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How to Comply with the SEC Short Sale Disclosure Requirement
October 29, 2008
Marty Dunn,
Erin Jaskot,
Rebekah Toton
The SEC has adopted new Rule 10a-3T as an "interim final temporary rule" that extends the requirement for institutional investment managers to file Forms SH reporting short sales and short positions in Section 13(f) securities. The Form SH filing requirement will expire on August 1, 2009. We previously published Client Alerts relating to the SEC’s emergency orders establishing and modifying the Form SH reporting requirement. The Client Alerts are available here.
There has been a significant amount of uncertainty regarding the practical application of Rule 10a-3T. The discussion below reflects the SEC’s description of Rule 10a-3T in Release No. 34-58785 and subsequent staff interpretive positions. All references in the discussion below to short sales and short positions are assumed to involve transactions in Section 13(f) securities by an institutional investment manager that exercises investment discretion with respect to accounts holding Section 13(f) securities and that has filed, or was required to file, a Form 13F for the calendar quarter, as required under Section 13(f) and Rule 13f-1(a).
Note -- The SEC established “transition period” rules for the weeks ending October 18, 2008 and October 25, 2008. This Client Alert does not address the transition period. If you have questions regarding the Rule 10a-3T transition period, please contact your O’Melveny & Myers adviser.
How to Comply with the Form SH Filing Requirement
Determining the application of Rule 10a-3T requires an answer to the following two questions:
- Does the institutional investment manager have an obligation to file a Form SH?
- If the institutional investment manager has an obligation to file a Form SH, what information must be disclosed on that Form SH?
1. Does the institutional investment manager have an obligation to file a Form SH?
An institutional investment manager is required to file a Form SH only if the institutional investment manager effected a short sale during the applicable reporting period. [1] In considering the answer to this question, it is important to note the following:
- A short sale during the applicable reporting period of any value will trigger an obligation to file a Form SH.
- An obligation to file a Form SH is triggered only by a short sale during the reporting period. Even where the institutional investment manager has an open short position reflecting short sales made prior to the reporting period, if the institutional investment manager did not effect a short sale during the reporting period, there is no obligation to file a Form SH (regardless of the fair market value of the open short position).
2. If the institutional investment manager has an obligation to file a Form SH, what information must be disclosed on that Form SH?
Form SH requires disclosure of the following for each day of the reporting period -- Date, CIK of Manager, Name of Issuer, CUSIP Number, Short Position (Start of Day), Number of Securities Sold Short, and Short Position (End of Day). [2] The SEC refers to these seven disclosure items as “data elements.”
Once the obligation to file a Form SH is established, the information regarding a short sale or short position [3] that must be disclosed on that Form SH will depend on the fair market value of the following three data elements:
- the start of day short position;
- the gross number of securities sold short during the day; and
- the end of day short position.
Rule 10a-3T includes a two-part de minimis disclosure exception from the requirement to disclose information regarding short sales and short positions on Form SH. The two standards in the de minimis disclosure exception are:
- a fair market value of $10 million;[4] and
- a number of shares equaling one-quarter of one percent of that class of the issuer’s Section 13(f) securities issued and outstanding.
The de minimis disclosure exception is to be examined on a data element-by-data element, day-by-day, and issuer-by-issuer basis. Accordingly, the de minimis disclosure exception has two possible effects on the information that is required to be disclosed on Form SH:
- For any day during the reporting period in which the de minimis tests are met for any of the three data elements, the institutional investment manager may disclose “N/A” instead of the actual number of shares for that data element on that day (unless the amount is zero, in which case “0” is to be disclosed for the relevant data element(s)).
- If the de minimis tests are met for each of the three data elements for every day of the reporting period, the SEC staff has indicated that no disclosure is required with regard to a short sale or a short position in that issuer’s securities.
Application of the de minimis disclosure exception
The de minimis disclosure exception relates to the information that is required to be disclosed on a Form SH. The de minimis disclosure exception is not an exception from the requirement to file a Form SH. It is important to note, however, that if the de minimis disclosure exception results in the elimination of any obligation to include any information regarding short sales or short positions on the Form SH, it is our understanding that the Form SH need not be filed.
The de minimis disclosure exception should be applied as follows (for ease of discussion, the following assumes that the number of shares sold short or included in an open short position is less than one-quarter of one percent of that class of the issuer’s outstanding Section 13(f) securities):
Step One -- Determine that the institutional investment manager has an obligation to file a Form SH.
- If the institutional investment manager effected a short sale in a Section 13(f) security during the reporting period, then the institutional investment manager has an obligation to file a Form SH.
- If the institutional investment manager did not effect a short sale in a Section 13(f) security during the reporting period, then the institutional investment manager has no obligation to file a Form SH for that period (regardless of the size of any continuing open short positions that were entered into in prior reporting periods).
Step Two -- Determine whether the de minimis disclosure exception allows the institutional investment manager to omit certain information from the filed Form SH by applying the exception to every short sale and every short position, as follows:
- Disclosure Regarding Classes of Section 13(f) Securities in which the Institutional Investment Manager Effected a Short Sale During the Reporting Period:
- On any day where the fair market value of the start of day short position, the gross number of securities sold short during the day, or the end of day short position with regard to an issuer's securities is between $0.01 and $10 million, the investment manager may put “N/A” in the appropriate columns of the Form SH. It is important to note that the “N/A” reference may be used only when the fair market value of a data element is between $0.01 and $10 million. As such, the institutional investment manager must disclose the actual number of shares for a data element whenever the fair market value of that number of shares is $10 million or greater. Similarly, if no short sales occurred that day or there is not an open short position at the start of that day or at the end of that day, the institutional investment manager must put “0” in the appropriate column.
- If each of the fair market value of the start of day short position, the gross number of securities sold short during the day, and the end of day short position with regard to an issuer's securities is less than $10 million on every day of the reporting period, the institutional investment manager is not required to disclose any information regarding that class of securities at all, as it would result in the institutional investment manager putting either “0” or “N/A” in every data element for every day on the Form SH with regard to that class of securities.
- Disclosure Regarding Classes of Section 13(f) Securities in which the Institutional Investment Manager Did Not Effect a Short Sale During the Reporting Period, but Does Have an Open Short Position: The institutional investment manager must apply the de minimis test to all open short positions in the same manner as it would apply the test to a class of Section 13(f) securities in which it had effected a short sale during the reporting period. Even if the de minimis test permits the institutional investment manager to omit information regarding the short sale that triggered the filing obligation in Step One above, the manager is required to include disclosure in the Form SH with regard to any open short position with a fair market value of $10 million or more.
Step Three -- Determine whether the de minimis exception removes the obligation of the institutional investment manager to file a Form SH, as follows:
- If the de minimis disclosure exception would result in the institutional investment manager presenting either “0” or “N/A” with regard to the start of day short position, the gross number of securities sold short during the day, and the end of day short position for all short sales and all open short positions on every day in the reporting period, it is our understanding that the institutional investment manager is not required to file a Form SH at all.
Rule 10a-3T Examples
In each of the following examples, assume the number of shares sold short or included in an open short position is less than one-quarter of one percent of that class of the issuer’s outstanding Section 13(f) securities.
Example 1: An institutional investment manager effects three short sales during a reporting period:
- one short sale on Monday in the securities of Company A, with a fair market value on each day of the week of less than $45,000;
- one short sale on Tuesday in the securities of Company B, with a fair market value on each of Tuesday through Friday of less than $400,000; and
- one short sale on Tuesday in the securities of Company C, with a fair market value on each of Tuesday through Friday of less than $800,000.
The institutional investment manager does not have any other open short positions.
- Filing Requirement: Because the institutional investment manager executed short sales during the reporting period, Rule 10a-3T requires the institutional investment manager to file a Form SH. As discussed below, however, the de minimis disclosure exception will eliminate this filing obligation.
- Disclosure Obligation: Because the fair market value of the start of day short position, the gross number of securities sold short during the day, and the end of day short position with regard to each short sale and short position in the securities of each of the three companies is less than $10 million on every day of the reporting period, the institutional investment manager has no disclosure obligation regarding the short sales or short positions in the securities of Company A, Company B, or Company C. Because the Form SH would not include any information regarding short sales or short positions (other than “0” or “N/A”), the institutional investment manager does not have to file a Form SH for this reporting period.
Example 2: An institutional investment manager has seven open short positions in the securities of seven different issuers. All seven of these open positions are the result of short sales effected prior to the reporting period. The fair market value of each of the seven open short positions is more than $10 million at the start and end of each day of the reporting period. The institutional investment manager did not effect any short sales during the reporting period.
- Filing Requirement: Because the institutional investment manager did not effect any short sales in Section 13(f) securities during the reporting period, the institutional investment manager has no filing requirement, even though there are seven open short positions in excess of the de minimis disclosure exception.
- Disclosure Obligation: Because there is no filing requirement, there is no disclosure obligation.
Example 3: An institutional investment manager has seven open short positions in the securities of seven different issuers (Companies A through G). All seven of these open positions are the result of short sales effected prior to the reporting period. The fair market value of four of the open short positions (Companies A through D) is more than $10 million at the start and end of each day of the reporting period. The fair market value of three of the open short positions (Companies E through G) is less than $10 million at the start and end of each day of the reporting period. The institutional investment manager effects one short sale during the reporting period -- a short sale in the securities of Company H on Monday of the reporting period. The fair market value of the shares of Company H that were sold short is $900 on Monday and the fair market value of that short position on each remaining day in the reporting period never exceeds $1000.
- Filing Requirement: Because the institutional investment manager effected a short sale during the reporting period, Rule 10a-3T requires the institutional investment manager to file a Form SH.
- Disclosure Obligation:
- Because the fair market value of the start of day short position, the gross number of securities sold short during the day, and the end of day short position with regard to the securities of Company H is less than $10 million on every day of the reporting period, the institutional investment manager has no disclosure obligation regarding the short sale or short position in the securities of Company H.
- Because the open short positions in the securities of Companies A through D each have a fair market value of $10 million or more on at least one day during the reporting period, the institutional investment manager has a reporting obligation regarding the short positions in the securities of each of these four companies. The institutional investment manager would put the number of shares in the short position at the beginning and end of each day during the reporting period. As the institutional investment manager did not effect any short sales in the securities of these companies, it would put a “0” in the column asking for the “Number of Securities Sold Short (Day)” for each day.
- Because the open short positions in the securities of Companies E through G each have a fair market value of less than $10 million on every day during the reporting period, the institutional investment manager has no disclosure obligation regarding the short positions in the securities of Companies E through G.
Example 4: An institutional investment manager executes a total of three short sales during the reporting period:
- one 300,000 share short sale in the securities of Company A on Tuesday --
- the fair market value of these shares is $12 million at the end of Tuesday of the reporting period ($40 per share) and $12.3 million at the end of Wednesday of the reporting period ($41 per share),
- on Thursday of the reporting period, the manager reduces the short position to 200,000 shares, with a fair market value at the end of that day of $8 million ($40 per share), and
- on Friday of the reporting period, the manager closes out the short position in Company A.
- one 500,000 share short sale in the securities of Company B on Wednesday -- the fair market value of these shares is $7 million at the end of Wednesday of the reporting period ($14 per share), $6.5 million at the end of Thursday of the reporting period ($13 per share), and $7.5 million at the end of Friday of the reporting period ($15 per share); and
- one 170,000 share short sale in the securities of Company B on Friday -- the fair market value of these shares is $2.55 million at the end of Friday of the reporting period ($15 per share).
The institutional investment manager also has a prior open short position of 2,000,000 shares of Company C -- the fair market value of the shares is more than $10 million at all times that the position remains open. The institutional investment manager closes out this position on Wednesday of the reporting period.
- Filing Requirement: Because the institutional investment manager effected short sales during the reporting period, Rule 10a-3T requires the institutional investment manager to file a Form SH.
- Disclosure Obligation: Because the fair market value of the short sale in the securities of Company A does not meet the de minimis exception for every data element for each day of the reporting period, disclosure must be included regarding the securities of Company A. The information would be disclosed as follows:
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Date
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CIK of Manager
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Name of Issuer
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CUSIP Number
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Short Position (Start of Day)
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Number of Securities Sold Short
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Short Position (End of Day)
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[Sunday Date]
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[CIK Number]
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Company A
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CUSIP Number
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0
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0
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0
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[Monday Date]
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[CIK Number]
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Company A
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CUSIP Number
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0
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0
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0
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[Tuesday Date]
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[CIK Number]
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Company A
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CUSIP Number
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0
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300,000
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300,000
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[Wednesday Date]
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[CIK Number]
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Company A
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CUSIP Number
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300,000
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0
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300,000
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[Thursday Date]
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[CIK Number]
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Company A
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CUSIP Number
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300,000
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0
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N/A
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[Friday Date]
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[CIK Number]
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Company A
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CUSIP Number
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N/A
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0
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0
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[Saturday Date]
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[CIK Number]
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Company A
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CUSIP Number
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0
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0
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0
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- Because the fair market value of the end of day short position in the securities of Company B on the Friday of the reporting period does not meet the de minimis disclosure exception, the de minimis disclosure exception is not met for every data element for each day of the reporting period and therefore disclosure must be included regarding the securities of Company B. The information would be disclosed as follows:
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Date
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CIK of Manager
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Name of Issuer
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CUSIP Number
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Short Position (Start of Day)
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Number of Securities Sold Short
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Short Position (End of Day)
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[Sunday Date]
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[CIK Number]
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Company B
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CUSIP Number
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0
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0
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0
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[Monday Date]
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[CIK Number]
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Company B
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CUSIP Number
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0
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0
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0
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[Tuesday Date]
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[CIK Number]
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Company B
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CUSIP Number
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0
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0
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0
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[Wednesday Date]
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[CIK Number]
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Company B
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CUSIP Number
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0
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N/A
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N/A
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[Thursday Date]
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[CIK Number]
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Company B
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CUSIP Number
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N/A
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0
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N/A
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[Friday Date]
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[CIK Number]
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Company B
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CUSIP Number
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N/A
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N/A
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670,000
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[Saturday Date]
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[CIK Number]
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Company B
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CUSIP Number
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670,000
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0
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670,000
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- Because the fair market value of the short position in the securities of Company C does not meet the de minimis exception for every data element for each day of the reporting period, disclosure must be included regarding the securities of Company C. The information would be disclosed as follows:
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Date
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CIK of Manager
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Name of Issuer
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CUSIP Number
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Short Position (Start of Day)
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Number of Securities Sold Short
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Short Position (End of Day)
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[Sunday Date]
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[CIK Number]
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Company C
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CUSIP Number
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2,000,000
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0
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2,000,000
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[Monday Date]
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[CIK Number]
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Company C
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CUSIP Number
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2,000,000
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0
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2,000,000
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[Tuesday Date]
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[CIK Number]
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Company C
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CUSIP Number
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2,000,000
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0
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2,000,000
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[Wednesday Date]
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[CIK Number]
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Company C
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CUSIP Number
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2,000,000
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0
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0
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[Thursday Date]
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[CIK Number]
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Company C
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CUSIP Number
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0
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0
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0
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[Friday Date]
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[CIK Number]
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Company C
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CUSIP Number
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0
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0
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0
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[Saturday Date]
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[CIK Number]
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Company C
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CUSIP Number
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0
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0
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0
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Conclusion
Please contact any of the attorneys listed below if you have any questions regarding Rule 10a-3T or the filing of a Form SH.
[1] If an institutional investment manager has an obligation to file a Form SH, it must be filed on the last business day of the calendar week following the “reporting period” (i.e., the calendar week in which the investment manager effected a short sale). In effect, Rule 10a-3T moves the reporting deadline for each week from Monday, as required under the Emergency Orders, to Friday of the week following the reporting period.
[2] Rule 10a-3T no longer requires institutional investment managers to disclose the following three data elements that had been required under the Emergency Orders: the value of the short sale, the largest intraday short position, and the time of day of the largest intraday short position.
[3] If an institutional investment manager executes any short sale in a Section 13(f) security during a reporting period, the institutional investment manager must also disclose all short positions that are open during that period unless the short position meets the de minimis disclosure exception. This includes open short positions reflecting short sales made prior to September 22, 2008, which had been exempt under the Emergency Orders.
[4] This is an increase from the $1 million de minimis disclosure exception previously provided for under the SEC’s emergency orders.
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