On 26 April 2010 the Financial Services Authority (FSA) published a consultation paper on the implementation of certain aspects of the Financial Services Act 2010 [see Essential corporate news - week ending 6 April 2010] (CP 10/11). CP 10/11 sets out, inter alia, the FSA’s proposed new rules in relation to short selling in light of the powers provided to it by the Financial Services Act 2010 (and inserted into Part 8A and section 131 Financial Services and Markets Act 2000 (FSMA)).

CP 10/11 includes the following proposals in relation to short selling:

  • Disclosure of short selling positions - The FSA intends to remove the short selling provisions currently contained in the Code of Market Conduct sourcebook and produce a new module in the FSA Handbook, the Financial Stability and Market Confidence sourcebook. The existing rules, which require disclosure of significant short positions where a company is undertaking a rights issue and in relation to UK financial sector stocks (banks and insurance companies and their parent undertakings), will be remade in the new sourcebook. They will be largely unchanged except in relation to the rights issue disclosure regime to which the FSA intends to narrow the scope of companies to which the regime applies. The rights issue disclosure regime will, in effect, be restricted to UK companies and companies for whom a UK prescribed market is the main or sole trading venue for their securities.
  • Disclosure thresholds - The FSA recognises that the Committee of European Securities Regulators has recommended [see Essential corporate news - week ending 5 March 2010] a higher initial public threshold of 0.5 per cent for its general European short selling regime, accompanied by a system of private disclosures to regulators starting at a lower 0.2 per cent threshold. However, until a European short selling regime is finalised, the FSA considers it appropriate to maintain the existing thresholds of 0.25 per cent for UK financial sector companies disclosure (accompanied by a disclosure requirement for each 0.1 per cent change or where the person’s net short position falls below 0.25 per cent) and 0.25 per cent on a one-off basis for rights issues.
  • Calculating net short positions - The FSA is proposing to retain the methodology for calculating a short position set out in its FAQs. All economic interests in the issued share capital of the issuer should be taken into account to determine the investor’s economic exposure. Also, during a rights issue period, a person should not be able to net a short position in the company’s existing capital with a long position in the nil-paid rights, but a short position in the nil-paid rights should be taken into account when calculating the overall net short position in the company.
  • Netting - The FSA does not consider it appropriate for a group of companies, where more than one company hold a short position in another company, to net positions at group level. Short positions should be netted at legal entity level.
  • Applicability of the disclosure rules - The FSA considers that the disclosure obligations should continue to apply to holders of net short positions. Where an investment manager or fund manager acts on behalf of a client on a non-discretionary basis, the disclosure obligation will apply to the client, but the client can arrange for the investment manager to make a disclosure on the client’s behalf. Where the investment manager acts on a discretionary basis, both the investment manager and the client will be subject to the disclosure requirements. Market makers will continue to be exempt from the disclosure obligation.
  • Enforcement - The FSA has been given a new power under section 131G FSMA to impose financial penalties or public censure on persons who breach any of the short selling rules. Sections 131E and 131F FSMA also enable the FSA to require a person to provide information and documents as reasonably required to determine whether a person has contravened the rules. The FSA’s policy for determining the level of penalty is set out in Rule 6 of the Decision Procedure and Penalties manual.

The FSA invites comments on CP 10/11 by 25 June 2010.

(FSA, Consultation Paper 10/11: Implementing aspects of the Financial Services Act 2010, including proposals on short selling, 26.04.10)

(FSA, Press Release, 26.04.10)