While compliance officers may have mixed feelings about the incoming new short selling rules from the SEC, they will certainly bring about significant changes. During the SEC's October 13, 2023 open meeting, even Commissioner Peirce expressed her concerns about the potential burden of the new regulations, especially for firms that engage in substantial short-selling activities or operate in multiple jurisdictions. Her concerns highlight the complexities and resource implications that financial institutions face in adapting to this new regime.
So, what do we think are going to be the biggest challenges for compliance officers of these long-awaited rules?
Way, way more reportable positions…but on who exactly?
The new short selling rules, or Rule 13f-2, significantly expand the scope of reportable positions, covering a wide range of issuers. This expansion, driven by the Dodd-Frank Act's mandate, is all about enhancing the transparency in short selling. By broadening the scope, the SEC has intensified the surveillance burden for firms across a lot of areas.
And the real kicker is the SEC's decision not to provide a definitive list of in-scope issuers. This means the onus is placed on firms to determine their compliance obligations by interpreting the rules and staying informed of further guidance from the SEC. The only way for firms to manage this is by having agile systems that are built to adapt as more is determined.
And for good measure, the new rules demand a comprehensive view of global security positions. This extends reach to non-US domiciled entities trading and shorting US securities in reportable issuers, and also includes non-reporting issuers for US and non-US entities.
Enter the era of XML
Filings will also need to be prepared in XML format. For a lot of compliance officers out there, the ability to do this will need technological upgrades and a boost in expertise. Compliance teams cannot afford missed, late or incomplete filings and must be ready to navigate this new technical requirement while ensuring accuracy and timeliness in reporting.
Different thresholds for different issuers
Under the new short selling rules, managers must also file Form SHO if their short positions surpass specified thresholds. These thresholds vary based on the nature of the issuer: for equity securities of a reporting issuer (in short, US Section 12 Registered issuers), the threshold is a monthly average gross short position of at least $10 million, or 2.5% of shares outstanding; for non-reporting issuers (all other issuers which Form SHO filers sell short ), it's a gross short position of $500,000 or more at the close of regular trading hours on any settlement date during the month. This filing, due within 14 days of month-end, includes detailed information about gross short positions and related daily activities. Managers must carefully track and report this data, a task compounded by the SEC’s mandate to correct any inaccuracies within 10 days of discovery. Non-compliance with Form SHO can lead to significant fines and sanctions from the SEC so it is no small matter.
Not daily reporting but check what you did each day at the end of the month
The new rules may have aimed to simplify the filing process, but some argue that they will undoubtedly make it more complex without the right technology. For example, they require firms to calculate the aggregated average gross short positions for the month using daily settlement-date short position quantities and prices. This is a departure from the usual practice of using trade-date positions for most other reporting. And, even though the threshold calculation can be done at the end of each month, daily trading data must be captured accurately and, without automated systems, this is going to be difficult for compliance officers to achieve.
In addition to this, if either of the thresholds is met then additional information related to positions is further required. This includes calculating net changes in short positions which involves tracking all trading activity within a given month. This process demands meticulous record-keeping and the ability to accurately capture daily positions over the course of a month.
Daily tracking, monthly calculations, precise reporting
In addition, the new short selling rules require both diverse and extensive compliance requirements. This means sophisticated software services are needed to handle the regime, the massive datasets and intricate calculations and must be able to generate accurate disclosure forms (including XML), and ultimately help with the filing process.
The takeaway is clear..the SEC wants firms to automate
The implementation of US short-selling rules and Form SHO represents a significant shift in compliance requirements by the SEC and underlines the trend across regulators worldwide to nudge firms to greater automation of key processes. Financial institutions must not only understand and adapt to these changes but proactively shift and shape their compliance strategies accordingly.
