• SEC Adopts Interim Final Temporary Rule Requiring Disclosure of Short Sales and Short Positions
  • November 20, 2008
  • Law Firm: Blank Rome LLP - Philadelphia Office
  • Introduction

    On October 15, 2008, the Securities and Exchange Commission (the “SEC”) adopted interim final temporary Rule 10a-3T and Temporary Form SH under the Securities Exchange Act of 1934 (the “Exchange Act”).1 Rule 10a-3T requires certain institutional investment managers to file Form SH with the SEC following a calendar week in which they effected short sales of Section 13(f) securities. Essentially, this temporary rule modifies and extends the reporting requirements established by the SEC emergency order issued on September 18, 2008 (as amended and extended on September 21, 2008, and October 2, 2008), and the temporary rule and Form will be effective from October 18, 2008 until August 1, 2009. In addition, the SEC is soliciting comments on the interim final temporary rule and Form SH.

    Background

    Concerned with recent price fluctuations and disruptions in the securities markets that have been exacerbated by abusive short selling practices, the SEC issued emergency orders under Section 12(k)(2) of the Exchange Act in July and September 2008 to reduce or eliminate certain of these practices.2 A short sale occurs when there is (1) a sale of a security not owned by the seller or (2) a sale that is consummated by the delivery of a security that has been borrowed by or on behalf of the seller. Abusive “naked” short selling is defined by the SEC as selling securities short without having the securities available for delivery, and intentionally failing to deliver the securities within the standard three-day settlement period.

    The September 18, 2008 emergency order, as amended, required an institutional investment manager that exercises investment discretion over securities covered by Section 13(f) of the Exchange Act to file weekly reports on Form SH, disclosing certain information about any short sales involving such securities. This order was amended on September 21, 2008 to clarify certain issues and was extended on October 2, 2008 to be effective until October 17, 2008. In addition, the SEC stated in October that the Form SH filings would remain nonpublic, to the extent allowed by law.

    Under the terms of the emergency orders, institutional investment managers were required to file Form SH reports with the SEC on the first business day of each week immediately following a week in which the investment manager effected any short sale in a security covered by Section 13(f) of the Exchange Act, other than an option. For each security that had been sold short, the Form SH had to identify, among other things, the number and value of securities sold short during the day, as well as the opening short position, the closing short position, the largest intraday short position, and the time at which such largest intraday short position occurred for that security. The orders included a de minimis exception for short positions in securities that did not exceed specified amounts. This reporting requirement also applied only to short sales effected on or after September 22, 2008.

    Rule 10a-3T and Form SH

    Since SEC has found the information provided on Form SH forms to be helpful during the current financial crisis, it decided to adopt an interim final temporary rule that served to extend the requirements to file Form SH reports until August 1, 2009, with certain modifications. Rule 10a-3T requires certain institutional investment managers that exercise investment discretion for accounts holding Section 13(f) securities to file a non-public Form SH on a weekly basis if they effected short sales of such securities during the reporting period preceding the filing due date.

    Beginning October 18, 2008, the weekly filing requirement for Form SH will be on the last business day of a calendar week immediately following a calendar week in which the investment manager effected short sales. This new deadline will provide filers with more time to gather the necessary information to complete this form. Also, since filers had difficulty obtaining certain information previously required by Form SH, the SEC no longer requires the disclosure of the value of the securities sold short, the largest intraday short position, and the time of day of the largest intraday short positions. All short positions, including those effected before September 22, 2008, must be disclosed on Form SH for those columns reporting the short position at the start of the day, the short position at the end of the day, and the number of securities sold short during the day. Filers will also be required to submit an XML-tagged data file to the SEC providing the information requested after a phase-in period.

    An institutional investment manager is not required to file a Form SH report if:

    • no short sales of Section 13(f) securities were effected during the reporting period covered by the Form SH due to be filed; or
    • on each calendar day during the calendar week, the start of day short position, the gross number of securities sold short during the day and the end of day short position constitute less than one-quarter of 1% 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 SEC, unless the filer knows or has reason to believe the information is inaccurate, and the fair market value of each of the above securities and positions is less than $10 million.

    Starting with the calendar week ending November 1, 2008, filers must report information in accordance with the instructions contained in Rule 10a-3T and in the EDGAR instructions on the SEC’s web site. To transition to the new temporary rule, investment managers who are required to file a Form SH report on October 24, 2008 or October 31, 2008 may exclude from those reports disclosure of short positions for short sales effected before September 22, 2008. However, should the filer choose to exclude such disclosures during the transition period, the relevant fair market threshold for reporting short sales or positions remains $1 million. In addition, investment managers do not have to file their Form SH reports in XML format on October 24, 2008 or October 31, 2008.

    Finally, the SEC included in the adopting release several requests for comment on several aspects of the interim final temporary rule. The SEC will consider public comments to determine whether further changes to the temporary rule and form may be required, as well as whether the rule and form should be extended beyond August 1, 2009, their current expiration date, or made permanent. Comments should be received by the SEC on or before December 16, 2008.

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    1. Release No. 34-58785 (Oct. 15, 2008).
    2. Release Nos. 34-58166 (July 15, 2008), 34-58572 (Sept. 17, 2008), 34-58591 (Sept. 18, 2008), 34-58592 (Sept. 18, 2008), as amended and extended by Release Nos. 34-58591A (Sept. 21, 2008), 34-58611 (Sept. 21, 2008), 34-58703 (Oct. 1, 2008), 34-58711 (Oct. 1, 2008), 34-58723 (Oct. 2, 2008), and 34-58724 (Oct. 2, 2008).