Originally published October 16, 2008
Keywords: SEC, naked short selling, Form SH, Rule 204T, Securities Exchange Act, securities, Regulation SHO, Rule 10a-3T,
On October 14, 2008, the US Securities and Exchange Commission (SEC) issued three formal rulemaking orders effectively extending the "naked short selling" rules implemented under an emergency order issued on September 17, 2008 (the "September Emergency Order").1 On October 15, 2008, the SEC took the additional step of issuing another formal rulemaking order effectively extending the requirement for certain institutional investment managers to file information on Form SH concerning certain short sales and positions.2 As was foreshadowed on October 2, 2008,3 the SEC took the following steps:
Rule 204T of Regulation SHO. The SEC adopted, on an interim final basis, temporary Rule 204T under Regulation SHO.4 This rule is effective October 17, 2008, and will expire, absent further SEC action, on July 31, 2009. Rule 204T requires short and long sellers and their broker-dealers to deliver equity securities by the settlement date (three days after the sale transaction date, or T+3) and imposes penalties for failure to do so. Although the rule, as formally adopted, is substantially similar to the rule implemented under the September Emergency Order, there are some modifications designed to address technical and operational issues. The SEC has requested public comment on interim final Rule 204T, and comments are due on or before 60 days after the order is published in the Federal Register.
Exchange Act Rule 10b-21. The SEC formally adopted Rule 10b-21 under the Securities Exchange Act of 1934.5 Rule 10b-21 provides that it constitutes a "manipulative or deceptive device or contrivance," as used under Section 10(b) of the Exchange Act, for any short seller, including a broker-dealer acting for its own account, to deceive others (e.g., broker-dealers, participants of a registered clearing agency, or purchasers) about the seller's intention or ability to deliver equity securities sold short in time for settlement, and to subsequently fail to deliver those securities on or before the date delivery is due. Although identical to the prior version implemented under the September Emergency Order, the permanent version of Rule 10b-21 is technically effective when that prior version lapses on October 17, 2008. The SEC is not seeking comment on this rule because it was formally proposed prior to the September Emergency Order.6
Amendments to Rule 203(b)(3) of Regulation SHO. The SEC formally adopted amendments to Rule 203(b)(3) of Regulation SHO that eliminate the options market maker exception from the close-out requirements in Regulation SHO.7 Although identical to the prior amendments implemented under the September Emergency Order, the permanent amendments to Rule 203 are technically effective when those prior amendments lapse on October 17, 2008. The SEC is not seeking comment on these amendments because they were formally proposed prior to the September Emergency Order.8
Form SH and Exchange Act Rule 10a-3T. The SEC adopted, on an interim final basis, temporary Rule 10a-3T under the Exchange Act and Form SH.9 This rule and accompanying form are effective October 18, 2008, and will expire, absent further SEC action, on August 1, 2009. The SEC has requested public comment on interim final Rule 10a-3T, and comments are due on or before 60 days after the order is published in the Federal Register. The new requirements are similar to those established under the SEC's prior emergency orders with the following notable modifications:
- The filing deadline will be the last business day of the calendar week following a week in which short sales are effected (rather than the first business day);
- Filers will no longer be required to disclose the value of the securities sold short (old column 5 of Form SH), the largest intraday short position (old column 7) or the time of day of the largest intraday short position (old column 8);
- Filers will be required to submit an XML tagged data file to the SEC; and
- The threshold for reporting short sales or positions will be raised from a fair market value of US$1 million to US$10 million. Filers will have the option, during a two-week phase-in period, to either: (a) report short positions effected prior to September 22, 2008, and take advantage of the higher threshold or (b) continue using the old lower threshold during this phase-in period. Starting with the November 7, 2008, filing, however, all filers will be required to report their short positions effected prior to September 22, 2008.
1. Securities Exchange Act Rel. No. 58,572 (September 17, 2008) available at http://www.sec.gov/rules/other/2008/34-58572.pdf. See also Exchange Act Rel. No. 58,711 (October 1, 2008) (extending the September Emergency Order) available at http://www.sec.gov/rules/other/2008/34-58711.pdf. For more information regarding the SEC's issuance of these emergency orders, please see Client Alert: SEC Issues New Rules to Combat Naked Short Selling Abuses (September 18, 2008) and Client Alert: SEC Extends Short Sale Emergency Orders (October 3, 2008). If the rules implemented under these emergency orders were not extended or otherwise adopted via formal rulemaking, they were set to expire at 11:59 p.m. ET on October 17, 2008.
2. Form SH was created pursuant to an emergency order issued by the SEC on September 18, 2008. Securities Exchange Act Rel. No. 58,591(September 18, 2008) available at http://www.sec.gov/rules/other/2008/34-58591.pdf. See also Exchange Act Rel. No. 58,591 (September 21, 2008) (amending the original Form SH emergency order) available at http://www.sec.gov/rules/other/2008/34-58591a.pdf and Exchange Act Rel. No. 58,724 (October 2, 2008) (extending the Form SH filing requirements through October 17, 2008) available at http://www.sec.gov/rules/other/2008/34-58724.pdf. For more information regarding the SEC's issuance of these Form SH emergency orders, please see Client Alert: SEC Halts Short Selling of Financial Companies (September 19, 2008).
3. See SEC Press Release 2008-235 available at http://www.sec.gov/news/press/2008/2008-235.htm.
4. See Exchange Act Rel. No. 58,773 (October 14, 2008) available at http://www.sec.gov/rules/final/2008/34-58773.pdf.
5. See Exchange Act Rel. No. 58,774 (October 14, 2008) available at http://www.sec.gov/rules/final/2008/34-58774.pdf.
6. See Exchange Act Rel. No. 57,511 (March 17, 2008) available at http://www.sec.gov/rules/proposed/2008/34-57511fr.pdf.
7. See Exchange Act Rel. No. 58,775 (October 14, 2008) available at http://www.sec.gov/rules/final/2008/34-58775.pdf.
8. See Exchange Act Rel. No. 56,213 (August 7, 2007) available at http://www.sec.gov/rules/proposed/2007/34-56213.pdf.
9. See Exchange Act Rel. No. 58,785 (October 15, 2008) available at http://www.sec.gov/rules/final/2008/34-58785.pdf.
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