Securities Law Prof Blog

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

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Monday, July 27, 2009

SEC Finalizes Short Sales Rule and Announces Other Initiatives

The SEC published amendments to Regulation SHO to make permanent amendments contained in Interim Final Temporary Rule 204T (“temporary Rule 204T”) of Regulation SHO, with some modifications to address commenters’ concerns. These amendments are intended to help further the goals of reducing fails to deliver and of addressing abusive “naked” short selling in all equity securities. These goals will be furthered by requiring that, subject to certain limited exceptions, if a participant of a registered clearing agency has a fail to deliver position at a registered clearing agency it must immediately purchase or borrow securities to close out the fail to deliver position by no later than the beginning of regular trading hours on the settlement day following the day the participant incurred the fail to deliver position. In addition, a participant that does not comply with this close-out requirement, and any broker-dealer from which it receives trades for clearance and settlement, will not be able to short sell the security either for itself or for the account of another, unless it has previously arranged to borrow or borrowed the security, until the fail to deliver position is closed out.

In addition, the SEC announced other actions to protect against abusive short sales and to make more short sale information publicly available.  These include working with several SROs to make short sale volume and transaction data available through the SRO Web sites. The SEC is also considering proposals on a short sale price test and circuit breaker restrictions.

Finally, the SEC intends to hold a public roundtable on September 30 to discuss securities lending, pre-borrowing, and possible additional short sale disclosures. The roundtable will consider, among other topics, the potential impact of a program requiring short sellers to pre-borrow their securities, possibly on a pilot basis, and adding a short sale indicator to the tapes to which transactions are reported for exchange-listed securities.

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