On February 25, 2022, the U.S. Securities and Exchange Commission issued a proposal—Short Position and Short Activity Reporting by Institutional Investment Managers (the Proposal)—that would require certain institutional managers to report, monthly, on a new proposed Form SHO on EDGAR their short position data and activity for certain equity securities. The Proposal also proposes a new rule under Regulation SHO (Proposed Rule 205) requiring a “buy to cover” order marking requirement as well as making amendments to the national market system plan governing the consolidated audit trail (CAT) under Rule 613 of the Securities Exchange Act of 1934, as amended (the Exchange Act). Through the Proposal, the SEC is seeking to make short selling activity more transparent, allowing it to respond more quickly to market events.
Currently, Regulation SHO requires broker-dealers to:
- Mark sales orders as “long,” “short” or “short exempt”;
- Before effecting a short sale, to locate a source of shares that the seller reasonably believes can be timely delivered; and
- Close out failures to deliver from long or short sales.
Regulation SHO also provides for a short sale price test circuit breaker and anti-fraud provisions to address “naked” short selling. Section 929X of the Dodd-Frank Wall Street Reform and Consumer Protection Act added Exchange Act Section 13(f)(2) that requires the SEC to prescribe rules to make certain short sale data, including issuer name, the securities title and class, CUSIP number and the aggregate amount, publicly available on a monthly basis.
Proposed Rule 13f-2 is intended to create greater transparency and bolster confidence in the markets, by having certain institutional managers confidentially report short sales data that the SEC will anonymize and publish to investors and other market participants on an aggregated basis.
Proposed Rule 13f-2
Under the proposed rule, managers would be required to file proposed Form SHO with the SEC within 14 calendar days after the end of each calendar month for:
- Each equity security of a SEC-reporting company in which the gross short position equals or exceeds:
- $10 million at the close of any settlement date during a calendar month or
- A monthly average gross short position of 2.5% of the shares outstanding; or
- Each equity security of a non-reporting company in which the gross short position equals or exceeds $500,000 at the close of any settlement date during the calendar month.
The information to be filed in the proposed Form SHO would include:
- The eligible security’s name;
- The end of month gross short position; and
- Daily trading activity resulting in changes to the manager’s reported gross short position for each settlement date during the reporting period for the calendar month.
The SEC would publish, through EDGAR, the following information within one month after the end of the reporting calendar month based on the reporting contained in the proposed Form SHO:
- The issuer’s name and other identifying information;
- The aggregated gross short position for all reporting managers in the issuer’s reported security at the close of the last settlement date of the calendar month of the reporting period and the corresponding dollar value;
- The percentage of the reported aggregate gross short position that is reported as fully hedged, partially hedged or not hedged; and
- For each reported settlement date during the calendar month reporting period, the net activity in the security, as aggregated across all managers.
The SEC publication of short selling data would not include the names of the short sellers. According to the Proposal, the aggregation of the short sale data is intended to address concerns that the disclosure of activities of individual managers would result in short squeezes and may generally discourage short-selling as a strategy for individual managers.
The Proposal would not require disclosure of short positions established through derivatives, it only applies to short positions directly on the subject security. The SEC acknowledges this as a potential path to circumvent the reporting requirement, but believes it is counterbalanced by the increased costs a short seller may face in trying to use derivatives instead of direct short sales.
Other Proposed Amendments
Under Proposed Rule 205, broker-dealers would be required to collect and report additional data on certain purchase orders (whether for their own or another person’s account) to cover short sales. Specifically, a broker-dealer would be required to mark a purchase order as “buy to cover” if, at the time of the order’s entry, the purchasing broker-dealer or another person has a gross short position in the same security for the account for which it is purchasing.
The CAT amendment would require CAT reporting firms to report “buy to cover” order marking information, which would be collected through Proposed Rule 205, and reliance on the bona fide market making exception under Regulation SHO. The CAT amendment and Proposed Rule 205 are intended to supplement the short sale data that would be provided to the SEC on proposed Form SHO. According to the Proposal, collectively, they would help inform market participants by better reflecting the timing of increases and decreases in short positions.
If the Proposal is adopted, companies and other market participants will have somewhat greater visibility into short sale activity in their stock, which may help them to better anticipate volatility in their stock price, as well as understanding the potential for “short activism” in their stock. The SEC has established a comment period for the Proposal that lasts until the later of 30 days after its publication in the Federal Register or April 26, 2022.