SEC Rule 13f-2: A New Era of Transparency in Short Selling Disclosure

The Securities and Exchange Commission (SEC) is ushering in a new era of transparency with the introduction of Rule 13f-2, a significant amendment to the Securities Exchange Act of 1934. Effective from 2nd January, 2025, this rule is set to enhance the visibility of short selling activities by requiring institutional investment managers to report detailed short position data.

This new regulation is poised to have a profound impact on the financial industry, particularly for those involved in equity securities.

On 13th October, 2023, the SEC adopted Rule 13f-2, which mandates that Institutional Investment Managers (IIMs) who meet or exceed specific reporting thresholds must file Form SHO. This form requires the disclosure of short position data and short activity data for equity securities within 14 calendar days after the end of each calendar month. The SEC will then aggregate this data and make it publicly available, providing greater transparency into the short selling activities of large market players.

Rule 13f-2 applies to Institutional Investment Managers as defined under Section 13(f)(6)(A) of the Exchange Act. This includes any entity, other than a natural person, that invests in or buys and sells securities for its own account, or exercises investment discretion over another person’s account. This broad definition captures a wide range of market participants, including brokers, dealers, investment advisors, banks, insurance companies, pension funds, and corporations.

Interestingly, the rule does not require IIMs to operate primarily within the United States or to have a minimum advisory business size. Nearly any domestic entity, apart from individuals investing personally, must assess whether they meet the thresholds outlined in Rule 13f-2 to determine if a monthly Form SHO filing is necessary.

The rule defines equity securities broadly, including exchange-listed and over-the-counter stocks, warrants, convertible debts, ADRs, and ETF positions. While listed options, swaps, and certain derivatives generally fall outside the reporting requirements, the SEC acknowledges that some may be classified as “equity securities” and thus subject to disclosure.

Importantly, while derivatives short positions do not count toward the reporting threshold, they must still be reported under Form SHO’s daily activity details.

There are two key exclusions in calculating the thresholds for reporting:

• Short positions established through derivatives: These are not counted towards the thresholds.
• Short positions in ETFs: Securities held by the ETF do not need to be included when calculating whether the threshold has been met.

The reporting thresholds under Rule 13f-2 vary depending on whether the short position is in an equity security of a Reporting Company issuer or a Non-Reporting Company issuer:

1. Reporting Company Issuers:
   – A monthly average gross short position valued at $10 million or more at the close of any settlement date during the month.
   – A monthly average gross short position constituting at least 2.5% of the shares outstanding.
2. Non-Reporting Company Issuers:
   – A disclosure is required for each gross short position valued at $500,000 or more at the close of any settlement date during the calendar month.

Form SHO must be filed in XML format to ensure standardised reporting and validation of data. The form consists of a cover page with basic information and two detailed information tables:

1. Information Table 1: Reporting month, issuer details (name, LEI), equity security class, CUSIP, and FIGI (if applicable), along with gross short positions and their US dollar value.
2. Information Table 2: Daily trading activity that affects a manager’s reported gross short position for each settlement date during the calendar month.

IIMs must file Form SHO within 14 calendar days after the end of each calendar month. Any errors identified post-submission must be amended within 10 calendar days of discovery. The SEC will publish aggregated data from Form SHO reports within one calendar month after the end of the reporting period.

Compliance with Rule 13f-2 presents several challenges:

• Investment Discretionary Level: Aggregating positions across accounts, including those managed by subsidiaries, adds complexity.
• Global Position Reporting: Unlike other global reporting requirements, monitoring under Rule 13f-2 must be based on settlement date positions, requiring synchronisation across different systems.
• Daily Threshold Monitoring, Monthly Reporting: This contrast with quarterly 13F reporting adds another layer of complexity.
• XML Reporting: Ensuring accurate and timely XML reporting is critical for compliance.

At Funds-Axis, we understand the complexities of complying with new regulatory requirements like Rule 13f-2. Our automated shareholder disclosure monitoring software provides a comprehensive solution for global compliance, covering over 80 countries on a single platform. We offer:

• Advanced Data Aggregation: Our system sources data from various platforms and formats, ensuring seamless aggregation.
• Threshold Monitoring: Our rules engine automatically identifies triggers based on reporting thresholds, streamlining the monitoring process.
• Real-time Market Data Integration: We maintain connections with multiple reference data providers, ensuring access to accurate and timely market information.
• XML Reporting: Our technology converts short positions into XML format, facilitating compliance and operational efficiency.

If you are an Institutional Investment Manager navigating the complexities of Rule 13f-2, Funds-Axis is here to help. Contact us today to learn how our automated solutions can support your compliance efforts and streamline your regulatory reporting processes.