In recent years, the SEC has placed considerable focus on abusive short selling. In the fall of 2008, the SEC issued interim final temporary rules to Regulation SHO designed to curtail abusive short selling and increase disclosure of short selling activity. On April 10, 2009, the SEC issued proposed amendments to Regulation SHO that would reinstate restrictions on short sales through price restrictions, circuit breakers or a combination of these methods. An overview of these proposed amendments is discussed in our previous corporate alert entitled "The SEC Holds Roundtable on Proposed Restrictions on Short Selling" available at http://www.drinkerbiddle.com/secroundtable /.
On July 27, 2009, the SEC issued a press release outlining the steps it has taken to curtail abusive short selling and to increase market transparency, including addressing the interim final temporary rules to Regulation SHO previously adopted in 2008. The SEC also stepped up enforcement of its short selling rules by settling two cases alleging abusive short selling on August 5, 2009. In addition, on August 17, 2009, the SEC issued a proposal seeking comments on an alternative uptick rule, a variation on the price restriction test previously proposed on April 10, 2009. An overview of these additional measures is discussed in our previous corporate alert entitled "Short Selling Restrictions – Update" available at http://www.drinkerbiddle.com/short_selling /.
The SEC's focus on abusive short selling continued on February 24, 2010, when it approved amendments to Regulation SHO to adopt pricing restrictions on short sales of certain securities whose price has experienced a severe intraday decline.
Overview of Amendments
The SEC voted 3-2 to adopt the previously proposed "alternative uptick rule." It did not, however, adopt this price restriction on a market-wide and permanent basis. Rather, the alternative uptick rule has been combined with a "circuit breaker" and will apply only to a particular security when there is a 10 percent or more decline in that security's price from the prior day's closing price. The amendments apply to all "covered securities," defined as all securities, except options, listed on a national securities exchange, and will apply regardless of whether the covered security is traded on an exchange or in the over-thecounter market.
Once the circuit breaker is triggered, the alternative uptick rule applies to short sales in that security for the remainder of the trading day plus the following day. The alternative uptick rule only allows short selling at a price above the current national best bid, and short sales at a price equal to or below that price are prohibited, subject to certain limited exceptions. The rules require trading centers to establish, maintain and enforce written policies and procedures that are reasonably designed to prevent the execution or display of a short sale in violation of the rule. The rule does not impose restrictions on long sales, and long sellers are permitted to sell at the current national best bid even if the circuit breaker is triggered.
Exemptions
Certain short sales are exempt from the price restrictions. The rule allows short sales marked "short exempt" to be executed or displayed without regard to the price. The exemptions include: (i) short sale orders identified by the broker-dealer as being above the current national best bid at the time the order is submitted; (ii) a seller's delay in delivery if the broker-dealer has a reasonable basis to believe that the seller owns the covered security being sold and that the seller intends to deliver the covered security as soon as all restrictions on delivery have been removed; (iii) odd-lot transactions; (iv) certain bona fide domestic arbitrage transactions; (v) certain international arbitrage transactions; (vi) overallotments and lay-off sales; (vii) certain riskless principal transactions; and (viii) transactions on a volume-weighted average price basis. The amendments require broker-dealers to establish, maintain and enforce written policies and procedures that are reasonably designed to assure proper identification of short exempt orders.
Implementation
The rules became effective on May 10, 2010, and included a six-month implementation period to allow trading centers, broker-dealers and other market participants sufficient time to modify their systems, policies and procedures in order to comply with the new rules.
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