On October 2, 2008, the Securities and Exchange Commission (“SEC” or the “Commission”) issued: (1) an order extending its September 18 Emergency Order, as amended on September 21, prohibiting short sales in the publicly-traded common stock of certain financial companies until the earlier of midnight on October 17 or three business days after the President signs the Emergency Economic Stabilization Act of 2008 (11:59 p.m. E.T. on Wednesday, October 8); and (2) an order extending its September 18 Emergency Order, as amended on September 21, requiring hedge funds and other institutional money managers to report certain information relating to short sales in Section 13(f) securities on Form SH until midnight on October 17.
Significantly, the SEC reversed course on the issue of public disclosure of Form SH. The prior order had provided for a two-week delay in the public posting of the forms. Citing the possibility that public disclosure of short sale positions could lead to “additional, imitative short selling,” the SEC determined to make all Forms SH filed under the Emergency Orders non-public, including those forms already filed on September 29, 2008. The filings may, however, be subject to public disclosure pursuant to the Freedom of Information Act.
In addition, on October 1, 2008, the SEC issued: (1) an order extending its September 17 Emergency Order implementing temporary Rule 204T, under which securities sold short must be delivered by settlement date (i.e., three business days after trade date or “T+3”) or pre-borrow requirements will be imposed upon the broker-dealer with respect to future short sales in the same security, eliminating the options market maker exception from the close-out requirements of Rule 203(b)(3) of Regulation SHO, and implementing Rule 10b-21, the new prohibition against fraud in connection with short selling until midnight on October 17; and (2) an order extending its September 18 Emergency Order temporarily broadening Rule 10b-18’s safe harbor from liability for issuer repurchases until midnight on October 17.
With these extensions, the SEC has reached the limit of its authority to extend the temporal scope of the above-mentioned Emergency Orders through another order. The SEC has already indicated that it will extend the Form SH filing requirement beyond October 17 through an interim final rule, which would go into effect immediately upon expiration of the Emergency Orders.
Extension of Ban on Short Sales of Financial Firms’ Publicly Traded Common Stock
The SEC explained the basis for the continued exercise of its “emergency” authority, citing continuing concern “about the potential for sudden and excessive fluctuations of securities prices generally and disruption in the functioning of the securities markets that could threaten fair and orderly markets.” The SEC explained that it intends “the prohibition to restore investor and market confidence by preventing short selling from being used to drive down the prices of securities in financial institutions even where there is no fundamental basis for a price decline other than general market conditions.”
The list of companies covered by the ban has grown to approximately 1,000, and includes many companies that are not traditionally viewed as “financial institutions.” Market participants should continue to check the websites of the exchanges for updates to the list of financial institutions covered by the ban.
Extension of Form SH Reporting Requirement
As a result of the extension of the Emergency Order, as amended, anyone required to file a Form SH must do so on October 6 and October 14 (the filing is made on the 14th because the 13th is a federal holiday). The SEC also made technical amendments to Form SH and its accompanying Instructions. The new version of Form SH is available on the SEC’s website at http://www.sec.gov/about/forms/formsh.pdf and the new version of Form SH Instructions is available at http://www.sec.gov/about/forms/formsh_instructions.pdf.
All Forms SH filed pursuant to the Emergency Order, including the forms filed on September 29, will remain non-public to the extent permitted by law without the filer needing to submit a confidential treatment request. The October 2 Order does not specify how the anticipated interim final rule will address the confidentiality of the filings. There is a possibility that the SEC will decide that after October 17, when an interim final rule is in place, Form SH filings will be made public. Similarly, any final rule promulgated by the SEC may make Form SH filings public.
It is important to note that the government’s ability to keep records non-public is not absolute, and therefore there can be no guarantee that any Form SH will remain non-public. Specifically, the Commission may be required to make information public pursuant to a Freedom of Information Act (“FOIA”) request unless the filer has requested confidential treatment and the information is protected from disclosure by one of the exemptions to FOIA. In the Emergency Order on Form SH effective as of September 22, the SEC specified that the information on the form would become public after two weeks, and in keeping with that, specified that “no Commission procedure for seeking confidential treatment of information filed or transmitted to the Commission … shall apply to the information that this Order requires to be filed.” The October 2 Emergency Order provides, in contrast, that the filings will be kept non-public “to the extent permitted by law without the filer needing to submit a confidential treatment request.” We therefore suggest that filers consider following the procedures for seeking confidential treatment of their Form SH filings pursuant to the Commission’s rules for maximum protection of their confidential information while keeping in mind that the Commission nonetheless may summarily reject their confidential treatment requests.
Extension of Rule 204T and Rule 10b-21
The SEC on September 17 issued an emergency order imposing a T+3 hard delivery requirement on short sales pursuant to temporary Rule 204T, eliminating the options market maker exception from the Regulation SHO Rule 203(b)(3) close out requirements and implementing a new short selling fraud prohibition pursuant to Rule 10b-21. As a result of the October 1 Order, these temporary provisions will expire at midnight on October 17. However, in an October 1 press release, the Commission stated that it intends to adopt interim final rules continuing the above provisions in effect beyond October 17 without interruption.
Extension of Rule 10b-18 Safe Harbor for Issuer Repurchases
On October 1, the SEC issued an order extending its September 18 Emergency Order easing restrictions on the ability of securities issuers to repurchase their own securities. The Emergency Order, which suspended or altered certain elements of Exchange Act Rule 10b-18, will now expire at midnight on October 17.