An aggressive timeline and unfamiliar territory
To comply with the SEC’s significant changes to shareholding disclosures rules for substantial shareholding (SH) and short selling (SS), institutional investors have a lot of work to do. The aggressive compliance timeline starts on February 5, 2024 and extends throughout the year. To meet these milestones, firms need to immediately formulate a strategy.
To deal with the demanding US Schedules 13D/G amendments, at least firms can begin from a base of familiarity with SH disclosures. They already track beneficial ownership in US listed securities, perform complex calculations to determine such ownership thresholds within their hierarchies at both entity and group levels, and disclose detailed holdings/holder information upon breaches.
But with the launch of 13f-2 — the US’ first SS disclosure rule, many firms will be charting unknown regulatory waters.
High-level impacts of the rule changes
Schedules 13 D/G
As stated, for many firms, the complexities of SH disclosures are familiar via ongoing compliance with US Schedules 13D/G. But the amendments significantly add to that complexity, and now:
- Include cash-settled instruments
- Require more intensive monitoring and reporting capabilities
- Accelerate filing deadlines for beneficial ownership reports, as delineated in the following exhibit
- Require the report itself to be disclosed using structured, machine-readable XML-based language
Current Filing Rules
Initiation Dates and Filing Changes
- Schedule 13D: Investors are required to submit within 10 days of initially acquiring beneficial ownership of 5% or more in equity, equity derivatives, or cash settled derivatives of US listed registered voting shares.
- Amendments: Must be made immediately after triggering event.
- Schedule 13G: Qualified institutional investors (QII) will be required to submit their filings within 45 days after the end of calendar year in which they became 5% holders.
- Amendments: Must be made to filings within 10 days of breaching 10%, or a 5% increase/decrease of holdings.
Within 5 days after the end of calendar month.
- Schedule 13G: Any investor who qualifies to submit must file their initial filings within 10 days after exceeding the threshold of 5% of beneficial ownership in registered voting shares.
- Amendments: Must be made to filings promptly after exceeding the threshold of 10% of beneficial ownership.
- Schedules 13D/G: All the filings should be reported in PDF format.
SEC Rule 13f-2 — short-selling disclosure (Form SHO)
In contrast to the substantial-shareholding amendments, this new short-selling rule puts firms in unfamiliar territory. In Europe, firms are already subject to a high degree of disclosure. Now with the launch of Rule 13f-2, the SEC has instituted a similar approach to ensure public availability of short-sale related data in the US. Quite expansive and stringent, this brand-new rule means that many firms will be startled to discover they have come into scope and must implement compliance immediately.
In scope: Institutional investors with investment discretion over, and meeting or exceeding a monthly average of daily gross short positions of 10 million USD or 2.5% of registered securities outstanding must now report specified short-position and short-activity data for equity shares. Many asset managers’ portfolios will be impacted.
Compliance is operationally challenging — firms must get ready to perform the intensive monitoring that has to take place monthly.
- Compile positions
- Submit Form SHO (the all-new short-selling report) within 14 days of month end
In addition, as of January 2, 2025, Form SHO must be submitted in machine-readable format.
To comply with these new SEC requirements for SH and SS disclosures, firms face urgent challenges. Chief among them are:
- Locating and making available newly covered beneficial ownership data, especially for cash-settled instruments. If firms have not yet accomplished this step, they are already at risk of missing the initial disclosure due date of February 5, 2024.
- Locating and making available short-sale-related data and instituting calculations to meet SS filing requirements.
- Establishing the newly intensified monitoring cadences (down to the time of submission) across the board.
- Prepping the machine-readable reporting format due in December 2024. No more PDFs.
Behind the scenes prep
Given the brief time remaining to prepare, and the urgent up-front challenges, it is essential for firms whose investment value puts them in scope to seek the most strategic means to handle and futureproof themselves for the SEC’s burgeoning shareholding disclosure requirements.
The complexities of these disclosures require a data management and regulatory reporting system that:
- Easily incorporates equity, equity and cash-settled derivatives, and short-selling position tracking datasets from a firm’s disparate sources
- Swiftly determines a holding’s eligibility for disclosure via a fit-for-purpose data-dictionary architecture that understands beneficial ownership types
- Accurately onboards and reflects a firm’s specific entity hierarchy so that shareholding data can be aggregated and disaggregated as needed at entity and group levels in accordance with intricate, changing disclosure requirements
- Provides transparent and flexible application of rules. For example, given organizations’ distinct entity structures, a firm may require certain operating model rule-modifications
- Calculates thresholds on large data volumes and provides an alert on any breach, enabling firms to manage their individual disclosure obligations on a timely basis
- Compiles reports according to threshold rules within disclosure submission timelines in various machine-readable formats as defined by each regulator (e.g., XML, XBRL, and HTML)
- Is SaaS-enabled to efficiently handle large data volumes and calculations, and, ideally, also provides regulatory change-management support
- Is modular in the sense that a firm only required to disclose SH, can do that, and add SS monitoring if it becomes necessary
- Is globally applicable, so a firm can address all its shareholding disclosure requirements in a uniform way across jurisdictions