SEC Adopts Rule to Increase Transparency Into Short Selling and Amendment to CAT NMS Plan for Purposes of Short Sale Data Collection

The U.S. Securities and Exchange Commission (SEC) has published a press statement to inform of the finalization of new rules regarding short sales reporting – particularly of institutional fund managers – and new rules regarding certain data submissions and recordkeeping of broker-dealers in the context of short sales activities. The final rules follow a corresponding consultation in 2022 (EventID 14622), and will – so the SEC – enhance overall market transparency regarding short selling as requested by Congress following the financial crisis in 2008/2009.
#### Content of the final rules and changes to the draft version where applicable
##### New rules regarding short sales reporting of institutional fund managers
In large, the final rule on short sales reporting requirements of institutional investment funds will not significantly diverge from the one proposed. However, as a consequence of respondents concerns on the scope of the reporting obligations and the triggering thresholds, the SEC has made some modifications in this context which will be discussed in more detail below – wherever applicable.
(1) Reporting content, filing deadline, and format:
As proposed, new Rule § 13f-2 under the Securities Exchange Act of 1934 (17 CFR Part 240) will require institutional fund managers to file new form SHO on a monthly basis, reporting gross short positions in equity securities at the close of regular trading hours on the last settlement date of the calendar month.
Reporting data will include:
– the settlement date;
– the issuer name;
– the issuer LEI;
– the class of the security for which information is reported;
– the CUSIP;
– the FIGI;
– the gross short position (number of shares) at the close of the last settlement date of the calendar month reporting period;
– the end of month gross short position (rounded to nearest USD).
It shall be noted in this context, that in contrast to the proposed form, the final version does no longer require the provision of a hedging classification on the form.
Furthermore, institutional fund managers will have to provide – for each settlement date during the calendar month – net daily activity data from the covered month that have led to the gross positions, including activity data in derivatives. Here, too, the granularity of data to be provided to the Commission has been adjusted to no longer require the reporting of several data fields, including the „number of shares purchased to cover an existing short position“ or the number of shares sold, purchased, or assigned in connection with certain derivative exposures.
Form SHO has to be filed within 14 days following month-end via the SEC’s EDGAR system in a structured, machine-readable data language and will be aggregated and made public by the SEC. Some information, however, such as individual positions or the name of fund managers, will be kept confidential.
(2) Thresholds for determining the reporting obligation:
The new rule will be applicable to short positions concerning securities issued by registered, reporting securities issuers where institutional fund managers have for each security
– a monthly average gross short position worth $10 million or more in U.S. dollars or
– a monthly average gross short position at the end of regular trading hours representing 2.5% or more of the shares outstanding in that equity security.
It will also be applicable to short positions concerning securities issued by a non-reporting issuers where any such gross short position reaches a value of $500,000 or more at the close of regular trading hours during the calendar month.
The bold words marked above represent changes to the draft version which stated „at the end of day” instead of „the end of regular trading hours, and – more importantly – which required fund managers to determine their reporting requirements on a daily basis.
(3) Publications of the SEC:
The Commission will release aggregated short sale data about equity securities reported by managers on form SHO. This information, which will be made available through EDGAR and with a slight time delay, will include details such as the total combined short positions of reporting managers for a given equity security at the end of the last trading day of the month, both in terms of shares and their dollar value. Additionally, it will provide data on the „net“ activity for each settlement date within the same month.
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##### Amendments to the „National Market System (NMS) Plan Governing the Consolidated Audit Trail“
To recall, the SEC proposed to require broker-dealers to submit data on purchase orders to the NMS that indicate whether or not the purchase is made for „covering“ purposes of short sales positions and that indicate whether or not firms are making use of the bona-fide exemption for market making activity. Due to the feedback received, the SEC will refrain from requiring the reporting of whether or not a purchase is for „covering“ purposes. However, the requirement to indicate reliance on the bona-fide exemption will remain.