| Americas | Articles
The SEC has issued three significant regulatory updates that directly impact investment advisers: the implementation of Form SHO filing requirements, revisions to Form PF, and the introduction of Form NPX as an additional component of 13F reporting. Understanding the implications of these changes is essential for investment advisers to adapt their compliance strategies effectively and mitigate regulatory risks.
Form SHO
In response to the evolving landscape of securities trading, the SEC has implemented Rule 13f-2 under the Securities Exchange Act of 1934 (Exchange Act), with a close 3-2 vote on October 13, 2023. This pivotal rule introduces Form SHO, a confidential filing requirement aimed at providing comprehensive insights into short positions and daily activities conducted by investment managers who surpass specified thresholds.
Rule 13f-2 mandates investment managers to submit Form SHO if their short positions exceed predefined thresholds during a given calendar month. These thresholds vary depending on whether the short position pertains to equity securities of reporting or non-reporting entities.
For equity securities of reporting issuers, managers must file Form SHO if their gross short position meets one of the following criteria at the close of regular trading hours:
- A monthly average gross short position of at least $10 million, or
- A monthly average gross short position representing at least 2.5 percent of the shares outstanding.
For short positions in equity securities of non-reporting issuers, disclosure is required if the gross short position value meets or exceeds $500,000 at the close of regular trading hours on any settlement date during the calendar month.
Managers meeting the disclosure thresholds must lodge Form SHO with the SEC via the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system within 14 calendar days following the end of the respective month. The form comprises a cover page and two information tables, delineating applicable short position information and daily activity affecting the gross short positions during the reporting period.
All information included in Form SHO is subject to confidentiality treatment under Rule 83 of the SEC’s Regulation Concerning Information and Requests. The SEC will publish aggregate short position information, including gross position, dollar value, and net activity for each individual equity security reported by managers on Form SHO. This data will be published within one month after the end of each calendar month, with a slight delay intended to mitigate imitative trading activity and safeguard managers’ proprietary trading strategies.
While Rule 13f-2 and Form SHO become effective 60 days after publication in the Federal Register, compliance with the rule and related form is required 12 months after the effective date. Public dissemination of aggregated reporting data by the SEC will follow three months later. Rule 13f-2, Form SHO and the amendment to the CAT National Market System Plan will become effective on January 2, 2024
Form PF updates
Meanwhile, in a move to bolster systemic risk assessment and fortify investor protection efforts, the SEC announced amendments to Form PF, the confidential reporting form for certain SEC-registered investment advisers to private funds. These amendments, effective six months after publication, aim to provide the Financial Stability Oversight Council (FSOC) with enhanced visibility into private funds and empower both the SEC and FSOC to monitor systemic risk effectively.
Under the amended regulations, large hedge fund advisers are required to file current reports within 72 hours of specific reporting events indicating potential stress at a fund or investor harm. These events include extraordinary investment losses, margin and default events, prime broker relationship terminations, operations events, and withdrawal-related incidents.
Private equity fund advisers must now file event reports within 60 days of each fiscal quarter end, detailing significant events such as general partner changes, fund terminations, and adviser-led secondary transactions.
Large private equity fund advisers will provide annual reports on general partner and limited partner clawbacks, along with additional information on strategies and borrowings as part of their annual filing.
The amendments apply to large hedge fund advisers, private equity fund advisers, and large private equity fund advisers meeting specific asset management thresholds.
The Final Amendments to Form PF encompass various changes, including:
- disaggregating complex fund structures
- reporting parallel managed accounts
- identifying trading vehicles
- reporting investments in fund of funds
- calculating assets under management (AUM)
- reporting fund performance
- collecting expanded biographical data
- noting withdrawal or redemption rights
- addressing digital assets reporting.
The effective and compliance date for the implementation of new Section 5, pertaining to current reporting events for large hedge fund advisers, and new Section 6, focusing on quarterly reporting events for all private equity fund advisers, was December 11, 2023. The effective and compliance date for the amended Section 4, which concerns annual reporting for large private equity fund advisers, is scheduled for June 11, 2024.
N-PX
Form N-PX is a crucial reporting tool mandated by the SEC for registered management investment companies, excluding small business investment companies registered on Form N-5, to disclose their complete proxy voting records annually. This guide provides detailed insights into the requirements and procedures associated with Form N-PX, particularly focusing on the upcoming changes effective July 1, 2024.
Institutional managers, as defined by Rule 13f-1 under the Exchange Act, are obligated to report their proxy voting records concerning executive compensation matters of public companies annually. These reports cover votes on executive compensation approval, frequency of such votes, and golden parachute compensation related to mergers or acquisitions. Originating from Section 951 of the Dodd-Frank Act, this mandate is standardized and enforced through Rule 14Ad-1, effective July 1, 2024.
The revised Form N-PX comprises three main sections:
- Cover page: Provides identifying information and indicates report type. If proxy votes are reported by other entities, details of those entities must be included.
- Summary page: Includes information on joint reporting with other institutional managers or series-related details for registered funds.
- Proxy voting record: Contains detailed records of proxy votes, including shares voted, shares loaned and specific categories for different types of votes, such as Section 14A say-on-pay votes.
Key enhancements
- Detailed reporting: The amended Form N-PX requires more comprehensive reporting, including the number of shares voted and shares loaned and not recalled, along with categorization of votes into 14 predefined categories.
- Alignment with proxy cards: If available, filers must align their reporting language with SEC proxy cards for consistency and clarity.
- Streamlined reporting: Short-form reporting options are available for cases where proxy votes are reported by other entities, or when no voting activity occurs due to disclosed policies.
Institutional managers are advised to undertake the following preparatory measures:
- Review current proxy voting policies and practices to ensure alignment with Form N-PX requirements.
- Maintain accurate records of all required information for every Say-on-Pay vote occurring on or after July 1, 2023.
- Track shares voted and shares loaned and not recalled before record dates for precise reporting.
With the impending changes to Form N-PX reporting requirements, you must prepare to fulfill your obligations accurately and in a timely manner. Adhering to these guidelines will facilitate seamless compliance with SEC regulations and enhance transparency in proxy voting practices. The first reporting date for N-PX is August 31, 2024, reporting how you voted proxies relating to executive compensation and golden parachute matters of any public company during the period spanning July 1, 2023 to June 30, 2024.
We can help
As these regulatory adjustments loom on the horizon, investment advisers must recognize the need to adapt swiftly. Our team are experts in advising on regulatory change and supporting firms with meeting their compliance obligations efficiently.
Get in touch
