As we have seen, shareholding disclosures are already off to a busy start in 2022 and here we go again! The US Securities Exchange Commission (SEC) has released another disclosure proposal, however this is not an amendment to an existing disclosure rule. This time it is for a new short position reporting rule; Exchange Act Rule 13f-2 and amendments to regulations SHO and CAT to increase market transparency regarding short selling.
More transparency to short-selling
On 25 February 2022 the SEC unanimously voted to propose rules and amendments to broaden the scope of short sale-related data available to the investing public and to regulators. After the 2008 financial crisis, Congress directed the SEC to bring more transparency to short selling. The proposed changes are a response to Congress’s mandate under Section 13f-2 of the Securities Exchange Act, added under Section 929X of the Dodd-Frank Wall Street Reform and Consumer Protection Act, to make certain short sale data publicly available. The SEC states that the proposed rule will help them address future market events, striking a balance between the need for transparency and the price discovery process. This new data will supplement the short sale data that is currently publicly available from FINRA and stock exchanges.
As we saw with the proposed changes to 13D and 13G beneficial ownership reporting, again the US is not going as far as the EU, UK and certain Asian jurisdictions, which have daily short selling position reporting obligations with thresholds as low as -0.1%.
What is proposed?
Proposed Rule 13f-2 would require institutional investment managers exercising investment discretion over short positions to file the confidential Proposed Form ‘SHO’ with the SEC via EDGAR. The requirement would be to do this within 14 calendar days after the end of each calendar month, with regard to each equity security and all accounts over which the manager meets or exceeds either of the following thresholds:
- For any equity security of an issuer in which the manager meets or exceeds either:
- a gross short position in the equity security with a US dollar value of $10 million or more at the close of any settlement date during the calendar month, or
- a monthly average gross short position as a percentage of shares outstanding in the equity security of 2.5 percent or more; or
- For any equity security of an issuer that is not a reporting company issuer as described above in which the manager meets or exceeds a gross short position in the equity security with a US dollar value of $500,000 or more at the close of any settlement date during the calendar month.
What detail would they report?
- the name of the eligible security
- end of month gross short position information
- daily trading activity that affects a manager’s reported gross short position for each settlement date during the calendar month reporting period.
The SEC would aggregate the data by security, maintaining the confidentiality of the reporting managers, and publicly disseminate the data to all investors.
What is EDGAR?
EDGAR is the SEC’s Electronic Data Gathering, Analysis, and Retrieval system. It is their primary system for submitting documents under the Securities Act of 1933, the Securities Exchange Act of 1934, the Trust Indenture Act of 1939, and the Investment Company Act of 1940.
When does the consultation close?
In light of Proposed Rule 13f-2, the SEC reopened the comment period for Proposed Exchange Act Rule 10c-1. Comments should be received on or before 30 days after publication in the Federal Register or 26 April 2022 (which is 60 days after issuance), whichever is later.
How can Kaizen help?
Kaizen will be closely monitoring these proposals and ensuring our shareholding disclosure monitoring and reporting system is ready for this new reporting regime immediately upon implementation.