On October 13, 2023, the U.S. Securities and Exchange Commission (“SEC”) adopted (i) a new Rule 13f-2 under the Securities Exchange Act of 1934 (the “Exchange Act”) which will require a wide range of firms to file monthly reports with the SEC for large short positions in equity securities on a new Form SHO, as well as (ii) an amendment to the National Market System plan governing the Consolidated Audit Trail (the “CAT NMS Plan”) which adds an additional reporting requirement for CAT-reporting firms relying on the bona fide market maker exception to Reg SHO’s locate requirement.  The Final Rules, described in greater depth below, will require a significant compliance effort from firms and could potentially risk the exposure of certain valuable proprietary data. 

Key Takeaways:

  • A wide variety of firms will be required to make reports on Form SHO, including many investment advisers, family offices, broker-dealers, and unregistered proprietary trading firms.
  • The reporting requirement will depend on the firm’s “gross” short position regardless of its actual economic position, meaning that many large trading firms will be required to make reports for securities in which they are close to net flat.
  • Synthetic short positions are not included in the calculation of whether a short position threshold has been met. 

Rule 13f-2 and Form SHO

Who is Required to Report?

The new Rule 13f-2 will require any “Institutional Investment Manager” that exceeds certain short position thresholds in equity securities to file a Form SHO with the SEC once a month.  The term “Institutional Investment Manager” is defined very broadly to include both (1) non-natural persons that are investing in or buying and selling securities for their own accounts (which includes both “dealers” as well as firms that rely on the “trader” exception to dealer status); and (2) natural or non-natural persons exercising investment discretion with respect to the account of any other person (which includes most investment advisers, and some brokers). 

Short Position Thresholds

The short position thresholds vary depending on the type of security.  For equity securities that are of a class issued through a registered offering, or for which the issuer is required to file reports pursuant to Section 15(d) of the Exchange Act, an Institutional Investment Manager will need to file a report on Form SHO with regard to such securities if (i) the Institutional Investment Manager has a monthly average gross short position at the close of regular trading hours with a U.S. dollar value of $10 million or more; or (ii) the Institutional Investment Manager has a monthly average gross short position at the close of regular trading hours of 2.5% or more of the outstanding shares in the security.

For all other equity securities, an Institutional Investment Manager will need to file a report on Form SHO with regard to such securities if the Institutional Investment Manager has a gross short position in the security with a U.S. dollar value of $500,000 or more at the close of regular trading hours on any settlement date during the calendar month.  Therefore, an Institutional Investment Manager with short positions in securities other than securities of a publicly reporting issuer will need to consider whether their gross short position surpasses the threshold on a daily basis rather than a monthly basis. 

The rule defines the term “gross short position” to mean the number of shares of the equity security that are held short as a result of “short sales” as defined in Reg SHO, without the inclusion of any offsetting economic positions.  The SEC explicitly declined to base the thresholds on a “net” short position, explaining that such a threshold would “dilute the usefulness of the data in providing market participants with a sense of substantial short positions.”  This choice means that trading firms with substantial short positions for activities like hedging may be forced to report those positions despite having relatively flat positions in an actual economic sense.

The definition of “gross short position”, however, is tied to the definition of “short sale” in Reg SHO, meaning that it only includes actual sales of securities which the seller does not own (or which are consummated by the delivery of securities borrowed by, or for the account of, the seller).  It does not include “synthetic” short positions that provide an economic short position without the mechanics of a short sale.

Form SHO

Any Institutional Investment Manager that trips one of the reporting thresholds will need to file a report on Form SHO within 14 calendar days after the end of each month.  The Institutional Investment Manager will need to complete entries in two tables—Table 1 and Table 2—for each security in which they exceed one of the thresholds.  Table 1 requires the Institutional Investment Manager to list the relevant security as well as the short position (both in number of shares and in USD).  Table 2 requires the Institutional Investment Manager to list the net change in their short position for each trading day of the month.

Following the retrieval of this information, the SEC plans to publish aggregated information derived from the data reported on Form SHO.  The SEC’s view is that aggregating the data before releasing it to the public eliminates any concerns from the industry that proprietary trading information will become publicly available, which would allow others to gain insight into a firm’s trading operations.  However, several commenters on the proposal, as well as Commissioner Peirce, have noted their concern with the possibility that this very valuable data could be misappropriated or disclosed after the SEC collects it, or that the SEC could later reverse course and decide that some or all of this information should be made public, without aggregation or anonymization.  The industry will have to hope that the SEC’s cybersecurity protections are up-to-snuff to prevent hackers from accessing the information, and that leaks of this data do not begin to pop up once reporting begins. 

CAT NMS Plan

In addition to Rule 13f-2, the Final Rules include an update to the CAT NMS Plan relating to the bona fide market making exception to the Reg SHO locate requirement.  The default rule under Reg SHO is that a broker-dealer may not accept a short sale unless the broker-dealer has borrowed the security, entered into a bona fide agreement to borrow the security, or has reasonable grounds to believe that the security can be borrowed so that it can be delivered on its due date.  This so-called “locate” requirement has several exceptions, including an exception for market makers selling short in connection with bona fide market making activity in the security for which the exception is claimed (the “bona fide market making exception”).  

The amendment to the CAT NMS Plan will require CAT reporting firms that are reporting short sales to indicate whether the firm is asserting the use of the bona fide market making exception under Reg SHO.  Broker-dealers already internally keep track of which short sales are made in reliance on the bona fide market making exception, but identifying these sales in the CAT NMS Plan, in addition to being potentially costly for broker-dealers, will mean that any mistaken reliance on this exception will become far more identifiable to regulators. 

Compliance Dates Rule 13f-2, Form SHO, and the amendment to the CAT NMS Plan will become effective 60 days after the final rules are published in the Federal Register, though the compliance date for Rule 13f-2 and Form SHO is one year after effectiveness, and the compliance date for the CAT NMS Plan amendment is 18 months after effectiveness.  Public aggregated reporting of the short sale data will be published beginning 15 months after publication.