The SEC’s New Rule 13f-2

The SEC has adopted a new rule 17 CFR 240.13f-2 (“Rule 13f-2”) to require institutional investment managers to report short positions and activity data for their equity securities. The SEC plans to aggregate and publish the filed shorting data within a month of each reporting period on an anonymous basis. Rule 13f-2 shall be effective from 2 January 2025.

The Managers And Securities In Scope

The requirements to file under Rule 13f-2 are sufficiently wide as to potentially capture any manager with a connection to the US securities markets engaging in short selling of any security with equity-like characteristics. Institutional investment manager is defined by reference to the Securities Exchange Act of 1934 (the "Exchange Act") as: "being 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" (s.13(f)(6)(A) of the Exchange Act) The SEC has stated that Rule 13f-2 will have extra-territorial effects in its adopting release. The adopting release envisions any manager "operating in the US securities markets such that the investment manager is subject to filing reports [with the SEC]" to be within scope of Rule 13f-2. There has been no clarification as to whether Rule 13f-2 will apply only to managers that are subject to filing obligations under other 13f rules or to any managers with an SEC filing obligation. There are no minimum AUM exemptions for managers with respect to their obligations under Rule 13f-2. Rule 13f-2 adopts a similarly broad definition of equity security, incorporated from s.3(a)(11) of the Exchange Act, meaning that potentially any security with equity-like properties may fall within scope of Rule 13f-2. The SEC has also noted that Rule 13f-2 will require managers to report their short trades of "securities of US and non-US issuers … regardless of where those sales occur".

The Thresholds

Rule 13f-2 has defined two new categorisations of issuer of equity securities, with separate reporting thresholds. For securities (i) registered under s.12 of the Exchange Act or (ii) of an issuer that is required to file reports under s.15(d) of the Exchange Act, known in Rule 13f-2 as securities of a "Reporting Company Issuer", the threshold is the lesser of:
  • a monthly average gross short position at the close of regular trading hours (4 p.m. ET) in the equity security of USD10m or more; or
  • a monthly average gross short position at close of regular trading hours (4 p.m. ET) as a percentage of shares outstanding in the equity security of 2.5% or more.
For securities not subject to the above registration and filing requirements, being securities of a "Non-Reporting Company Issuer", the threshold is even lower:
  • a gross short position in the equity security of USD500k or more at the close of regular trading hours (4 p.m. ET) on any settlement date during the calendar month.
This definition of close of regular trading hours will likely cause significant complications for non-US managers and managers shorting non-US securities, as it will necessitate intra-day threshold calculations.

Next Steps

As Rule 13f-2 is expected to be wide-reaching, not least as the SEC has not provided a list of types of securities that are within scope of Rule 13f-2, managers should begin to evaluate any short positions to determine:
  • whether the securities have equity-like characteristics; and
  • whether such securities would be considered Reporting Company Issuer securities.
The SEC has not provided further clarification on the operation of Rule 13f-2 since the publication of the final iteration of Rule 13f-2, as such managers should expect the Rule to apply as initially published. It is imperative that Managers put in place processes to make these determinations going forward. Given the relatively short timeframe until Rule 13f-2 becomes effective and the operational complexities implied, managers engaged in short-selling will have to develop internal processes to identify, calculate thresholds and report these short positions sooner rather than later. The London Stock Exchange Group has reported that some firms have turned to automation given the sheer volume of data that needs to be processed and submitted. The LSEG has opined that the processes deployed to comply with Rule 13f-2 may be combined with existing (and changing) requirements from global stock exchanges with respect to shareholding reporting requirements. There also appears to be an additional push from certain bodies, such as the Society for Corporate Governance, NIRI and the NYSE, to reduce the deadline for form 13f filings from the current 45 days after quarter-end. The combination of these efforts with Rule 13f-2 means that managers will need to ensure that however they choose to comply, that these processes are able to withstand shorter and shorter timescales.