SEC Issues Interim Final Temporary Rule Extending Short Sale Reporting

October 20, 2008

As reported in previous Davis Polk communications, the SEC’s emergency orders requiring large institutional investment managers to report short sales in Section 13(f) securities on Form SH (collectively, the “Emergency Order”) expired at 11:59 p.m. on Friday, October 17. In anticipation of the Emergency Order’s expiration, on Wednesday, October 15 the SEC adopted new Rule 10a-3T under the Securities Exchange Act (the “Interim Rule”), which became effective on October 18 and will extend until August 1, 2009. The SEC is soliciting comments on the Interim Rule.

The Interim Rule generally extends the reporting requirements that were established by the Emergency Order. The most significant changes are summarized below.

End of week filing. The Interim Rule requires Form SH to be filed on the last business day of the calendar week following a week in which reportable short sales were effected. Under the Emergency Order, a reporting manager was required to file Form SH on the first business day following a calendar week in which reportable short sales were effected. The change was implemented to allow more time for managers to collect and verify information for their reports.

Decreased information requirements. Form SH will no longer require the disclosure of the value of securities sold short, the largest intraday short position or the time of day of the largest intraday short position. Form SH previously required this information to be disclosed in columns 5, 7 and 8, respectively. The SEC noted that this information was difficult to obtain for some reporting managers.

No grandfathering of short positions. Under the Emergency Order, a reporting manager did not need to disclose short positions established prior to September 22, 2008 (effectively treating a short position as “zero” as of that date). The Interim Rule eliminates this exception. However, to facilitate the transition to the Interim Rule, a manager may still rely on the exception for its reports to be filed on October 24 or October 31.

The SEC believes that eliminating the grandfathering provision will improve its ability to analyze short sale activity. The SEC noted that the provision was intended to address concerns about public disclosure of managers’ pre-existing short positions under the Emergency Order. Public disclosure was contemplated under the Emergency Order when it was originally promulgated by the SEC on September 18, but the SEC announced on October 2 that Form SH filings would remain non-public.

Increased de minimis threshold. Under the Emergency Order, managers were not required to report short sales or positions that would otherwise be reportable if (i) the short sale or position constitutes less than 0.25% of that class of the issuer’s issued and outstanding Section 13(f) securities (as reported in the issuer’s most recent SEC filings) and (ii) the fair market value of the short sale or short position is less than $1,000,000. The Interim Rule increases the fair market value threshold to $10,000,000.

A manager should continue to use the $1,000,000 de minimis threshold for its October 24 or October 31 filings if it does not intend to disclose its pre-September 22 short positions in those reports in reliance on the transitional provision described above.

Who must file. The Interim Rule will apply to all institutional investment managers that were 13F filers as of the end of the previous calendar quarter.

Data provided in Form SH will be required to be submitted in XML format pursuant to new technical specifications that the SEC intends to provide, which are expected to be effective for the November 7 reporting date. Reports to be filed on October 24 or October 31 will utilize the same EDGAR format as required for previous reports (i.e., ASCII or HTML).

The Interim Rule and its accompanying release address two questions that had been raised by reporting managers. The first involves reporting short sales or positions in a particular security that are below the de miminis threshold on a particular day during a week for which Form SH is required to be filed. Some managers were confused as to whether any information needed to be reported at all on such days with respect to such securities. The Interim Rule and the release indicate that once a filing is required, a manager may apply the de minimis exception on a day-by-day and element-by-element basis, but that reliance must be documented by disclosing “N/A” in the data element where information would otherwise be required to be reported. In other words, the name of the issuer and the CUSIP apparently need to be reported each day, even if the manager’s short sales and/or short position in the security are de minimis.

The second question involves the confidentiality of submissions. We are aware that certain reporting managers who were concerned about public disclosure of their short positions on Form SH, even after the SEC’s October 2 announcement that the information would remain non-public, submitted separate requests for confidential treatment along with their filings. In the Interim Rule release, the SEC specifically states that a Form SH filer should not submit a confidential treatment request to the SEC and notes that the Freedom of Information Act provides at least two exemptions under which the SEC believes it may withhold Form SH information. Reporting managers should continue to label Form SH as non-public, as required by the form’s instructions. The Interim Rule provides explicitly that Form SH shall be “nonpublic to the extent permitted by law.”

See the Interim Final Temporary Rule Release

See the Davis Polk client communications regarding the orders:

If you have any questions regarding this newsflash, please call your Davis Polk contact.

Davis Polk & Wardwell