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The “long” of it
13F-2, the first SEC-driven short-selling regulation which goes into effect on January 2, 2025 with implications for institutional investors ─ including broker-dealers, investment advisers, banks, insurance companies, pension funds, and corporations ─ requires continuous monitoring of an investor’s short positions and monthly disclosures (Form SHO) on breaching the designated thresholds for both reporting and non-reporting company issuers.
Reporting companies:
Those issuing Section 12-registered class of equity securities or those subject to Section 15D. Disclosure is required for managers with holdings that breach a monthly average of daily gross short positions of US$10 million or 2.5% of shares outstanding in reporting-company issuers.
Non-reporting companies:
This category effectively captures everything outside the reporting company definition, including any holdings in private companies, US issuers trading on the over-the-counter (OTC) markets, and even non-US-listed issuers. Disclosure is required for managers with holdings breaching a gross short position of US$500,000 in issuers during the month, as opposed to a monthly average.
Unsurprisingly, the regulation poses a number of challenges that institutions will need to address in order to be fully compliant.
Main Compliance Challenges for Market Participants
Data collection and calculations:
Identifying whether an equity security falls under a given threshold will require institutions to obtain source data as disseminated in various reports filed with the SEC, a potentially time-consuming and complex process. Adding to the complication is the fact that the universe of in-scope securities under 13F-2 is notably broader than under 13F-1 (view the key differences here), as the former includes not only US-listed equities but also OTC equities as well as foreign equities. Lastly, threshold-breach assessments are based on gross-short positions, the institution’s long positions must still be processed in order to calculate the net holdings in a given issuer of the affected assets. Meeting these challenges demands a robust system that actively identifies the required data and automatically performs the appropriate calculations at the relevant stage.
Monitoring:
For reporting companies, the need to disclose is unknown until the end of the month, making it crucial that institutions assess and monitor their positions while performing the necessary daily calculations across entity structures, to mitigate any month-end surprises. For non-reporting companies, institutions will need to monitor their positions daily to identify if a disclosure obligation will arise at month-end. Managing this challenge requires a system that easily tracks holdings and hosts an array of analytical capabilities to better analyze the institution’s funds and portfolio.
XML submission:
Disclosure Form SHO must be submitted in a machine- readable XML format, necessitating access to the relevant technical capabilities to generate the form in line with the designated technical schema.
The “short” of it
In the ever-evolving regulatory landscape, SEC Rule 13F-2 places the need for a solution that supports seamless and efficient calculation and reporting front and center, specifically, one that enables market participants to:
Calculate daily gross-short positions, based on their beneficial ownership and generate the reports for the investors in structured, machine-readable language for seamless reporting.
Address the complexity of calculating short positions held in reporting and non-reporting company issuers, across different entities within the group.
Calculate holdings, determine if they have breached any notable SEC thresholds, and raise appropriate alerts that notify investors to submit filings in a timely and efficient manner.
As this latest Rule takes effect, collaboration between investment managers and technology providers is instrumental. The Nasdaq AxiomSL team looks forward to working with affected organizations to interpret, understand impacts and implement a future-forward approach calculation and reporting that will prepare them not just for SEC Rule 13F-2 but also the swath of regulatory initiatives globally that require more frequent calculation and reporting.
Nandeep Bansal is Global Shareholding Disclosure (GSD) Product Manager at Nasdaq.
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