On Oct. 15, 2008, the Securities and Exchange Commission (the “SEC” or the “Commission”) issued a release (the “Release”) adopting an interim final temporary rule (the “Temporary Rule”) regarding the reporting of short sales and short positions on Form SH. The Temporary Rule extends the weekly reporting requirements of Form SH until Aug. 1, 2009, and will apply to all institutional managers required to file a Form 13F for the calendar quarter. In the Release, the SEC seeks comments with respect to many aspects of the short sale reporting and, more generally, with respect to the utility of such reporting.

The Commission explains the justification for the Temporary Rule by reiterating its concern about market disruptions and specifically refers to “possible unnecessary or artificial price movements that may be based on unfounded rumors and may be exacerbated by short selling.” According to the SEC, the Form SH reporting “will provide useful information to the staff to analyze the effects of our rulemakings relating to short sales and in evaluating whether our current rules are working as intended.” In addition, the Commission notes that regulators in other jurisdictions, specifically the UK Financial Services Authority and the Netherlands Authority for the Financial Markets (which oversees the Euronext Amsterdam stock exchange), require daily disclosure to regulators of short positions greater than 0.25% of the stock of listed companies. The statutory authority cited by the Commission in promulgating the Temporary Rule is its rulemaking authority under Sections 3(b), 10 and 23(a) of the Securities Exchange Act of 1934 (“Exchange Act”).

The Temporary Rule continues the reporting requirements for Form SH set forth in the Commission’s emergency rulemaking of Sept. 18, 2008 (the “Emergency Order”), with the following notable clarifications and modifications:

  • Confidentiality of the Form SH Filings

In the Release, the SEC reiterated its concern that public disclosure of Form SH data could lead to “imitative short selling.” The SEC reaffirmed that it will treat the Form SH Filings as non-public “to the extent permitted by law” and asserted that it has the authority to withhold the information on Form SH from disclosure to the public under two exemptions from the Freedom of Information Act—one for confidential trade secrets and commercial or financial information and the other for information contained in regulatory reports used by the agency for the supervision of financial institutions. In light of this, the SEC indicated that form SH filers “should not submit a confidential treatment request to the Commission” and should instead label their filings as “NONPUBLIC” in accordance with the Instructions to the Form. 

  • Filing to be Made on the Last Business Day of a Calendar Week

Beginning on Oct. 18, 2008, the Form SH weekly filing deadline will be the last business day of the calendar week following the week in which the short sales were effected. Accordingly, Forms SH for the weekly period ended Oct. 18, 2008, will not be filed on Monday Oct. 20, but instead will be filed on Friday, Oct. 24.

  • New Formatting Requirement

The Temporary Rule requires that—beginning with the Form SH filing due on November 7, 2008—the following data elements in the Form SH must be submitted in an XML tagged data file: the date; the Central Index Key (CIK) of the filer; the name of the issuer; the CUSIP of the issuer; the short position at the start of the day; the number of securities sold short on that day; and the short position at the end of the day. The purpose of the XML tagging is to allow the Commission staff to more easily analyze the data. 

  • Fewer Categories of Data Required

Form SH will no longer require reporting of the value of securities sold short (currently column 5 of the form), the largest intraday short position (currently column 7 of the form) or the time of the largest intraday short position (currently column 8 of the form). The Commission noted that intraday position information was difficult for many filers to obtain, and therefore eliminated these requirements. The start-of-day short position, number of shares shorted that day, and the end-of-day short position still must be reported. 

  • Options Exercise Reportable

Although reporting of options is not required, short sales executed in connection with the exercise of options are subject to the Form SH reporting requirements. In the Release, the SEC specifies that short sales effected as a result of the exercise of put options or the assignment of call options must be reported. 

  • Pre-Existing Short Positions Reportable

The Commission has reversed course with respect to the reportability of short positions that existed before Sept. 22, 2008, prior to the imposition of reporting under the first Emergency Order. The Commission had specifically excluded such pre-existing short positions from Form SH reporting under the Emergency Order, which led to firms keeping track of such short positions separately from any short positions put on after the Emergency Order began. To avoid confusion, and to make the short selling reflected in the filings easier to follow, the SEC in the Temporary Rule now requires that all such pre-existing short positions be included in the reporting. There will be an optional two-week phase-in period for any filers wishing to continue excluding the pre-Sept. 22 short positions, but starting with the Nov. 7 filing, all reports must reflect the pre-existing positions. 

  • Fair Market Value under De Minimis Exception Increased

The de minimis reporting threshold with regard to fair market value has been increased from $1 million to $10 million with the second prong of the exception, i.e., 0.25% of the issuer’s issued and outstanding Section 13(f) securities, remaining intact. It is important to note, however, that any filer relying on the two-week phase-in for reporting of pre-Sept. 22 short positions must continue to use the $1 million threshold until expiration of the phase-in period. 

  • De Minimis Reporting Provisions

The Temporary Rule specifies that a Form SH must be filed for any week in which the de minimis reporting threshold is crossed with respect to any one of the following three data elements: start-of-day short position, number of shares shorted that day, or end-of-day short position. Thus, if a short position above the de minimis threshold was reported at the end of one week, then any short sale— no matter how small—in any subsequent week would trigger the Form SH filing requirement for that week (unless the existing short position was covered.) The Temporary Rule also specifies that if any one data element on any day is below the de minimis threshold, then “N/A” is the appropriate entry for that element.

  • Clarification regarding “Riskless Principal” Transactions

The Release clarifies that broker-dealers that effect short sales in the course of handling a customer order on a “riskless principal” basis do not need to report the short sales on Form SH. For instance, where a broker-dealer receives an order to buy a Section 13(f) security from a customer and the broker-dealer then seeks to execute that order, in whole or in part, by purchasing the security as riskless principal and then selling the security to the customer and the broker-dealer has an overall net short position in that security, that short sale is not reportable.

  • The Commission’s Requests for Comments

In the Release, the SEC seeks comments with respect to a broad range of questions about Form SH reporting. Comments are due to the Commission on or before 60 days after publication of the Temporary Rule in the Federal Register. Among the questions specifically raised by the Commission in the Release are:

    • Whether the information required by Form SH should be publicly reported, or made public after some period of delay. 
    • Whether the Commission should require short sellers to keep detailed books and records akin to requirements imposed upon broker dealers pursuant to rule 17a-3(a)(6) under the Exchange Act. Rule 17a-3(a)(6) requires broker dealers to keep a memorandum of each brokerage order, and of any other instruction, given or received for the purchase or sale of securities, whether executed or unexecuted. 
    • Whether the Commission should require public filings when short positions cross certain thresholds, requirements that may be similar to those currently found under Sections 13(d) and (g) of the Exchange Act and, if so, what reporting thresholds would be appropriate. 
    • Whether the Temporary Rule should be amended to require disclosure of any synthetic arrangements that function as short sales and to identify the parties to such transactions, which is rooted in a concern that managers will use synthetic short positions to ensure that they do not have a filing obligation. 
    • Whether the Commission should include a “hedging” exemption from the reporting requirements, how such a “hedging” exemption should be defined, and whether or not a “hedging exemption” would subsume the purpose of the rule.