activities

Compliance Dates

The final rules became effective on January 2, 2024 when it was published in the Federal Register.

The final rules provide a compliance period of twelve (12) months from the effective date for Rule 13f-2 and Form SHO and public aggregate reporting to follow three (3) months later. 

The compliance date for the CAT NMS Plan will be eighteen (18) months after the effective date. 

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Form SHO Reporting Requirements:

Form SHO, under the new reporting regime of Rule 13f-2, is designed to provide greater transparency through the publication of short sale-related data to investors and other market participants. The new reporting regime of Rule 13f-2 provides disclosures that supplement the short sale-related information that currently is publicly available or accessible for a fee from existing short sale reporting regimes provided by some registered national securities exchanges (“exchanges”) and registered national securities associations (“RNSAs”).

Who needs to report?

Rule 13f–2 will require Managers as defined in section 13(f)(6)(A) of the Exchange Act, as an ‘‘Institutional investment manager’’ 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 (as defined in Rule 13f-1(b)) with respect to the account of any other person. As such, the term ‘‘institutional investment manager’’ typically can include brokers and dealers, investment advisers, banks, insurance companies, pension funds and corporations.

What securities are in scope for Rule 13f-2 reporting?

Equity securities as defined in section 3(a)(11) of the Exchange Act. This scope of securities includes both exchange-listed and OTC equity securities, including, inter alia, ETFs, certain derivatives, and options, warrants and other convertibles, which is consistent with the equity securities to which Rules 200, 203, and 204 of Regulation SHO apply.

What are the key reporting requirements and frequency of reporting?

Form SHO must be reported within 14 days after the end of the month. The SEC will then publish aggregate data about a month later. For each reported equity security, an institutional money manager must report

(1) The 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) The “net” activity in the reported equity security for each individual settlement date during the calendar month, including activity in derivatives like options.

What are the reporting thresholds?

• Threshold A: For securities of a "reporting company issuer," managers must meet or exceed either a monthly average of daily gross short positions of USD $10 million or more, or 2.5 percent or more of shares outstanding.

• Threshold B: For securities of a "non-reporting company issuer," managers must meet or exceed a gross short position in the equity security with a USD $500,000 or more at any settlement date during the calendar month.

What information does Form SHO require?

How can firms best ensure they comply with Rule 13f-2?

Firms need to consider certain steps to comply with Rule 13f-2. This involves checking if their holdings crossed specific limits in the past month.

Step 1: Categorization:

Divide all global equity securities into two groups:

Reporting Company Issuers: These are companies that report regularly to the SEC.

Non-Reporting Company Issuers: These are companies not required to report to the SEC.

Step 2: Threshold Check:

For each security, check if the holdings exceed the filing threshold specific to its category (Reporting vs. Non-Reporting).

Challenges:

• Combining Positions: Aggregating holdings across different markets can be tricky. This includes identifying and combining positions for the same security listed in different places (e.g., dual-listed stocks, foreign stocks traded over-the-counter in the US).

• Foreign Securities: Determining if a foreign security qualifies as an "equity security" under the rule, if a sale qualifies as a "short sale," or which threshold category it belongs to can be complex.

How can RegEdge assist you?

Our comprehensive knowledge of compliance reporting requirements, cross-jurisdictional trade and transaction reporting and other regulatory requirements allows RegEdge to assist clients in traversing the complex regulatory landscape (including SEC, CFTC, EMIR, MiFID II, SFTR, MAS, ASIC, HKMA, and JFSA) to not only achieve compliance but also improve efficiency and facilitate sound decision-making. RegEdge has recent experience helping clients with the implementation of 13f-2 related requirements such as Transparency Directive Amending Directive (TDAD) disclosures, US Shareholding Disclosures (13D, 13G), SEC Form 13F reporting and HK Disclosure of Interests (DOI).

• Perform a detailed assessment of data requirements to enable the firm to be prepared for Form SHO reporting. Pinpoint critical areas where data is missing for short selling and positions, reference data, and required attributes. This includes gaps affecting aggregation methods, and identification of securities that fall under the rule's scope.

• Assist with business analysis, data analysis, and program management for implementing Form SHO requirements, leveraging either in-house solutions or vendor offerings.

• Offer comprehensive support for implementing Form SHO reporting requirements, guiding you through the entire process from business analysis and solution design to implementation and final regulatory submissions.

For a detailed set of services, visit us at https://www.regedge.com/all-services