The SEC recently proposed to require investment managers to report short sale information on a monthly basis if such activity exceeds certain thresholds (described below), and to require broker dealers to begin to mark “buy to cover” trades under Regulation SHO in addition to marking trading activity as “long,” “short,” and “short exempt.”  The definition of “investment manager” in the proposed rules would be the same as that applied for purposes of reporting on Form 13F.[1]  The proposed rules would not impact hedging positions that do not meet the current definition of “short sales.”  These proposals follow other recent proposals by the SEC to expand beneficial ownership reporting under Section 13(d) of the Exchange Act by non-passive investors to include cash-settled derivatives and to require reporting of large security-based swap positions. 

The SEC stated that the short sale reporting proposal seeks to balance its goal to enhance regulatory surveillance and market transparency of short selling activity in light of the trading activity involving GameStop equity and other perceived market disruptions with the hope that additional transparency will discourage rather than facilitate manipulative market practices or “copy-cat” trading. 

Under the proposal, investment managers that have investment discretion over accounts that exceed certain thresholds on short sale activity would have to comply with proposed Rule 13f-2 and new Form SHO to report short sale activity on a monthly basis in a form submitted confidentially to the SEC.  The thresholds that trigger a monthly filing are as follows:   

  • For any “equity security” of an issuer registered pursuant to Section 12 of the Exchange Act or for which the issuer is under a reporting obligation under section 15(d) of the Exchange Act, where the investment manager’s short sale activity meets or exceeds either (1) a gross short position in the equity security with a U.S. dollar value of $10 million at the close of any settlement date or (2) a monthly average gross short position as a percentage of shares outstanding in the equity security of 2.5 percent or more; or
  • For any “equity security” of any other issuer where the investment manager’s gross short sale position meets or exceeds a gross short position with a US dollar value of $500,000 or more at the close of any settlement date.

“Equity security” includes securities convertible into equity securities but would not include short positions established through derivatives, and “gross short position” is calculated without regard to any offsetting long position. 

The information reported would include whether the position is fully hedged, partially hedged, or unhedged, as well as daily activity as of each settlement date during the month.  Reporting would be required within 14 days after month-end for any month in which a threshold had been exceeded. Significantly, while the filings made by investment managers would not be publicly available, the proposed rules would make aggregated information about short positions publicly available by the end of the month following the reported month.  The proposed rules would make the following information publicly available:

  • The issuer’s name and other identifying information related to the issuer;
  • The aggregated gross short position and corresponding dollar value across all reporting investment managers in the security at the close of the last settlement date of the relevant calendar month;
  • The percentage of the reported aggregate gross short position that is reported as being fully hedged, partially hedged, or not hedged; and
  • For each reported settlement date during the calendar month reporting period, the “net” activity aggregated across all reporting investment managers.

While information that is specific to any particular investment manager would not be publicly disclosed, it would be subject to a FOIA request. 

The SEC further proposed to amend Regulation SHO to add Rule 205 to require broker dealers to mark trades as “buy to cover” a short position in addition to the current order marking requirements.  The SEC also proposed amendments to the consolidated audit trail plan created pursuant to the requirements of Rule 613 of the Exchange Act to provide additional data on purchases to cover short sales as well as assertion of Regulation SHO’s bona fide market making exceptions.

We expect that many industry participants will be submitting comments to the SEC on these proposals, subject to a short comment period of 30 days following publication in the federal register or April 26.  The SEC appears to be on a fast track, and new rules could be expected as soon as the end of the year. 

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[1] 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.  The SEC explains that the term “institutional investment manager” typically can include investment advisers, banks, insurance companies, broker-dealers, pension funds and corporations.

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Photo of Louis Rambo Louis Rambo

Louis Rambo is a partner in the Corporate Department and a member of the Capital Markets Group. He focuses his practice on counseling public companies and their boards of directors on corporate governance, capital markets transactions, mergers and acquisitions, securities regulation, disclosure and…

Louis Rambo is a partner in the Corporate Department and a member of the Capital Markets Group. He focuses his practice on counseling public companies and their boards of directors on corporate governance, capital markets transactions, mergers and acquisitions, securities regulation, disclosure and shareholder activism. Prior to joining the Firm, Louis served as an attorney in the Division of Corporation Finance with the Securities and Exchange Commission.

Photo of Christopher Wells Christopher Wells

Chris Wells heads Proskauer’s Hedge Funds Group and has been a leading lawyer in the hedge fund industry for more than 30 years. During that time, he has assisted on hundreds of hedge fund launches, counselling and assisting hedge fund managers as they…

Chris Wells heads Proskauer’s Hedge Funds Group and has been a leading lawyer in the hedge fund industry for more than 30 years. During that time, he has assisted on hundreds of hedge fund launches, counselling and assisting hedge fund managers as they grew from often very modest beginnings to become some of the world’s largest and best known hedge funds.

He advises fund managers and investors on all aspects of the hedge fund business, including fund structuring and formation, seed investments, asset manager M&A transactions, agreements among principals, employment and compensation issues, and regulatory and enforcement matters.

Chris’s long and deep experience in the hedge fund industry gives him a unique ability to counsel clients dealing with some of the most challenging situations that fund managers can encounter, including complex fund restructurings, evolving hedge fund investment terms, hybrid and alternative fund structures, liquidity challenges and constraints, internal disputes, and complex enforcement matters.

Photo of Frank Zarb Frank Zarb

Frank Zarb is a partner in our Corporate Department and a member of the Capital Markets Group, where he concentrates his practice on equity finance and a wide range of regulatory matters under U.S. federal securities laws.

He counsels public and private companies…

Frank Zarb is a partner in our Corporate Department and a member of the Capital Markets Group, where he concentrates his practice on equity finance and a wide range of regulatory matters under U.S. federal securities laws.

He counsels public and private companies, hedge funds and family offices, and market intermediaries and other financial institutions on a wide range of transactional and securities regulatory compliance matters including:

  • Equity investments and dispositions in public and private companies
  • Public company registration, disclosures and preparation of periodic reports
  • Tender offers, equity lines, proxy contests, SPACs, and other highly regulated transactions
  • Regulation M, Regulation SHO, Forms 13F and 13H, insider trading and other trading issues
  • Corporate governance and stock exchange listing standards
  • Federal and state proxy requirements as well as shareholder proposals and communications
  • Regulation of financial intermediaries, including trading of public and private equity, and complex and novel trading structures
  • Advocating with the SEC on behalf of a market intermediary related to back-office processing matters.

Frank’s practice is both domestic and international, beginning with his experience in senior positions with the Securities and Exchange Commission. As a member of the staff of the SEC’s Office of International Corporate Finance, Frank advised U.S. companies seeking to do business in the EU, Asia and the Middle East, as well as companies from those regions doing business in the U.S., or otherwise seeking to comply with the U.S. securities laws.  In the Office of Chief Counsel, he focused on federal proxy rules, and supervised a team of staff members that provided guidance in the course of proxy season.

Prior to joining the Firm, Frank was deputy general counsel/chief securities counsel for Bristol Myers Squibb Co. in a new position required by the SEC. Prior to joining Bristol-Myers, Frank was a corporate partner with Morgan, Lewis & Brockius.

Social Responsibility

Frank is a Trustee of the Gerald R. Ford Presidential Foundation, and he provides significant pro bono assistance to non-profit social service institutions in the Washington, D.C. area.