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(Article from Registered Funds Regulatory Update, April 2022)

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On February 25, 2022, the SEC announced that it unanimously voted to approve proposed changes requiring certain institutional investment managers to report short sale-related data on certain equity securities to the SEC. A short sale is the sale of a security that the seller does not actually own that is then consummated by the seller delivering a borrowed security. While short selling can be a useful market tool, it can also be used to drive down stock prices, accelerate a declining market in a particular stock or manipulate stock prices

If proposed new Rule 13f-2 under the Exchange Act is adopted, the new rule will make significant changes to short selling disclosure obligations for certain institutional investment managers in connection with the SEC’s effort to provide more transparency to market participants and regulators on large short selling activity and mitigate stock price manipulation during times of irregular market volatility. Rule 13f-2 would require institutional investment managers exercising investment discretion over short positions exceeding certain thresholds to file with the SEC, on a nonpublic basis, new Form SHO to report certain data relating to month-end short positions and certain related daily transaction activity. The thresholds specifically depend on whether the short position relates to an equity security of a SEC reporting or non-reporting issuer.

• For SEC reporting issuers, Form SHO is required for each “gross short position” over which the institutional investment manager and any person under its control has investment discretion that (i) has a value of at least $10 million at the close on any settlement date during the calendar month; or (ii) represents a monthly average gross short position as a percentage of shares outstanding in the equity security of at least 2.5%.
• For SEC non-reporting issuers, Form SHO is required for each short position with a value that meets or exceeds $500,000 at the close of any settlement date during the month.

Institutional investment managers that meet the disclosure thresholds in a calendar month would be required to file proposed Form SHO with the SEC via EDGAR within 14 calendar days following the end of such month. The identity of the institutional investment manager filing Form SHO will be kept confidential to avoid retaliation against short sellers. The SEC will then take the reported data on Form SHO and publish aggregate information related to individual equity securities and net activity during the applicable month. The information is intended to fill an information gap into the lifecycle of a short sale not currently publicly available. Current short sale transaction information provided by major U.S. stock exchanges and FINRA does not reflect increases and decreases in reported short positions. SEC Chair Gary Gensler stated that proposed Rule 13f-2 “would strengthen transparency of an important area of our markets that would benefit from greater visibility and oversight.”

The public comment period will remain open until April 15, 2022.

Short Position and Short Activity Reporting by Institutional Investment Managers, SEC Release No. 34-9413 (Feb. 25. 2022), available at: https://www.sec.gov/rules/proposed/2022/34-94313.pdf.