As the clock ticks down toward the January 2025 compliance deadline for SEC Rule 13f-2, institutional investment managers face an unprecedented regulatory challenge. This new rule, aimed at increasing transparency around short-selling activities, represents a significant shift from existing reporting frameworks, leaving firms grappling with how to overhaul their data management and reporting systems.

David Emero, Head of Regulatory Reporting Product Strategy at n-Tier, warns that while Rule 13f-2 may appear straightforward on the surface, it introduces layers of complexity that require immediate attention. "Firms need to get moving now," Emero emphasizes, "regardless of any potential future delay." With regulatory pressure building and resources stretched thin across various compliance initiatives, Rule 13f-2 is not just another box to check—it's a new paradigm in data management that could expose firms to both operational strain and regulatory risk if not addressed in time.

What is Rule 13f-2?

Adopted by the SEC in October 2023, Rule 13f-2 introduces new reporting obligations for institutional investment managers holding certain levels of short positions in equity securities. Under the rule, firms that meet or exceed specific thresholds must report aggregated short positions and short activity data on a new form, Form SHO. This information will be collected and aggregated by the SEC, providing greater transparency around short-selling activities.

The rule also amends the Consolidated Audit Trail (CAT) requirements, obligating market makers to indicate whether a short sale was conducted in bona fide market-making activities. This amendment further aligns with the SEC’s broader goal of increasing visibility into market transactions.

Why Rule 13f-2 Poses Unique Challenges

Unlike its predecessor, Rule 13f-1, which required a relatively straightforward quarterly report of long positions, Rule 13f-2 demands daily monitoring and reporting of short positions based on settlement dates. This marks a significant shift from the trade-date-based reporting systems most firms currently rely on.

“Most existing position reporting regimes are based on trade date positions, while Rule 13f-2 is based on settlement date short positions,” Emero explained. As a result, firms may need to revamp their internal infrastructure, moving from front-office trading systems to back-office and settlement systems to properly source data.

This shift requires firms to aggregate short positions across all accounts under common control—both proprietary and customer discretionary accounts—and report on those positions daily. This is especially challenging for large multinational firms that must consolidate data from millions of accounts across multiple legal entities, each potentially using different back-office systems and infrastructure.

Key Data Management Requirements

Rule 13f-2 introduces stringent data management processes, especially in terms of reference data collection and aggregation. Firms must gather and track a wealth of static security reference data—such as outstanding shares, issuer classification, and end-of-day prices—to calculate short position values and determine if thresholds have been met.

The reporting thresholds themselves are lower and more complex than those under Rule 13f-1, with firms required to report short positions if they exceed $10 million in aggregate capital or 2.5% of a company’s outstanding shares. Emero noted that the $500,000 threshold for reporting under Rule 13f-2 is likely to impact many firms that previously fell below the $100 million threshold under Rule 13f-1.

In addition to position data, firms will need access to accurate security identifiers, including the CUSIP, FIGI, issuer’s legal name, and LEI, to properly complete the Form SHO filing. This will require robust data systems and processes that many firms may not currently have in place.

Increased Regulatory Scrutiny

Adding to the challenge, regulators have become increasingly stringent in their review of reported data. Emero pointed out that global regulators, particularly in the U.S., have developed sophisticated systems to analyze and correlate data across multiple reporting obligations, such as the Consolidated Audit Trail (CAT) and Large Options Position Reporting. Firms that fail to meet these stringent standards risk facing hefty fines, as recent penalties have demonstrated regulators’ intolerance for incomplete or inaccurate data submissions.

Emero warned that regulators will expect firms to actively monitor and supervise their short positions, even if they do not meet the reporting thresholds under Rule 13f-2. This means firms must implement not only reporting systems but also robust surveillance and control mechanisms to ensure compliance.

Preparing for Compliance

Firms should begin implementing scalable and efficient systems now, according to Emero. For those relying on manual processes for their 13f-1 filings, a daily reporting requirement under Rule 13f-2 represents a significant increase in workload and complexity. Implementing an automated, repeatable process will be critical for meeting the new demands without overwhelming internal resources.

Moreover, investment managers will need to ensure they have the data infrastructure in place to manage and aggregate short positions across global entities and accounts. This may involve re-evaluating data sources, upgrading systems, and ensuring that proper controls are in place to prevent data discrepancies.

Conclusion

As the deadline for Rule 13f-2 approaches, firms must act quickly to prepare for the new data management and reporting requirements. The rule’s complexity, combined with increased regulatory scrutiny, makes early preparation essential. Firms that fail to implement robust processes risk not only non-compliance but also significant penalties. By focusing on automation, data integrity, and comprehensive oversight, firms can navigate the challenges posed by Rule 13f-2 and ensure they meet the January 2025 deadline with confidence.

* * *

Attorney Advertising—Anderson P.C. is a U.S. law firm and provides this information as a service to clients, prospective clients, and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship.

Anderson P.C. is a boutique law firm dedicated to defending clients in government investigations and securities enforcement actions initiated by the SEC, FINRA, DOJ, and other regulatory bodies. We provide focused, strategic counsel and regulatory guidance across the full spectrum of federal laws and regulations affecting broker-dealers, investment advisers, banks, asset managers, private funds, public companies, senior executives, and digital assets. Our deep expertise allows us to navigate complex legal challenges and deliver results-driven solutions tailored to our clients' unique needs.

If you have any questions or need legal assistance related to government investigations, securities enforcement actions, or regulatory compliance, please don't hesitate to contact us. Our team at Anderson P.C. is here to provide the expert guidance and support you need to navigate these complex challenges.