Applies Broadly to A Wide Range of Equities

Compliance Delayed One Year to Permit Fund Systems Updates

On October 13, 2023, the Securities and Exchange Commission adopted new Rule 13f-2 to require monthly reporting of short sale positions and activity data on new Form SHO by institutional investment managers. The new rules require monthly reporting on new Form SHO of activity related to a broad spectrum of “equity securities.” An investment manager must report on activity and positions where it has investment discretion, subject to thresholds described below. The SEC also amended the CAT NMS Plan to supplement the reporting requirements for covered firms.

What investment managers are covered by Rule 13f-2?

The “institutional investment managers” to which the new rules apply is the same group as are subject to Form 13F, without the additional element for purposes of Form 13F that the manager have $100 million or more under management. The term is defined under the Exchange Act to mean 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.

Because Rule 13f-2 and new Form SHO are not limited by the $100 million threshold that triggers Form 13F filing obligations, they will pick up many new investment managers that have not traditionally been required to report their short or long positions with the SEC, including many based outside of the U.S.

What securities are covered by Rule 13f-2?

The scope of “equity securities” to which the new rules apply is broad and generally tracks the applicability to Regulation SHO, covering securities as well as convertible instruments, ADRs and ETFs. By contrast, while Form 13F focuses on “equity securities,” the scope of reportable securities is limited to those on the “13F List,” which the SEC updates quarterly. The new rule also applies to both exchange-listed and other securities issued by public companies, as well as to equity securities issued by non-public companies, such as those that might be traded over-the-counter.  

What are the reporting thresholds under Rule 13f-2 and new Form SHO?

A covered investment manager will be required to report on Form SHO all short activity related to public company equity securities if the manager has a monthly average gross short position in such stock at the close of regular trading hours equal to or greater than $10 million, or, as a percentage of shares outstanding, equal to or greater than 2.5%. For private company equity securities, the threshold is a gross short position with a dollar value of $500,000 or more at the close of regular trading hours on any settlement date during the month. Economic short positions created through the use of swaps or other derivatives do not need to be included when calculating the reporting thresholds.

What information is required in Form SHO?

For each reported equity security, a covered investment manager will report all Form SHO information, including the following:

  • The investment manager’s end-of-month gross short position in the equity security at the close of regular trading hours on the last settlement date of the calendar month; and
  • For each individual settlement date during the month, the manager’s “net” activity in the reported equity security.

Will the information in Form SHO become public?

Form SHO will be filed with the SEC within 14 calendar days of each month end, but the information in individually-filed forms will not be available to the public, except perhaps pursuant to a FOIA request. However, the SEC will publish aggregated data for each equity security. The SEC expects that it will make public aggregated information derived from data reported on Form SHO within one month after the end of the reporting calendar month.  

The Amendment to the CAT NMS Plan

The SEC also amended the CAT NMS Plan to require CAT reporting firms (broker-dealers) to report for short sales whether they are relying on the bona fide market making exception in Rule 203(b)(2)(iii) of Regulation SHO.

What were the changes from the proposing release?

The SEC made several key changes to the final rules from what had been proposed in response to comments received. In particular, the SEC did not adopt proposed Rule 205 which would have required broker-dealers to mark purchase orders as “buy to cover” when purchasing to cover short positions, removed the proposed requirements for Form SHO to report positions as “fully hedged,” “partially hedged,” or “not hedged,” and did not adopt the proposed requirement for investment managers to separately notify the SEC when certain information required an amendment to their Form SHO.

Compliance Dates

The new rules relating to Form SHO and the amendment to the CAT NMS Plan will be effective 60 days after publication in the Federal Register, although the obligation to comply with new Rule 13f-2 and file the new Form SHO will be delayed for 12 months following the effective date. The SEC will begin to publish aggregated short sale data three months following the delayed compliance date. The amendment to the CAT NME Plan has a compliance date of 18 months following the effective date of the rules.

What Affected Firms Should Do Now

Although compliance is delayed for more than 12 months from the date of the SEC’s adoption release, firms should begin now to ensure that their systems are up-to-date to compile the required information within the required timeframes in a manner that minimizes the burden of reporting monthly and to monitor on a daily basis whether their “gross short position” exceeds the identified thresholds. Firms should also think about how the SEC’s publication of aggregated short sale data may impact their investment strategies in either a positive or negative manner, or may impact general market behavior. Please feel free to contact us for more information.

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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.

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 Elanit Snow Elanit Snow

Elanit Snow is a senior counsel in the Corporate Department and a member of the Finance Group.

Elanit represents financial institutions, hedge funds, private equity funds and multinational corporations on complex over-the-counter derivatives and other synthetic financing transactions and secondary market and distressed…

Elanit Snow is a senior counsel in the Corporate Department and a member of the Finance Group.

Elanit represents financial institutions, hedge funds, private equity funds and multinational corporations on complex over-the-counter derivatives and other synthetic financing transactions and secondary market and distressed debt trading. She represents clients in structuring and negotiating ISDA, MRA, GMRA, MSFTA, clearing, prime brokerage and other related documentation. Elanit advises clients on structuring bespoke transactions to gain synthetic leverage or to hedge exposure to key market risks. Elanit also advises clients on the legal, compliance and regulatory requirements of the Dodd-Frank Act applicable to derivatives transactions.

Elanit represents both buyers and sellers on a diverse range of transactions involving syndicated loans, bankruptcy claims and other distressed and illiquid assets.

Photo of Benjamin Catalano Benjamin Catalano

Benjamin J. Catalano is a securities regulatory and enforcement lawyer and co-head of the Broker Dealer Practice.

Ben has extensive experience advising financial services companies on compliance with all aspects of federal and state securities laws and self-regulatory organization (SRO) rules. He represents…

Benjamin J. Catalano is a securities regulatory and enforcement lawyer and co-head of the Broker Dealer Practice.

Ben has extensive experience advising financial services companies on compliance with all aspects of federal and state securities laws and self-regulatory organization (SRO) rules. He represents clients in securities litigation and enforcement matters. He also conducts internal investigations and reviews for financial services companies and other corporate clients on a broad range of subjects pertaining to their businesses.

He has represented major U.S. and international financial institutions, including J.P. Morgan Chase & Co.; Nomura Securities International Inc.; Instinet LLC; The Bank of New York Mellon Corp.; Pershing LLC; Neuberger Berman; Goldman Sachs; Credit Suise; Société Générale S.A.; Needham & Company, LLC; Cowen & Co. LLC; BNP Paribas Securities Corp.; Calyon Securities (USA) Inc.; HSH Nordbank Securities; Westpac Securities; Banco Espirito Santo de Investimento, S.A.; Banca IMI; Banque Privée Edmund de Rothschild; Apollo Investment Management, LLC; Ares Capital Corp.; Bain Capital; Toronto Stock Exchange; Montreal Stock Exchange; Tokyo Stock Exchange; Cürex Group Holdings, LLC; The Depository Trust and Clearing Corporation; The Depository Trust Company; and National Securities Clearing Corporation.

Securities Law Compliance

Ben advises U.S. and international banks, broker-dealers, investment advisers, exchanges, clearing agencies and other financial intermediaries on compliance with federal securities laws, state blue sky laws, New York Stock Exchange (NYSE), Financial Industry Regulatory Authority (FINRA) and other SRO rules.

He counsels clients and assists them in developing comprehensive compliance and supervisory programs in areas such: as advertising and correspondence; anti-money laundering; cross-border trading under Rule 15a-6; financial reporting; insider trading/information barrier procedures; licensing and registration; net capital, custody, and clearance and settlement, including introducing and clearing broker arrangements; market access; recordkeeping; Regulation M and IPO trading restrictions; Regulation NMS and related market structure issues; research restrictions, disclosures and Regulations AC; soft-dollar and commission sharing arrangements; swaps regulation and compliance.

Securities Litigation and Enforcement

Ben represents clients in securities related litigation, enforcement proceedings and investigations.

Ben has represented financial services companies and individuals in numerous enforcement proceedings before the SEC, NYSE Regulation, FINRA and other SROs in various matters including trading and sales practices, insider trading and market manipulation, trade reporting, research analyst conflicts, net capital compliance, supervision and recordkeeping.

He has represented clients in litigations and arbitrations involving suitability, sales practices, unauthorized trading, fraudulent transfers and derivatives transactions. Ben succeeded in obtaining summary judgment in favor of a broker-dealer that inadvertently transferred stolen stock certificates. In a case of first impression under Article 8 of the Uniform Commercial Code, Decker v. Yorkton Securities, Inc., Court of Appeals of the State of California, 1st Appellate District, the Court held that in order to hold a broker liable to a third party with an adverse claim to securities transferred by the broker, the plaintiff must show that the broker had subjective knowledge of a significant probability of the adverse claim.

Ben also counsels clients in SEC and SRO examinations and reviews.

Internal Investigation and Reviews

Ben frequently is called on to conduct internal investigations, examinations and reviews of business practices, employee conduct, supervisory systems and operations of financial services companies and other corporations.

He has served as or acted on behalf of the SEC or SRO mandated independent consultant or third party examiner in a number of securities industry enforcement matters. He also has conducted numerous investigations, examinations and reviews to assess compliance with regulatory requirements in various areas for broker-dealers, investment advisers, securities exchanges and other financial service providers.

Examples of some of the client matters he has handled include the following:

  • Examination of OTC trading and sales practices by a major broker-dealer in response to an SEC administrative proceeding, NYSE hearing panel decision and NASD Acceptance Waiver and Consent (AWC) mandating retention of an independent consultant
  • Examination of Trade Allocation Policies and Procedures by a major broker-dealer in response to an NYSE hearing panel decision mandating retention of an outside consultant
  • Evaluation of remediation methodology and payments in connection with mutual fund sales subject to NAV transfer programs in response to NASD AWC mandating retention of a Third Party Examiner
  • Examination of trade execution and related functions of designated dealers on a major securities exchange
  • Investigation of possible insider trading by an employee of a broker-dealer
  • Investigation of trading in compliance with NYSE Rule 92 by an NYSE member firm
  • Investigation of possible interpositioning by equity traders of a broker-dealer
  • Review of business practices relating to the sale of auction rate securities by a broker-dealer
  • Review of research distribution and trading practices in compliance with Rule 15a-6 by a major international bank and its U.S. broker-deal affiliate
  • Review of anti-money laundering policies and procedures by a major financial services company and its broker-dealer subsidiaries
  • Review of compliance with Regulation NMS by a major broker-dealer
  • Review of business practices of a primary research facilitator in compliance with federal and industry standards for prevention of the misuse of material non-public information
  • Review and implementation of swap dealer business conduct requirements

Prior to the practice of law, Ben was the chief compliance officer for the Capital Markets Division of PaineWebber Incorporated (now UBS Financial Services, Inc.). He began his career in the legal and compliance division of Drexel Burnham Lambert Incorporated.

Selected Articles and Presentations

“Someone Should Have Done Something! A Critical Examination of Liability for Failure to Supervise under Federal Securities Laws,” The Business Lawyer, Vol. 78, Winter 2022-2023.

“The Promise of Unfavorable Research: Ramifications of Regulations Separating Research and Investment Banking for IPO Issuers and Investors,” The Business Lawyer, Vol. 72, Winter 2016-2017.

“Analysis of the SEC’s MiFID II No-Action Relief,” The National Law Review, January 2018.

“Investment Advisers Act Implications for Client Commission (Soft Dollar) Arrangements – Part I,” February 2014, available at https://www.proskauer.com/video/investment-advisers-act-implications-for-soft-dollar-arrangements-part-1

“Investment Advisers Act Implications for Client Commission (Soft Dollar) Arrangements – Part II,” February 2014, available at https://www.proskauer.com/video/investment-advisers-act-implications-for-soft-dollar-arrangements-part-2

“A Look at Regulations for Non-U.S. Investment Advisers and Portfolio Managers Doing Business in the United States,” The Metropolitan Corporate Counsel, May 2012.

“Regulation of Non-U.S. Broker-Dealers Doing Business in the U.S. – Part I,” The Metropolitan Corporate Counsel, April 2008.

“Regulation of Non-U.S. Broker-Dealers Doing Business in the U.S. – Part II,” The Metropolitan Corporate Counsel, May 2008.

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.