SEC Adopts Interim Rule to Require Disclosure of Short Sales and Short Positions by Institutional Investment Managers
On October 15, 2008, two days before the expiration of the emergency orders requiring disclosure of short sales by institutional investment managers,1 the SEC adopted Rule 10a-3T, an interim final temporary rule (the “Interim Rule”) that extends the reporting requirements imposed by the emergency orders with some modifications.2 The SEC also revised Form SH to reduce the data reporting require- ments and eliminated the “grandfather” provision that exempted institutional invest- ment managers from reporting short positions in section 13(f) securities3 held before September 22, 2008 with certain exceptions. The Interim Rule becomes effective on October 18, 2008 and expires on August 1, 2009.
In the Adopting Release, the SEC reiterated its concern over “sudden and excessive fluctuation of securities prices and disruptions in the fair and orderly functioning of securities markets” and the “possible unnecessary or artificial price movements that may be based on unfounded rumors and may be exacerbated by short selling.”4 The SEC expects that the information it receives in the Form SH filings will allow the staff to analyze the effects of the short selling rulemakings, to evaluate whethertherulesareworkingasintended,andto review the propriety of certain short selling transactions.
New Filing Deadline
Under the Interim Rule, every institutional investment manager that exercises investment discretion with respect to accounts holding section 13(f) securities that has filed, or was required to file, a Form 13F for the previous calendar quarter5 is required to file a report on Form SH electronically via the EDGAR system on or before 5:30 PM Eastern time on the last business day of each calendar week immediately following any Sunday through Saturday calendar week (a “Form SH Reporting Period”) in which the institutional investment manager has effected a reportable short sale with respect to a section 13(f) security that is not an option.
Accordingly, the first filing date using revised Form SH under the Interim Rule is Friday, October 24, 2008.
Exceptions to the Filing and Reporting Requirements
Under the Interim Rule, the circumstances under which an institutional investment manager is exempt from filing Form SH for a particular reporting period are different than was the case under the Emergency Orders. The SEC also raised the threshold for reporting short sales and short positions from a fair market value of $1 million to a fair market value of $10 million.
An institutional investment manager is not required to file Form SH to report short sales6 or short positions7 of section 13(f) securities on Form SH where:
(i) No short sales of a section13(f) security have been effected during the reporting period to be covered by the Form SH filing; or
(ii) On each calendar day during the Form SH Reporting Period, the start of day short posi- tion, the gross number of securities sold short during the day and the end of day short position each constitute less than one-quarter of one percent or more of that class of the is- suer’s section 13(f) securities issued and out- standing as reported on the issuer’s most recent annual, quarterly or current report filed with the Commission pursuant to section 13 of the Exchange Act, unless the manager knows or has reason to believe the information contained therein is inaccurate, and the fair market value of the start of day short position, the gross number of securities sold short during the day and the end of day short position each are less than $10,000,000.8
As such, if any short sale of a section 13(f) security that has been effected during the Form SH Report Period exceeds the volume thresholds or the fair market value threshold of $10 million, then the institutional investment manager must file Form SH.
Once a determination is made that a Form SH filing is required, an institutional investment manager is not required to report short sales or short positions of section 13(f) securities on Form SH where, on any calendar day of the Form SH Reporting Period, the start of day short position, the gross number of securities sold short during the day, or the end of day short position in the section 13(f) security constitutes less than one-quarter of one percent of that class of the issuer’s section 13(f) securities issued and outstanding as reported on the issuer’s most recent annual, quarterly, or current report filed with the Commission pursuant to section 13 of the Exchange Act, unless the manager knows or has reason to believe the information contained therein is inaccurate, and the fair market value of the start of day short position, the gross number of securities sold short during the day, or the end of day short position is less than $10,000,000.9 The institutional investment manager must designate in the appropriate data element its reliance on this exception with respect to information otherwise required to be reported. Accordingly, on a specific day when a section 13(f) security does not have to be reported because it is below the reporting threshold, “N/A” is to be indi- cated in the appropriate data element.
When a Form SH is required to be filed, filers will be required to disclose not only the short sales that caused the filer to need to make the filing, but also any other open short positions held during the Form SH Reporting Period, including any open short positions effected prior to September 22, 2008.10
Options and Riskless Principal Transactions Are Excluded from Being Reported
In general, institutional investment managers are not required to report options and short sales of options on section 13(f) securities. However, if an institutional investment manager exercises a put and is net short pursuant to Rule 200(c) of Regulation SHO, the resulting transaction is a short sale and must be reflected on Form SH.11 Similarly, if the institutional investment manager effects a short sale as a result of assignment to it as a call writer, upon exercise, the resulting transaction is a short sale and must be reflected on Form SH.12
Riskless Principal Transactions
Under two scenarios involving riskless principal transactions,13 the broker-dealer effecting a short sale does not have to report the short sales on Form SH. The two scenarios are as follows:
(i) a broker-dealer receives an order to sell a section 13(f) security from a customer who is net long on the securities being sold, and the broker-dealer then seeks to execute that or- der, either in whole or in part, by selling the section 13(f) security as riskless principal, and the broker-dealer has an overall net short position in such section 13(f) security; or
(ii) a broker-dealer receives an order to buy a section 13(f) security from a customer, and the broker-dealer then seeks to execute that order, either in whole or in part, by purchasing the section 13(f) security as riskless principal, and then selling the section 13(f) security to the customer, and the broker-dealer has an overall net “short” position in such section 13(f) security.14
Revised Form SH
The SEC has revised the information to be disclosed in Form SH so that filers are no longer required to disclose the value of the securities sold short (column 5 of prior Form SH), the largest intraday short position (column 7 of prior Form SH) and the time of day of the largest intraday short positions (column 8 of prior Form SH).
Starting on the October 24, 2008 filing date, institutional investment managers are required to identify the following in Form SH:
- trade date;
- the Central Index Key (CIK) of the institutional investment manager;
- the issuer name;
- the CUSIP for the relevant securities; and
- with respect to each day of the Form SH Reporting Period in which short sale trading activity occurred:
- the start of day short position;
- the gross number of securities sold short during the day; and
- the end of day short position.
Pre-September 22, 2008 Short Positions
The Interim Rule, when fully implemented, is designed to capture all open short positions of Section 13(f) securities, including those that existed prior to September 22, 2008 (the first reporting period under the original September 18, 2004 Emergency Order) to the extent they have not been closed out. During the transition period, beginning with the report due October 24, 2008, and including the report due October 31, 2008, Form SH filers may report pre- September 22 short positions. If a Form SH filer chooses to include September 22 short positions during the transition period, the filer should only include those pre-September 22 short positions that meet the revised de minimis test in the Interim Rule. If a Form SH filer chooses not to include pre-September 22 short positions during the transition period, the filer should continue to report short positions that meet the old de minimis test on the reports due October 24, 2008 and October 31, 2008.15
After the October 24 and October 31 transition period, starting with the November 7, 2008 filing, all Form SH reports must reflect open pre-September 22 short positions of Section 13(f) securities.
To the extent pre-September 22 short positions are reported, the SEC is requiring Form SH filers to include them in the start of day short position (column 5 of Form SH), the number of securities sold short (column 6 of Form SH) and end of day short position (column 7 of Form SH).
Filing Format of Form SH
The SEC is permitting institutional investment managers that file Form SH on October 24, 2008 and October 31, 2008 to file Form SH on EDGAR in the same manner as the form was filed pursuant to the Emergency Orders.
Form SH filed on November 7, 2008 and going forward must be filed in the XML tagged data file format.
Filings on Form SH Are Non-Public
Under the Interim Rule, the filings on Form SH are to be non-public to the extent permitted by law. The Adopting Release reminds filers that the Forms SH should be marked “non-public” in accordance with the Form SH instructions and filers are asked not to submit requests for confidential treatment.
Request for Comments from the SEC
The Adopting Release contains a number of questions posed by the SEC staff asking the financial industry for their input regarding the current application of the Interim Rule and whether further changes are re- quired. The request for comments includes:
- Should only a subset of institutional investment managers be required to file Form SH?
- Are there better ways to collect information about short sales than by requiring Form SH?
- Should the SEC require short sellers to keep current detailed books and records of their short sale activities and their short positions similar to the format required under Rule 17a- 3(a)(6) under the Exchange Act?
- Should institutional investment managers report conducting short sales through synthetic instruments or through third parties that are not required to report on Form SH?
- Should Rule 10a-3T be revised to include the disclosure of options, short sales of options, and short sales of other instruments such as single stock futures? Should the SEC consider harmonizing the short sale reporting and regulations under the SEC regime with foreign regulators?
- Should the SEC adopt measures similar to the short sale report- ing requirements implemented by the FSA in the United Kingdom?
- Are the reporting thresholds set at appropriate levels, or should they be higher or lower?
- Should the SEC require the filing of Form SH less frequently, such as bi-weekly, monthly, or quarterly?
- Should the information required by Form SH remain non-public to the extent permitted by law?
Comments on the Interim Rule are due on or before December 16, 2008. The SEC staff will consider public comments on Rule 10a-3T and Form SH in determining whether the SEC should revise the Interim Rule and Form SH, as well as whether the SEC should promulgate a longer-term or permanent short sale reporting requirement upon expiration of Rule 10a-3T and Form SH on August 1, 2009 that is the same or similar to the requirements contained in the Interim Rule.
1) The Securities and Exchange Commission (“SEC”) first imposed the short sale disclosure requirements in an emergency order released on September 18, 2008. Emergency Order Pursuant to Section 12(k)(2) of the Securities Exchange Act of 1934 Taking Temporary Action to Respond to Market Developments, SEC Rel. No. 34-58591 (Sept. 18, 2008). That emergency order was subse- quently amended by the SEC on September 21, 2008. Amendment to Emergency Order Pursuant to Section 12(k)(2) of the Securities Exchange Act of 1934 Taking Temporary Action to Respond to Market Developments, SEC Rel. No. 34-58591A (Sept. 21, 2008). The disclosure requirement was ex- tended to expire on October 17, 2008 and Form SH filings were made non-public in a further emergency order issued on October 2, 2008. Amendment to Order and Order Extending Emergency Order Pursuant to Section 12(k)(2) of the Securities Exchange Act of 1934 Taking Temporary Action to Respond to Market Developments, SEC Rel. No. 34-58724 (Oct. 2, 2008). These emer- gency orders are collectively referred to as the “Emergency Orders.”
2) Disclosure of Short Sales and Short Positions by Institutional Investment Managers, SEC Rel. No. 34-58785 (Oct. 15, 2008) (the “Adopting Re- lease”). In the Adopting Release, the SEC adopted Rule 10a-3T as an interim temporary final rule under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and a temporary Form SH.
3) “Section 13(f) securities ” are generally U.S. equity securities traded on a U.S. exchange and/or certain other securities such as: • ADRs; • convertible or debt securities; • swaps and other derivatives if these transac- tions result in an investment manager exercising investment discretion over the under- lying which is a traded U.S. equity security; and • put and call options to the extent that they appear on the SEC’s list of reportable secu- rities. Each quarter a complete list of section 13(f) securities is available.
4) Adopting Release, at 7-8. 5) The Emergency Orders applied to institutional invest- ment managers that were required to file Form 13F for the quarter ended June 30, 2008. Because the Interim Rule will be in effect until August 1, 2009, the Interim Rule refers instead to the previous calendar quarter.
6) A “short sale” is any sale of a security which the seller does not own or any sale which is consummated by the delivery of a security borrowed by, or for the account of, the seller. Rule 200(b) of Regulation SHO sets out the circumstances in which a person shall be deemed to own a security for purposes of determining whether a short sale has occurred. For purposes of the Interim Rule: [i]f a person that has loaned a security to another person sells the security and a bona fide recall is initiated within two business days after trade date, the person that has loaned the security is deemed to own the security for purposes of Rule 200(g)(1) and Rule 200(b) of Regulation SHO, and such sale will not be treated as a short sale. Rule 10a-3T(a)(2).
7) “[F]or purposes of Form SH a ‘short position’ is the aggregate gross short sales of an issuer’s section 13(f) securities (excluding options), less purchases to close out a short sale in the same issuer. The Form SH short position is not net of long position in the issuer.” Rule 10a-3T(a)(2).
8) Rule 10a-3T(b)(2) under the Exchange Act (emphasis added).
9) Rule 10a-3T(b)(3) under the Exchange Act.
10) See Adopting Release, at 19. Previously, Form SH filers with pre-September 22, 2008 open short positions were instructed to indicate zero with respect to start of the day short positions. See Division of Corporate Finance, Division of Investment Management, and Division of Trading and Markets Guidance Regarding the Commis- sion’s Emergency Order Concerning Disclosure of Short Selling, Question 6 (September 24, 2008) and Form SH General Instruction released on September 18, 2008. Note that the determination whether to disclose open pre-September 22, 2008 open positions of section 13(f) securities will be based on whether the fair market value of each such position is over $1 million and not $10 million. Adopting Release, at 22.
11) Adopting Release, at 14.
12) Id. at 14.
13) “A ‘riskless principal’ transaction is generally described as trades in which, after receiving an order to buy (or sell) from a customer, the broker-dealer purchases (or sells) security from (or to) another person in a contem- poraneous offsetting position.” Id. at 18 n.28.
14) Id. at 18
15) Adopting Release, at 22. Notwithstanding the $10 million fair market value threshold adopted under the Interim Rule, if the manager excludes a pre-September 22, 2008 section 13(f) short position, “the relevant fair market threshold for reporting short sales or positions is the $1 million threshold”. Adopting Release, at 20.