Why the SEC Disclosure Rule Matters: How New US Short-Selling Regulations Will Challenge Investment Compliance

How will the SEC’s New Rule impact investment compliance?

Will the SEC’s new Rule 13f-2 put an end to the movie industry's dreams of a sequel to “The Big Short”? While that remains uncertain, one thing is clear: the Rule will significantly enhance transparency around equity short positions. What remains murky is just how firms will manage the increased manpower and complexity these Reporting changes demand. This Rule mirrors Rule 13f-1 for long positions and serves as a counterpoint to the EU’s Short Selling regulations.

More reporting more frequently

The onus on firms will test their operational capabilities to onboard the new regulations into their compliance program efficiently. Under Rule 13f-2, institutional investment managers, including investment advisers and entities managing their own portfolios, must file a new Form SHO for investment compliance reporting monthly if their gross short positions exceed specific thresholds. To comply with the new regulation in January 2025, Form SHO will require analysis of end-of-month data and daily changes in short positions. Although individual filings won't be public, the SEC will aggregate and publish the data within 30 days after the month's end. 

The first analysis for Rule 13f-2 starts just around the corner on January 2, with the first Form SHO due by February 14, 2025.

Thresholds for Reporting: 

• Threshold A for Reporting Issuers: If the average gross short position exceeds $10 million or 2.5% of the issuer's outstanding shares over the month.
• Threshold B for Nonreporting Issuers: If the gross short position exceeds $500,000 on any settlement day.
• Form SHO includes detailed tables for reporting monthly gross short positions and daily trading activity affecting these positions.

Ways to get ready: Technology and automation

As January approaches, uncertainty about how the new Rule will be interpreted and how managers will be expected to comply is increasing stress levels.

• There is no magic list to confirm how investment managers identify who is a reporting issuer and who is not. The broad scope of potential securities, including listed and unlisted, and foreign equities may trigger new data requirements.
• How managers will tackle the new complexities of calculations and processing required to generate the reportable information efficiently is not clear. Not all firms are equipped for daily monitoring. They may have to settle for learning about filing requirements at the month's end which could increase the burden on existing compliance teams and processes.

The new Rule may have aimed to simplify filing, but for those without the right processes and technology, it will undoubtedly make it more complex. 

Evaluate your firm’s readiness with these steps:

• Conduct an inventory of current systems and data sources related to daily short transactions. Collaborate with existing vendors and research new ones to fill any gaps.
• Investigate capabilities to automate daily threshold monitoring. If your short transaction volume is low, consider necessary efforts.
• Understand the implications of publicly disclosing information about your short trading strategies as a firm. Determine if you want an ‘early warning’ system to identify potential filing scenarios.
• Organize a ‘mock’ monthly reporting cycle. Test your program and flag any weaknesses.

With proper preparation, including the technology and automation steps discussed, most institutional investment managers should meet the January 2, 2025, deadline for enhanced compliance reporting without too much pain. As global regulatory authorities strive to protect shareholders and improve market efficiency, managers must stay ahead of evolving regulations and proactively adapt their compliance strategies. Otherwise, for some, the New Year might not be an occasion to celebrate.

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Matt Grinnell is global product manager for Linedata software solutions, including fund oversight and compliance. A seasoned industry veteran, Matt’s focus is driving vision and strategy, working closely with clients and industry participants to discover and develop initiatives that grow customer value. Before joining Linedata, Matt worked at Fidessa for over a decade, where he was responsible for global product management and marketing of investment compliance and regulatory controls solutions. Prior to that he held compliance leadership roles at Putnam Investments and Fidelity and specialized in assessing the impact of new regulations and evaluating industry trends in risk and compliance.