• SEC Extends and Modifies Short Sale Reporting Requirements
  • October 29, 2008 | Authors: Barry N. Hurwitz; Roger P. Joseph; Neal E. Sullivan
  • Law Firms: Bingham McCutchen LLP - Boston Office; Bingham McCutchen LLP - Washington Office
  • On October 15, 2008, the Securities and Exchange Commission adopted an “interim final temporary” rule extending the recently imposed requirement that certain institutional investment managers file weekly reports on Form SH with respect to short sales of Section 13(f) securities. The previous filing requirements had been adopted by the SEC pursuant to an emergency order that was due to terminate on October 17, 2008. The new temporary rule will be in effect through August 1, 2009 unless it is sooner terminated or extended.

    The temporary rule requires the filing of Form SH by institutional investment managers that filed, or were required to file, a Form 13F for the previous calendar quarter (as opposed to the quarter ended June 30, 2008, as was the case under the emergency order). Form SH must be filed each week to report short sales and short positions during the prior calendar week in which short sales are effected, subject to the exceptions described below.

    The filing requirements under the temporary rule are similar to those that were in effect under the emergency order, although there are some significant changes:

    • The Form SH weekly filing deadline will be the last business day of the next calendar week (typically, Friday) following a calendar week in which short sales are effected, instead of the first business day of that next week.
    • Filers will no longer be required to disclose the value of the securities sold short, the largest intraday short position or the time of day of the largest intraday short position.
    • The threshold for reporting short sales or positions will be raised from a fair market value of $1 million to a fair market value of $10 million, as discussed in greater detail below.
    • Filers will be required to report all short positions, including short positions effected prior to September 22, 2008 (which had been exempt from reporting under the emergency order). For example, a filer will be required to report its entire short position in a particular Section 13(f) security, not just the short position established on or after September 22, 2008. (This will not be required for the filings due by October 24 and October 31, 2008, but the filer will not be able to take advantage of the new $10 million de minimis exemption unless it reports its full short positions).
    • To facilitate the SEC’s review of Form SH data, filers will be required to file in XML format, but this will not be required for the filings due by October 24 and October 31, 2008.
    • Certain additional formatting changes have also been implemented, including a requirement to identify an institutional investment manager’s CIK number on a per-entry basis, which may complicate reporting for multiple managers reporting on the same Form SH.

    Under the temporary rule, an institutional investment manager will not be required to file Form SH with respect to a particular calendar week if:

    • It effected no short sales of a Section 13(f) security during that week; or
    • On each calendar day during that week, (a) the start of day short position, the gross number of securities sold short during the day and the end of day short position each constitute less than one-quarter of one percent (0.25%) of that class of the issuer’s Section 13(f) securities issued and outstanding and (b) the fair market value of the start of day short position, the gross number of securities sold short during the day and the end of day short position each are less than $10 million.

    Once it has been determined that a Form SH filing is required, an institutional investment manager is not required to report short sales or short positions of Section 13(f) securities where:

    • On any day of the week covered by the Form SH, (a) the start of day short position, the gross number of securities sold short during the day [and] the end of day short position in a Section 13(f) security constitutes less than one-quarter of one percent (0.25%) of that class of the issuer’s Section 13(f) securities issued and outstanding and (b) the fair market value of the start of day short position, the gross number of securities sold short during the day [and]* the end of day short position is less than $10 million; or
    • A broker-dealer seeks to execute a customer order, either in whole or in part, through a riskless principal transaction, and a short sale results from a sale order of a customer who is net long the Section 13(f) security, or a purchase order of a Section 13(f) security.

    For purposes of the tests described above, the number of securities issued and outstanding is determined according to what is reported in an issuer’s most recent annual, quarterly or current report filed with the SEC, unless the investment manager knows or has reason to believe the information contained therein is inaccurate. Fair market value of a Section 13(f) security is determined with reference to the market price of that security as of the close of the New York Stock Exchange on the date of the applicable transaction.

    Under the emergency order, the SEC stated that Form SH filings would be “nonpublic to the extent permitted by law.” In the release adopting the new rule, the SEC reaffirms that position and explains that at least two exemptions under the Freedom of Information Act give the SEC the authority to withhold Form SH data from public disclosure. The release explains that while filers should continue to label the top and bottom of each page of a Form SH filing with the word “NON-PUBLIC” (in bold and capital letters), filers should not submit a confidential treatment request to the SEC.

    The SEC has requested comments on a number of aspects of the temporary rule and has indicated that it intends to address such comments in a future release.

    ENDNOTES
    The SEC release uses the word “or.” However, as a matter of practice, we think it would be prudent to treat this as an “and” test, especially on a day when a short position in a Section 13(f) security is first established.