On September 18, 2008 the US Securities and Exchange Commission
(SEC) issued an order pursuant to the Securities and Exchange Act
of 1934 (the SEC Order) that "all persons are prohibited from
short selling any publicly traded securities" of certain
financial sector firms. This order was updated on September 22,
2008 to provide that US stock exchanges and markets are authorized
to specify which firms would be the subject of the prohibition, and
that the firms themselves could request that short selling of their
On September 19, 2008 the Ontario Securities Commission (OSC)
issued a Temporary Order (the OSC Order) under Section 127 (5) of
the Securities Act (Ontario) prohibiting short selling of
securities of certain financial sector firms listed on the Toronto
Stock Exchange (TSX) and also interlisted in the United States.
The firms affected are: Aberdeen Asia-Pacific Income Investment
Company Ltd., Bank of Montreal, The Bank of Nova Scotia, Canadian
Imperial Bank of Commerce, Fairfax Financial Holdings Limited,
Kingsway Financial Services Inc., Manulife Financial Corporation,
Quest Capital Corp., Royal Bank of Canada, Sun Life Financial Inc.,
Thomas Weisel Partners Group Inc., The Toronto-Dominion Bank, and
Merrill Lynch & Co., Canada Ltd.
The OSC Order will remain in effect until October 3, 2008,
unless extended by Order of the OSC.
It appears that the OSC Order was issued as a precautionary
matter with respect to short selling of the securities of financial
sector firms subject to the SEC Order, and that the OSC Order was
only intended to prevent arbitrage in securities that are
interlisted in the US (or in the case of Merrill Lynch & Co.,
Canada Ltd., whose shares are interchangeable into securities of
Merrill Lynch & Co. Inc. which is listed in the US and subject
to the SEC Order). The Canadian securities regulators do not appear
to be inclined to extend the OSC Order to Canadian financial sector
firms that are not interlisted, or to firms active in other
The OSC Order only addresses short selling in the securities of
the named financial sector firms, and does not apply to short
positions arising through exposure to derivatives.
On September 22, 2008, the Investment Industry Regulatory
Organization of Canada (IIROC) published a Reminder Respecting
Obligations in the Conduct of Short Sales (the IIROC Reminder)
reiterating that "naked short selling" in Canada is
prohibited. As stated in the IIROC Reminder, "under Rule 2.2
of the Universal Market Integrity Rules (UMIR), a Participant or
Access Person will be considered to have engaged in manipulative
and deceptive behaviour if the Participant or Access Person enters
a sell order on a marketplace without having the reasonable
expectation of settling any trade that would result from the
execution of the order".
The views of the OSC and IIROC regarding short selling may have
been influenced by the Market Regulation Services Inc.'s
Statistical Study on Failed Trades published in April 13, 2007 (the
MRS Statistical Study on Failed Trades) which reviewed the
activities of 25 Canadian investment dealers. The MRS
Statistical Study on Failed Trades indicated that failed
trades involving short sales were projected to account for only
0.07% of total short sales by study participants. We understand
that this low rate of failed short sale trades is in contrast to
the US experience and may be responsible for triggering a more
severe response from the SEC on the matter of short selling.
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