On Sept. 18, 2008, the Securities and Exchange Commission (“SEC” or “the Commission”) issued an Emergency Order prohibiting short sales of the publicly traded securities of identified financial firms and requiring that hedge funds and other market participants, who filed a Schedule 13F for the second quarter 2008, report their short sales during the week of Sept. 22 through Sept. 26 of all publicly held Section 13(f) securities by filing new Form SH with the SEC no later than 5:30 pm on Monday, Sept. 29, 2008. See “SEC Bans Short Selling and Imposes New Disclosures” (SRZ Alert, Sept. 19). The Emergency Order contained a de minimis exclusion from the filing requirement for short positions established on or after Sept. 22 that constitute less than 0.25% of the issued and outstanding class of that Section 13(f) security and that have a fair market value less than $1 million.

The SEC issued an Amended Order on Sept. 21 which, in addition to clarifying and modifying the short sale ban, made the following changes relative to the filing of Form SH: (a) the Form SH, which is required to be filed through EDGAR, will no longer be immediately available to the public through the EDGAR database but instead will be non-public for two weeks, after which the SEC will make the Forms available to the public via the EDGAR database; (b) the Form SH must be labeled as “NON-PUBLIC” in bold and capital letters at the top and bottom of each page of the Form; (c) after the lapse of the above-mentioned two-week period, the SEC’s confidential treatment request procedures shall not apply with respect to information filed via Form SH; (d) the Form no longer mentions or requires disclosure of any transactions entered into to close all or part of any short position; however, the diminution in a short position due to covering transactions may be reflected in start of day and end of day short position disclosures; and (e) Form SH filings must be submitted in ASCII or HTML format.

On Sept. 24, the SEC issued guidance in the form of 18 questions and answers (“Q&As”) regarding key Form SH interpretive issues. In addition, the SEC staff has provided informal guidance on certain issues. For your reference, the following is a link to the Q&As: http://www.sec.gov/divisions/marketreg/shortsaledisclosurefaq.htm.  

Here are the critical interpretive points:

  • Extension of Order. The SEC warns that if it extends the Emergency Order, then managers will need to file a Form SH on Oct. 6 for short sales during the week of Sept. 28 through Oct. 4 and make additional filings for subsequent weeks; thus, managers are on notice to continue keeping track of reportable short sales, largest intra-day positions and other information during that week. (See Answer to Question 4.)
  • Options. The writing, purchase or sale of options that are on the Official List of Section 13(f) securities does not need to be reported; however, a short sale of a Section 13(f) security that results from the exercise or assignment of an option is reportable as of the date of the exercise or assignment. (See Answers to Questions 5 and 7.)
  • Calculation of De Minimis Exclusion. For purposes of the threshold, the short position in the Section 13(f) security at the end of Day 1 is added to the short position in that security at the end of Day 2 and so on, and the reporting requirement is triggered if the cumulative short position at the end of any day in the progression exceeds either prong of the de minimis threshold. (See Answer to Question 10.) Once the filing requirement is triggered, the de minimis exclusion is applied to the amount of a particular Section 13(f) security that was sold short on a day-by-day and column-bycolumn basis. If the amount of a particular Section 13(f) security that was sold short on a particular day is below both prongs of the de minimis threshold, then that day’s sale are not reportable in column 4 of the Form SH and “N/A” is entered instead. However, if the cumulative short position on that day (taking into account previous day’s short sales) exceeds either prong of the de minimis exclusion, then the cumulative position is reportable under columns 6 and 7 of the form. If there has been no short sale activity on a particular day after the filing of the Form SH has been triggered, then columns 4 and 5 should be populated with zeroes. (See Answer to Question 12.)
  • Obligation to Collect and Report Trading Data. The SEC has clarified that for purposes of completing column 8 of the Form SH, which requires disclosure of the time of day of the “largest intra-day short position,” the time at which the last short sale order that comprises the largest intraday position was filled should be used. (See Answer to Question 14.) While the SEC has provided procedures (described below) through which filers can document their inability to obtain certain information required to complete the Form, there is a strong presumption that filers either have the required trade data in their possession (e.g., time of order fill may be ascertained from trade confirmations) or can obtain the required data from their brokers.
  • Procedures for Trade/Position Data Not Reasonably Available. If any information required by Form SH is not reasonably available to the filer—either because obtaining the information would involve unreasonable effort and expense or because the information is “peculiarly within the knowledge of another person not affiliated with [the filer]”—the information may be omitted subject to the following conditions (1) the filer shall give whatever information it possesses or can retrieve without unreasonable effort and expense, as well as the sources of such information; and (2) the filer shall include a statement with the Form SH either showing that unreasonable effort or expense would be involved or indicating that the filer has no affiliation with the person within whose knowledge the information rests and stating the result of a request made to that person for the information. In the case of information omitted from column 8, the filer may simply include on the Summary Page of Form SH, a statement that the time of day of the largest intraday short position has been omitted because it is unknown and not reasonably available (“U-NRA”). In column 8, for each applicable security, the filer would then insert the notation “U-NRA”. (See Answer to Question 14.) It should be noted that the cover page to the Form SH contains a certification to be signed by the Reporting Manager confirming that “all information contained herein is true, correct and complete….” Any institutional investment manager who intends to omit information from a Form SH and state that it is not reasonably available should be prepared to provide an explanation to the SEC if asked and would, of course, be potentially subject to penalties for any false representation on the Form regarding the inability to obtain required trade data.
  • Valuation. For purposes of column 5 of Form SH (“Value of Securities Sold Short (Day)”), filers cannot use execution prices but instead must use the market price of the section 13(f) security on its primary or listing market as of the close of NYSE floor trading for the day in question (no matter what U.S. market the securities were traded on). If the securities are sold short on a non-business day, the filer must use the market price as of the close of NYSE trading for the most recent business day. (See Answer to Question 15.)