Short selling regulation: Analyzing SEC Rule 13f-2

Bloomberg Professional Services

This article was written by Kate Lee, Global Head of Enterprise Regulatory Data Solutions, and Thomas Labbe, Global Regulatory Product Manager, Ellena Lee, Global Regulatory Product Manager

Short selling has piqued the general public’s interest over the years. In 2011, Michael Lewis brought this niche investment strategy to life with his book, The Big Short, Inside the Doomsday Machine, dramatizing the U.S. housing bubble in the 2000’s. Short selling gained broad notoriety again in 2021 during the Covid-19 pandemic. During this latest hype cycle, short selling became tied to the meme stock revolution when short sellers and retail investors battled over the future of GameStop.

Another constituent also took note: regulators. In particular, the U.S. Department of Justice and Securities and Exchange Commission started investigating short sellers for potential market manipulation.

After its investigation, the SEC concluded, “while short selling can serve useful market purposes, such as facilitating price discovery, there are concerns that it could be used to drive down the price of a security, to accelerate a declining market in a security, or to manipulate stock prices.” 

In October 2023, the SEC proposed SEC Rule 13f-2, designed to provide greater transparency to investors and market participants by increasing the public availability of short sale related data.

An overview of SEC Rule 13f-2

The rule, effective on January 2, 2024, requires institutional investment managers that meet or exceed certain thresholds to begin reporting certain short position data for equity securities on a monthly basis in January 2025. The SEC believes that these requirements may potentially impact a wide variety of market players such as banks, hedge funds, insurance companies, broker/dealers, corporations and pension funds.

The SEC defined two reporting thresholds for the rule:

• Threshold A which applies to reporting company issuers. This means any equity security of an issuer that is registered pursuant to Section 12 of the Exchange Act or an equity security for which the issuer is required to file reports pursuant to Section 15(d) of the Exchange Act. Threshold A amount is either:
• A monthly average gross short position at the close of regular trading hours in the equity security with a U.S. dollar value of $10 million or more; or 
• A monthly average gross short position at the close of regular trading hours as a percentage of shares outstanding in the equity security of 2.5% or more.

• Threshold B which applies to non-reporting company issuers. The refers to any equity security of an issuer that is not a reporting company issuer is in scope.
  • Threshold B amount corresponds to a gross short position in the equity security with a U.S. dollar value of $500,000 or more at the close of regular trading hours on any settlement date during the calendar month.

Compliance challenges

The leading challenge firms face when looking to comply with Rule 13f-2 is identifying equity securities of reporting or non-reporting company issuers. Unlike Rule 13f-1, for which the SEC publishes a list of “Section 13(f) securities”, for Rule 13f-2, the SEC mentioned that “it is not necessary to compile and periodically provide a list of securities covered by Rule 13f-2,” and consequently the SEC will not provide a list comparable to that published for Rule 13f-1. 

Another compliance challenge flows from the fact that the universe of in scope securities under 13f-2 is much broader than under 13f-1, as the former includes not only US-listed equities but also OTC equities as well as foreign equities. 

Firms will also need to identify whether an equity security falls under Threshold A or B. To determine this, they need to obtain the correct source data disseminated in various reports filed with the SEC or FDIC. Given the number of reports firms need to look through to find very specific data points, this can be an incredibly time-consuming and complex process because. If the wrong source document is used, it can throw off a firm’s ability to comply effectively.

As the first compliance date is January 2, 2025, there is relatively little time left for firms to prepare.

How can we help?

Following a series of close consultations with market participants and industry representatives, Bloomberg has created a new enterprise data solution, available via Data License, that helps identify SEC 13f-2 equity securities of reporting or non-reporting company issuers. 

The solution provides indicators that specifically aim to identify whether a security is registered or will be registered pursuant to Section 12(b), 12(g) or 15(d) of the Exchange Act. To do so, the solution uses Bloomberg’s robust repository of issuer filings including from the SEC and FDIC for the determination of a security’s registration status. Specifically, Bloomberg looks at current and periodic filings such as 10-K, 10-Q, 8-K, 20-F, 40-F, etc. and extracts SEC 12(b), 12(g) and 15(d) registration information from these documents then applies it to the corresponding equity securities.

Bloomberg’s indicators also help identify whether a given security should be categorized as Threshold A or B for the purpose of Rule 13f-2 reporting. 

By providing threshold types of A or B and SEC registration indicators, clients will be able to better understand if their short position triggers a reporting requirement and what thresholds should be applied. Bloomberg’s solution takes a data-driven approach to automate these classifications to help market participants appropriately categorize their assets.

Bloomberg’s Regulatory Products are tools that can be integrated to assist clients in implementing their compliance programs. Bloomberg is known for its comprehensive, high quality reporting data plus its global team of regulatory experts who can build effective data-driven solutions to automate processes like the ones required by SEC Rule 13f-2. Other recent examples include timely regulatory data solutions for SEC Rule 15c2-11, SEC Rule 2a-5, and most recently the NAIC’ bonds rule. Today, Bloomberg provides over 60 regulatory data products covering more than 90 regulations globally. 

To learn more about Bloomberg’s SEC 13f-2 Data Solution, request a demo here.