Rule2023-23050
Short Position and Short Activity Reporting by Institutional Investment Managers
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Published
November 1, 2023
Effective
January 2, 2024
Issuing agencies
Securities and Exchange Commission
Abstract
The Securities and Exchange Commission ("Commission") is adopting a new rule and new Form SHO pursuant to the Securities Exchange Act of 1934 ("Exchange Act") and the Dodd-Frank Wall Street Reform and Consumer Protection Act ("DFA"). The new rule and related form are designed to provide greater transparency through the publication of short sale-related data to investors and other market participants. Under the new rule, institutional investment managers that meet or exceed certain specified reporting thresholds are required to report, on a monthly basis using the related form, specified short position data and short activity data for equity securities. In addition, the Commission is adopting an amendment to the national market system ("NMS") plan governing the consolidated audit trail ("CAT") created pursuant to the Exchange Act to require the reporting of reliance on the bona fide market making exception in the Commission's short sale rules. The Commission is publishing the text of the amendments to the NMS plan governing the CAT ("CAT NMS Plan") in a separate notice.
Full Text
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<title>Federal Register, Volume 88 Issue 210 (Wednesday, November 1, 2023)</title>
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[Federal Register Volume 88, Number 210 (Wednesday, November 1, 2023)]
[Rules and Regulations]
[Pages 75100-75188]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-23050]
[[Page 75099]]
Vol. 88
Wednesday,
No. 210
November 1, 2023
Part II
Securities and Exchange Commission
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17 CFR Parts 240 and 249
Short Position and Short Activity Reporting by Institutional Investment
Managers; Final Rule
Federal Register / Vol. 88 , No. 210 / Wednesday, November 1, 2023 /
Rules and Regulations
[[Page 75100]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 240 and 249
[Release No. 34-98738; File No. S7-08-22]
RIN 3235-AM34
Short Position and Short Activity Reporting by Institutional
Investment Managers
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
adopting a new rule and new Form SHO pursuant to the Securities
Exchange Act of 1934 (``Exchange Act'') and the Dodd-Frank Wall Street
Reform and Consumer Protection Act (``DFA''). The new rule and related
form are designed to provide greater transparency through the
publication of short sale-related data to investors and other market
participants. Under the new rule, institutional investment managers
that meet or exceed certain specified reporting thresholds are required
to report, on a monthly basis using the related form, specified short
position data and short activity data for equity securities. In
addition, the Commission is adopting an amendment to the national
market system (``NMS'') plan governing the consolidated audit trail
(``CAT'') created pursuant to the Exchange Act to require the reporting
of reliance on the bona fide market making exception in the
Commission's short sale rules. The Commission is publishing the text of
the amendments to the NMS plan governing the CAT (``CAT NMS Plan'') in
a separate notice.
DATES:
Effective date: January 2, 2024.
Compliance date: The applicable compliance date is discussed in
Part VI of this release.
FOR FURTHER INFORMATION CONTACT: Timothy M. Riley, Branch Chief;
Patrice M. Pitts, Special Counsel; James R. Curley, Special Counsel;
Jessica Kloss, Attorney Advisor; Brendan McLeod, Attorney Advisor;
Roland Lindmayer, Attorney Advisor; Josephine J. Tao, Assistant
Director, Office of Trading Practices; and Carol McGee, Associate
Director, Office of Derivatives Policy and Trading Practices, Division
of Trading and Markets, Securities and Exchange Commission, 100 F
Street NE, Washington, DC 20549-8010, at (202) 551-5777.
SUPPLEMENTARY INFORMATION: The Commission is adopting new 17 CFR
240.13f-2 (``Rule 13f-2'') and related form 17 CFR 249.332 (``Form
SHO'') under the Exchange Act to require certain institutional
investment managers to report, on a monthly basis on new Form SHO,
certain short position data and short activity data for certain equity
securities as prescribed in Rule 13f-2.
The Commission is also adopting, in a separate notice published
elsewhere in this issue of the Federal Register, an amendment to the
CAT NMS Plan (``CAT Amendment''), pursuant to 17 CFR 242.608(a)(2)
(``Rule 608(a)(2)'') and (b)(2) (``Rule 608(b)(2)''), that enables the
Commission to adopt a rule to amend any effective NMS plan. For the
text of the amendment to the CAT NMS Plan, please see the Notice of the
Text of the Amendment to the National Market System Plan Governing the
Consolidated Audit Trail for Purposes of Short Sale-Related Data
Collection.\1\
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\1\ Notice of the Text of the Amendment to the National Market
System Plan Governing the Consolidated Audit Trail for Purposes of
Short Sale-Related Data Collection, Exchange Act Release No. 34-
98739 (Oct. 13, 2023).
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Table of Contents
I. Overview
A. Background
B. The Proposals
C. Overview of Proposed Rule 13f-2, Proposed Form SHO, Proposed
Rule 205 and Proposed CAT Amendments
1. Overview of Comments Received
2. Final Rule 13f-2, Form SHO and CAT Amendment
II. Discussion of Final Rule 13f-2 and Form SHO
A. Final Rule 13f-2
1. Scope of Persons Covered by Final Rule 13f-2
2. Scope of Reported Securities
3. Reporting Thresholds
4. Form SHO
B. Data Aggregation and Publication of Information by the
Commission
1. Proposal
2. Comments
3. Final Rule
III. Proposed Amendment to Regulation SHO To Aid Short Sale Data
Collection
A. Proposed Rule 205
B. Comments
IV. Amendments to CAT
A. Proposal To Require ``Buy to Cover'' Order Marking
B. Proposal To Require Reporting of Reliance on Bona Fide Market
Maker Exception
V. Other Comments
VI. Compliance Date
VII. Paperwork Reduction Act Analysis
A. Background
B. Burdens for Managers Under Rule 13f-2 and Form SHO
1. Applicable Respondents
2. Burdens and Cost
C. Burdens and Costs Associated With the Amendment to CAT
1. Summary of Collections of Information
2. Use of Information
3. Respondents
4. Total Initial and Annual Reporting and Record Keeping Burdens
D. Collection of Information Is Mandatory
E. Retention Period of Recordkeeping Requirement
F. Confidentiality
VIII. Economic Analysis
A. Introduction
B. Baseline
1. Institutional Investment Managers
2. Short Selling
3. Current Short Selling Regulations
4. Existing Short Selling Data
5. Competition
C. Economic Effects
1. Investor Protection and Market Manipulation
2. Effects on Stock Price Efficiency
3. Effect on Market Liquidity
4. Effect on Corporate Decision Making
5. Effect on the Securities Lending Market
6. Compliance Cost
7. Effect of Certain Electronic Filing and Dissemination
Requirements
8. Potential Increased Use of Derivatives
D. Efficiency, Competition and Capital Formation
1. Efficiency
2. Competition
3. Capital Formation
E. Reasonable Alternatives
1. Alternative Approaches
2. Data Modifications
3. Threshold Modifications
4. Other Alternatives
IX. Regulatory Flexibility Act Certification
X. Other Matters
Statutory Authority
I. Overview
A. Background
Short selling involves a sale of a security that the seller does
not own, or a sale that is consummated by the delivery of a security
borrowed by, or for the account of, the seller.\2\ In order to deliver
the security to the purchaser, the short seller will generally borrow
the security, usually from a broker-dealer or an institutional
investor, and later close out the position by purchasing equivalent
securities on the open market and returning the security to the lender.
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\2\ See 17 CFR 242.200(a).
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Short selling is generally used to profit from an expected downward
price movement, to provide liquidity in response to unanticipated
demand,\3\ or
[[Page 75101]]
to hedge the risk of a long position in the same security or a related
security.\4\ Short selling provides the market with important benefits,
such as providing market liquidity and pricing efficiency.\5\ While
short selling can serve useful market purposes, such as facilitating
price discovery, there are concerns that it could be used to drive down
the price of a security, to accelerate a declining market in a
security, or to manipulate stock prices.\6\
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\3\ Market liquidity is generally provided through short selling
by market professionals, such as market makers, who offset temporary
imbalances in the buying and selling interest for securities. Short
sales effected in the market add to the selling interest of stock
available to purchasers and reduce the risk that the price paid by
investors is artificially high because of a temporary contraction of
selling interest. Short sellers covering their sales also may add to
the buying interest of stock available to sellers. See Amendments to
Regulation SHO, Exchange Act Release No. 61595 (Feb. 26, 2010), 75
FR 11232, 11235 (Mar. 10, 2010) (``Rule 201 Adopting Release'').
\4\ See, Short Sales, Exchange Act Release No. 50103 (July 28,
2004), 69 FR 48008 (Aug. 6, 2004) (``Regulation SHO Adopting
Release'').
\5\ See, e.g., Phil Mackintosh, How Short Selling Makes Markets
More Efficient, NASDAQ (Oct. 1, 2020), available at <a href="https://www.nasdaq.com/articles/how-short-selling-makes-markets-more-efficient-2020-10-01">https://www.nasdaq.com/articles/how-short-selling-makes-markets-more-efficient-2020-10-01</a>. Efficient markets require that prices fully
reflect all buy and sell interest. Market participants who believe a
stock is overvalued may engage in short sales in an attempt to
profit from a perceived divergence of prices from true economic
values. Such short sellers add to stock pricing efficiency in part
because their transactions inform the market of their evaluation of
future stock price performance. This evaluation is reflected in the
resulting market price of the security. See Rule 201 Adopting
Release, 75 FR 11235 nn. 29 & 30. Historically, short sellers have,
at times, through doing research, uncovered fraudulent behavior. See
also generally discussion in infra Parts VIII.C.2 and VIII.C.4.
\6\ See, e.g., Div. Econ. Risk Analysis, Short Sale Position and
Transaction Reporting (June 5, 2014), at 6-7 (``DERA 417(a)(2)
Study''), available at <a href="https://www.sec.gov/files/short-sale-position-and-transaction-reporting0.pdf">https://www.sec.gov/files/short-sale-position-and-transaction-reporting0.pdf</a> (This is a study of the
Staff of the U.S. Securities and Exchange Commission, which
represents the views of Commission staff, and is not a rule,
regulation, or statement of the Commission. The Commission has
neither approved nor disapproved the content of this study and, like
all staff statements, it has no legal force or effect, does not
alter or amend applicable law, and creates no new or additional
obligations for any person.); Rule 201 Adopting Release, 75 FR 11235
(describing a ``bear raid'' where an equity security is sold short
in an effort to drive down the price of the security by creating an
imbalance of sell-side interest, as an example of unrestricted short
selling that could ``exacerbate a declining market in a security by
increasing pressure from the sell-side, eliminating bids, and
causing a further reduction in the price of a security by creating
an appearance that the security's price is falling for fundamental
reasons, when the decline, or the speed of the decline, is being
driven by other factors''). See generally discussion infra Part
VIII.C.1.
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The Commission has plenary authority under section 10(a) of the
Exchange Act to regulate short sales of securities as necessary or
appropriate in the public interest or for the protection of
investors.\7\ Regulation SHO, which became effective on January 3,
2005,\8\ imposes four general requirements with respect to short sales
of equity securities. Under 17 CFR 242.200 (``Rule 200 of Regulation
SHO''), broker-dealers must properly mark sale orders as ``long,''
``short,'' or ``short exempt.'' \9\ Under 17 CFR 242.203 (``Rule 203 of
Regulation SHO''), a broker-dealer must locate a source of shares that
the broker-dealer reasonably believes can be delivered in time for
settlement (commonly referred to as the ``locate requirement'') before
effecting a short sale.\10\ Under 17 CFR 242.204 (``Rule 204''), if the
broker or dealer that is a member of a registered clearing agency fails
to deliver the security to the registered clearing agency in time for
settlement, the broker or dealer must take action to close out the
failure to deliver if that failure results from a long or short
sale.\11\ Separately, under 17 CFR 242.201 (``Rule 201''), trading
centers \12\ must have policies and procedures in place to restrict
short selling when a covered security has triggered a short sale price
test circuit breaker.\13\ In addition, the Commission adopted an
antifraud provision, 17 CFR 240.10b-21 (``Rule 10b-21''), to address
failures to deliver in securities that have been associated with
``naked'' short selling.\14\
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\7\ 15 U.S.C. 78j(a).
\8\ See Regulation SHO Adopting Release.
\9\ See 17 CFR 242.200(g). A broker or dealer must mark all sell
orders of an equity security as ``long,'' ``short,'' or ``short
exempt.'' A sell order may only be marked ``long'' if the seller is
``deemed to own'' the security being sold and either (i) the
security to be delivered is in the physical possession or control of
the broker or dealer; or (ii) it is reasonably expected that the
security will be in the physical possession or control of the broker
or dealer no later than the settlement of the transaction. See 17
CFR 242.200(g). A person is deemed to own a security only to the
extent that he has a net long position in such security. See 17 CFR
242.200(c). Once marked as long, short, or short-exempt, the order
mark should not be changed regardless of any subsequent changes in
the person's net position. See In re OZ Mgmt., Exchange Act Release
No. 75445 (July 14, 2015) (settled) (discussing where OZ Management
submitted short sale orders to its executing broker, but identified
such sales as long sales to its prime broker, causing books and
records of the prime broker to be inaccurate), available at <a href="https://www.sec.gov/litigation/admin/2015/34-75445.pdf">https://www.sec.gov/litigation/admin/2015/34-75445.pdf</a>.
\10\ See 17 CFR 242.203(b)(1) and (2). The Regulation SHO locate
requirement provides that broker-dealers may not accept a short sale
order in an equity security from another person, or effect a short
sale in an equity security for its own account, unless the broker-
dealer has (i) borrowed the security, or entered into a bona-fide
arrangement to borrow the security; or (ii) reasonable grounds to
believe that the security can be borrowed so that it can be
delivered on the date delivery is due; and (iii) documented
compliance with this requirement (``locate requirement'').
\11\ See 17 CFR 242.204. ``Failures to deliver,'' or ``fails,''
occur when a broker-dealer fails to deliver securities to the party
on the other side of the transaction on the settlement date.
\12\ Trading center in Regulation SHO means a national
securities exchange or national securities association that operates
an SRO trading facility, an alternative trading system, an exchange
market maker, an OTC market maker, or any other broker or dealer
that executes orders internally by trading as principal or crossing
orders as agent. 17 CFR 242.200.
\13\ See 17 CFR 242.201.
\14\ See ``Naked'' Short Selling Antifraud Rule, Exchange Act
Release No. 58774 (Oct. 14, 2008), 73 FR 61666, 61674 (Oct. 17,
2008) (In a ``naked'' short sale, a seller does not borrow or
arrange to borrow the necessary securities in time to deliver them
to the buyer within the standard settlement period. Although abusive
``naked'' short selling is not defined in the federal securities
laws, it refers generally to selling short without having stock
available for delivery and intentionally failing to deliver stock
within the standard settlement period. In addition, a seller
misrepresenting its short sale locate source or ownership of shares
may intend to fail to deliver securities in time for settlement and,
therefore, engage in abusive ``naked'' short selling.).
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Section 929X of the DFA added section 13(f)(2) of the Exchange Act,
entitled ``Reports by institutional investment managers,'' requiring
the Commission to prescribe rules to make certain short sale data
publicly available no less frequently than monthly.\15\ Specifically,
section 13(f)(2) provides: ``[t]he Commission shall prescribe rules
providing for the public disclosure of the name of the issuer and the
title, class, CUSIP [Committee on Uniform Securities Identification
Procedures] number, aggregate amount of the number of short sales of
each security, and any additional information determined by the
Commission following the end of the reporting period. At a minimum,
such public disclosure shall occur every month.'' \16\ In addition, the
Commission has received multiple petitions to adopt reporting
requirements for short sellers similar to those required for holders of
long positions.\17\
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\15\ Public Law 111-203, sec. 929X, 124 Stat. 1376, 1870 (July
21, 2010).
\16\ 15 U.S.C. 78m(f)(2).
\17\ See, e.g., Letter from Elizabeth King, Corporate Secretary,
NYSE Group, et al. (Oct. 7, 2015, Petition 4-689) (stating that
rulemaking under 929X ``provides an opportunity to implement
meaningful public disclosure standards for short-sale activity,
consistent with that currently required for institutional investment
managers under section 13(f) of the Exchange Act for long position
reporting''), available at <a href="https://www.sec.gov/rules/petitions/2015/petn4-689.pdf">https://www.sec.gov/rules/petitions/2015/petn4-689.pdf</a>; Letter from Edward S. Knight, Executive Vice
President, General Counsel and Chief Regulatory Officer, NASDAQ
(Dec. 7, 2015, Petition 4-691) (requesting that the Commission
``take swift action to promulgate rules to require public disclosure
by investors of short positions in parity with the disclosure regime
applicable to long positions''), available at <a href="https://www.sec.gov/rules/petitions/2015/petn4-691.pdf">https://www.sec.gov/rules/petitions/2015/petn4-691.pdf</a> (``NASDAQ Petition''); see also
Letter from E. Carter Esham, Executive Vice President, Emerging
Companies, Biotechnology Innovation Organization (BIO) (Mar. 11,
2016) (``BIO Letter'') (applauding reforms to the short disclosure
framework proposed in the NASDAQ Petition and in the NYSE Petition
and advocating for the promulgation of rules to ensure parity
between public disclosures required of investors taking long and
short positions), available at <a href="https://www.sec.gov/comments/4-691/4691-5.pdf">https://www.sec.gov/comments/4-691/4691-5.pdf</a>; Letter from Andrew D. Demott, Jr., Chief Operating
Officer, Superior Uniform Group (supporting NASDAQ Petition and
advocating adoption of disclosure requirements for short sellers),
available at <a href="https://www.sec.gov/comments/4-691/4691-10.pdf">https://www.sec.gov/comments/4-691/4691-10.pdf</a>.
Developments in the market with regard to ``meme'' stocks in early
2021, some of which were widely reported as involving large short
sellers, also highlighted a need for more consistent and
consolidated short sale information. See, e.g., Robert Smith et al.,
``Short Squeeze'' Spreads as Day Traders Hunt Next GameStop, Fin.
Times (Jan. 27, 2021), available at <a href="https://www.ft.com/content/acc1dbfe-80a4-4b63-90dd-05f27f21ceb2">https://www.ft.com/content/acc1dbfe-80a4-4b63-90dd-05f27f21ceb2</a>; Are ``Meme Stocks'' Harmless
Fun, or A Threat to the Financial Old Guard?, Economist (July 6,
2021) (retrieved from Factiva database). See also Sharon Nunn & Adam
Kulam, Short-Selling Restrictions During Covid-19, Yale Sch. of
Mgmt., Program on Fin. Stability (Jan. 12, 2021), available at
<a href="https://som.yale.edu/story/2021/short-selling-restrictions-during-covid-19">https://som.yale.edu/story/2021/short-selling-restrictions-during-covid-19</a> (discussing global short selling regulatory responses to
the Covid-19 pandemic).
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[[Page 75102]]
B. The Proposals
In February 2022, in an effort to increase transparency regarding
short position and short activity data to both market participants and
regulators, and to address the requirements of section 13(f)(2), the
Commission proposed new rule 13f-2 (``Proposed Rule 13f-2'') and
related form (``Proposed Form SHO'') under the Exchange Act.\18\
Proposed Rule 13f-2 would require certain institutional investment
managers (``Managers'') with gross short positions that meet certain
quantitative reporting thresholds to report, on a monthly basis on new
Proposed Form SHO, certain short position data and short activity data
for certain equity securities. Proposed Form SHO included two parts:
Information Table 1-reports of information including, but not limited
to, data elements explicitly referenced in section 13(f)(2), gross end-
of-month short positions in equity securities that meet the reporting
thresholds, and whether such positions are fully hedged, partially
hedged, or not hedged; and Information Table 2-reports of information
including, but not limited to, certain daily activity data (including
options assignments and exercises) that affect a Manager's gross short
positions during the calendar month reporting period. Managers would
file Proposed Form SHO with the Commission via the Commission's
Electronic Data Gathering, Analysis, and Retrieval system (``EDGAR'')
within 14 calendar days after the end of the calendar month. The
Commission would then expect to publish on EDGAR aggregated information
derived from the data reported on Proposed Form SHO within one month
after the end of the reporting calendar month.
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\18\ Short Position and Short Activity Reporting by
Institutional Investment Managers, Exchange Act Release No. 34-94313
(Feb. 25, 2022), 87 FR 14950 (Mar. 16, 2022) (``Proposing
Release'').
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In the Proposing Release, the Commission stated that the required
short sale disclosures that would be collected under Proposed Form SHO
and the aggregated data published pursuant to Proposed Rule 13f-2 would
increase transparency and provide several important benefits to market
participants and regulators. Such aggregated information would help
inform market participants regarding the overall short sale activity by
reporting Managers. More information about the short sale activity and
gross short positions of reporting Managers may promote greater risk
management among market participants and may facilitate capital
formation to the extent that greater transparency bolsters confidence
in the markets. As discussed in the Proposing Release, the Commission's
regular access to Proposed Form SHO data would bolster the Commission's
oversight of short selling, as Proposed Rule 13f-2 and Proposed Form
SHO would improve the utility of information available to the
Commission and other regulators.\19\
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\19\ Proposing Release, at 14951.
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Additionally, to supplement the short sale data made available to
the Commission in Proposed Form SHO filings, the Commission proposed a
new rule at 17 CFR 242.205 prescribing a ``buy to cover'' order marking
requirement under Regulation SHO (``Proposed Rule 205'') for certain
purchase orders effected by a broker-dealer for its own account or for
the account of another person at the broker-dealer, if, at the time of
order entry, the purchaser had a gross short position in such security
in the account for which the purchase is being made. The Commission
also proposed amendments to the NMS plan governing the CAT (``Proposed
CAT Amendments'') to require the reporting of ``buy to cover'' order
marking information and of reliance on the bona fide market making
exception in Rule 203(b)(2)(iii) of Regulation SHO (``BFMM locate
exception''). Proposed Rule 205 and the Proposed CAT Amendments were
designed to fill an information gap for the Commission and other
regulators by providing insights into the lifecycle of a short sale
that are not available under existing data sources.\20\
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\20\ Because data obtained through CAT are not made public, the
``buy to cover'' and ``bona fide market making'' data reported
pursuant to the Proposed CAT Amendments would not be made publicly
available as a result of such reporting.
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C. Overview of Proposed Rule 13f-2, Proposed Form SHO, Proposed Rule
205 and Proposed CAT Amendments
1. Overview of Comments Received
The Commission received robust comment on Proposed Rule 13f-2,
Proposed Form SHO, Proposed Rule 205, and the Proposed CAT Amendments
(collectively, the ``Proposals''). Comments were submitted by
individual investors as well as other market participants, such as
trade associations, institutional investment managers, investment
advisers, broker-dealers, non-profit organizations, and academicians.
These comments, which are discussed in context below, included a
variety of different viewpoints on various aspects of the
Proposals.\21\ Many commenters were supportive of the Proposals as a
step toward increasing transparency into short sale activity.\22\ Many
commenters stated that short selling is a particularly opaque area of
the market and that increasing transparency regarding short selling
would be beneficial to market participants.\23\
[[Page 75103]]
Some of these commenters stated that the increased information
regarding short sales would allow investors to be better informed and
make better investment decisions.\24\ A number of these commenters
urged the Commission to strengthen the proposed reporting requirements
further by, for example, lowering or eliminating the thresholds
triggering reporting obligations under Proposed Rule 13f-2.\25\
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\21\ The comment letters on the Proposing Release (File No. S7-
08-22) are available at <a href="https://www.sec.gov/comments/s7-08-22/s70822.htm">https://www.sec.gov/comments/s7-08-22/s70822.htm</a>. Over 98% of the over 3,000 comments received were from
individual investors, most of whom (over 1,900) submitted a
variation of a template letter from ``We The Investors,'' an
advocacy group for retail investors. The remaining comments were
from trade associations, financial services firms--including
institutional investment managers and investment management firms,
broker-dealers--and their advisors, non-profit organizations,
academicians, and entities other than individual investors. See
Comment Letter from We the Investors, available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-typea.pdf">https://www.sec.gov/comments/s7-08-22/s70822-typea.pdf</a> (``WTI Letter'').
\22\ See, e.g., Comment from Samuel Hudock (Mar. 2, 2022),
available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-20118373-271244.htm">https://www.sec.gov/comments/s7-08-22/s70822-20118373-271244.htm</a>; Comment from Michelle R. Bracke (Mar. 4, 2022) available
at <a href="https://www.sec.gov/comments/s7-08-22/s70822-20118531-271417.htm">https://www.sec.gov/comments/s7-08-22/s70822-20118531-271417.htm</a>;
Comment from Joshua Barbee (Mar. 4, 2022), available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-20118530-271416.htm">https://www.sec.gov/comments/s7-08-22/s70822-20118530-271416.htm</a>; Comment
from Robert Ross (Mar. 14, 2022), available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-20119365-272251.htm">https://www.sec.gov/comments/s7-08-22/s70822-20119365-272251.htm</a>; Comment from David
Arkules (Feb. 28, 2022), available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-20118071-270876.htm">https://www.sec.gov/comments/s7-08-22/s70822-20118071-270876.htm</a>; Comment from Gina Preziosi
(Mar. 7, 2022), available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-20118726-271589.htm">https://www.sec.gov/comments/s7-08-22/s70822-20118726-271589.htm</a>; Comment from Jessica Cooke (Mar. 9,
2022), available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-20118963-271791.htm">https://www.sec.gov/comments/s7-08-22/s70822-20118963-271791.htm</a>; Comment from Mauricio Gonzalez (Oct. 12, 2022),
available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-310835.htm">https://www.sec.gov/comments/s7-08-22/s70822-310835.htm</a>; Comment from Liam Sutton (Oct. 19, 2022), available at
<a href="https://www.sec.gov/comments/s7-08-22/s70822-311965.htm">https://www.sec.gov/comments/s7-08-22/s70822-311965.htm</a>; Comment
from Nicholas Graham (Oct. 19, 2022), available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-312051.htm">https://www.sec.gov/comments/s7-08-22/s70822-312051.htm</a>; Comment from
Steffen Maier (Oct. 19, 2022), available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-312049.htm">https://www.sec.gov/comments/s7-08-22/s70822-312049.htm</a>; Comment from Zachary D'Elia
(Oct. 19, 2022), available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-312047.htm">https://www.sec.gov/comments/s7-08-22/s70822-312047.htm</a>; Comment from Stephen Leachman (Oct. 19, 2022),
available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-312046.htm">https://www.sec.gov/comments/s7-08-22/s70822-312046.htm</a>; Comment from Sergio Herrera (Oct. 19, 2022), available
at <a href="https://www.sec.gov/comments/s7-08-22/s70822-312042.htm">https://www.sec.gov/comments/s7-08-22/s70822-312042.htm</a>; Comment
from David P. Miller Jr. (Oct. 19, 2022), available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-312038.htm">https://www.sec.gov/comments/s7-08-22/s70822-312038.htm</a>.
\23\ See, e.g., Comment from William Bloxham (Oct. 21, 2022),
available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-313372.htm">https://www.sec.gov/comments/s7-08-22/s70822-313372.htm</a>; Comment from Ricardo Gomez (Oct. 29, 2022), available at
<a href="https://www.sec.gov/comments/s7-08-22/s70822-316604.htm">https://www.sec.gov/comments/s7-08-22/s70822-316604.htm</a>; Comment
from Victor Arriaza (Oct. 29, 2022), available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-316625.htm">https://www.sec.gov/comments/s7-08-22/s70822-316625.htm</a>; Comment from Kyle
Byrd (Oct. 29, 2022), available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-316701.htm">https://www.sec.gov/comments/s7-08-22/s70822-316701.htm</a>; Comment from Tarek Elseweifi (Oct. 29,
2022), available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-316706.htm">https://www.sec.gov/comments/s7-08-22/s70822-316706.htm</a>; Comment from Clay Wyant (Oct. 29, 2022), available at
<a href="https://www.sec.gov/comments/s7-08-22/s70822-316708.htm">https://www.sec.gov/comments/s7-08-22/s70822-316708.htm</a>; Comment
from Yin Hung Lam (Oct. 29, 2022), available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-316601.htm">https://www.sec.gov/comments/s7-08-22/s70822-316601.htm</a>; Comment from Evan Anderson
(Oct. 29, 2022), available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-316580.htm">https://www.sec.gov/comments/s7-08-22/s70822-316580.htm</a>; Comment from Connor Judson (Oct. 29, 2022),
available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-316599.htm">https://www.sec.gov/comments/s7-08-22/s70822-316599.htm</a>; Comment from Nicky (Oct. 29, 2022), available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-316638.htm">https://www.sec.gov/comments/s7-08-22/s70822-316638.htm</a>.
\24\ See, e.g., Comment from Eric Mills (April 27, 2022),
available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-20126810-287520.htm">https://www.sec.gov/comments/s7-08-22/s70822-20126810-287520.htm</a> (``[T]he proposals will serve the mission of the SEC by
increasing transparency regarding short selling activity. On-going
efforts by the SEC to increase market transparency and relieve
information asymmetries promote efficiency, order, fairness, capital
formation, and public trust. The result is an enhancement of
investor ability to assess the market and make more informed
decisions.''); Comment from Stanley Little (Mar. 8, 2022), available
at <a href="https://www.sec.gov/comments/s7-08-22/s70822-20118870-271692.htm">https://www.sec.gov/comments/s7-08-22/s70822-20118870-271692.htm</a>
(``The proposed rule is a[n] important missing link for investors.
The ordinary person wishing to make money in the stock market should
have all available information at their disposal to make informed
decisions . . . The transparency rule is such a tool needed to make
well informed decisions.''); Comment from Brendon Withers (Feb, 27,
2022), available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-20118078-270936.htm">https://www.sec.gov/comments/s7-08-22/s70822-20118078-270936.htm</a> (supported ``immediate implementation [of the
proposals] to improve the US Stock Market and provide a more fair
and free system in which market participants can have accurate
information and make informed decisions based on CURRENT AND
ACCURATE data.'').
\25\ See, e.g., Letter from Stephen W. Hall, Legal Director and
Securities Specialist, Better Markets, et al. (Apr. 26, 2022), at
12, available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-20126822-287528.pdf">https://www.sec.gov/comments/s7-08-22/s70822-20126822-287528.pdf</a> (``[T]the SEC should eliminate the proposed
thresholds so as to reduce or eliminate the risk that unknown,
hidden short positions could pose to investors and the markets.'')
(``Better Markets Letter''); Comment from Matthew Sinex (Oct. 31,
2022), available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-317106.htm">https://www.sec.gov/comments/s7-08-22/s70822-317106.htm</a>; Comment from Noah Tewahade (Oct. 30, 2022), available at
<a href="https://www.sec.gov/comments/s7-08-22/s70822-317046.htm">https://www.sec.gov/comments/s7-08-22/s70822-317046.htm</a>; Comment
from Luke Dansie (Oct. 31, 2022), available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-317081.htm">https://www.sec.gov/comments/s7-08-22/s70822-317081.htm</a>; Comment from Mike Flowers (Oct.
30, 2022), available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-317245.htm">https://www.sec.gov/comments/s7-08-22/s70822-317245.htm</a>; Comment Letter from Katherine Lander (Oct. 30,
2022), available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-317266.htm">https://www.sec.gov/comments/s7-08-22/s70822-317266.htm</a>; Comment from Marco Alvarenga (Oct. 31, 2022), available
at <a href="https://www.sec.gov/comments/s7-08-22/s70822-316992.htm">https://www.sec.gov/comments/s7-08-22/s70822-316992.htm</a>; Comment
Letter from Erikka Jehle (Oct. 31, 2022), available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-316930.htm">https://www.sec.gov/comments/s7-08-22/s70822-316930.htm</a>.
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As discussed in further detail below, some commenters recommended
changes to the Proposals in response to their concerns about: the scope
of Proposed Rule 13f-2; the underlying approach and levels of the
proposed thresholds that would trigger a reporting obligation under
Proposed Rule 13f-2; the feasibility of operationalizing Proposed Rule
205 in a manner that would result in the gathering of meaningful short
sale-related data; and the necessity for the Proposed CAT Amendments.
Some commenters stated that the Commission did not sufficiently
articulate the benefits of, or regulatory justification for, the
Proposals and did not accurately estimate or adequately justify the
costs and impacts of the new reporting requirements.\26\ Some of these
commenters expressed concern that the Proposing Release's Economic
Analysis did not adequately estimate the costs and burdens of the
Proposals.\27\
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\26\ E.g., Comment Letter from Robert Toomey, Managing Director
and Associate General Counsel, Securities Industry and Financial
Markets Association, et al. (Apr. 26, 2022), at 3, available at
<a href="https://www.sec.gov/comments/s7-08-22/s70822-20126803-287514.pdf">https://www.sec.gov/comments/s7-08-22/s70822-20126803-287514.pdf</a>
(``SIFMA Letter'') (``SIFMA is concerned that such an expansive
reporting regime would impose burdens and costs on reporting parties
that would materially outweigh the benefit of the information they
might yield, and that the SEC has not provided justification for why
such information is necessary and/or cannot already be obtained
through other means available to the SEC''); see also, Comment
Letter from Thomas M. Merritt, Deputy General Counsel, Virtu
Financial (Apr. 26, 2022), available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-20126856-287588.pdf">https://www.sec.gov/comments/s7-08-22/s70822-20126856-287588.pdf</a> (``Virtu Letter'');
Comment Letter from Thomas Deinet, Executive Director, Standards
Board for Alternative Investments (Apr. 26, 2022), available at
<a href="https://www.sec.gov/comments/s7-08-22/s70822-20126850-287575.pdf">https://www.sec.gov/comments/s7-08-22/s70822-20126850-287575.pdf</a>
(``SBAI Letter''); Comment Letter from Matthew B. Siano, Managing
Director and General Counsel, Two Sigma (Apr. 26, 2022), available
at <a href="https://www.sec.gov/comments/s7-08-22/s70822-20126808-287518.pdf">https://www.sec.gov/comments/s7-08-22/s70822-20126808-287518.pdf</a>
(``Two Sigma Letter''); Comment Letter from Richard F. Kerr,
Partner, K&L Gates LLP (Apr. 26, 2022), available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-20126848-287571.pdf">https://www.sec.gov/comments/s7-08-22/s70822-20126848-287571.pdf</a> (``K&L
Gates Letter'').
\27\ See, e.g., SIFMA Letter, at 6 n. 15 (``SIFMA is concerned
that the SEC's economic analysis of the Proposed Rules does not
adequately consider that the sum total of the proposed requirements
may result in a burden that far exceeds the SEC's estimates with
respect to each individual component . . .''); Comment Letter from
Jennifer Han, Executive Vice President, Chief Counsel and Head of
Regulatory Affairs, Managed Funds Association (Apr. 26, 2022), at 7,
19, available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-20126815-287523.pdf">https://www.sec.gov/comments/s7-08-22/s70822-20126815-287523.pdf</a> (``MFA Letter'') (``[T]he SEC's economic
analysis and, specifically, the Proposal's estimated costs are
materially understated.''); Comment Letter from Mark A. Steffensen,
Senior Executive Vice President and General Counsel, HSBC North
American Holdings Inc. and HSBC Bank USA, N.A. (Jan. 24, 2023), at
15 n. 53, available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-20155771-324031.pdf">https://www.sec.gov/comments/s7-08-22/s70822-20155771-324031.pdf</a> (``HSBC Letter'') (``We [ ] do not believe that
the Commission's economic analysis adequately considers the costs of
Proposed Rule 13f-2 to market makers.'').
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2. Final Rule 13f-2, Form SHO and CAT Amendment
For the reasons discussed more fully in Parts II-IV below, and to
balance implementation and compliance costs and burdens with the
Commission's goal of enhancing transparency regarding short selling,
the Commission is adopting Rule 13f-2 and related Form SHO with certain
modifications in response to comments.\28\ The new reporting regime of
Rule 13f-2 provides disclosures that supplement the short sale-related
information that currently is publicly available or accessible for a
fee from existing short sale reporting regimes provided by some
registered national securities exchanges (``exchanges'') and registered
national securities associations (``RNSAs'').\29\
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\28\ Rule 13f-2 and Form SHO, as adopted, are responsive to the
policy recommendations to increase transparency around short selling
activities and improve short sale data of participants in the
Government-Business Forums on Small Business Capital Formation held
by the Commission in recent years. See, e.g., Report on the Report
on the 41st Annual Small Business Forum, at 22, available at 2022
OASB Annual Forum Report (<a href="http://sec.gov">sec.gov</a>); Report on the Report on the 40th
Annual Small Business Forum, at 25, available at <a href="https://www.sec.gov/files/2021_OASB_Annual_Forum_Report_FINAL_508.pdf">https://www.sec.gov/files/2021_OASB_Annual_Forum_Report_FINAL_508.pdf</a>.
\29\ See infra Part II.A.4. See also Proposing Release, at
14964-65.
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Final Rule 13f-2 will require Managers (defined in section
13(f)(6)(A) of the Exchange Act) to report to the Commission, on a
monthly basis on related Form SHO, certain short position data and
short activity data for certain equity securities. In particular:
<bullet> On the Cover Page of Form SHO, Managers will be required
to report certain basic information including its name, mailing
address, business telephone number and business email, as well as the
name, title, business telephone number and business email of the
Manager's contact employee for the Form SHO report; and the date the
report is filed. The Manager will also provide its non-lapsed Legal
Entity Identifier (``LEI'') if it has one. If other Managers are
required to be listed in the ``Other Manager(s) Reporting for this
Manager'' section of the Cover Page, the Manager will also be required
to include the name and non-lapsed LEI of each such ``Other Manager''
listed, if the LEI of such ``Other Manager(s)'' is available to the
Manager filing the Form SHO report.
<bullet> With regard to each individual equity security reported on
by Managers
[[Page 75104]]
in the Information Tables of Form SHO, Managers will report: the
issuer's name and LEI if it has one, and the equity security's title of
class, CUSIP, and Financial Instrument Global Identifier (``FIGI'') (if
any has been assigned).\30\
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\30\ See infra nn. 36 & 218.
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<bullet> With regard to Information Table 1 of Form SHO, the
Manager will also report the number of shares of the reported equity
security that represent the Managers' gross short position at the close
of the last settlement date of the calendar month reporting period, as
well as the corresponding U.S. dollar value of this reported gross
short position.
<bullet> With regard to Information Table 2 of Form SHO, for each
reported equity security, for each individual settlement date during
the calendar month reporting period, a Manager will report ``net''
activity in the reported equity security. The net activity reported by
a Manager will be expressed by a single identified number of shares of
the reported equity security, and will reflect offsetting purchase and
sale activity by Managers. A positive number of shares identified will
indicate net purchase activity in the equity security on the specified
settlement date, while a negative number of shares identified will
indicate net sale activity in the equity security on the specified
settlement date.
Managers will report such information regarding each equity
security if the following thresholds are met:
<bullet> With respect to any equity security that is of a class of
securities that is registered pursuant to Exchange Act section 12 \31\
or for which the issuer of that class of securities is required to file
reports pursuant to Exchange Act section 15(d) \32\ (a ``reporting
company issuer'') in which the Manager meets or exceeds either: (1) a
monthly average of daily gross short positions at the close of regular
trading hours in the equity security with a U.S. dollar value of $10
million or more, or (2) a monthly average of daily gross short
positions at the close of regular trading hours as a percentage of
shares outstanding in the equity security of 2.5 percent or more
(``Threshold A'').
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\31\ 15 U.S.C. 78l.
\32\ 15 U.S.C. 78o(d).
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<bullet> With respect to any equity security that is of a class of
securities of an issuer that is not a reporting company issuer as
described above (a ``non-reporting company issuer'') in which the
Manager meets or exceeds a gross short position in the equity 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.
(``Threshold B'').
The Commission will then publish aggregate information as follows:
<bullet> With regard to Information Table 1 of Form SHO, the
Commission will publish, for each class of equity securities, as an
aggregated number of shares across all reporting Managers, the number
of shares of the reported equity security that represent the Managers'
gross short position at the close of the last settlement date of the
calendar month, as well as the corresponding aggregated U.S. dollar
value of this reported gross short position.
<bullet> With regard to Information Table 2 of Form SHO, for each
reported equity security, for each individual settlement date during
the calendar month, the Commission will publish the net activity in the
reported equity security, as aggregated across all reporting Managers.
The Commission is also adopting, substantially as proposed, the
amendment to the CAT NMS Plan to require broker-dealers with a
reporting obligation to CAT, to report whether an original receipt or
origination of an order to sell an equity security is a short sale for
which a market maker is claiming the BFMM locate exception. However,
for the reasons discussed below, the Commission is not adopting
Proposed Rule 205 or the CAT ``buy to cover'' reporting requirements.
Changes Made to the Proposals: In response to comments, and as
discussed in more detail below, the Commission is modifying the
proposal generally by:
<bullet> Streamlining Form SHO reports by not adopting as proposed
the requirement to report hedging classifications on Information Table
1, and by requiring a lower level of granularity of reporting on
Information Table 2; \33\
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\33\ Because the proposed rule and form called for publication
of only ``net'' activity based on the information reported in
Information Table 2, this change in information reported on Form SHO
as adopted does not affect the information published by the
Commission from information derived from the Form SHO reports.
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<bullet> Adjusting the calculation of the dollar value prong of the
reporting threshold for equity securities of reporting company issuers
(i.e., Threshold A) to be based on a monthly average of daily gross
short positions rather than the proposed daily calculation;
<bullet> Requiring in Rule 13f-2 and in the instructions to Form
SHO that, for purposes of determining whether a Manager meets or
exceeds a reporting threshold, a Manager shall determine its gross
short position ``at the close of regular trading hours'' in the equity
security, rather than at the ``end of day'' as was provided for in the
instructions to Proposed Form SHO;
<bullet> Not adopting Proposed Rule 205 and, consequently, not
adopting the Proposed CAT Amendment requiring a ``buy to cover'' order
mark in order receipts and order origination reports submitted to the
CAT; and
<bullet> Making modifications to the text of Rule 13f-2 and the
instructions to Form SHO to provide context and enhance
comprehensibility, such as--adding a reference in the definition of
``gross short position'' to ``short sales'' as defined in Rule 200(a)
of Regulation SHO and making minor adjustments to phrasing in the
definition; \34\ adding language to the rule text to more precisely
describe the equity securities for which information is reported in
final Form SHO; \35\ deleting the superfluous word ``collectively''
from the rule text to enhance overall readability; replacing the term
``active LEI'' on Proposed Form SHO with ``non-lapsed LEI'' \36\ on
final Form SHO; updating the contact information to be provided on the
final Form SHO cover page,\37\ and making corresponding modifications
to conform the text of Rule 13f-2 and the instructions to Form SHO.
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\34\ Specifically, we made a non-substantive revision to change
the word ``including'' to ``such as'' and removed the amphibological
comma.
\35\ To affirm that the Rule 13f-2 requirements apply to each
class of an equity security about which information is being
reported on Form SHO, and to more accurately indicate that classes
of securities, not issuers, are registered pursuant to section 12 of
the Exchange Act, Rules 13(a)(1) and Rule 13(a)(2) have been revised
to refer to ``each equity security that is of a class of
securities'' rather than ``each equity security of an issuer . . .
.'' This distinction by class of security is also consistent with
CUSIP procedures, under which, we understand, different classes of
stock have distinct identifying codes. Rule 13f-2 requires that
Managers provide CUSIP numbers for equity securities for which
information is reported on Form SHO.
\36\ For greater precision in the terminology used in Form SHO
as adopted, an LEI that is currently in effect is referred to as a
``non-lapsed LEI,'' rather than an ``active LEI'' (the terminology
used in Proposed Form SHO), of a Manager. A non-lapsed LEI is an LEI
for which the Manager is current on its periodic renewal fees needed
to maintain the LEI. Further, to avoid any suggestion that a Manager
filing a Form SHO report has an obligation to monitor the status of
an issuer's LEI, Instructions 8.c and 9.c of Form SHO--``Column 3.
Issuer LEI. If the issuer has an LEI, enter the issuer's active
LEI''--have been revised to remove the term ``active.''
\37\ The required Form SHO Cover Page contact information for
the reporting Manager and its ``Contact Employee'' has been updated
to reflect the greater reliance on the communication technology of
email rather than facsimile.
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<bullet> Making non-substantive, technical changes to correct
inadvertent
[[Page 75105]]
grammatical errors in the text of the adopted amendment to the CAT NMS
Plan that requires a broker-dealer with a reporting obligation to CAT
to indicate whether an order is a short sale effected by a market maker
in connection with bona fide market making activities for which the
BFMM locate exception is claimed.\38\
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\38\ Specifically, the preposition ``for'' was added before ``a
short sale'' to clarify that reporting is required for a short sale
in which the bona fide market maker exception is claimed, the
article ``the'' was added before ``exception,'' and the preposition
``in'' was added before ``Rule 203(b)(2)(iii)'' to clarify that the
BFMM locate exception is found in Rule 203(b)(2)(iii).
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II. Discussion of Final Rule 13f-2 and Form SHO
A. Final Rule 13f-2
1. Scope of Persons Covered by Final Rule 13f-2
a. Proposal
Exchange Act section 13(f) pertains to ``Reports by Institutional
Investment Managers.'' \39\ Proposed Rule 13f-2 would have required
Managers to collect and file with the Commission via EDGAR certain
short sale-related data on proposed Form SHO, within fourteen (14)
calendar days after the end of each calendar month, with regard to each
equity security over which the Manager and all accounts over which the
Manager (or any other person under the Manager's control) has
investment discretion \40\ that meet or exceed a quantitative reporting
threshold (``Reporting Threshold'').
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\39\ 15 U.S.C. 78m(f).
\40\ See Proposed Rule 13f-2(b)(3).
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As defined in section 13(f)(6)(A) of the Exchange Act and for
purposes of Proposed Rule 13f-2, ``institutional investment manager''
includes any person, other than a natural person, investing in or
buying and selling securities for its own account, and any person
exercising investment discretion with respect to the account of any
other person.\41\ As such, the term ``institutional investment
manager'' typically can include brokers and dealers, investment
advisers, banks, insurance companies, pension funds and
corporations.\42\
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\41\ See Proposed Rule 13f-2(b)(1).
\42\ See also Instructions to Form 13F.
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Proposed Rule 13f-2(b)(3) states that ``investment discretion'' has
the same meaning as in 17 CFR 240.13f-1(b) (``Rule 13f-1(b) under the
Exchange Act''),\43\ and Rule 13f-1(b) states that ``investment
discretion'' has the same meaning as in section 3(a)(35) of the
Exchange Act. Rule 13f-1(b)'s definition is comprehensive in that it
covers all accounts over which the Manager, or any person under the
Manager's control, has investment discretion. This same definition of
investment discretion was used by the Commission in adopting 17 CFR
240.10a-3T (``interim final temporary Rule 10a-3T'') in 2008, which
required certain Managers to file weekly nonpublic reports with the
Commission on Form SH regarding short sales and positions.\44\ In
addition, the Rule 13f-1(b) definition of investment discretion is used
for Form 13F ``long'' position reporting by certain Managers.\45\
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\43\ See 17 CFR 240.13f-1(b).
\44\ See infra discussion in Part II.A.3.a.
\45\ See Form 13F (<a href="http://sec.gov">sec.gov</a>), available at <a href="https://www.sec.gov/pdf/form13f.pdf">https://www.sec.gov/pdf/form13f.pdf</a>.
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b. Comments and Final Rule
One commenter encouraged the Commission to expand the scope of
market participants subject to reporting under Proposed Rule 13f-2
``beyond just Managers.'' \46\ This commenter believed the Commission's
determination ``to omit a large group of market participants from
Proposed Rule 13f-2's scope will negatively affect the completeness and
analytical sufficiency of the aggregated and disclosed short sale data,
impeding the Commission's ability to accurately reconstruct significant
or unusual market events.'' \47\ This commenter believed that omitting
a large group of market participants would ``not provide the Commission
with full visibility into the short sale market that it could otherwise
achieve pursuant to Proposed Rule 13f-2'' and believed that an
``artificially narrow scope will not further the Commission's stated
goals of providing greater transparency and filling the information
gaps for market participants and regulators.'' \48\ This commenter,
however, did not identify what market participants were being omitted
under the proposal and that should otherwise be included.
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\46\ See Comment Letter from the Alternative Investment
Management Association Ltd (Apr. 26, 2022), at 10-11, available at
<a href="https://www.sec.gov/comments/s7-08-22/s70822-20126829-287533.pdf">https://www.sec.gov/comments/s7-08-22/s70822-20126829-287533.pdf</a>
(``AIMA Letter''); see also SBAI Letter, at 3 (stating that the
proposed reporting only includes Managers, which would not provide a
complete perspective of shorting activity). In raising concerns
about reporting and monitoring burdens imposed by the reporting
regime of Proposed Rule 13f-2, other commenters, however, did not
question the application of the proposed rule to institutional
investment managers.
\47\ AIMA Letter, at 11.
\48\ Id.
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As a potential alternative to Proposed Rule 13f-2, however, this
commenter suggested, in part, that the current FINRA short interest
reporting regime could be enhanced, and subsequently codified, to
address potential limitations in the currently available short sale-
related data. However, because FINRA's short interest reporting is
applicable only to broker-dealers that are FINRA member firms, Managers
represent a more diverse group of market participants than is required
under FINRA reporting (as was suggested as a potential alternative by
the commenter). As stated above, Managers typically can include various
market participants, including brokers and dealers, as well as
investment advisers, banks, insurance companies, pension funds and
corporations. Accordingly, the Commission is adopting as proposed Rule
13f-2(b)(1) to define institutional investment managers as having the
same meaning as in Exchange Act section 13(f)(6)(A). Short sale-related
data reported by Managers on Form SHO will provide additional context
to, and otherwise supplement, currently available data by, for example,
distinguishing directional short selling of Managers from short sale
activity effected by market makers and liquidity providers. This
approach should reduce the reporting of non-directional, ``transient''
short sales activity and provide market participants with more focused
information on substantial short positions held by Managers.
Another commenter suggested that the Commission consider an
exemption for certain types of Managers that do not regularly utilize
short positions or that only utilize short positions for passive
investing purposes.\49\ By capturing short sale-related data from
Managers who hold substantial gross short positions--regardless of the
purpose for which they utilize short positions, the reporting regime of
Rule 13f-2 will enhance transparency and provide useful information to
market participants regarding overall short sale activity. Furthermore,
having the reporting obligation under Rule 13f-2 triggered by a
reporting threshold that is calculated based on a monthly average of
daily gross short positions in certain equity securities, rather than
the proposed
[[Page 75106]]
daily calculation,\50\ is designed in part to alleviate concerns for
Managers who only occasionally meet or exceed the prescribed reporting
thresholds.
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\49\ See Comment Letter from Valerie Dahiya, Partner, Perkins
Coie LLP (Apr. 26, 2022), at 3, available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-20126839-287549.pdf">https://www.sec.gov/comments/s7-08-22/s70822-20126839-287549.pdf</a> (``Perkins Coie
Letter'') (stating that ``for institutional investment managers that
only selectively utilize short positions, or who only do so
passively, these additional compliance costs in relation to the
institutional investment manager's usage of short positions could in
turn impose untended risks to the manager's underlying investors if
the institutional investment manager must divert additional time and
resources for compliance and oversight'').
\50\ See infra Part II.A.3 for more discussion of the reporting
thresholds in Proposed Rule 13f-2 and Rule 13f-2 as adopted.
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In addition, the Commission did not receive any comments regarding
the definition of ``investment discretion'' as proposed. The Commission
is adopting Rule 13f-2(b)(3) as proposed to define the term
``investment discretion'' as having the same meaning as in Rule 13f-
1(b) (which, among other things, incorporates the definition in section
3(a)(35) of the Exchange Act). In addition, Managers that will file
reports on adopted Form SHO likely have experience reporting on Form
13F, for which this same definition is used.\51\
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\51\ See infra Part VIII.B.1. Registered investment advisers,
particularly those managing hedge funds, are the primary Managers
likely to be affected by Rule 13f-2.
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2. Scope of Reported Securities
a. Proposal
Under the proposed rule, a Manager would have had to file a Form
SHO report with regard to:
<bullet> Any equity security of an issuer that is registered
pursuant to section 12 of the Exchange Act \52\ or for which the issuer
is required to file reports pursuant to section 15(d) of the Exchange
Act \53\ in which the Manager meets or exceeds either (1) a gross short
position in the equity security with a U.S. dollar value of $10 million
or more at the close of regular trading hours on any settlement date
during the calendar month; or (2) a monthly average gross short
position as a percentage of shares outstanding in the equity security
of 2.5 percent or more (Threshold A); and
---------------------------------------------------------------------------
\52\ 15 U.S.C. 78l.
\53\ 15 U.S.C. 78o(d).
---------------------------------------------------------------------------
<bullet> Any equity security of an issuer that is not a reporting
company issuer as described above in which the Manager meets or exceeds
a gross short position in the equity 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 (Threshold B).
As proposed, the reporting thresholds in Rule 13f-2(a)(1) and (2)
(each a ``Proposed Reporting Threshold'') applied to equity securities,
as the term ``equity security'' is defined in section 3(a)(11) of the
Exchange Act \54\ and 17 CFR 240.3a11-1 (``Rule 3a11-1'').\55\ This
scope, which included both exchange-listed and over-the-counter
securities, is consistent with the securities to which Rules 200, 203,
and 204 of Regulation SHO apply.\56\ The proposed scope would have
included exchange-traded fund (``ETF'') securities, but would not have
required Managers, in calculating a Proposed Reporting Threshold or
Form SHO data, to consider short positions the ETF held in individual
underlying equity securities.\57\ And because the Proposed Reporting
Thresholds were based on a Manager's gross short position in the
underlying equity security itself, the proposed rule would not have
required the Manager to account for derivative exposure as part of the
threshold calculation for the underlying equity security, but would
have required Managers to report certain changes in their gross equity
short positions derived from acquiring or selling the equity in
connection with derivative activity, such as exercising an option.\58\
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\54\ Section 3(a)(11) of the Exchange Act defines ``equity
security'' as any stock or similar security or any security future
on any such security; or any security convertible, with or without
consideration, into such a security, or carrying any warrant or
right to subscribe to or purchase such a security; or any such
warrant or right; or any other security which the Commission shall
deem to be of similar nature and consider necessary or appropriate,
by such rules and regulations as it may prescribe in the public
interest or for the protection of investors, to treat as an equity
security. 15 U.S.C. 78c(a)(11).
\55\ See Proposing Release, at 14956 n.59.
\56\ See Regulation SHO Adopting Release, at 48012.
\57\ Proposing Release, at 14958.
\58\ As stated in the Proposing Release, the Commission believed
this proposed approach balances Managers' reporting costs with the
utility such data provides to regulators. See Proposing Release, at
14962.
---------------------------------------------------------------------------
b. Comments and Final Rule
The Commission received several comments on Proposed Rule 13f-2's
and Proposed Form SHO's proposed scope of securities, with commenters
expressing a variety of views. Most commenters took an expansive view,
exemplified by one such commenter's statement that ``all different
securities and ETFs should be required to report all short sale data.
The more information that is available to every investor and the
Commission the better.'' \59\ As discussed below, other commenters, by
contrast, recommended narrowing the universe of ``in scope'' securities
by, for example, aligning with similar Commission reporting and public
dissemination regimes, limiting the scope to securities of U.S.
reporting companies, or excluding ETFs, options and warrants and other
convertibles, and derivatives. Some commenters focused on the impact on
implementation and compliance costs related to Proposed Rule 13f-2
reporting requirements and recommended that derivatives, options,
warrants and other convertibles, and ETFs be excluded from the scope of
equity securities subject to Proposed Rule 13f-2 reporting
requirements.\60\
---------------------------------------------------------------------------
\59\ Comment from Samuel Meadows (Mar. 26, 2022), at 1,
available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-273456.htm">https://www.sec.gov/comments/s7-08-22/s70822-273456.htm</a>
(``Samuel Meadows Comment'').
\60\ See, e.g., MFA Letter, at 11-12 (recommending that, to
simplify compliance, provide clarity, and reduce costs, Commission
should limit the reporting requirements to stocks of U.S. reporting
company issuers, and exclude derivatives and ETFs); SIFMA Letter, at
20 (recommending reduction of compliance costs by creating a list of
equity securities that would be subject to Proposed Rule 13f-2
reporting requirements that would exclude ``extraneous securities,
such as options, warrants, convertibles, and ETFs''); Comment Letter
from Frank Vivirito, Compliance Officer, XR Securities LLC (Apr. 25,
2022), at 2 (``XR Securities Letter'') (stating ``I feel strongly
that highly liquid, higher priced, active and efficient ETFs (and
perhaps even some single name equities) with limited or no
settlement issues'' should be excluded from Proposed Rule 13f-2
reporting requirements).
---------------------------------------------------------------------------
Comments on the Scope of Covered Securities
Most commenters supported the applicability of Proposed Rule 13f-2
to short positions in ETFs, some expressing specific concerns about
``improper'' use of ETFs to leverage short positions.\61\ However, one
commenter advocating for the exclusion of ETFs from the universe of
``in-scope'' securities stated that, in most circumstances, Managers
short ETFs largely for hedging purposes and not for the same reasons
that Managers short stocks of reporting company issuers; this commenter
stated that such information ``will provide the public, and the SEC,
very little in terms of useful information.'' \62\
---------------------------------------------------------------------------
\61\ See, e.g., Comment Letter from Nick Dougherty (Mar. 27,
2022), at 2, available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-20121466-273451.pdf">https://www.sec.gov/comments/s7-08-22/s70822-20121466-273451.pdf</a> (``Nick Dougherty Letter''); Anonymously
Submitted Comment (Mar. 21, 2022), at 1, available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-20120739-272894.pdf">https://www.sec.gov/comments/s7-08-22/s70822-20120739-272894.pdf</a>. See
generally, Anonymously Submitted Comment (Mar. 21, 2022), at 2,
available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-20122297-278355.htm">https://www.sec.gov/comments/s7-08-22/s70822-20122297-278355.htm</a> (recommending that ``[a]ll securities, including ETFs,
OTC stocks, swaps etc. should have their positions data recorded and
submitted to the SEC daily''); Samuel Meadows Comment, at 1 (``I
strongly believe that all different securities and ETFs should be
required to report all short sale data.'').
\62\ MFA Letter, at 12.
---------------------------------------------------------------------------
The Commission disagrees with the commenter that reporting about
gross short positions in ETFs will not provide useful information to
the public and the Commission. Establishing short positions in an ETF
can provide short exposure to a diverse set of equity securities or
create a directional short strategy such as leveraged shorting. Because
of their multipurpose nature, ETFs are a substantial piece of the
short-
[[Page 75107]]
side market.\63\ ETFs are subject to the requirements of Regulation
SHO, and there is a benefit to applying the Rule 13f-2 reporting
requirements to the same universe of securities subject to the
Commission's short sale rules. Further, short sale-related data
regarding ETFs will provide important transparency to a significant
segment of market activity to both the marketplace and regulators
alike.\64\
---------------------------------------------------------------------------
\63\ ETFs are a popular trading tool that can be used in various
ways, including, for example, to hedge a long position, or to
establish a directional short position. See Exchange-Traded Funds,
Investment Company Act Release No. 33646 (Sept. 25, 2019), 84 FR
57162 (Oct. 24, 2019) (``[ETFs] have become a popular trading tool,
making up a significant portion of secondary market equities
trading.''). See also Giovanny Moriano & Brian Baker, Best inverse
and short ETFs--here's what to know before buying them, Bankrate
(Feb. 16, 2023), available at <a href="https://www.bankrate.com/investing/best-inverse-etfs/">https://www.bankrate.com/investing/best-inverse-etfs/</a> (describing traders' use of short ETFs to hedge
against falling prices in other positions, to make directional bets
on securities or indexes, or to magnify returns through leveraged
short ETFs); The Renaissance of ETFs, Oliver Wyman (2023), available
at <a href="https://www.oliverwyman.com/our-expertise/insights/2023/may/exchange-traded-funds-are-fueling-market-opportunities.html">https://www.oliverwyman.com/our-expertise/insights/2023/may/exchange-traded-funds-are-fueling-market-opportunities.html</a> (stating
``As of the end of December 2022, total ETF assets under management
(AUM) have reached $6.7 trillion across the US and Europe, growing
at approximately 15% compound annual growth rate (CAGR) since 2010.
. . . We expect a significant part of this growth to come from
active ETFs.''). Active ETFs can include inverse and short ETFs that
seek to use short strategies or leverage.
\64\ See Experiences of US Exchange-Traded Funds During the
COVID-19 Crisis, Inv. Co. Inst. (Oct. 2020), available at <a href="https://www.sec.gov/comments/credit-market-interconnectedness/cll10-2.pdf">https://www.sec.gov/comments/credit-market-interconnectedness/cll10-2.pdf</a>
(``Early in 2020, . . . ETF trading volume accounted for between 20
and 30 percent of total stock market trading on a daily basis . . .
.''); see also Richard B. Evans et al., ETF Short Interest and
Failures-to-Deliver: Naked Short-Selling or Operational Shorting?,
U. Pa. Wharton Sch. (Jan. 2018), available at <a href="https://jacobslevycenter.wharton.upenn.edu/wp-content/uploads/2018/08/ETF-Short-Interest-and-Failures-to-Deliver.pdf">https://jacobslevycenter.wharton.upenn.edu/wp-content/uploads/2018/08/ETF-Short-Interest-and-Failures-to-Deliver.pdf</a> (stating that ETFs
constitute roughly 10% of U.S. equity market capitalization but over
20% of short interest, and that short interest for the ETF market
has increased steadily over several years).
---------------------------------------------------------------------------
Some commenters recommended that fixed-income securities be added
to the proposed scope of securities.\65\ These commenters believed that
all investment vehicles, including fixed income securities, should be
included within the scope of securities subject to potential reporting.
These commenters generally believed that short positions in fixed
income securities would provide additional transparency to the
marketplace. One of these commenters believed that fixed income
securities should be included under the rule because ``bonds play a
large role in market activities, along with the repo market'' and that
``corporate bond borrowing data provides an unparalleled insight into
short positioning at a security and issuer level.'' \66\
---------------------------------------------------------------------------
\65\ See, e.g., Nick Dougherty Letter (Mar. 27, 2022), at 3
(stating that ``fixed income securities should be included under
Proposed rule 13f-2''); Anonymously submitted Comment (Mar. 21,
2022), at 1, available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-20120739-272894.pdf">https://www.sec.gov/comments/s7-08-22/s70822-20120739-272894.pdf</a>.
\66\ Anonymously submitted Comment (Mar. 21, 2022), at 1,
available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-20120739-272894.pdf">https://www.sec.gov/comments/s7-08-22/s70822-20120739-272894.pdf</a>.
---------------------------------------------------------------------------
Fixed income securities are not subject to the Commission's short
sale rules. Market participants, including Managers, are currently
accustomed to complying with the short sale rules with regard to equity
securities that meet the definition of short sales in Rule 200(a) of
Regulation SHO.\67\ Further, the self-regulatory organizations
(``SROs'') currently collect and provide data on short sales of equity
securities as defined by Rule 200(a) of Regulation SHO. Consistent with
the discussion in the Proposing Release, the aggregated short sale-
related data that will be published by the Commission under Rule 13f-2
will provide additional context to market participants regarding equity
securities that are subject to the requirements of Regulation SHO.\68\
For these reasons, the Commission is not including fixed income
securities.
---------------------------------------------------------------------------
\67\ See Proposing Release, at 14956 n.59.
\68\ See id. at 14956.
---------------------------------------------------------------------------
Some commenters also recommended excluding options, warrants, and
other convertibles from the rule.\69\ Other commenters recommended that
derivatives be included within the scope of Proposed Rule 13f-2 \70\-
including those not within the definition of equity security in section
3(a)(11) of the Exchange Act and Rule 3a11-1 thereunder.\71\
---------------------------------------------------------------------------
\69\ SIFMA Letter, at 20.
\70\ See, e.g., Better Markets Letter, at 9 (stating that ``[i]n
order for the final rule to actually serve its purpose, it must
require that institutional investment managers include their short
interest that arises from derivatives positions''); WTI Letter, at 4
(stating that not including derivatives contracts such as options
and security-based swaps is a ``huge hole that must be remedied''
and ``will inevitably result in firms exploiting the loophole . .
.''); Samuel Meadows Comment, at 1 (stating that ``[a]ny and all
Short positions resulting from derivatives should be included in
whether they meet a Reporting Threshold'').
\71\ See supra nn. 54 & 55 and accompanying text; see generally
Part II.A.2.a.
---------------------------------------------------------------------------
Certain derivatives, options, warrants, and convertibles are
themselves equity securities for purposes of section 3(a)(11) of the
Exchange Act and Rule 3a11-1 thereunder, and therefore for purposes of
final Rule 13f-1.\72\ Derivatives and other securities that are not
equity securities within the definitions of section 3(a)(11) of the
Exchange Act and Rule 3a11-1 thereunder, are not within the scope of
the rule. Managers are currently accustomed to complying with
requirements for equity securities under Rule 200(a) of Regulation SHO.
The Commission is not including derivatives and other securities that
are not equity securities under the definitions of section 3(a)(11) of
the Exchange Act and Rule 3a11-1 thereunder. Many commenters who
requested that derivatives be included expressed concern that
derivatives could be used to create substantial economic short
positions, while avoiding Proposed Rule 13f-2's reporting
requirements.\73\ The Commission recognizes, as it did in the Proposing
Release, that there is a risk that Rule 13f-2 could be a catalyst for
growth in markets of economic equivalents of underlying equity
securities as short sellers look for new avenues to take the economic
equivalent of short positions while avoiding these proposed reporting
requirements.\74\ Managers do not have to account for economic exposure
to an underlying equity security created through the use of equity
derivatives when calculating the reporting thresholds for reporting
short sales of that underlying equity security. However, once a Manager
meets or exceeds a reporting threshold for an underlying equity
security, the Manager will then be required to report certain short
activity for each settlement date during the reporting calendar month,
and that disclosure will take into account activity in options,
tendered conversions, secondary offering transactions,\75\ and other
equity derivatives or activity that might affect the reported short
positions on Form SHO, as discussed further below.\76\ Managers must
also report gross short positions of each equity security resulting
from short sales as defined in Rule 200(a) of Regulation SHO to the
extent the Manager's positions meet the relevant thresholds.\77\
Finally, large
[[Page 75108]]
positions in options are currently reportable under a separate
requirement.\78\ In addition, there is a separate reporting regime for
security-based swaps,\79\ which may also lessen the likelihood of
Managers attempting to avoid the requirements of Rule 13f-2 by using
these instruments.
---------------------------------------------------------------------------
\72\ Id.
\73\ See, e.g., Comment Letter from Oliver Davies, Apr. 20,
2022, available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-20124155-280554.htm">https://www.sec.gov/comments/s7-08-22/s70822-20124155-280554.htm</a> (expressing concern that ``funds are using
complex derivative positions like options and swaps to hide their
true short positions''); Anonymously submitted Comment, Mar. 14,
2022, available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-20119368-272254.htm">https://www.sec.gov/comments/s7-08-22/s70822-20119368-272254.htm</a> (positing that excluding derivative positions
can create opportunities to avoid triggering the reporting
thresholds through other economically equivalent instruments).
\74\ See infra Part VIII.C.8; see also Proposing Release, at
15001.
\75\ See infra n. 285.
\76\ See infra Part II.A.4.
\77\ Option exercises or assignments can result in a short sale.
See, e.g., Rule 201 Adopting Release, at 11263 n. 433 (explaining
that short sales that result from option exercises or assignments
are short sales but are not covered by the Rule 201 of Reg. SHO's
price test because there is no national best bid).
\78\ FINRA Rule 2360 requires FINRA member firms to report large
options positions to the Large Options Positions Report (``LOPR''),
which FINRA uses to surveil for potentially manipulative behavior,
including attempts to corner the market in the underlying equity,
leverage an option position to affect the price, or move the
underlying equity to change the value of a large option position.
\79\ See Regulation SBSR, 17 CFR 242.900 through 242.909.
---------------------------------------------------------------------------
Comments on Creating a List
Some commenters recommended narrowing the universe of ``in-scope''
securities to lessen the burden on Managers and to help to ensure
compliance with Proposed Rule 13f-2. Certain commenters recommended
that the Commission create and publish a list of securities subject to
Form SHO reporting, much like the Commission's Official List of Section
13(f) Securities (``13F List'') required by statute to be made
available to the public pursuant to section 13(f)(4) of the Exchange
Act \80\ for use in the preparation of quarterly reports filed with the
Commission for purposes of long position reporting under Rule 13f-1.
One such commenter suggested that providing such a list would ``promote
greater efficiency in validating reported short positions and
consistency in reporting of those positions among managers.'' \81\
Another commenter recommended aligning Proposed Rule 13f-2 with the
scope of other similar reporting and public dissemination regimes
(e.g., Rule 13f-1, and prior Rule 10a-3T \82\) that are focused on a
narrower set of securities, namely certain section 13(f) securities
that are included on the 13F List.\83\
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\80\ 15 U.S.C. 78m(f)(4).
\81\ Comment Letter from Sarah A. Bessin, Associate General
Counsel & Nhan Nguyen, Assistant General Counsel, Investment Company
Institute (Apr. 26, 2022), available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-20126820-287527.pdf">https://www.sec.gov/comments/s7-08-22/s70822-20126820-287527.pdf</a> (``ICI Letter'') at 9
n.28; see also MFA Letter, at 13 (positing that having an ``official
list'' of securities subject to Form SHO reporting would reduce the
burden on Managers to make judgments about whether a particular
security is in-scope for Form SHO reporting and would reduce
inconsistencies among reporting Managers in making such judgments in
the absence of such a list); see also SIFMA Letter, at 20
(suggesting that the ``Form SHO List'' include securities that are
included on the 13F List while excluding securities that should not
be covered by Form SHO, as well as the total shares outstanding for
each security).
\82\ Rule 10a-3T and Form SH focused on certain section 13(f)
securities and excluded options that are reportable on Form 13F.
\83\ HSBC Letter, at 13-14 (recommending that Commission align
the reporting requirements of Proposed Rule 13f-2 to a narrower set
of securities--e.g., the securities prescribed in Rule 13f-1--rather
than with securities that are ``in-scope'' with Regulation SHO).
---------------------------------------------------------------------------
Narrowing the scope of securities to the 13F List would effectively
exclude certain equity securities that are subject to the requirements
of Regulation SHO, which the Commission continues to believe would be
inconsistent with the Commission's objective to publish short sale-
related data under Rule 13f-2 that will provide additional context to
market participants regarding securities that are subject to the
Commission's current short sale rules.\84\ As stated above, market
participants, including Managers, are currently accustomed to complying
with the short sale rules with regard to equity securities generally,
so narrowing the scope to the 13F List that periodically changes, or to
a list created for purposes of Rule 13f-2 that is similar in concept to
the 13F List, could result in reduced Rule 13f-2 reporting and,
consequently, less transparency of short sale-related data. Narrowing
the scope to securities that are included on the 13F List could also
result in additional administrative costs and burdens to Managers to
the extent that Managers have to perform additional monitoring to
ensure that their Form SHO reports cover, and the calculations required
to determine whether a reporting obligation under Rule 13f-2 has been
triggered because a Reporting Threshold has been met, apply to, only
the narrower scope of securities (a subset of the equity securities
currently subject to the Commission's short sale rules). Such an
outcome is inconsistent with the Commission's objective of enhancing
transparency, while balancing the interests of gathering and disclosing
data that provides additional context to market participants regarding
securities that are subject to the requirements of Regulation SHO
against the potential costs to reporting Managers.
---------------------------------------------------------------------------
\84\ See Proposing Release, at 14956.
---------------------------------------------------------------------------
Additionally, with respect to long position reporting, section
13(f)(1) expressly provides that the Commission shall make available to
the public a list of all equity securities that are subject to such
reporting.\85\ However, section 13(f)(2) does not require publication
of such a list. Further, existing short sale-related reporting to
exchanges and RNSAs does not rely on a published list of securities.
For these reasons, it is not necessary to compile and periodically
provide a list of securities covered by Rule 13f-2.
---------------------------------------------------------------------------
\85\ Section 13(f)(1) of the Exchange Act (15 U.S.C. 78m(f)(1))
requires any institutional investment manager exercising investment
discretion over accounts holding at least $100 million in fair
market value of certain equity securities to file reports on Form
13F with the Commission at the times set forth in 17 CFR 240.13f-1
(``Rule 13f-1''). The statute directs the Commission to make
available to the public, for a reasonable fee, a list of all equity
securities described in section 13(d)(1) of the Exchange Act and to
disseminate to the public the information contained in the reports.
---------------------------------------------------------------------------
Comments To Limit Scope to Equity Securities of U.S. Reporting Company
Issuers
Some commenters recommended tailoring the scope of securities
subject to Rule 13f-2 reporting to the equity securities of U.S.
reporting company issuers.\86\ Many of these commenters raised concerns
about the costs to Managers of developing new systems to capture
trading of equity securities of non-reporting company issuers. Certain
commenters focused on how a requirement to report short sales of equity
securities of non-reporting company issuers would represent an
expansion of reporting requirements beyond what is currently required
under existing reporting regimes under Exchange Act sections 13(d),
13(f)(1), 13(g), and 16.\87\ Other commenters believed that requiring
Managers to report short position information in equity securities of
non-reporting company issuers would be extremely costly and provide
little public benefit.\88\ Another such commenter stated that because
securities of non-reporting company issuers can be held
[[Page 75109]]
by only a small number of U.S. investors, cannot be traded on U.S.
securities exchanges, and can often be subject to contractual
restrictions on transfer, short sales in such securities are rare due
to the limitations on the number of shares available to borrow.\89\
Another commenter stated that trading (including short selling) in
securities of non-reporting company issuers is limited, which
potentially makes Managers that file Form SHO reports with respect to
such securities more susceptible to retaliatory and manipulative
trading strategies.\90\ As stated above, the Commission is adopting
Rule 13f-2 and Form SHO to help enhance transparency regarding short
selling in equity securities--including both exchange-listed and over-
the-counter securities, and ETFs--that are already subject to
Regulation SHO. Consistent with the discussion in the Proposing
Release, through the publication of short sale-related data to
investors and other market participants, the information published
under Rule 13f-2 will provide additional context to market participants
regarding equity securities that are subject to the requirements of
Regulation SHO.\91\ To that end, the Commission continues to believe
that transparency regarding short selling in over-the-counter (``OTC'')
equity securities, many of which are non-reporting company issuers,\92\
is important to investors generally, including many retail investors.
The Commission has previously stated that securities ``that trade in
the OTC market are primarily owned by retail investors.'' \93\
Consistent with this view, it is important from a transparency
perspective to include, as proposed, non-reporting issuers for purposes
of reporting under Rule 13f-2. While the Commission is cognizant that
information on non-reporting company issuers will be more difficult to
obtain and more costly to report than information on reporting company
issuers, the Commission disagrees there would be little benefit to the
public from such information, particularly given the extent of trading
in OTC market securities by retail investors.\94\ Furthermore, OTC
securities typically have lower prices, lower trading volume, and are
by definition not traded on exchanges, making them potentially more
prone to fraud.\95\ In addition, as discussed further below,
publication of aggregated data approximately one month following the
reporting calendar month will alleviate concerns regarding potential
retaliation against reporting Managers.
---------------------------------------------------------------------------
\86\ See, e.g., MFA Letter, at 11-12; Letter from Leigh R.
Fraser, Partner, Ropes & Gray LLP (Apr. 26, 2022), at 9, available
at <a href="https://www.sec.gov/comments/s7-08-22/s70822-20126853-287579.pdf">https://www.sec.gov/comments/s7-08-22/s70822-20126853-287579.pdf</a>
(``Ropes & Gray Letter''). Cf. SIFMA Letter, at 5 (recommending,
rather than separate reporting thresholds for reporting company
issuers and non-reporting company issuers, a single threshold apply
to U.S. equity securities included in a ``Form SHO List'' akin to
the 13F List that ``would include securities that are included on
the 13F List, while also excluding certain extraneous securities,
such as options, warrants, convertibles, and ETFs that should not be
covered by Proposed Form SHO reporting'').
\87\ See, e.g., Ropes & Gray Letter, at 9 (stating that a
requirement to report short sale-related data regarding equity
securities of U.S. private companies would represent a ``significant
expansion'' of reporting requirements imposed in investors beyond
what currently is required under existing reporting regimes under
Exchange Act sections 13(d), 13(f)(1), 13(g), 13(h), and 16).
\88\ See, e.g., MFA Letter, at 11-12 (stating that because non-
reporting company issuer securities are not publicly traded,
information about transactions in such securities would not likely
have an effect on price efficiency or market liquidity, but could
have negative consequences for Managers--e.g., increasing the risk
of exposing Managers, their short positions, and trading strategies,
which could facilitate retaliatory and manipulative trading
strategies).
\89\ Ropes & Gray Letter, at 8-9.
\90\ MFA Letter, at 11-12.
\91\ See Proposing Release, at 14956.
\92\ See, e.g., Publication or Submission of Quotations Without
Specified Information, Exchange Act Release No. 89891 (Sept. 16,
2020) (``Adopting Release for Amendments to Rule 15c2-11''), 85 FR
68124, 68125 (Oct. 27, 2020) (``However, in other cases, there is no
or limited current public information available about certain
issuers of quoted OTC securities to allow investors or other market
participants to make informed investment decisions.'').
\93\ See, e.g., Publication or Submission of Quotations Without
Specified Information, Exchange Act Release No. 89891 (Sept. 16,
2020), 85 FR 68124, 68125 (Oct. 27, 2020) (citing to Andrew Ang, et
al., Asset Pricing in the Dark: The Cross-Section of OTC Stocks, 26
Rev. Fin. Studs. 2985-3028 (2013) (``Securities that trade in the
OTC market are primarily owned by retail investors[,]''); see also
Unraveling the Mystery of Over-the-Counter Trading, FINRA Inv'r
Insights (Jan. 4, 2016), available at <a href="https://www.finra.org/investors/insights/unraveling-mystery-over-counter-trading">https://www.finra.org/investors/insights/unraveling-mystery-over-counter-trading</a> (``OTC
equities are largely owned by retail investors, according to a 2013
study from Columbia University, who may be attracted to the low
price of many OTC equities, including so-called ``penny stocks''
that trade at under $5 a share. That activity is typically very
speculative.'').
\94\ See id. See also infra Part VIII.C.6 for a discussion of
costs related to tracking non-reporting companies, and infra Part
II.A.3 for discussion of possible benefit.
\95\ See, e.g., Adopting Release for Amendments to Rule 15c2-11,
85 FR 68124, at 68185.
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Other commenters raised questions as to whether the Commission's
jurisdiction extended to equity securities not traded in the U.S. One
such commenter, highlighting the disparity between Proposed Rule 13f-2
reporting and reporting of long positions in the same securities,
questioned why it would be in the public interest to require more
expansive disclosure with respect to short positions than long
positions, and stated that the ``proposed scope of the rule would
provide U.S. investors with information that is of limited value,
particularly with respect to non-U.S. securities.'' \96\
---------------------------------------------------------------------------
\96\ HSBC Letter, at 13-14 (recommending that the reporting
requirements of Proposed Rule 13f-2 be limited to equity securities
of reporting company issuers that are traded on a Commission-
registered trading platform).
---------------------------------------------------------------------------
Exchange Act section 13(f)(2)'s cross-border reach is based on the
territorial approach that the Commission has applied when crafting
rules to implement other provisions of the Exchange Act.\97\ Consistent
with that territorial approach (which is based on Supreme Court
precedent, including Morrison v. National Australia Bank, Ltd. and its
progeny) the Commission examines the relevant statutory provision to
determine the domestic conduct that is covered by the provision.\98\
The Commission understands section 13(f)(2), by its terms, to apply to
any institutional investment manager already subject to U.S. reporting
requirements. This indicates that the relevant domestic conduct under
section 13(f)(2) is being an institutional investment manager operating
in the U.S. securities markets such that the investment manager is
subject to filing reports with the Commission. Thus, when that relevant
domestic conduct is present here in the United States, section
13(f)(2)'s regulatory reporting obligation will generally apply.
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\97\ See, e.g., Regulation SBSR--Reporting and Dissemination of
Security-Based Swap Information, Exchange Act Release No. 74244
(Feb. 11, 2015), 80 FR 14563, 14649 (Mar. 19, 2015) (``2015
Regulation SBSR Adopting Release'') (discussing the territorial
approach to the cross-border application of Title VII requirements
for regulatory reporting and public dissemination of security-based
swap transactions).
\98\ 561 U.S. 247. See, e.g., Abitron Austria GmbH v. Hetronix
Int'l, Inc, 600 U.S. **, **, 2023 WL 4239255, at *4 (June 29, 2023)
(stating that ``[the Supreme Court has] repeatedly and explicitly
held that courts must ``identif[y] `the statute's ``focus'' ' and
as[k] whether the conduct relevant to that focus occurred in United
States territory'').
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The Commission is adopting Rule 13f-2 and Form SHO to help enhance
transparency regarding short selling in equity securities--including
both exchange-listed and over-the-counter securities, and ETFs. The
Commission continues to believe that, through the publication of short
sale-related data to investors and other market participants, the
information reported by Managers will provide important additional
context to market participants regarding short sale activity in these
equity securities by Managers. The Commission disagrees that the
reported information would be of ``limited value'' as was suggested by
a commenter. Transparency regarding short selling by Managers of
securities of U.S. and non-U.S. issuers is important regardless of
where those sales occur.
Final Rule
For the reasons discussed above, the Commission is adopting the
scope of securities as originally proposed. Specifically, the final
rule will cover equity securities as defined in section 3(a)(11) of the
Exchange Act and Rule 3a11-1 thereunder. This scope of securities
includes both exchange-listed and OTC equity securities, including,
inter alia, ETFs, certain derivatives, and options, warrants and other
convertibles, which is consistent with the equity securities to which
Rules 200, 203, and 204 of Regulation SHO apply.\99\
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\99\ See Regulation SHO Adopting Release, at 48012.
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[[Page 75110]]
3. Reporting Thresholds
a. Proposal
To balance the interests of gathering and disclosing data and the
potential costs to reporting Managers, the Commission proposed separate
thresholds for short positions in reporting company issuers, or
Threshold A, and non-reporting company issuers, or Threshold B.\100\
Threshold A, in Proposed Rule 13f-2(a)(1), involved a two-pronged
approach that would have required reporting by Managers that have, with
regard to each equity security of a reporting company issuer, either
(i) a gross short position with a U.S. dollar value of $10 million or
more at the close of regular trading hours on any settlement date
during the calendar month, or (ii) a 2.5 percent or higher monthly
average gross short position as a percentage of shares
outstanding.\101\ Threshold B, in Proposed Rule 13f-2(a)(2), involved a
single-pronged approach that would have required reporting by Managers
that have, with regard to each equity security of a non-reporting
company issuer, 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.\102\ The Proposed Reporting Thresholds were based on comment
letters and analysis of Form SH data collected under Rule 10a-3T, an
interim temporary rule adopted by the Commission in October 2008, which
required certain institutional investment managers to file weekly
nonpublic reports with the Commission on Form SH regarding their short
sales and short positions in certain section 13(f) securities, other
than options.\103\ Rule 10a-3T required reporting of short positions
that were either greater than 0.25 percent of shares outstanding or $10
million in fair market value.\104\ This temporary rule was adopted in
the wake of the 2008 financial crisis in response to concerns about
high levels of volatility associated with short selling.\105\ Proposed
Threshold B was developed based on an analysis of OTC Markets
data.\106\ The Proposed Reporting Thresholds were structured to make it
more difficult for Managers with substantial gross short positions to
avoid disclosure by trading below a Proposed Reporting Threshold,
particularly with lower market capitalization securities.
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\100\ As discussed above, an issuer of a class of securities
that is registered pursuant to Exchange Act section 12 or for which
the issuer is required to file reports pursuant to Exchange Act
section 15(d) is referred to herein as a reporting company issuer;
issuers not meeting those criteria are referred to herein as non-
reporting company issuers.
\101\ Proposed Rule 13f-2(a)(1). See Proposing Release, at 14962
(describing in detail the design of Threshold A).
\102\ Proposed Rule 13f-2(a)(2). See Proposing Release, at 14962
(describing in detail the design of Threshold B).
\103\ Disclosure of Short Sales and Short Positions by
Institutional Investment Managers, Exchange Act Release No. 58785
(Oct. 15, 2008), 73 FR 61678 (Oct. 17, 2008). The rule extended the
reporting requirements established by the Commission's Emergency
Orders dated Sept. 18, 2008, Sept. 21, 2008, and Oct. 2, 2008, with
some modifications. See Emergency Order Pursuant to Section 12(k)(2)
of the Securities and Exchange Act of 1934 Taking Temporary Action
to Respond to Market Developments, Exchange Act Release No. 58591
(Sept. 18, 2008), 73 FR 55175 (Sept. 24, 2008); Amendment to
Emergency Order Pursuant to Section 12(k)(2) of the Securities
Exchange Act of 1934 Taking Temporary Action to Respond to Market
Developments, Exchange Act Release No. 58591A (Sept. 21, 2008), 73
FR 55557 (Sept. 25, 2008) (amending the Sept. 18, 2008 Emergency
Order (``Order'') to clarify certain technical issues and when the
information filed by the institutional investment managers on a
nonpublic basis would be made public by the Commission on a delayed
basis); Amendment to Order and Order Extending Emergency Order
Pursuant to Section 12(k)(2) of the Securities Exchange Act of 1934
Taking Temporary Action to Respond to Market Developments, Exchange
Act Release No. 58724 (Oct. 2, 2008), 73 FR 58987 (Oct. 8, 2008)
(extending effectiveness of the Order through Oct. 17, 2008, and
stating that the Forms SH filed under the Order would remain
nonpublic to the extent permitted by law).
\104\ See Proposing Release, at 14963-65 (discussing the
analysis of Form SH data).
\105\ Rule 10a-3T remained in effect through July 2009, at which
time the Commission stated that it and its staff would be working
with several SROs to make certain short sale volume and transaction
data publicly available through SRO websites. See Proposing Release,
at 14954 (providing background on Rule 10a-3T and related Form SH).
\106\ See Proposing Release, at 14964 n.82 (``This analysis was
performed using data from OTC Markets Group Inc. available through
Wharton Research Data Services, <a href="https://wrds-www.wharton.upenn.edu/pages/about/data-vendors/otc-markets-group/">https://wrds-www.wharton.upenn.edu/pages/about/data-vendors/otc-markets-group/</a>. The data were filtered
to only include equities that had a closing price and short interest
on September 30, 2020. Approximately 13% of the data did not have
total shares outstanding available, representing approximately 14%
of the dollar value of short interest. We use these data without
shares outstanding as a proxy for non-reporting issuers. The
Commission used September 2020 because that is the most recent date
in which a dataset containing total shares outstanding for a broad
set of OTC equities was available.'').
---------------------------------------------------------------------------
The approach to Threshold A, as described in the Proposing Release,
was designed to ensure that a substantial short position in either a
small capitalization security or a large capitalization security could
potentially trigger a reporting obligation under Threshold A.\107\ For
example, it would be difficult for a Manager to trigger only a dollar
threshold in a given security if the market capitalization of the
reporting company issuer is small; likewise, it would be difficult for
a Manager to trigger only a percentage threshold in a given security if
the market capitalization of the reporting company issuer is large. The
Commission believed that this would help to ensure transparency into
short sale-related activity that would be beneficial to both market
participants and regulators. As stated above, the Proposed Reporting
Thresholds were structured to make it more difficult for Managers with
substantial gross short positions to avoid disclosure by trading below
a Reporting Threshold, particularly with lower market capitalization
securities. The proposed U.S. dollar value-based prong was designed to
capture Managers with a substantial short position, even if the
position was relatively small compared to the market capitalization of
the issuer.\108\ The prong based on percentage of shares outstanding
was designed to capture Managers with gross short positions that are
large relative to the size of the issuer and, therefore, could have a
significant impact on the issuer.\109\
---------------------------------------------------------------------------
\107\ Id. at 14962.
\108\ Id.
\109\ Id.
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Regarding Threshold B, as discussed in the Proposing Release, a
$500,000 or more threshold for non-reporting company issuer securities
is similar to the median dollar value of a position of 2.5 percent of
the market capitalization of OTC stocks for which the Commission was
able to obtain information on total shares outstanding.\110\ The
Commission believed that this approach with regard to non-reporting
company issuers would help to ensure added transparency into short
sale-related activity that would be beneficial to both market
participants and regulators, because, as discussed in the Proposing
Release, it would capture Managers with substantial short positions in
an equity security of a non-reporting company issuer, even if such
positions are relatively small compared to the market capitalization of
the issuer.\111\ Rather than a two-pronged reporting threshold for
equity securities of non-reporting company issuers, however, the
Commission proposed a single-pronged, dollar value-based, reporting
threshold for non-reporting company issuer securities given its
understanding that the number of total shares outstanding for non-
reporting company issuers may not be readily and consistently
accessible to Managers.\112\
---------------------------------------------------------------------------
\110\ Id. at 14962-63.
\111\ Proposing Release, at 14962-63.
\112\ Id. at 14962.
---------------------------------------------------------------------------
As discussed in the Proposing Release, to determine whether the
proposed dollar value prong of Threshold A (Proposed Rule 13f-
2(a)(1)(i)) or Threshold B (Proposed
[[Page 75111]]
Rule 13f-2(a)(2)) is met, a Manager would be required to determine its
end of day gross short position on each settlement date during the
calendar month and multiply that figure by the closing price at the
close of regular trading hours on the relevant settlement date.\113\ In
circumstances where such closing price was not available in calculating
Threshold B, a Manager would be required to use the price at which it
last purchased or sold any share of that security, which would be
readily available to the Manager.\114\
---------------------------------------------------------------------------
\113\ Id. at 14957.
\114\ Id.
---------------------------------------------------------------------------
As discussed in the Proposing Release, to determine whether the
second prong of Threshold A (Proposed Rule 13f-2(a)(1)(ii))--2.5
percent or higher monthly average gross short position as a percentage
of shares outstanding in the equity security--is met, the Manager would
be required to (a) identify its gross short position in the equity
security at the close of each settlement date during the calendar month
of the reporting period, and divide that figure by the number of shares
outstanding in such security at the close of that settlement date, then
(b) add together the daily percentages during the calendar month as
determined in (a) and divide the resulting total by the number of
settlement dates during the calendar month reporting period. The number
of shares outstanding of the security for which information was being
reported would have been determined by reference to an issuer's most
recent annual or quarterly report, and any subsequent update thereto,
filed with the Commission.\115\
---------------------------------------------------------------------------
\115\ Id.
---------------------------------------------------------------------------
b. Comments and Final Rule
As discussed below, the Commission received numerous comments
regarding various aspects related to the Proposed Reporting Thresholds.
Generally, these comments varied, with some commenters recommending,
for example, that the Commission raise the thresholds (which would
trigger less gross short position reporting) and others recommending
the Commission lower or eliminate the thresholds (which would trigger
additional gross short position reporting).\116\ Some commenters
expressed general support for the Proposed Reporting Thresholds, or
expressed support for certain aspects of those thresholds.\117\
---------------------------------------------------------------------------
\116\ See, e.g., ICI Letter, at 9-10 (supporting a higher
threshold, stating that ``a higher threshold would still provide the
Commission with information on such large positions, while reducing
the burdens on managers of reporting smaller positions that likely
would have a lesser market impact''); K&L Gates Letter, at 4-5
(supporting a higher threshold, and stating that ``[u]nless the
Reporting Thresholds are modified, we anticipate that the Commission
will be inundated with reports providing significant detail about
positions that, in many cases, are not sufficiently sizable to
impact the larger markets or raise the type of concerns that the
Proposal was intended to address''); but see WTI Letter (stating
that ``it is important to set the threshold as low as possible to
mitigate any effects and impacts from firms attempting to game the
threshold'').
\117\ See, e.g., SIFMA Letter, at 20 (stating that ``while
certain SIFMA members believe that the threshold should be higher,
other SIFMA members did not object to the proposed threshold of 2.5
percent of the issuer's TSO or $10 million fair market value'');
Schulte Roth & Zabel LLP Letter (Apr. 26, 2022), at 3, available at
<a href="https://www.sec.gov/comments/s7-08-22/s70822-20126845-287561.pdf">https://www.sec.gov/comments/s7-08-22/s70822-20126845-287561.pdf</a>
(``Schulte Roth & Zabel Letter'') (stating that ``[w]e believe that
the 2.5 percent threshold identifies those situations where a short
position could lead to market manipulation'').
---------------------------------------------------------------------------
Comments To Raise Threshold A
Some commenters recommended increasing the proposed Reporting
Threshold A by, for example, doubling the percent of shares outstanding
threshold from 2.5 percent to 5 percent so as to be consistent with the
existing reporting requirements of 17 CFR 240.13d-1 (``Exchange Act
Rule 13d-1'') \118\ and the proposed reporting requirements of 17 CFR
240.10B-1 (``Exchange Act Rule 10B-1'') \119\ related to large
positions in security-based swaps.\120\ Other commenters also
recommended doubling that same percentage of shares outstanding
threshold from 2.5 percent to 5 percent, because the commenters
believed that the proposed 2.5 percent threshold was not sufficiently
sizable to have a market impact.\121\ Additionally, one commenter
believed that the lack of any reported instances of ``short-side''
manipulation did not justify a lower percentage threshold compared to
Rule 13d-1 and proposed Rule 10B-1.\122\
---------------------------------------------------------------------------
\118\ Rule 13d-1 (requiring long-side equity securities holders
to file a Schedule 13D or Schedule 13G if the security holder owns
over 5% of an issuer's equity securities).
\119\ See Prohibition Against Fraud, Manipulation, or Deception
in Connection With Security-Based Swaps; Prohibition Against Undue
Influence Over Chief Compliance Officers; Position Reporting of
Large Security-Based Swap Positions, Exchange Act Release No. 93784
(Dec. 15, 2021), 87 FR 6652, 6678 (Feb. 4, 2022) (``Rule 10B-1
Proposal''). See also Reopening of Comment Period for Position
Reporting of Large Security-Based Swap Positions, Exchange Act
Release No. 97762 (June 20, 2023), 88 FR 41338 (June 26, 2023)
(proposing to require any person holding security-based swap
positions to file a proposed Schedule 10B if they hold in excess of
$300 million in equity security-based swap positions or if the
notional value of those security-based swap positions is 5% of the
outstanding number of shares of a class of equity securities,
whichever is less).
\120\ See, e.g., Ropes & Gray Letter, at 6 (recommending
increasing the threshold to 5% in order to ``mitigate costs to
investors and provide consistency with other reporting regimes'');
K&L Gates Letter, at 5 (stating that 2.5% does not ``represent a
significant portion of an issuer's outstanding equity securities,''
and recommending increasing the threshold to more than 5% of an
issuer's voting equity securities in order to be consistent with the
existing reporting requirements of Rule 13d-1); Perkins Coie Letter,
at 6 (recommending alignment with requirements of Rule 13d-1(a) that
require filing of Schedule 13D or 13G upon crossing a 5% threshold
of ownership of any class of an equity security); ICI Letter, at 10
(stating that Commission identified 5% as a threshold over which a
position could have a meaningful market impact in ``recent'' Rule
10B-1 proposal).
\121\ K&L Gates Letter, at 5; see also ICI Letter, at 9-10
(``However, we believe that a higher threshold would still provide
the Commission with information on such large positions, while
reducing the burdens on managers of reporting smaller positions that
likely would have a lesser market impact.'').
\122\ One commenter believed that the proposed Rule 13f-2
reporting regime was overly expansive and ``asymmetric'' to existing
or other proposed reporting regimes in multiples ways, such as the
proposed percentage reporting threshold of 2.5% being lower than the
5% threshold in Rules 13d-1 and 10B-1. See SIFMA Letter, at 3-4
(stating that there is ``no empirical evidence'' that short selling
requires an ``asymmetric'' reporting regime and that ``[t]his
conclusion is consistent with the SEC's own reported enforcement
actions, i.e., any reported instances of `short-side' manipulation
(e.g., `short and distort' campaigns) are dwarfed by the instances
of `long-side' manipulation (e.g., `pump and dumps'). There thus is
simply no basis for such asymmetric regulation.'').
---------------------------------------------------------------------------
Other commenters proposed that the U.S. dollar value-based
threshold of Threshold A be raised.\123\ One commenter suggested that
it be increased from the proposed $10 million to $100 million because a
$100 million threshold would capture more substantial short positions
and be consistent with the adjustment to the proposed percentage of
shares outstanding threshold as compared to former Form SH (i.e., a
tenfold increase from 0.25 percent under Form SH to 2.5 percent under
Proposed Form SHO).\124\
---------------------------------------------------------------------------
\123\ See, e.g., Virtu Letter, at 2 (positing that dollar value
thresholds ``are significantly lower than is necessary''); Perkins
Coie Letter, at 2 (finding the $10 million (USD) gross short
position threshold of Threshold A too low); XR Securities Letter, at
2 (citing circumstance illustrating that $10M prong of Threshold A
may be too low).
\124\ Schulte Roth & Zabel Letter, at 3.
---------------------------------------------------------------------------
For reasons set forth below and discussed more fully in Part VIII,
increasing the proposed Threshold A percentage-based threshold from 2.5
percent or more of total shares outstanding to 5 percent (e.g., to be
consistent with the existing 5 percent reporting threshold of Exchange
Act Rule 13d-1 and the proposed reporting requirements of Exchange Act
Rule 10B-1), as suggested by some commenters,\125\ is not warranted or
appropriate. In this regard, because the rules are designed for
different purposes and utilize different reporting thresholds to meet
their respective
[[Page 75112]]
objectives, the Commission does not believe, as one commenter states,
that comparing Rule 13f-2 with long-side Rule 13d-1, as well as
comparing perceived instances of ``short-side'' and ``long-side''
manipulation, is an accurate assessment by which to determine Rule 13f-
2's Reporting Thresholds. Reporting under Exchange Act section 13(d) is
intended to provide information to the public and the affected issuer
about rapid accumulations of its equity securities in the hands of
persons who have the potential to change or influence control of the
issuer.\126\ Reporting under Rule 13f-2, in contrast, is intended to
capture Managers with gross short positions that are large relative to
the size of the issuer and could therefore have a significant impact on
the issuer, especially for issuers with a small market capitalization
where the dollar-based threshold is less likely to be breached.\127\ An
increase in the percentage-based prong of Threshold A, from 2.5 percent
to 5 percent, would reduce transparency into short positions in smaller
stocks. Specifically, increasing the percentage from 2.5 percent to 5
percent would reduce transparency into stocks with less than a $400
million market capitalization. This reduction could be meaningful given
that, short and distort campaigns and other market manipulations are
more likely to occur in stocks with lower market capitalizations and
less public information.\128\ As a result, the appropriate threshold
for Rule 13d-1 is not necessarily the appropriate threshold for Rule
13f-2. Instead, the Commission continues to believe that a broader
coverage of short position reporting (i.e., using a 2.5 percent
reporting threshold) is more appropriate for Rule 13f-2, especially
given that the reported data are aggregated and anonymized before
public dissemination with a delay. Here, the Commission is designing a
reporting threshold that is appropriate for the purposes of section
13(f)(2). Based on analysis of Form SH, a 2.5 percent or higher monthly
average gross short position is an appropriate threshold.\129\ For
example, one exchange estimates that median short interest for small-
cap issuers is only about 3 percent,\130\ indicating that a single
Manager breaching the 2.5 percent threshold would be significant for
many issuers. Thus, a percentage-based Threshold A is appropriate to
adopt as proposed.
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\125\ See supra nn. 121 & 122.
\126\ See, e.g., Filing and Disclosure Requirements Relating to
Beneficial Ownership, Release No. 34-14693 (Apr. 21, 1978), 43 FR
18501, 18484 (Apr. 28, 1978) (stating that the ``legislative history
[of Exchange Act section 13(d)] reveals that it was intended to
provide information to the public and the affected issuer about
rapid accumulations of its equity securities in the hands of persons
who would then have the potential to change or influence control of
the issuer'').
\127\ See Proposing Release, at 14961-64.
\128\ See infra Part VIII.C.1 (discussing market manipulations)
and Part VIII.E.3 (discussing how thresholds are triggered at
various dollar amounts).
\129\ See infra Part VIII.E for discussion of different
threshold options.
\130\ See Short Interest in Decline, Nasdaq (Mar. 3, 2022),
available at <a href="https://www.nasdaq.com/articles/short-interest-in-decline">https://www.nasdaq.com/articles/short-interest-in-decline</a>.
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Nor does the Commission believe that raising the dollar-based
threshold of Threshold A from $10 million to $100 million to be
consistent with the tenfold increase in percentage threshold is
warranted or appropriate. Based on its analysis of Form SH data as
discussed in the Proposing Release,\131\ as well as the need to balance
costs with the rule's ultimate goal of transparency, $10 million
strikes an appropriate balance of limiting costs of reporting to
Managers, while increasing transparency into short positions,
especially for equity securities of issuers with mid or large market
capitalizations that may not be captured under the percentage
threshold. While issuers with small market capitalizations may have
only one or a few large short sellers, issuers with mid or large market
capitalizations may have tens or even hundreds of large short sellers,
which diffuses the percentage of short interest for each short seller.
The Commission considered this when setting a dollar-based threshold of
Threshold A such that large short sellers are captured for all equity
issuers.
---------------------------------------------------------------------------
\131\ As discussed in the Proposing Release, the Proposed
Reporting Thresholds were based on comment letters and analysis of
Form SH data collected under Rule 10a-3T. Proposing Release, at
14963-64. Rule 10a-3T required reporting of short positions that
were either greater than 0.25% of shares outstanding or $10 million
in fair market value. Comment letters to Rule 10a-3T itself
generally concurred with the dollar reporting obligation but
expressed concerns that the percentage obligation was too low.
Suggestions for a percentage reporting obligation ranged from 1% to
5% of shares outstanding. See, e.g., Seward Kissel LLP, available at
<a href="https://www.sec.gov/comments/s7-31-08/s73108-43.pdf">https://www.sec.gov/comments/s7-31-08/s73108-43.pdf</a>; Investment
Adviser Association, available at <a href="https://www.sec.gov/comments/s7-31-08/s73108-38.pdf">https://www.sec.gov/comments/s7-31-08/s73108-38.pdf</a>; and Securities Industry and Financial Markets
Association, available at <a href="https://www.sec.gov/comments/s7-31-08/s73108-52.pdf">https://www.sec.gov/comments/s7-31-08/s73108-52.pdf</a>.
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Comments To Lower or Eliminate Reporting Thresholds
Other commenters recommended that the Proposed Reporting Thresholds
be reduced or eliminated. Some of these commenters were concerned that
the Proposed Reporting Thresholds could be too lenient and under-
inclusive,\132\ and some of those commenters supported removing the
thresholds entirely because of the possibility of Managers
intentionally maintaining short positions just below the thresholds to
avoid reporting.\133\ One commenter stated that the final rule should
``eliminate the proposed thresholds so as to reduce or eliminate the
risk that unknown, hidden short positions could pose to investors and
the markets.'' \134\ However, eliminating thresholds to capture all
short sale data may result in the inclusion of ``transient'' short
sales,\135\ such as short sales due to market making or customer
facilitation activity rather than directional short sales. By providing
a properly calibrated threshold this type of ``noise'' should be
reduced and allow market participants to instead focus on substantial
short sales that are more likely to be directional. The reduction of
``noisy'' short position information also sets Rule 13f-2 apart from
existing short sale data regimes, such as those provided by FINRA and
the exchanges, which do not have thresholds. On the other hand, the
threshold cannot be set so high that substantial short sales by
Managers are out of scope. The Reporting Thresholds, as adopted, will
help ensure added transparency into short sale-related activity that
would be beneficial to both market participants and regulators, and
will result in reporting by Managers with a substantial gross short
position in both reporting and non-reporting company issuers.
---------------------------------------------------------------------------
\132\ See, e.g., Comment from Peter Stauduhar (Mar. 6, 2022),
available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-20118728-271591.htm">https://www.sec.gov/comments/s7-08-22/s70822-20118728-271591.htm</a> (stating that ``[t]he thresholds are a critical part of
the success of this rule, and I urge the Commission to worry less
about the burden the reporting will have on short sellers'').
\133\ See, e.g., Comment from Travis Donovan (Mar. 14, 2022),
available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-272287.htm">https://www.sec.gov/comments/s7-08-22/s70822-272287.htm</a>; Comment from Steve B. (Mar. 14, 2022), available at
<a href="https://www.sec.gov/comments/s7-08-22/s70822-20119335-272221.htm">https://www.sec.gov/comments/s7-08-22/s70822-20119335-272221.htm</a>
(``SteveB.Comment''); Anonymously Submitted Letter (Apr. 2, 2022),
available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-20122297-278355.htm">https://www.sec.gov/comments/s7-08-22/s70822-20122297-278355.htm</a> (``I believe that all short sales should be recorded and
reported. The minimum threshold should be a single short sale.'').
\134\ Better Markets Letter, at 12.
\135\ See Virtu Letter, at 2-3.
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Recommendations to Base Reporting Thresholds on a Single Metric
Some commenters, often in conjunction with recommendations to
increase the Proposed Reporting Thresholds, suggested applying a single
threshold metric. One commenter proposed the Commission adopt a single
U.S. dollar value-based threshold for all issuers in order to limit the
impact of
[[Page 75113]]
any potential ambiguity around identifying the number of shares
outstanding for non-reporting company issuers.\136\ Another commenter,
however, recommended that the Commission adopt a single threshold based
on percentage of shares outstanding, stating that it would ``mitigate
unnecessary operational and cost burdens on Managers,'' as the
commenter believed that a U.S. dollar value-based threshold would
require more difficult system buildouts.\137\
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\136\ See MFA Letter, at 4 (stating that ``[a] dollar-based
approach would be more simple and less costly for managers to
employ'').
\137\ See, e.g., ICI Letter, at 8-9 (stating ``we recommend that
the Commission adopt a single reporting threshold level that is an
average short position in an equity security based on a percentage
of shares outstanding rather than on a dollar value''); see also K&L
Gates Letter, at 5 (recommending a threshold triggered only by ``a
position representing more than 5 percent of an issuer's voting
equity'').
---------------------------------------------------------------------------
The Reporting Thresholds are designed to require the filing of Form
SHO by Managers with substantial gross short positions. The two-pronged
approach of Threshold A measures the size of a Manager's short position
relative to both dollar amount and number of shares. The dollar value-
based prong (Rule 13f-2(a)(1)(i)) captures Managers with substantial
short positions, even if such positions are relatively small compared
to the market cap of the issuer. The percentage of total shares
outstanding-based prong (Rule 13f-2(a)(1)(ii)) captures Managers with
gross short positions that are large relative to the size of the issuer
and, therefore, could have a significant impact on the issuer. With
respect to securities of non-reporting company issuers, however, the
Commission understands that the number of total shares outstanding may
not be readily and consistently accessible.\138\ For this reason, a
single-pronged, dollar value-based Reporting Threshold is an efficient
way for Managers to determine whether they trigger Threshold B (Rule
13f-2(a)(2)) that avoids the additional cost and complexity of locating
the number of total shares outstanding for the securities of a non-
reporting company issuer that may be difficult or impossible to
locate.\139\
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\138\ Proposing Release, at 14962.
\139\ Id.
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Comments Recommending the Use of the Same Threshold for Reporting
Company and Non-Reporting Company Issuers
Another commenter recommended not having differing thresholds for
reporting company issuers and non-reporting company issuers.\140\ This
commenter believed having two different reporting thresholds ``would be
unnecessarily complicated and burdensome.'' \141\ Furthermore, the
commenter stated as an alternative the creation of a ``Form SHO List''
akin to the 13F List that would include total shares outstanding of
each security to assist in threshold calculations.\142\ As a result of
the potential difficulties in accessing the total shares outstanding
for non-reporting company issuers discussed above, using a percent of
total shares outstanding-based approach would not be appropriate for
non-reporting company issuers. Requiring total shares outstanding for
both thresholds would be operationally difficult, potentially
inaccurate and therefore costly for Managers to determine for some non-
reporting companies. Requiring a dollar-based metric for both
thresholds could be both under-inclusive and over-inclusive, as the
markets for reporting and non-reporting companies differ. For example,
a high dollar threshold (e.g., $10 million) for both thresholds would
under-include many non-reporting companies while a low dollar threshold
(e.g., $500,000) would over-include reporting companies. For these
reasons, the Commission is adopting Threshold B as proposed.
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\140\ See SIFMA Letter, at 19-20 (stating that ``the proposed
distinction between the thresholds that would apply to Reporting
Company securities and Non-Reporting Company securities would be
unnecessarily complicated and burdensome'').
\141\ Id.
\142\ SIFMA suggested that the ``Form SHO List'' include
securities that are included on the 13F List, while excluding
securities that should not be covered by Form SHO. Id. at 20. SIFMA
further suggested that the ``Form SHO List'' include, for each
security, the total shares outstanding.
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For similar reasons, and as discussed in the ``Scope of Reported
Securities'' section above, the Commission will not be publishing a
``Form SHO List'' with total shares outstanding to assist in Manager
calculations, as one commenter suggested. The thresholds as adopted are
designed to reduce operational burdens while capturing substantial
short positions in both reporting and non-reporting company issuers.
Adopting a much lower dollar threshold for non-reporting company
issuers than that for reporting company issuers results in Managers not
being required to determine percentages of total shares outstanding
and, due to sparse data in non-reporting company issuer markets,
Managers would avoid the difficulty of having to do so. A ``Form SHO
List'' with total shares outstanding would not be necessary for
Managers reporting positions in reporting company issuers because,
unlike Rule 13f-1 securities, Rule 13f-2 covers equity securities as
discussed above,\143\ rendering additional guidance on what securities
qualify unnecessary. Additionally, as discussed above in the Scope of
Reported Securities section, section 13(f)(1) expressly provides that
the Commission shall make available to the public a list of all equity
securities that are subject to such reporting,\144\ while section
13(f)(2) does not require publication of such a list.
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\143\ See supra Part II.A.2.
\144\ Section 13(f)(1) of the Exchange Act (15 U.S.C. 78m(f)(1))
requires any institutional investment manager exercising investment
discretion over accounts holding at least $100 million in fair
market value of certain equity securities to file reports on Form
13F with the Commission at the times set forth in Rule 13f-1. The
statute directs the Commission to make available to the public, for
a reasonable fee, a list of all equity securities described in
section 13(d)(1) of the Exchange Act and to disseminate to the
public the information contained in the reports.
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Comments Regarding Other Concerns Related to Thresholds
Implementation and Compliance Costs
Some commenters stated that the Proposing Release did not
adequately account for the burdens associated with monitoring for
whether a Reporting Threshold is met, i.e., whether a Manager has a
Form SHO reporting obligation.\145\ Specifically, these commenters
stated that the Proposing Release did not address the costs of those
Managers who would need to develop and implement reporting systems to
monitor for whether a Reporting Threshold is met or exceeded, that may
or may not ultimately result in a reportable gross short position.\146\
The
[[Page 75114]]
comments are addressed in the Economic Analysis, in Part VIII below.
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\145\ See, e.g., Virtu Letter, at 2 (``the dollar value
thresholds referenced in the Proposal are significantly lower than
is necessary''); MFA Letter, at 4 (recommending a single, dollar-
based threshold only); SIFMA Letter, at 5 (recommending elimination
of different thresholds for reporting and non-reporting companies in
favor of one uniform threshold for U.S. equity securities); ICI
Letter, at 9 (recommending a single, percentage-based threshold for
both reporting and non-reporting company issuers); Ropes & Gray
Letter, at 2 (recommending that all thresholds ``be determined using
average positions over a month rather than daily positions.'').
\146\ See, e.g., MFA Letter, at 10-11; see also ICI Letter, at 5
(stating that Proposed Rule 13f-2 would require a Manager to
continuously monitor and record any activity that could potentially
be subject to future reporting on Form SHO). While the costs would
likely be higher if Managers choose to monitor daily, Rule 13f-2
does not require daily monitoring, either for reporting or non-
reporting company issuers. Managers may choose to do this threshold
calculation on a rolling basis, or to do the calculation after the
month has ended. While some Managers may choose to incur the higher
costs of daily tracking and calculation for purposes of compliance
with Rule 13f-2, the final rule's Reporting Threshold for reporting
company issuers is not based on a Manager's gross short position on
a single trading date, reducing the need for daily tracking. See
infra Part VIII.C.6.b.
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``Gross'' Short Position versus ``Net'' Short Position
Some commenters requested that the Reporting Thresholds be
calculated based on ``net'' short position rather than ``gross'' short
position as proposed. Multiple commenters expressed concern that using
a gross short position calculation would not accurately reflect risk in
the markets.\147\ However, other commenters supported the use of the
proposed gross short position data either instead of or in conjunction
with net short position data.\148\ One commenter proposed requiring net
short position reporting by Managers that are solely reporting on Form
SHO with regard to one issuer while requiring gross short position
reporting for Managers with short positions in more than one
issuer.\149\ One commenter proposed that, if a gross short position
calculation is used, market makers should not be subject to adopted
Rule 13f-2's reporting requirements.\150\ However, another commenter
supported applying the rule's requirements to market makers.\151\ One
commenter stated that, even though market makers do not typically carry
overnight positions and would likely not trigger the Proposed Reporting
Thresholds, market makers would still incur the costs of end-of-day
calculations to determine whether they meet or exceed the Proposed
Reporting Thresholds.\152\
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\147\ See, e.g., Virtu Letter, at 3 (stating that ``the
requirement to report such positions on a gross rather than net
basis would likely distort the actual degree of short positions as
it will capture circumstances where a firm is net long but may have
short positions among its accounts.''); Perkins Coie Letter, at 3-4,
6. (recommending that ``[r]ather than set a low threshold and over
capture short position information, the SEC should revise the
requirement to $10 million net short position as opposed to
gross.''); Schulte Roth & Zabel Letter, at 2 (stating that ``net
short position data would more accurately reflect actual positions
taken by institutional investment managers and provide useful
transparency to the Commission and to the marketplace.''); ICI
Letter, at 10 (recommending that ``the Commission streamline and
simplify how managers account reflect hedging positions by adopting
a net short position threshold and eliminating the required
indication of whether a position is hedged or not in Form SHO.'');
Comment Letter from Anonymous Fund Manager at 1-2, available at
<a href="https://www.sec.gov/comments/s7-08-22/s70822-20126773-287490.pdf">https://www.sec.gov/comments/s7-08-22/s70822-20126773-287490.pdf</a>
(``Anonymous Fund Manager Letter'') (recommending that the
Commission ``modify the proposed threshold requirements to reference
short positions on a net `delta-adjusted' basis as opposed to a
gross basis or, in the alternative, exclude from the reporting
obligations under the Proposed Rules `bona fide hedging activity' as
such term would be defined in the final rules.'').
\148\ See, e.g., Comment from Josh Allen (Mar. 14, 2022),
available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-272295.htm">https://www.sec.gov/comments/s7-08-22/s70822-272295.htm</a>; Comment from An Investor (Apr. 4., 2022), available at
<a href="https://www.sec.gov/comments/s7-08-22/s70822-20122297-278355.htm">https://www.sec.gov/comments/s7-08-22/s70822-20122297-278355.htm</a>
(supported including both net and gross short positions in
reporting).
\149\ Perkins Coie Letter, at 4 (stating that ``the SEC should
consider amending its proposal to require net position reporting by
certain types of managers that do not regularly utilize short
positions. For instance, the SEC could require net short position
reporting by filers that are solely reporting on Form SHO with
regards to one issuer. For any filer reporting more than one issuer,
the SEC could require gross short position reporting.'').
\150\ HSBC Letter, at 16 (stating that ``[b]ecause Proposed Rule
13f-2 requires disclosure of gross positions, market makers could be
required to report large positions, even if a market makers' [sic]
net position is close to zero (i.e., because such short positions
are typically hedged via options or swaps). Subjecting market makers
to Proposed Rule 13f-2 may, therefore, result in market participants
receiving unhelpful and misleading information about the short sale
market.'').
\151\ See Samuel Meadows Comment, at 2 (stating that ``Market
Makers should NOT be except [sic] from reporting for any reason.
Market Makers should report short sales the same as everyone else
should they pass the Reporting Threshold.'').
\152\ See SIFMA Letter, at 11-12 (stating that ``[h]owever, as
the Proposing Release notes, requiring Institutional Investment
Managers to consider intraday short sale activity, which would not
be captured in the `gross short position' as reflected on their
trade date stock records, in determining whether the threshold has
been exceeded, would be incredibly onerous--particularly, for
example, for market makers that generally may not carry large
overnight short positions.'').
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As discussed in the Proposing Release, under the proposal, a
Manager would report its ``gross'' short position in an equity security
without offsetting such gross short position with ``long'' shares of
the equity security or economically equivalent long positions obtained
through derivatives of the equity security.\153\ For example, if a
Manager has investment discretion over multiple accounts, some of which
have long positions in an equity security and some have short positions
in the same equity security, only the total gross short position in the
``short accounts'' is reported, without being offset by the long
positions in the ``long accounts.'' Requiring a Manager to report its
daily gross short position in a security will provide a more complete
view of short positions held by Managers in a security, particularly
once the data is aggregated for publication.\154\ Permitting Managers
to ``net'' positions would dilute the usefulness of the data in
providing market participants with a sense of substantial short
positions. For example, requiring net short position reporting by
Managers that are solely reporting on Form SHO with regard to one
issuer, or for other types of Managers infrequently using short
positions, as one commenter suggested, would provide minimal cost
savings and create misleading data that could be difficult to aggregate
and confusing to market participants. Further, the data collected and
provided by FINRA \155\ and the exchanges is not netted.\156\ By
providing aggregate gross positions reported by Manager in a security,
the final rule will supplement such existing short sale information
with additional context on substantial gross short sale positions.
---------------------------------------------------------------------------
\153\ Proposing Release, at 14956.
\154\ In addition, commenters stated they would be uncertain how
to ``offset'' positions when discussing the hedging indicator. See
infra Part II.A.4.d.iii.(B). Netting would raise similar concerns.
\155\ See, e.g., Short Interest--What It Is, What It Is Not,
FINRA Inv'r Insights (Jan. 25, 2023), available at <a href="https://www.finra.org/investors/insights/short-interest">https://www.finra.org/investors/insights/short-interest</a> (``The short
interest data is just a snapshot that reflects short positions held
by brokerage firms at a specific moment in time on two discrete days
each month. The Short Sale Volume Daily File reflects the aggregate
volume of trades within certain parameters executed as short sales
on individual trade dates.'').
\156\ See, e.g., Frequently Asked Questions (FAQ) about Short
Interest Reporting, FINRA, available at <a href="https://www.finra.org/filing-reporting/regulatory-filing-systems/short-interest/faq">https://www.finra.org/filing-reporting/regulatory-filing-systems/short-interest/faq</a> (``Q1:
Rule 4560 applies to short interest positions resulting from: (1) a
``short sale,'' as defined by Regulation SHO Rule 200(a); or (2)
where the transaction that caused the short position was marked
``long,'' consistent with Regulation SHO Rule 200(g), due to the
firm's or the customer's net long position at the time of the
transaction. For example, a sale may be marked as ``long'' because
the overall net position in the security within an aggregation unit
is long at the time of the sale. If the execution results in a short
position in a specific account (or subaccount) held within the
aggregation unit, this position is reportable pursuant to Rule
4560.''; Q11: ``Where, as part of a strategy, an account holds both
a short and long position in the same security simultaneously, the
short position is reportable as short interest pursuant to Rule 4560
and must be reported in full, i.e., not netted against the long
position.'').
---------------------------------------------------------------------------
In addition, the Commission is making additional modifications,
discussed further below, that should alleviate burdens on market makers
that may otherwise need to undertake the obligation of calculating
reporting thresholds despite generally holding positions below such
thresholds. Specifically, the Commission is modifying the threshold
calculations to a monthly average of daily gross short positions rather
than a single daily position, as discussed under the subheading ``When
the Reporting Obligation is Triggered'' below. Further, as discussed in
Part III below, the Commission is not adopting the proposed requirement
to report ``buy to cover'' activity, which a commenter \157\ stated
would be more difficult if gross positions are required to be reported.
The Commission, in adopting Rule 13f-2, will require a Manager to
report its ``gross'' monthly short position as
[[Page 75115]]
proposed under Proposed Rule 13f-2(b)(4).
---------------------------------------------------------------------------
\157\ SIFMA Letter, at 24.
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When the Reporting Obligation Is Triggered
To ease reporting burdens and reduce costs, some commenters
proposed decreasing the frequency of certain aspects of the U.S. dollar
value-based aspects of the Reporting Thresholds by instead using
monthly average positions, instead of the proposed ``close of regular
trading hours on any settlement date'' frequency.\158\ Alternatively,
one commenter suggested that the proposed monthly reporting requirement
should only be triggered if a Manager holds a short position in excess
of the Proposed Reporting Thresholds as of the last settlement day of
the month.\159\ Commenters stated that by using average monthly
positions rather than the proposed rule's use of any settlement date
within the reporting period, the reporting burden required of Managers
would be substantially lessened, since Managers may transiently cross
the reporting thresholds through activities such as market making,
hedging, and customer facilitation activity.\160\ Requiring reporting
for Managers who temporarily cross these thresholds on an intraday
basis through such activity, one commenter stated, would not adhere to
the legislative intent of DFA section 929X.\161\ Commenters stated that
transiently crossing these thresholds would not produce reported data
that would be valuable to the Commission; for example, short-term
market disruptions may trigger reporting under the proposed frequency
for Managers that do not hold substantial short positions.\162\ For
reasons discussed below, the Commission is modifying Proposed Rule 13f-
2(a)(1)(i) (the U.S. dollar value-based prong of Threshold A) to
trigger reporting requirements when a Manager has a monthly average of
daily gross short positions (``monthly average'') with a U.S. dollar
value of $10 million or more at the end of the calendar month, rather
than, as proposed, a $10 million or more gross short position at the
close of regular trading hours on any settlement date during the
calendar month.\163\
---------------------------------------------------------------------------
\158\ See, e.g., Virtu Letter, at 3 (stating that ``[w]e also
object to the reporting requirement being triggered by the existence
of a short position on any settlement date within a reporting
period.''); Ropes & Gray Letter, at 2 (stating that ``[a]ll filing
thresholds should be determined using average positions over a month
rather than daily positions.'').
\159\ SIFMA Letter, at 15 (advocating ``that the proposed
monthly reporting under Information Table 1 of Proposed Form SHO
should be triggered only if the Institutional Investment Manager
holds a gross short position in an equity security, as of the last
day of such month, in excess of the threshold(s) for reporting.'').
\160\ See Virtu Letter, at 2.
\161\ See SIFMA Letter, at 4.
\162\ See Ropes & Gray Letter, at 6-7.
\163\ This change to ``monthly average'' is responsive, in part,
to commenters' concerns about certain aspects of the U.S. dollar
value-based Reporting Thresholds. For reasons discussed below,
however, the Commission is adopting Threshold B as proposed
(Proposed Rule 13f-2(a)(2)), which employs an ``at the close of
regular trading hours on any settlement during the calendar month''
approach. The Form SHO ``Instructions For Calculating Reporting
Threshold,'' discussed below, explain in detail the method for
determining whether the modified threshold is met.
---------------------------------------------------------------------------
Threshold A, as adopted, will require reporting by Managers that
have, for each equity security of a reporting company issuer, either
(1) a monthly average gross short position at the close of regular
trading hours in the equity security with a U.S. dollar value of $10
million or more,\164\ or (2) a monthly average gross short position at
the close of regular trading hours as a percentage of shares
outstanding in the equity security of 2.5 percent or more.\165\ Using a
``monthly average'' dollar value for reporting company issuers will
result in Form SHO reporting by Managers that consistently carry large
gross short positions during the reporting month. This approach should
reduce the reporting of non-directional, ``transient'' short sales
activity \166\ and provide market participants with more focused
information on substantial short positions held by Managers. The
modification should also reduce the burdens of certain Managers,
specifically those Managers, including market makers, that periodically
meet or exceed the $10 million or more threshold on a given settlement
date during a calendar month, but that do not typically carry a large
gross short position throughout the month that will meet or exceed the
monthly average reporting threshold, by eliminating the need to
calculate (and potentially trigger) the threshold on a daily basis.
This will help the Commission to distinguish directional short selling
of Managers from short sale activity effected by market makers and
liquidity providers.\167\
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\164\ To determine whether this Reporting Threshold has been
met, a Manager shall determine its gross short position at the close
of regular trading hours in the equity security (as defined in Rule
13f-2) on each settlement date during the calendar month and
multiply that figure by the closing price at the close of regular
trading hours on the settlement date (``end of day dollar value'').
The Manager shall then add all end of day dollar values during the
calendar month and divide that sum by the number of settlement dates
in the month to arrive at a ``monthly average'' for each equity
security the Manager traded during that calendar month reporting
period.
\165\ The methods of calculation of the Reporting Thresholds are
prescribed in ``Instructions for Calculating Reporting Threshold''
in Form SHO. Rule 13f-2 and the instructions in Form SHO, require
that for purposes of determining whether a Manager meets or exceeds
a Reporting Threshold, a Manager shall determine its gross short
position ``at the close of regular trading hours'' in the equity
security, rather than at the ``end of day'' as was provided for in
the instructions to Proposed Form SHO. Accordingly, the Commission
is making a modification to the instructions for calculating
Threshold A and replacing ``end of day gross short position'' with
``gross short position at the close of regular trading hours.''
Addressing any potential ambiguity in terminology should facilitate
more consistency in reporting by Managers and more comparability of
the data reported on Form SHO. With this change, the calculation
instructions for Threshold A provide that to determine whether the
percentage threshold of Threshold A has been met, a Manager shall
(a) determine its gross short position at the close of regular
trading hours in the equity security (as defined in Rule 13f-2) on
each settlement date during the calendar month, and divide that
figure by the number of shares outstanding in such security at the
close of regular trading hours on the settlement date, and (b) add
up the daily percentages during the calendar month as determined in
(a) and divide that sum by the number of settlement dates in the
month to arrive at a ``monthly average'' for each equity security
the Manager traded during that calendar month reporting period. The
number of shares outstanding of the security for which information
is being reported shall be determined by reference to an issuer's
most recent annual or quarterly report, and any subsequent update
thereto, filed with the Commission.
\166\ See supra n. 135 and accompanying text.
\167\ See Proposing Release, at 14953.
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In addition, similar to the discussion in the Proposing Release
regarding the use of a monthly average gross short position of 2.5
percent or more of total shares outstanding,\168\ the Commission
continues to believe that using a monthly average gross short position
at the close of regular trading hours of $10 million or more, rather
than an end of each settlement date calculation as was originally
proposed, will reduce the risk that a Manager may time its short sales
to avoid triggering the adopted reporting threshold.\169\
---------------------------------------------------------------------------
\168\ Proposing Release, at 14962 (``In addition, the Commission
believes that requiring the reporting of short positions with a 2.5%
or higher monthly average gross short position would capture
Managers with gross short positions that are large relative to the
size of the issuer, and could therefore have a significant impact on
the issuer. Using a monthly average gross short position, rather
than an end of month gross short position, is also designed to
prevent the scenario where a Manager engages in trading activity on
the last day of the month in order to avoid reporting.'').
\169\ In addition, the Commission is making a modification to
specify in Rule 13f-2 and in the instructions in Form SHO that, for
purposes of determining whether a Manager meets or exceeds Threshold
A, a Manager shall determine its gross short position ``at the close
of regular trading hours'' in the equity security, rather than at
the ``end of day'' as was provided for in the instructions to
Proposed Form SHO. Reducing any potential ambiguity in terminology
should facilitate more consistency in reporting by Managers and more
comparability of the data reported on Form SHO.
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[[Page 75116]]
Threshold B, as proposed, and as adopted, will require reporting by
Managers that have, for each equity security of a non-reporting company
issuer, a gross short position in the equity 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.\170\ A single,
dollar-based prong approach (using the $500,000 or more on any
settlement date metric) for securities of non-reporting company issuers
(Rule 13f-2(a)(2)) will capture Managers with large gross short
positions, even if such positions are relatively small compared to the
market capitalization of the issuer. As discussed above, the markets
for non-reporting company issuers are more opaque and could benefit
more from transparency. Additionally, due to their lower liquidity,
equity securities of non-reporting companies can be more sensitive to
strategic trading than those of reporting companies.\171\ As a result,
for those securities, a single dollar threshold that can be triggered
on any day of a month is more appropriate than the two-prong threshold
calculated as monthly averages for equity securities issued by
reporting companies.
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\170\ The methods of calculation of the Reporting Thresholds are
prescribed in ``Instructions for Calculating Reporting Threshold''
in Form SHO. To determine the dollar value-based Reporting Threshold
described in Threshold B has been met, a Manager shall determine its
gross short position at the close of regular trading hours in the
equity security (as defined in Rule 13f-2) on each settlement date
during the calendar month and multiply that figure by the closing
price at the close of regular trading hours on the settlement date.
If such closing price is not available, a Manager shall use the
price at which it last purchased or sold any share of that security.
\171\ See infra Part VIII.E.3 (discussing difficulty in
obtaining information on non-reporting company issuers, and that
data is often stale and inaccurate).
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Basing Reporting Thresholds on Form SH Data
Some commenters maintained that the Commission should not have
based the Proposed Reporting Thresholds on Form SH data, as the Form SH
data was collected during ``a period of abnormal market conditions that
does not reflect recent changes in the markets,'' and urged the
Commission to more robustly support its rationale for selecting the
Reporting Thresholds.\172\ These commenters essentially suggested that
the use of Form SH data was unrealistic, and suggested that the
Commission consider whether the Reporting Thresholds are appropriate
based on more recent data and analysis.\173\ In the Proposing Release,
the Commission stated that to perform the underlying Reporting
Thresholds analysis, Form SH data on daily short positions for November
2008 through February 2009 were filtered and matched to Center for
Research in Security Prices, LLC for daily closing prices and Compustat
for daily shares outstanding. The Commission recognized that the
results of an analysis of Form SH data may not fully reflect the status
quo but that the analysis used appropriate data because it involved the
same type of entities (Managers) and the same activity (short
positions).\174\ As discussed in the Proposing Release, the Commission
believed that it struck a reasonable balance in proposing the Reporting
Thresholds with regard to the fundamental economic tradeoff of the
value of the data versus the cost of collecting the data.\175\
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\172\ Comment Letter from Barbara Bliss, Associate Professor of
Finance, et al. (Apr. 25, 2022), at 3, available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-20126591-287247.pdf">https://www.sec.gov/comments/s7-08-22/s70822-20126591-287247.pdf</a> (``Law and
Finance Professors Letter'') (``we believe the Commission could and
should more robustly support its rationale for these thresholds
before adopting any final rule.''); see also AIMA Letter, at 11-12
(commenter was critical of Reporting Thresholds based on ``stale and
limited'' data). For a discussion of Form SH applicability to the
current period, see infra Part VIII.C.6.a.
\173\ See, e.g., AIMA Letter, at 12 (stating that the Commission
should ``review and analyze current short interest market data for
reporting issuers to ensure that any final threshold based on a
gross position's dollar value accounts for the latest and most
complete data''); Law and Finance Professors Letter, at 3 (stating
that the Commission should ``consider more carefully whether the
stated disclosure thresholds are appropriate, based on more recent
data and analysis, and whether there should be a mechanism that
would permit these thresholds to change over time''); Two Sigma
Letter, at 7 (stating that Form SH burden estimates are an
``unrealistic benchmark'').
\174\ Proposing Release, at 14963 n.80.
\175\ Proposing Release, at 14963-64, 15007.
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The Commission disagrees with one commenter that stated that Form
SH data was ``stale and limited.'' \176\ The Commission continues to
believe that Form SH data is highly relevant for determining the
Reporting Thresholds. Form SH is the only existing data source of
individual Manager-level short sale positions.\177\ Form SH data was
collected from October 17, 2008, until August 1, 2009, and the
Commission analyzed daily data submitted from November 2008 until
February 2009 as representative of short positions held by Managers. By
the time Form SH was in effect, the global financial crisis was winding
down, and is considered by some to have calmed by approximately June
2009.\178\ Thus, data was analyzed for several months during which the
economy was returning to normalcy. Although the commenter suggested
such data does not address ``recent changes in the financial markets,''
the commenter did not elaborate on what ``recent changes'' would have
impacted an analysis of the Form SH data or the time period in which
the data was analyzed. Markets undergo periods of volatility and
stability and are constantly evolving over time. The data from Form SH
involves the same type of entities (Managers) and the same activity
(short positions) as Form SHO. The time period for which the Form SH
data was studied is sufficiently informative to provide a reasonable
assessment of appropriate reporting thresholds for purposes of Form
SHO.\179\
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\176\ See AIMA Letter, at 11-12.
\177\ While there are various limitations to be considered when
using Form SH data, Form SH data are the most relevant and
applicable source of data available for the purposes of estimating
the costs of the design and analysis of Rule 13f-2. There are no
other data sources, public or regulatory, which specifically track
Managers' short position activities in the U.S. See infra Part
VIII.C.6.a.
\178\ The National Bureau of Economic Research considers the
global financial crisis as having officially started Dec. 2007 and
ended June 2009. See, e.g., Nat'l Bureau of Econ. Research, Business
Cycle Dating, available at <a href="https://www.nber.org/research/business-cycle-dating">https://www.nber.org/research/business-cycle-dating</a>.
\179\ See discussion of Form SH in Part VIII.C.6.a.
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4. Form SHO
a. Reporting via EDGAR
i. Proposal
To enhance transparency of short sale-related data reported and
published pursuant to Proposed Rule 13f-2, Proposed Rule 13f-2(a)(3)
provided that Managers would file Form SHO (and any amendments thereto)
with the Commission on EDGAR.\180\ The Commission believed that most
Managers should be familiar with filing forms on EDGAR--for example,
Form 13F \181\--and relying on EDGAR to access registration statements,
periodic reports, and other filings with the Commission that are made
publicly available.\182\ The Commission believed
[[Page 75117]]
that requiring Proposed Form SHO to be reported via EDGAR would enhance
the accessibility, usability, and quality of the Proposed Form SHO
disclosures for the Commission, and would allow the Commission to
download disclosures from Form SHO directly, facilitating efficient
access, organization, and evaluation of the reported information.\183\
The Commission further believed that the improved quality and scope of
information available for the Commission's use in examining market
behavior and recreating market events would bolster the Commission's
oversight of short selling activity and enhance investor
protections.\184\
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\180\ See Proposed Rule 13f-2(a)(3) (providing that ``Form SHO
and any amendments thereto must be filed with the Commission via the
Commission's Electronic Data Gathering, Analysis, and Retrieval
System (``EDGAR''), in accordance with Regulation S-T. Certain
information regarding each such equity security reported by
institutional investment managers on Form SHO and filed with the
Commission via EDGAR will be published by the Commission on an
aggregated basis.'').
\181\ EDGAR filing is mandatory for all public Form 13F
submissions. See Rulemaking for EDGAR System, Exchange Act Release
No. 34-40934 (Jan. 12, 1999), 64 FR 2843 (Jan. 19, 1999); see also
Electronic Submission of Applications for Orders under the Advisers
Act and the Investment Company Act, Confidential Treatment Requests
for Filings on Form 13F, and Form ADV-NR; Amendments to Form 13F,
Exchange Act Release No. 34-95148 (June 23, 2022), 87 FR 38943 (June
30, 2022).
\182\ See, e.g., About EDGAR, available at <a href="https://www.sec.gov/edgar/about">https://www.sec.gov/edgar/about</a>; see also Important Information about EDGAR, available
at https://www.sec.gov/edgar/searchedgar/
aboutedgar.htm#:~:text=EDGAR%2C%20the%20Electronic%20Data%20Gathering
,and%20Exchange%20Commission%20(SEC) (``The [EDGAR] system processes
about 3,000 filings per day, serves up 3,000 terabytes of data to
the public annually, and accommodates 40,000 new filers per year on
average.'').
\183\ Proposing Release, at 14957.
\184\ Id.
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ii. Comments and Final Rule
Several commenters raised concerns about how the confidentiality of
the data reported on Form SHO via EDGAR would be preserved.\185\ Most
of these commenters spoke of a need to establish robust data security
protocols for the ``valuable and proprietary'' information that would
be reported on Proposed Form SHO via EDGAR. Several such commenters
expressed concerns about cyberattacks or other breaches of account
information.\186\
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\185\ See, e.g., K&L Gates Letter, at 5-6 (any final rule or
final Form SHO should ensure ``indefinitely'' the confidentiality of
information that could reveal the identity of the reporting
Manager).
\186\ See, e.g., AIMA Letter, at 14 (stating that the Commission
has not explained how it will protect the commercially sensitive
data that will be reported on Proposed Form SHO or acknowledged that
its systems are susceptible to data breaches); MFA Letter, at 8
(positing that ``the risk of increased cyberattacks or other
breaches of confidential account information far outweigh any
incremental benefit associated with requiring [Managers] to
individually report short position information''); Two Sigma Letter,
at 3-5 (cautioning that information on Proposed Form SHO reports
``will be private only so long as the Commission does not have its
systems breached, its personnel do not misappropriate the
information, the information is not unintentionally released, or
policies do not change retroactively''); SIFMA Letter, at 22 n.60
(citing cyber security, theft, and inadvertent data breach concerns
as chief among the risks of providing sensitive and confidential
information regarding short positions and short activity).
---------------------------------------------------------------------------
While no technology system or infrastructure is impervious to
cyberattack, the Commission employs an array of actions to safeguard
and protect the confidentiality and security of all information
reported to EDGAR, which will include data reported on Form SHO.\187\
The Commission has stated that it has ``engaged in a multi-year, multi-
phase effort to modernize the EDGAR system, including both internal and
public-facing components. Security and modernization enhancements were
deployed in June 2020, focusing on technology upgrades internal to the
system.'' \188\ Moreover, as discussed in Part I.A.4.f.ii below, the
Commission is adopting an approach to the confidential treatment of
information provided on Form SHO reports that all such information will
be deemed subject to a confidential treatment request under 17 CFR
200.83 (``Rule 83''). Accordingly, the Commission is adopting Rule 13f-
2(a)(3) as proposed.
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\187\ See Annual Report on SEC website Modernization Pursuant to
Section 3(d) of the 21st Century Integrated Digital Experience Act
(Dec. 2022), available at <a href="https://www.sec.gov/files/21st-century-idea-act-report-2022-12.pdf">https://www.sec.gov/files/21st-century-idea-act-report-2022-12.pdf</a>.
\188\ Id.
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b. Filing Form SHO Reports
i. Proposal
As described in the Proposing Release, Managers would use Proposed
Form SHO for reports to the Commission required by Proposed Rule 13f-2.
The Commission proposed that Managers would file a report on Proposed
Form SHO with the Commission within 14 calendar days after the end of
each calendar month with regard to each equity security in which the
Manager meets or exceeds a Reporting Threshold.\189\ The Commission
proposed that Managers would file the Form SHO with the Commission via
the Commission's EDGAR system in an eXtensible Markup Language
(``XML'') specific to Form SHO (``custom XML'' or ``Form SHO-specific
XML''),\190\ a structured machine-readable data language. The
Commission also proposed that Managers would either be able to file
Form SHO using a fillable web form the Commission would provide on
EDGAR to input Form SHO disclosures, or a Manager could use its own
software tool to file Form SHO to EDGAR directly in Form SHO-specific
XML.\191\ Reporting via EDGAR, as described in the Proposing Release,
would facilitate efficient access, organization, and evaluation of
reported information by the Commission.
---------------------------------------------------------------------------
\189\ Proposing Release, at 14956.
\190\ Id. at 14955.
\191\ See id. at 14955. The filing options described for
Proposed Form SHO are consistent with other EDGAR filings that are
filed in form-specific XML-based languages. See, e.g., Regulation of
NMS Stock Alternative Trading Systems, Exchange Act Release No.
83663 (July 18, 2018), 83 FR 38768 (Dec. 9, 2021) (requiring new
EDGAR Form ATS-N to be filed in an XML-based language specific to
that Form).
---------------------------------------------------------------------------
The Commission stated in the Proposing Release that requiring Form
SHO to be filed in custom XML format, since it is a structured,
machine-readable data language, would facilitate more thorough review
and analysis of the reported short sale disclosures by the Commission,
which would increase the efficiency and effectiveness with which the
Commission could identify manipulative short selling strategies.\192\
Furthermore, the Commission stated most Managers have experience filing
EDGAR forms that use similar EDGAR Form-specific XML-based data
languages, such as Form 13F and Form ATS-N.\193\
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\192\ See Proposing Release, at 14997 (``By requiring a
structured machine-readable data language and a centralized filing
location (EDGAR) for the disclosures on Proposed Form SHO, the
Commission would be able to access and download large volumes of
Proposed Form SHO disclosures in an efficient manner.'').
\193\ See, e.g., Proposing Release at 14960, 14999 (first citing
Form 13F, available at <a href="https://www.sec.gov/pdf/form13f.pdf">https://www.sec.gov/pdf/form13f.pdf</a>) (then
citing Regulation of NMS Stock Alternative Trading Systems, Exchange
Act Release No. 83663 (July 18, 2018), 83 FR 38768 (Aug. 7, 2018))
(requiring new EDGAR Form ATS-N to be filed in an XML-based language
specific to that Form); see also Money Market Fund Reforms,
Investment Company Act Release No. 34441 (Dec. 15, 2021), 87 FR 7248
(Feb. 8, 2022) (Form N-CR); Securities Offering Reform for Closed-
End Investment Companies, Exchange Act Release No. 88606 (Apr. 8,
2020), 85 FR 33290 (June 1, 2020) (Form 24F-2).
---------------------------------------------------------------------------
As proposed, if a Manager uses the web-fillable Proposed Form SHO
on EDGAR and encounters a technical error when filling out the form,
such Manager would be required to correct the identified technical
error before being permitted to file the Proposed Form SHO through
EDGAR. If a Manager uses its own software tool to file a Proposed Form
SHO filing to EDGAR directly in Proposed Form SHO-specific XML, and a
technical error is identified by EDGAR after the filing is sent, such
Manager would receive an error message that the filing has been
suspended, and would be required to correct the identified technical
error and re-file the Proposed Form SHO through EDGAR.\194\
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\194\ The Commission stated in the proposing release that the
XML schema (i.e., the set of technical rules associated with
Proposed Form SHO-specific XML) for Proposed Form SHO would
incorporate validations of each data field on Proposed Form SHO to
help ensure consistent formatting and completeness. For example,
letters instead of numbers in a field requiring only numbers, would
be flagged by EDGAR as a ``technical'' error that would require
correction by the reporting Manager in order to complete its
Proposed Form SHO filing. Field validations act as an automated form
completeness check when a Manager files Proposed Form SHO through
EDGAR; they do not verify the accuracy of the information filed in
Proposed Form SHO filings. Proposing Release, at 14960 n.72.
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[[Page 75118]]
As an alternative, the Commission also discussed whether Proposed
Form SHO should be required to be filed in Inline eXtensible Business
Reporting Language (``Inline XBRL'').\195\ The Commission stated that,
compared to the proposal, the Inline XBRL alternative, which is both
machine-readable and human-readable, would provide more sophisticated
validation, presentation, and reference features for filers and data
users.\196\ However, the Commission stated that given the fixed and
constrained nature of the disclosures to be reported on Proposed Form
SHO, the benefits of the Inline XBRL alternative would be muted, and
therefore Managers would not be able to take advantage of customization
and presentation features.\197\ Furthermore, the Commission stated in
the Proposing Release that the alternative Inline XBRL approach would
create greater initial implementation costs, such as licensing XBRL
filing preparation software, because many Managers may not have prior
experience structuring data in Inline XBRL.\198\
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\195\ See Proposing Release, at 15010-11.
\196\ See id.
\197\ See id.
\198\ See id.
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ii. Comments and Final Rule
The Commission received some comments about the use of Form SHO-
specific XML in filing Form SHO. In response to Q39 in the Proposing
Release,\199\ which asked whether the use of Form SHO-specific XML
would make the reported data more useful to users, one commenter stated
that data prepared in consistent, structured format would be
``significantly more functional and useful.'' \200\ Regarding the costs
and benefits of an Inline XBRL requirement as compared to Proposed Form
SHO-specific XML, this commenter supported using XBRL in a comma-
separated value (``CSV'') format, which is a text file that uses
delimiters such as commas to separate data fields.\201\ The commenter
stated that this would be the most appropriate standard ``for capturing
high volume, granular data in a compact format,'' and urged the
Commission to adopt XBRL rather than custom XML.\202\ The commenter
stated that XBRL-CSV has several advantages over the Commission's
proposed use of a custom XML format, such as reducing preparation costs
and processing costs, as well as improving validation.\203\ In
addition, the commenter disagreed with the Commission's view in the
Proposing Release that the benefits of the additional features of XBRL
would be muted if used for Form SHO due to the fixed and constrained
nature of the disclosures to be reported. The commenter stated that
several other agencies, such as the FDIC and FERC, have recently
adopted XBRL format over custom XML format. However, the commenter
acknowledges that initial implementation costs will be higher and
familiarization with the format will take longer for reporting
entities. Alternatively, another commenter supported the use of Form
SHO-specific XML, stating that ``XML is a widely used language and
therefore implementation and maintenance would keep costs low and
efficiency high,'' and thought it would allow for efficient review of
the reported data.\204\
---------------------------------------------------------------------------
\199\ Proposing Release, at 15012.
\200\ Comment Letter from Campbell Pryde, President and CEO,
XBRL US (Apr. 26, 2022), at 1 (``XBRL Letter''), available at
<a href="https://www.sec.gov/comments/s7-08-22/s70822-20126860-287597.pdf">https://www.sec.gov/comments/s7-08-22/s70822-20126860-287597.pdf</a>.
\201\ See id. at 2.
\202\ See id. at 2-5.
\203\ See id.
\204\ Comment from An Investor (Apr. 4, 2022), available at
<a href="https://www.sec.gov/comments/s7-08-22/s70822-20122297-278355.htm">https://www.sec.gov/comments/s7-08-22/s70822-20122297-278355.htm</a>.
---------------------------------------------------------------------------
The Commission is adopting the custom XML data reporting
requirement as proposed. As explained in the Proposing Release, the
filing options for Form SHO are consistent with other EDGAR filings
that are filed in Form-specific XML-based languages.\205\ The
Commission also continues to believe that because many Managers have
been using custom XML-based languages through other releases, they are
more familiar with this language than other languages, such as XBRL, so
the use of XML will promote efficiency in filing and review of Form SHO
reports. Familiarity with custom XML formats will reduce implementation
and ongoing compliance costs when compared to introducing XBRL-based
formats that may be unfamiliar to Managers. Managers' greater
familiarity with custom XML formats should also reduce the possibility
of data input errors when compared to XBRL formats. The above noted
commenter likewise stated that XBRL formats would entail higher initial
implementation costs and that familiarization with the XBRL formats
would take longer for reporting entities. The costs of using XBRL
formats in implementation and user retraining, along with the
inconsistencies relative to other filings that use Form-specific XML-
based languages, do not justify the potential data formatting benefits
of XBRL. Further, the commenter stated a preference for using XBRL
specifically in CSV format. In addition to the above concerns about
XBRL-based languages generally, the Commission believes that custom XML
format is more appropriate than an XBRL-CSV format for the purposes of
Form SHO because XML format is more human-readable than CSV format, and
XML is more flexible when using more complex data.
---------------------------------------------------------------------------
\205\ See, e.g., Regulation of NMS Stock Alternative Trading
Systems, Exchange Act Release No. 83663 (July 18, 2018), 83 FR 38768
(Dec. 9, 2021) (requiring EDGAR Form ATS-N to be filed in an XML-
based language specific to that Form).
---------------------------------------------------------------------------
Finally, the Commission's XML schema is designed to include
validations for each data field on Form SHO to help ensure consistent
formatting and completeness. The Commission continues to believe that
requiring Form SHO to be filed via Form-SHO specific XML, a structured
machine-readable data language, will facilitate more thorough review
and analysis of the reported short sale disclosures by the Commission,
increasing the efficiency and effectiveness of the Commission's
understanding of short selling and systemic risk. Additionally, most
Managers have experience filing EDGAR forms that use similar EDGAR
Form-specific XML-based data languages, such as Form 13F.\206\
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\206\ See Form 13F, available at <a href="https://www.sec.gov/pdf/form13f.pdf">https://www.sec.gov/pdf/form13f.pdf</a>.
---------------------------------------------------------------------------
c. Timing of Reporting by Managers and Publication by Commission
i. Proposal
Under Proposed Rule 13f-2(a), a Manager would have been required to
file the required information on Form SHO with the Commission within 14
calendar days after the end of each calendar month. Proposed Rule 13f-
2(a)(3) provides that certain information reported on Proposed Form SHO
would be published by the Commission on an aggregated basis. No time
frame for publication by the Commission was provided in Proposed Rule
13f-2. In the Proposing Release, however, the Commission estimated that
it would publish the aggregated information within one month after the
end of the calendar month.
ii. Comments and Final Rule
Comments on the frequency of reporting and publication varied. Some
commenters called for more frequent reporting by Managers and, by
implication, more frequent publishing by the Commission of information
from Form SHO reports. Several of these commenters suggested that
technology permits more frequent--i.e., daily, if not
[[Page 75119]]
monthly--reporting.\207\ Several of these comments also expressed
concern that the Commission's estimated month-long delay in publishing
the aggregated information would produce stale data that would
undermine the goal of greater transparency in the markets.\208\ The
Commission acknowledges that the technology exists for frequent
reporting of transactions and faster data processing. The Commission is
concerned, however, about the accuracy of the data reported by Managers
and the aggregated data published by the Commission pursuant to Rule
13f-2 reporting requirements. The Commission believes that the data
reported by Managers on Form SHO is more likely to be complete and
accurate if Managers are afforded sufficient time to gather, assemble,
and review the reported data.\209\ The Commission continues to believe
that 14 calendar days after the end of each month provides a reasonable
period of time for Managers to meet their Rule 13f-2 reporting
requirements. The Commission is also concerned that increasing the
frequency of Commission publication of aggregated data may increase the
risk of short squeezes or other manipulative activities that could
interfere with the price discovery function of equity markets. The
timeframes as proposed and as adopted balance such concerns with some
commenters' desire for faster transparency.
---------------------------------------------------------------------------
\207\ See, e.g., Comment from Regina Murrell (Mar. 25, 2023)
available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-20121170-273336.htm">https://www.sec.gov/comments/s7-08-22/s70822-20121170-273336.htm</a> (suggesting that technology be used to report short
positions daily); Anonymously Submitted Comment (Mar. 14, 2022)
(calling for reporting to regulators within twenty-four hours);
Anonymously Submitted Comment (Apr. 26, 2022) (calling for daily, if
not intraday, Form SHO reporting rather than monthly reporting, as
proposed); Anonymously Submitted Comment (Mar. 17, 2022) (stating
that technology permits more frequent reporting and release of short
sale-related data to the public in shorter timeframes); see also
Better Markets Letter, at 13 (predicting that the Commission's
``fairly significant delay'' in publishing the aggregated
information derived from Form SHO reports will lead to published
information that is ``less timely and less informative'').
\208\ See, e.g., Comment of Estaban Oliveras (Mar. 14, 2022)
available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-20119372-272258.htm">https://www.sec.gov/comments/s7-08-22/s70822-20119372-272258.htm</a> (commenting ``If data is neither accurate nor timely,
then what is the point of collecting data?'').
\209\ See Proposing Release, at 14956.
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Commenters taking the opposite view recommended that additional
time be given for Manager reporting and Commission publication. One
such commenter recommended that the Commission align the proposed
timelines for preparing and filing Form SHO reports with existing
filing requirements for other Commission reports and forms, to allow
for better coordination of the process of including short sale-related
data in multiple reporting frameworks.\210\ Another such commenter
suggested an initial filing period be extended to within 28 calendar
days upon crossing the threshold and then 14 calendar days for any
subsequent filing.\211\ Another commenter suggested that a minimum of
45 days before publication of aggregated data by the Commission was
necessary to protect Managers from the risk that their positions and
strategies would be used in a ``short squeeze or other market-driven
reaction'' or as part of a copycat strategy.\212\
---------------------------------------------------------------------------
\210\ ICI Letter, at 12 (stating that aligning Form SHO
reporting requirements with those of Form N-Port, for example, would
give Managers 30 days, rather than the proposed 14 days, after the
end of a calendar to file a Form SHO).
\211\ See Perkins Coie Letter, at 3 (stating a request to extend
the initial filing period to within 28 calendar days upon crossing
the threshold in order ``to reduce the monitoring and compliance
burdens for infrequent short position users'').
\212\ MFA Letter, at 18.
---------------------------------------------------------------------------
While adopting the proposed timeframes will delay the public
dissemination of aggregate short positions by about a month, the
Commission believes a longer delay such as 28 days for initial filings
or 45 days for all filings is unnecessary. FINRA's current short
interest reporting, for example, is published twice a month, resulting
in a delay of about two weeks.\213\ The final rule here requires
slightly more time than FINRA's current reporting regimes because
Managers need additional time following determination of whether they
meet a Reporting Threshold at the end of each calendar month to prepare
and file the data on Form SHO through EDGAR. Additionally, the
Commission believes that providing Managers with a reasonable period of
time to file complete and accurate short sale-related information in
the first instance will reduce the need for Managers to file amendments
to Form SHO. However, having an asymmetric filing deadline of 28 days
for initial filing and 14 days thereafter, as one commenter suggested,
would create negligible cost savings for Managers. Meanwhile, it may
have detrimental effects on the timing of data aggregation and
publication, which could unnecessarily affect the timing and quality of
aggregated published data.
---------------------------------------------------------------------------
\213\ See, e.g., FINRA, Short Interest Reporting, available at
<a href="https://www.finra.org/filing-reporting/regulatory-filing-systems/short-interest">https://www.finra.org/filing-reporting/regulatory-filing-systems/short-interest</a> (presenting ``due dates'' for reporting short
interest to FINRA and publication of short interest data by FINRA).
FINRA Rule 4560 requires FINRA member firms to report their short
positions in exchange-listed and over-the-counter equity securities
to FINRA twice each month. FINRA publishes the short interest
reports it collects from member firms for all such equity
securities.
---------------------------------------------------------------------------
Final Rule
After considering comments, the Commission is adopting Rule 13f-
2(a) as proposed, and continues to estimate that it will publish
aggregated data derived from Form SHO reports within one calendar month
after the end of the reporting calendar month.\214\ For example, for
data reported by Managers on Form SHO for the month of October, the
Commission expects to publish aggregated information derived from such
data no later than the last day of November. The Commission continues
to believe that 14 calendar days after the end of each calendar month
provides Managers with sufficient time for Managers that meet the
Reporting Threshold to prepare and file Form SHO data.
---------------------------------------------------------------------------
\214\ Publication of the aggregated information may be delayed
for an initial period following effectiveness of Rule 13f-2 and Form
SHO.
---------------------------------------------------------------------------
d. Contents of Form SHO
Form SHO, as proposed, consists of two parts: Cover Page and
Information Tables. As discussed more fully below:
<bullet> The Cover Page presents certain identifying information
about the Manager(s) filing the Form SHO report, the calendar month for
which the Manager is reporting, the type of Form SHO report being made,
and whether the Manager is filing the Form SHO report as an amendment;
\215\
---------------------------------------------------------------------------
\215\ See infra Part II.A.4.d.ii.
---------------------------------------------------------------------------
<bullet> Information Table 1 presents a Manager's monthly gross
short position in the equity security on which information is being
reported, as well as certain identifying information about that
security and about the issuer of that security; \216\ and
---------------------------------------------------------------------------
\216\ See infra Part II.A.4.d.iii.
---------------------------------------------------------------------------
<bullet> Information Table 2 presents daily activity affecting a
Manager's gross short position during a calendar month reporting
period, as well as certain identifying information about that security
and about the issuer of that security.\217\
---------------------------------------------------------------------------
\217\ See infra Part II.A.4.d.iv.
---------------------------------------------------------------------------
i. Financial Identifiers
(A) Proposal
The Commission proposed that a Manager provide the active LEI, if
any, of each Manager listed on the Cover Page. The Commission also
proposed that a Manager report on each of the Proposed Form SHO
Information Tables the FIGI and CUSIP number of each security on which
information is being reported, and the active LEI, if any, of
[[Page 75120]]
the issuer of those securities. These items are discussed in Special
Instructions 8.c, 8.e, and 8.f regarding Columns 3, 5, and 6 of
Information Table 1, and in Special Instructions 9.c, 9.e, and 9.f
regarding Columns 3, 5, and 6 of Information Table 2.
(B) Comments and Final Rule
The Commission received only a few comments regarding the proposed
requirement to report certain financial identifiers, including CUSIP
and FIGI (which identify specific securities), and LEI (which
identifies specific entities) on Form SHO.\218\ Two commenters stated
that the Commission should only require that CUSIP be reported on Form
SHO, and that the inclusion of additional financial identifiers could
cause confusion.\219\ Another commenter stated that the LEI and the
FIGI of issuers is ``not commonly provided'' in other holding reports
and would therefore cause Managers to incur additional costs.\220\
Another commenter, citing ``substantial CUSIP licensing costs,''
expressed concern that requiring the reporting of CUSIP could create an
``unnecessary financial burden'' on Managers.\221\ However, another
commenter stated that the inclusion of multiple financial identifiers
in addition to CUSIP, such as FIGI and LEI, could help foster
competition that ultimately reduces costs and improves data
quality.\222\
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\218\ FIGI and LEI each serve different functions. FIGIs
identify securities, whereas LEIs identify entities. Thus, a single
issuer's LEI could be associated with multiple FIGIs. Conversely,
multiple FIGIs could be associated with the same issuer's LEI.
Furthermore, identifying reporting Managers on Form SHO would
require an entity identifier (LEI) rather than a security identifier
(FIGI).
\219\ See, e.g., Comment Letter from CUSIP Global Services (Apr.
25, 2022), available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-20126577-287237.pdf">https://www.sec.gov/comments/s7-08-22/s70822-20126577-287237.pdf</a> (``CUSIP Letter''); Comment Letter from
American Bankers Association (Apr. 26, 2022), available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-20126641-287311.pdf">https://www.sec.gov/comments/s7-08-22/s70822-20126641-287311.pdf</a> (``ABA
Letter'').
\220\ Jennifer Han, Executive Vice President, Chief Counsel and
Head of Regulatory Affairs, Managed Funds Association (June 15,
2023), at 9, available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-206120-414822.pdf">https://www.sec.gov/comments/s7-08-22/s70822-206120-414822.pdf</a> (``MFA Letter 2'').
\221\ See Letter from Anonymous Fund Manager, at 9.
\222\ See Comment Letter from Gregory Babyak, Glob. Head Regul.
Affs., Bloomberg L.P., at 5 (May 2, 2022), available at <a href="https://www.sec.gov/comments/s7-08-22/s70822-20127745-288932.pdf">https://www.sec.gov/comments/s7-08-22/s70822-20127745-288932.pdf</a>.
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In DFA section 929X, Congress specifically directed the Commission
to include CUSIP in short sale disclosure rules.\223\ CUSIP is a
universally recognized identifier that has been used for a wide array
of financial instruments since 1964, allowing securities transactions
to be easily identified, cleared, and settled, including short sales.
Furthermore, market participants and investors are familiar with
CUSIPs, which are widely and publicly available and used to identify
most U.S. stocks.\224\ Many companies display their CUSIPs on their
websites, and brokers and dealers often provide investors with search
engines to look up stocks by CUSIPs.\225\ Accordingly, while the
Commission recognizes that there are licensing costs associated with
the CUSIP, the Commission is adopting, as proposed, the requirement
that Managers report in Column 5 of each of the Form SHO Information
Tables the CUSIP for the equity security for which information is
reported to help facilitate market participants' understanding of the
reported data.
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\223\ Public Law 111-203, sec. 929X, 124 Stat. 1376, 1870 (July
21, 2010).
\224\ See, e.g., Fast Answers: CUSIP Number, available at
<a href="https://www.sec.gov/answers/cusip">https://www.sec.gov/answers/cusip</a> (referencing CUSIP Global
Services).
\225\ See, e.g., Chad Langager, How to Locate the CUSIP Number
for a Stock, Investopedia (Apr. 6, 2022), available at <a href="https://www.investopedia.com/ask/answers/06/cusipforspecificstock.asp">https://www.investopedia
[…truncated; see source link]Indexed from Federal Register on November 1, 2023.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.