GameStop: A Catalyst For SEC Rule 13F-2 Short Selling Disclosure

13F-2: The Longtail Effects Of The GameStop Meme-Stock Thread

By 2021, we were well into the pandemic. With quarantines still impacting many parts of the world, both retail investment and social-media engagement accelerated within many demographics. One of the most consequential, associated events was the Reddit meme-stock thread that led to a group of retail investors taking advantage of a perceived undervaluation, by major institutional investors, of American video-game retailer, GameStop Corp., triggering a short squeeze.

This had an unprecedented impact on: 

• Hedge fund managers and other large, short sellers who had betted on GameStop's demise. This resulted in market volatility and huge losses as well as the production of the film Dumb Money, released in September 2023.
• The US Securities and Exchange Commission (SEC)’s recognition of the need for publicly available short sell-related data. This was critical for both the public and the SEC, as a major regulator, to better react in times of high uncertainty, and led directly to the issuing of Rule 13F-2, the first ever short selling regulation, published on January 2, 2024. 

SEC Rule 13F-2 imposes strict and complex monitoring and reporting requirements on participants with exposure to the US markets, including broker-dealers, investment advisers, banks, insurance companies, pension funds, and corporations. Starting January 2, 2025, these institutions must submit a filing within 14 days of each month-end. 

The Significance Of Rule 13F-2

As a new regulation, Rule 13F-2 has its own data and monitoring obligations. This will be a significant change, particularly for investors who have not previously needed to monitor their short positions in US securities.

The recent drive for modernization in the US financial ecosystem has led to impending changes to investor-level disclosure obligations for Rules 13G and 13D. With the addition of Rule 13F-2, it is certainly a new era at the SEC for required information. 

The responsibility for disclosing short-selling transaction data currently lies with broker-dealers with the existing FINRA short interest reporting obligation. However, with the introduction of 13F-2, the focus extends to market participants with exposure to the US markets, as a whole. 

Functional Drivers For Issuer And Threshold Categories Under Rule 13F-2

The new 13F-2 regulation requires continuous monitoring of an investor’s short positions and monthly disclosures on breaching the designated thresholds for both reporting and non-reporting company issuers.

• Reporting companies: Those issuing Section 12-registered class of equity securities/any US-listed security; or those subject to Section 15D, which includes issuers required to file periodic or supplementary information, as necessary, in the public interest and/or for protection of investors. Disclosure is required for managers with holdings that breach a monthly average of daily gross short positions of US$10 million or 2.5% of shares outstanding in reporting-company issuers. Because the need to disclose is unknown until the end of the month, it is crucial that institutions assess and monitor their positions, while performing the necessary daily calculations across entity structures, to mitigate any month-end surprises.

• Non-reporting companies: These are more difficult to determine as the category effectively captures any holdings in private companies or US issuers trading on the over-the-counter (OTC) markets. Interestingly, by casting this wide net, the SEC could also capture non-US-listed securities given that the activity of any institutional investor that falls under the purview of the US-reporting requirements would automatically be considered relevant domestic conduct. Disclosure is required for managers with holdings breaching a gross short position of US$500,000 in issuers during the month, as opposed to a monthly average. Again, it is vital that institutions monitor their positions daily to identify if a disclosure obligation will arise at month-end.