In an open meeting on April 8, 2009, the Securities and Exchange Commission voted unanimously to seek public comment on a total of five variations on two approaches to the re-regulation of short selling.1 Each of these proposals, if adopted, could have a significant impact on current short-selling practices. Although the Commission voted 5-0 to release the current proposals for comment, it was clear during discussion at the meeting that the Republican members of the Commission, Commissioners Casey and Paredes, were skeptical of which, if any, of the proposed rules should be adopted, and it was not clear which of the five proposals the other Commissioners might favor. The first set of proposals would include market-wide and permanent re-regulation of short sales generally.
The first alternative would reinstate an uptick rule substantially similar to the old Rule 10a-1 under the Securities Exchange Act of 1934, as amended, prohibiting short sales at a price below the last sale price. The second alternative would create a modified uptick rule that would prohibit short sales below the last national best bid. This second proposal is similar to that suggested in a recent proposal submitted by the CEOs of the NASDAQ OMX Group, NYSE Euronext, BATS Exchange, Inc. and the National Stock Exchange.2 That group argued that a rule based on the bid price, rather than the last sale price, would be more easily understood and adopted by markets that have grown larger and rely more on rapid electronic trading since the elimination of the original uptick rule.
The second set of proposals would affect specific securities temporarily, acting as a “circuit breaker” following a precipitous decline in price. Here the SEC provided three options for public comment. The first, a “circuit breaker halt” rule, would halt all short selling in a particular security for the rest of the trading day if a certain threshold percentage price decline were crossed. The second proposal, a “circuit breaker modified uptick” rule, would apply a national best bid price test to a particular security for the rest of the trading day if the threshold percentage price decline were crossed. The third, a “circuit breaker uptick” rule, would apply a last sale price test (essentially the traditional uptick rule) to a particular security for the rest of the trading day if the threshold percentage price decline were crossed. While the SEC’s proposal does not express a clear preference for a specific threshold percentage trigger for these circuit breaker proposals, the staff mentioned a 10 percent price decline per day as one possibility.
This development is the first step in the full reversal of the SEC’s elimination of price restrictions for short sales in 2007. If any of the proposed rules were to be adopted, they would join other regulations such as Regulation SHO, Rule 105 of Regulation M and Rule 10b-21 under the Exchange Act as part of the Commission’s attempts to address perceived short selling abuses. In July 2008, the SEC implemented an emergency order that imposed borrowing and delivery requirements on short sales of the equity securities of certain financial institutions. In September 2008, the SEC issued another emergency order banning the short selling of the securities of certain financial institutions. Since these restrictions have lapsed, the clamor for reinstatement of some version of the old uptick rule has only grown louder. In announcing its decision to re-evaluate the short sale restrictions, the Commission cited the “extreme market conditions and deterioration in investor confidence.”
The text of the proposed rules are not yet available, and, accordingly, the descriptions provided in this special alert are based on SEC press release and statements made by the commissioners and staff at the open meeting. The public comment period will run for 60 days following the publication of the proposals in the Federal Register.