SEC Staff Issues Guidance on New Short Positions Disclosure Form SH

The SEC has adopted a new disclosure rule requiring hedge funds and other large institutional investors to disclose their short positions. The new rule, designed to ensure transparency in short selling, applies to asset managers with more than $100 million invested in securities, who are required to promptly begin public reporting of their daily short positions on new Form SH. The order is effective September 22, 2008.

New Form SH requires disclosure of the number and value of securities sold short for each section 13(f) security, except for short sales in options, and the opening short position, closing short position, largest intraday short position, and the time of the largest intraday short position, for that security during each calendar day of the prior week.

According to the staff guidance, the disclosure requirement applies only to short sales effected after the effective date of the order. If a manager has a short position reflecting short sales effected prior to the effective date of the order, that pre-existing short position is not required to be reported on Form SH or for any days throughout the calendar week-long period that must be reported in the Form SH filing.

Thus, the manager is not required to add that pre-existing short-position to any new short positions created after the effective date. Transactions effected after the effective date to close out that pre-existing short position should also not be reported. Pre-existing short positions should not be included for purposes of determining whether the de minimis exclusion applies.

If the short position in the Form SH security constitutes less than one-quarter of one per cent of that class of the issuer's Form SH securities issued and outstanding and the fair market value of the short position in the Form SH security is less than $1,000,000 on every day of the reporting period, the manager need not file Form SH. If the manager fails to satisfy either prong of the de minimis exclusion on any day of a reporting period for any Form SH security, the manager must file Form SH for that period with respect to that Form SH security. Pre-existing short positions should not be included for purposes of determining whether the de minimis exclusion applies

The institutional investment manager may apply the de minimis exclusion on a day-by-day and column-by-column basis. For example, if the amount of securities sold short on a given day is de minimis for purposes of Form SH, said the staff, then disclosure of the amount is not required. However, the amount of securities sold short should still be taken into account in determining what type of disclosure is required under Column 6 (short positions at the end of the day) and Column 7 (largest intra-day short position). In the event the institutional investment manager excludes information using the de minimis exclusion, it should enter "N/A" in the appropriate columns.

Managers should use fair market value when valuing securities for purposes of Form SH. Managers should not use execution prices for valuing such securities. For purposes of determining the fair market value of securities sold short, a manager must use the market price of the security on the primary or listing market for the Form SH security as of the close of floor trading on the New York Stock Exchange for the day in question. This market closing time should be used to determine the price of all Form SH securities irrespective of the U.S. market on which such security trades. If the securities are sold short on a non-business day, a manager must use the market price of the Form SH securities as of the close of the NYSE for the most recent business day.

Options on section 13(f) securities and short sales of options on section 13(f) securities are not Form SH Securities, and therefore, should not be reported on Form SH. However, certain transactions that involve options are required to be reported on Form SH. For example, if an institutional investment manager exercises a put and is net short pursuant to Rule 200(c) of Regulation SHO, the resulting transaction is a short sale and must be reflected in Form SH. Similarly, if the institutional investment manager effects a short sale as a result of assignment to it as a call writer, upon exercise, the resulting transaction is a short sale and must be reflected in Form SH. Any short sales of Form SH securities resulting from exercise of options contracts are reportable as of the date of exercise.