Short Sale Reporting is No Longer Short Term

October 20, 2008

In its Release No. 58591A (originally issued on September 18, 2008 and amended on September 21, 2008), the Securities and Exchange Commission (the “SEC”) issued an emergency order (the “Order”) requiring institutional investment managers to report short sales of certain publicly traded securities using a newly adopted Form SH.  On October 2, 2008, the SEC amended and extended the Order in its Release No. 58724, finding it “necessary in the public interest and for the protection of investors to maintain fair and orderly securities markets.” Some technical changes were made, most significantly, that all submissions would remain confidential.  Because the Order was an emergency order with a maximum effective period of thirty (30) calendar days, even as amended, the Order was scheduled to expire October 17, 2008. That meant that the last filing due under the Order would be made on October 21, 2008, for the week ending October 19, 2008.

Circumstances have not quieted the SEC’s concerns “about possible unnecessary or artificial price movements that may be based on unfounded rumors and may be exacerbated by short selling.” On October 15, 2008, the SEC issued Release No. 34-58785 (the “SH Release”) adopting temporary Rule 10a-3T as an interim final temporary rule (the “Rule”) effective immediately (i.e., with respect to filings made after October 18, 2008) until August 1, 2009.  Also adopted was Temporary Form SH (“New Form SH”), which reflects the new reporting matrix for institutional investment managers. The SEC is soliciting comments on all aspects of the Rule and New Form SH.

Just as with the Order, the Rule requires an institutional investment manager that exercises investment discretion with respect to accounts holding “section 13(f) securities” having an aggregate fair market value of at least $100,000,000 to file New Form SH with the SEC following a calendar week in which it effected a short sale in a section 13(f) security (i.e., a security described in Rule 13f-1(c) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Thus, institutional investment managers must file a New Form SH if (1) as of the end of the most recent calendar quarter they filed, or were required to file, a Form 13F for that calendar quarter and (2) during a Sunday to Saturday calendar week effected a short sale in a section 13(f) security other than options.” Also unchanged from the Order is that “[the New] Form SH short position is not net of long position in the issuer.” [1] Also, multiple institutional investment managers can report on the same New Form SH; the New Form SH retains all of the identification information for reporting institutional investment managers and those filing combined reports or notices.

Also as was the case under the Order, (i) in order for a reporting institutional investment manager to retain the confidential nature of the data reported on the New Form SH, it must be labeled “non-public,” (ii) the Rule allows for exceptions to reporting, although some exceptions differ from those in the Order, (iii) option short sales are exempt from Form SH reporting requirements [2] and (iv) no Form SH is required if the institutional investment manager has not affected any short sales of section 13(f) securities during the subject reporting period covered by a New Form SH (i.e., a calendar week).

In a significant difference from the Order, the Rule exempts reporting if, for any calendar day when there was a short sale:

• 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 (¼%) 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 pursuant to Section 13 of the Exchange Act, unless the manager knows or has reason to believe the information contained therein is inaccurate, and

• 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 each less than $10,000,000 (with the calculation of the threshold amount being the product of the number of shares sold short that day and the market price of that security as of the time of the close of trading at the NYSE on that day).

This exemption differs from the Order in two ways.  The dollar threshold in the Order was only $1,000,000.  Further, the Rule makes it clear that the identity of the stock (name and CUSIP) must be reported, although other non-qualifying features (the start of day short position, the gross number of securities sold short during the day and the end of day short position) can be represented by “N/A”.  This was not clear in the Order. [3]

Another difference between the Order and the Rule is that New Form SH no longer requires disclosure of the value of the securities sold short (currently column 5 of Form SH), the largest intraday short position (currently column 7 of Form SH) and the time of day of the largest intraday short positions (currently column 8 of Form SH).  However, while the Order did not require disclosure of any trades prior to September 22, 2008, New Form SH filers will be required to report all short positions, including short positions effected prior to September 22, 2008, when reporting “Elements” 5, 6 and 7: Short Position (Start of Day), Number of Securities Sold Short (Day) and Short Position (End of Day).  This does not mean that all prior short positions must be disclosed, regardless of whether there has been a short sale. It is only when the need to report (i.e., a non-exempt short sale has occurred for the first time, once the Rule takes effect) that the pre-September 22, 2008 short positions have to be included.  However, the technical format for the submission of this data has changed to XML format.  The Order permitted reporting in ASCII or HTML. 

Although not stated in the Rule, it is apparent that separate Information Tables for each day of the week are no longer needed. As a final difference, the weekly filing deadline for New Form SH (as of October 18, 2008) will be the last business day of the calendar week following a calendar week in which a short sale was effected; generally that will be on Fridays, although filing for the week of June 21-27, 2009 will be due Thursday, July 2, 2008.  Under the Order, the Form SH filing deadline was the first business day of the calendar week following a calendar week in which a short sale was effected.

Although the Rule is effective immediately, there is a transition period until the calendar week ending November 1, 2008.  A New Form SH to be filed “on October 24, 2008 or October 31, 2008, must comply with [the Rule], except that they may exclude disclosure of short positions reflecting short sales before September 22, 2008 from [filings] on either or both of those dates,” provided they retain use of the Order’s $1,000,000 threshold for exempting reports of short sales (“i.e., the short position in the section 13(f) security constitutes less than ¼% of that class of the issuer’s securities issued and outstanding...and the fair market value of the short position in the section 13(f) security, as of September 22, 2008, was less than $1,000,000.”). 

While the SEC has resolved short sale reporting requirements for the moment, because short sales continue to be their focus to insure a stable market-place, it would appear that while this format may be “temporary”, the concept is permanent.  It may be small comfort that, however difficult the adjustment to capturing and tracking reportable trades may have been under the Order, it at least provided preparation for on-going SEC-mandated disclosure. 

[1] As with the current Form SH, closing the short position by purchasing the security allows for a deduction from the short position.  Further, if a recall of a loaned security is initiated (as the result of a sale) within two business days of the trade, the person that loaned the security is deemed to own the security for purposes of Rule 200(g)(1) and Rule 200(b) of Regulation SHO, and such sale will not be treated as a short sale.  Readers are referred to the Division of Trading and Market Guidance Regarding Sale of Loaned but Recalled Securities available at http://www.sec.gov/divisions/marketreg/loanedsecuritiesfaq.htm

[2] Not all options-related transactions are exempt, though. Short sales resulting from the exercise of option contracts are reportable as of the date of exercise.  In exercising a put that does not cover all short positions, the resulting transaction (because there are remaining short positions) is a short sale to be reported. “If the institutional investment manager effects a short sale as a result of assignment to it as a call writer, upon exercise, the resulting transaction is a short sale” to be reported.

[3] Another clarification provided by the Rule is the exemption permitted broker-dealers, effecting a short sale for an investment manager acting as a “riskless principal”, which is exempt from disclosure under the Rule:(i) a broker-dealer receives an order to sell a section 13(f) security from a customer who is net long on the securities being sold, and the broker-dealer then seeks to execute that order, either in whole or in part, by selling the section 13(f) security as riskless principal, and the broker-dealer has an overall net short position in such section 13(f) security; or (ii) a broker-dealer receives an order to buy a section 13(f) security from a customer, and the broker-dealer then seeks to execute that order, either in whole or in part, by purchasing the section 13(f) security as riskless principal,

For additional information on this topic, you may contact Howard A. Neuman and Carol Spawn Desmond.