New Short-Selling Reporting Rules: What You Need to Know
Rule 13f-2 & Form SHO: New Requirements for Investment Advisers
Short selling, wherein a market participant sells borrowed stock in anticipation of a downward price movement of the stock, is ubiquitous in today’s markets. However, regulators have been become increasingly concerned about this practice being used to drive down the price of a security, accelerate a declining market in a security, or manipulate stock prices. Within the past two decades, we’ve seen a flurry of regulatory rulemaking directed at short selling in the broker-dealer space (such as Regulation SHO). And more recently, the SEC turned its rulemaking attention to short selling amongst other market participants, including investment advisers. The SEC adopted new 17 CFR 240.13f-2 (“Rule 13f-2”) and related form 17 CFR 249.332 (“Form SHO”) under the Securities Exchange Act of 1934 (the “Exchange Act”) to require certain institutional investment managers to report, on a monthly basis on new Form SHO, certain short position data and short activity data for certain equity securities as prescribed in Rule 13f-2. The intent behind the new rule is to provide greater market transparency through the publication of short sale-related data, albeit on a delayed basis. Institutional investment managers that meet or exceed certain specific reporting thresholds are required to report specified short position data and short activity data for equity securities on a monthly basis using Form SHO. Rule 13f-2 became effective on January 2, 2024, with a compliance date of January 2, 2025.
Scope of Application
For purposes of Rule 13f-2, “institutional investment managers,” who are required to report certain short selling information, include “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,” which is the definition also used for Form 13F related purposes and includes investment advisers who have investment discretion. However, it should be noted that Form SHO filing requirements are not limited to Form 13F filers. And unlike Form 13F filing requirements, there is no exclusion for managers who exercise investment discretion below an aggregate amount, which means that any investment adviser who has discretionary investment authority is scoped into Rule 13f-2 and will need to file the Form SHO if its short selling activity meets the filing thresholds described below.
Reporting Thresholds
An institutional investment manager will need to determine whether it has a Form SHO filing obligation on a month-to-month basis. If the institutional investment manager exceeds one or more of the described thresholds during a calendar month, the filing obligation will be triggered. The thresholds depend on whether the short position relates to an equity security of a reporting or nonreporting company issuer. A “reporting company issuer” is an issuer with any equity security of a class of securities that is registered under Section 12 of the Exchange Act or for which the issuer is required to file reports under Section 15(d) of the Exchange Act. A “nonreporting company issuer” is a catchall for issuers not meeting the reporting company issuer definition.
For short positions related to an equity security of a reporting company issuer, the filing requirement would be triggered by a monthly average gross short position at the close of regular trading hours that equal or exceeds (a) $10 million or (b) 2.5% of shares outstanding in the equity security.
For short positions related to an equity security of a nonreporting 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.
Form SHO
Under Rule 13f-2, institutional investment managers who meet the regulatory thresholds will be required to file Form SHO within 14 calendar days after the end of each calendar month via the SEC’s EDGAR system. The SEC, in turn, will publish certain aggregated information derived from Form SHO publicly on EDGAR on a delayed basis. With a compliance date of January 2, 2025, the first Form SHO reports are due by February 14, 2025 (14 days after the end of the reporting month). If two or more institutional investment managers exercise investment discretion over the same security, only one of the managers must file a report, with the other manager(s) required to make a notice filing (and there is a space on Form SHO to indicate this).
Form SHO consists of a Cover Page, Information Table 1, and Information Table 2, as described in further detail below:
Cover Page: includes basic information about the institutional investment manager, such as its name, address, phone number, etc., and contact information for the person submitting the filing.
Information Table 1: includes the number of shares of the reported security that represent the institutional investment manager’s gross short position at the close of the last settlement date of the calendar month reporting period, as well as the corresponding U.S. dollar value of this reported gross short position.
Information Table 2: for each reported security, for each individual settlement date during the calendar month reporting period, the “net” activity in the reported equity security is reported, which is to be expressed by a single identified number of shares of the reported equity security and should reflect offsetting purchase and sale activity by the institutional investment manager. A positive number of shares identified will indicate net purchase activity in the equity security on the specified settlement date. A negative number of shares identified will indicate net sale activity in the equity security on the specified settlement date.
Unlike the Form 13F, the SEC will not be publishing a list of Rule 13f-2 securities, as all equity securities are potentially subject to reporting.
Have questions about reporting requirements? Contact us at info@stecroixconsulting.com.
Please note that information provided above is for general educational purposes only and should not be construed as legal advice.