SEC Emergency Order: Form SH Filing Requirement

September 29, 2008

On September 21, 2008, the Securities Exchange Commission (the "SEC") issued an emergency order ("Emergency Order") requiring institutional investment managers ("Managers") to disclose their short positions on a class of securities defined in section 13(f) of the Securities Exchange Act of 1934, as amended ("Exchange Act").  The disclosure requirement applies to short sales of section 13(f) securities that are effected during the term of the Emergency Order.  The Emergency Order became effective on September 22, 2008, and will remain in effect until October 2, 2008, unless further extended by the SEC.  Short sales transacted before and after the effective period of the Emergency Order are not subject to the disclosure requirement.  The initial deadline for the required disclosures, which must be reported on Form SH, is Monday, September 29, 2008.  Form SH must be filed before 5:30 p.m. EST. 

Who Must Report

Managers are required to file Form SH if they filed or were required to file Form 13F for the second quarter of 2008.  Managers who exercise investment discretion over accounts holding section 13(f) securities with an aggregate fair market value of at least $100,000,000 are subject to the Form 13F reporting requirement.  

Reporting on Form SH

Managers must report all short positions in section 13(f) securities (except options on 13(f) securities as explained below) by submitting a Form SH through EDGAR.  Managers may rely on the published list of 13(f) securities to determine whether they have short positions on securities that are reportable on Form SH.  The list is available on the SEC's website at http://www.sec.gov/divisions/investment/13flists.htm. 

Upon filing, the Form SH report is non-public.  Managers must label the Form SH with the phrase "NON-PUBLIC" in bold and capital letters at the top and bottom of each page of the form, including the cover page.  The SEC will make the Form SH available to the public two weeks after the due date of the Form SH. 
 
Form SH requires detailed disclosures concerning, among other things, the identity of Managers that are filing the Form SH, opening and closing short positions, the number and value of securities sold short, the largest intraday short position, and the time such position was established.  Consistent with Exchange Act rule 12b-21, information that is unknown and not reasonably available to the Manager may be omitted.  When omitting such information, the Manager must explain on the Form SH that the information is being omitted because the information is unknown and not reasonably available ("U-NRA"). 

Exclusions from Reporting on Form SH

The SEC has provided certain exclusions from the Form SH reporting requirement.  Set forth below are the most significant exclusions: 

• De Minimus Exclusion:  Managers are not required to file Form SH if the short position in a section 13(f) security is less than 0.25% of the securities issued and outstanding in that class of securities, and the fair market value of the short position in that security is less than $1,000,000 on each day of the reporting period.  If either of the two conditions is not met on any day, the Manager cannot claim the de minimus exclusion and must file Form SH disclosing the short positions on that section 13(f) security. 
• Options:  The Emergency Order excludes options on section 13(f) securities from the Form SH reporting requirement.  Managers are not required to report short sales of options on section 13(f) securities.  Short sales of section 13(f) securities that result from the exercise of options contracts (e.g. the exercise of a put option or an assignment to call writers), however, are reportable on Form SH as of the date of exercise.   
• Short Swaps: Short swaps, which appear on the long side of Form 13F, are excluded from the Form SH reporting requirement. 

Calculating Short Positions

The SEC has issued interpretive guidance to assist Managers in calculating short positions for purposes of the Form SH reporting requirements.  Set forth below are some "pointers" from the relevant SEC guidance: 

• Short positions on each section 13(f) security must be aggregated across all accounts as of the end of the trading day. 
• Long positions on a section 13(f) security in an account may not be netted against short positions on the same security in that same account or in other accounts when computing the total aggregate of short positions.  A short position can only be reduced by transactions that were effected for the purpose of closing-out that short position. 
• The "fair market value" of open short positions is determined by using the market price of the section 13(f) security on the primary or listing market for the security as of the close of floor trading on the New York Stock Exchange ("NYSE").  If the short sales are effected on a non-business day, the "fair market value" of open short positions is determined as of the close of floor trading on the NYSE on the most recent business day. 
• Short positions existing prior to September 22, 2008 are not required to be reported on Form SH, despite the column on the form titled "Short Position (Start of Day)."  Managers are required to disclose short positions existing from September 22, 2008 onward. 

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For assistance with any of the issues addressed in this update, please contact any one of the Bracewell & Giuliani attorneys listed on the upper right-hand side of this page.