October 16, 2008

SEC Adopts Interim Final Rule 10a-3T Requiring Institutional Managers to Report Certain Short Positions to the SEC on Form SH

The SEC yesterday issued new interim final Rule 10a-3T, which requires certain large institutional managers (i.e., those with $100 million or more in assets under management) to report to the SEC on Form SH their short positions in “13f” securities, other than options.  Rule 10a-3T extends the current emergency order issued by the SEC on September 18, 2008 (the “September 18th Order”, as amended on September 21, 2008), which currently requires managers to file non-public Form SH reports with the SEC regarding short positions in 13f securities and which is set to expire at midnight on October 17, 2008.  Rule 10a-3T becomes effective on Saturday, October 18th, 2008 and will continue through August 1st 2009.  The SEC timed the adoption and effectiveness of Rule 10a-3T in this way so as to avoid any interruption in the effectiveness of the current Form SH filing obligations.

Effect of Interim Final Rulemaking

As an interim final rule, Rule 10a-3T is effective immediately on October 18th even though the rule was never formally proposed and there was no prior notice and comment period before it became effective.  However, the SEC has asked for comments on all aspects of the rule and has granted a 60 post-effective comment period.  Given the many specific requests for comment by the SEC in the rule release and the intense interest in this rule by many market participants, it is highly likely that the SEC will amend Rule 10a-3T based on the comments it receives during the comment period.

A link to the SEC release adopting Rule 10a-3T, which includes the text of the rule, is provided here:

Changes from September 18th Emergency Order

Interim final Rule 10a-3T has been adopted in the much the same form as the temporary rule set forth in the September 18th Order.  However, there are several notable changes from the prior emergency rule.  First, the de minimis threshold under Rule 10a-3T, which managers may use to determine when a position may be reported as “N/A” rather than disclosing the actual amount of the position, has been raised from $1 million $10 million.  This means that a manager may report a position as “N/A” under Rule 10-a3T if both (1) the position represents less than 0.25% of the outstanding shares of the issuer, and (2) the fair market value of the position is less than $10 million.

Second, the “grandfathering” clause included in the September 18th Order has been eliminated so that, going forward, managers will be required to include pre-September 22nd short positions in calculating their reportable short positions.  Under the September 18th Order, managers were not required to report any short positions opened prior to September 22, 2008, and also were not required to include close-outs of any pre-September 22nd short positions in calculating opening or closing short positions reported on Form SH.  Thus, under the September 18th Order, managers were essentially required to maintain two separate books of short positions - one with positions opened before September 22nd, and a separate set of books beginning with short positions opened on or after September 22nd.  The SEC has eliminated this inefficiency in the Form SH reporting scheme under new Rule 10a-3T and has given managers a two-week transition period (covering the October 24th and October 31st reports) to adjust to the new requirement to report pre-September 22nd short positions.  During the two-week transition period, a manager is permitted to choose whether to report pre-Sept 22nd positions when calculating its reportable short positions.  If a manager chooses to exclude pre-September 22nd short positions, the manager must continue to use the lower $1 million threshold to determine whether a position is de minimis.  If a manager chooses instead to include pre-September 22nd short positions, it may use the new higher $10 million threshold to make de minimis determinations.  After October 31st, managers are required to include all pre-Sept 22nd positions in their Form SH filings but may rely upon Rule 10a-3T’s higher $10 million de minimis threshold.

Third, the SEC has given managers additional time to make their weekly Form SH filings.  Previously under the September 18th Order, Form SH filings were required to be made on the first business day of the calendar week following a calendar week in which a manager had a reportable short position (normally Mondays, unless there was a holiday).  Under Rule 10a-3T, managers are not required to make a weekly filing until the last business day of the calendar week following a calendar week in which short sales are effected (normally Fridays).  The SEC said they wanted to give filers additional time to gather and verify the information necessary to compute their reportable short positions and file Form SH.

Fourth, Rule 10a-3T eliminates the requirement in the September 18th Order to report (1) the value of securities sold short, (2) the largest intraday short position, and (3) the time of day of the largest intraday short positions.  All three of these requirements were considered fairly onerous and difficult to calculate by many filers, particularly the requirement to report the largest intraday short position based on the closing price for the day rather than the actual price at the time that the position was open, which many filers considered counterintuitive.

Non-Public Filing of Form SH & FOIA requests

When the SEC originally adopted the emergency Form SH filing rule in the September 18th Order, it stated that all Form SH filings would be made publicly available through EDGAR.  However, after considerable push-back and criticism from many market participants, the SEC amended the original Order on September 21st and agreed to allow the Form SH filings to remain non-public for the first two weeks after the due date for a Form SH filing.  When the SEC extended the September 18th Order by two more weeks on October 2nd, the SEC responded to additional criticisms from the market regarding the public disclosure of Form SH filings and permitted all Form SH filings made under the September 18th Order to remain permanently non-public.  The SEC’s stated reason for allowing Form SH filings to remain non-public was a fear that disclosing large short positions to the public would incite copy-cat short selling by members of the public that would have a negative effect on the markets.  Interim final Rule 10a-3T has preserved the permanent non-public filing status of Form SH reports.  However, as acknowledged by the SEC in the adopting release for Form SH, it is always possible for a member of the public to make a request pursuant to the Freedom of Information Act (“FOIA”) to obtain a copy of a Form SH filing in the SEC’s possession.  Nonetheless, the SEC cites two exemptions from FOIA disclosure that may provide filers with protection if a FOIA request is made for a Form SH filing.  The first exemption protects from disclosure trade secrets and privileged or confidential commercial or financial information, and the second exemption protects matters that are “contained in or related to examination, operating, or condition reports prepared by, on behalf of, of for the use of an agency responsible for the regulation or supervision of financial institutions.”  In addition, under FOIA the SEC must give any the filer of a Form SH whose Form SH has become the subject of a FOIA request at least 30 days notice and an opportunity to appeal the disclosure of the Form SH.

Staff Guidance Regarding Form SH Filing

The SEC staff has indicated that it will issue guidance regarding new Rule 10a-3T in the form of Frequently Asked Questions (“FAQs”).  However, as of this writing the FAQs had not been released.  In the meantime, the SEC staff has stated that the current interpretive guidance they issued on September 21st (“Guidance Regarding Commission’s Emergency Order Concerning Disclosure of Short Selling” - see link below) can still be relied upon to the extent that the guidance contained therein is applicable to provisions of the September 18th Order that were carried forward and incorporated into Rule 10a-3T.

A link to the September 21st SEC staff guidance is provided here: