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Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Wednesday, April 8, 2009

SEC Proposes Alternative Approaches to Short Sale Regulation

The SEC today voted unanimously to seek public comment on whether short sale price restrictions or circuit breaker restrictions should be imposed and whether such measures would help promote market stability and restore investor confidence. In June 2007, the SEC voted to eliminate price restrictions.  The Commission decided to re-evaluate the issue due to extreme market conditions and the resulting deterioration in investor confidence.

The Commission voted to propose two approaches to restrictions on short selling. One would apply on a market wide and permanent basis, while the other would apply only to a particular security during severe market declines in that security. They include:

Market-Wide, Permanent Approach

Proposed Modified Uptick Rule: A market-wide short sale price test based on the national best bid (a proposed modified uptick rule).

Proposed Uptick Rule: A market-wide short sale price test based on the last sale price or tick (a proposed uptick rule).

Security-Specific, Temporary Approach

Circuit Breaker: A circuit breaker that would either:

Ban short selling in a particular security for the remainder of the day if there is a severe decline in price in that security (a proposed circuit breaker halt rule).

Impose a short sale price test based on the national best bid in a particular security for the remainder of the day if there is a severe decline in price in that security (a proposed circuit breaker modified uptick rule).

Impose a short sale price test based on the last sale price in a particular security for the remainder of the day if there is a severe decline in price in that security (a proposed circuit breaker uptick rule).

In addition, the Commission proposed amendments to Regulation SHO to require that a broker-dealer mark a sell order "short exempt" if the seller is relying on an exception to a short sale price test restriction or a circuit breaker rule.

Public comments on today's proposed amendments must be received by the Commission within 60 days after their publication in the Federal Register.

The full text of the rule proposals will be posted to the SEC Web site as soon as possible.

http://lawprofessors.typepad.com/securities/2009/04/sec-proposes-alternative-approaches-to-short-sale-regulation.html

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