On February 26, 2010, the Securities and Exchange Commission (the “SEC”) adopted a new short sale pricing rule – Rule 201 under Regulation SHO (“Rule 201” or the “new rule”). While the new rule became effective on May 10, 2010, the SEC provided a six-month implementation period to enable trading centers and others to prepare for complying with the new rule, making the new rule’s compliance date November 10, 2010. However, on November 4, the SEC announced that it was extending the compliance date to February 28, 2011.1  

Rule 201 combines a “circuit breaker” with a price limitation to restrict short sales of a security that experiences a significant drop in price.2 It applies to “covered securities” – generally, any equity security listed on a national securities exchange, whether traded on an exchange or traded over-the-counter. Under Rule 201, each “trading center”3 is required to establish, maintain, and enforce written policies and procedures that are reasonably designed to prevent the execution or display of a short sale order for a covered security at a prohibited price, once the price of the security decreases by 10 percent or more from its previous closing price on its principal listing market. The restriction will remain in place for the rest of the day on which it is triggered and the following trading day. Once the circuit breaker is triggered, all short sales in the security (except for certain exempt transactions) must be priced above the security’s current national best bid (“NBB”) price. By not allowing short sales at or below the current NBB while the circuit breaker is in effect, Rule 201 will allow long sellers, who will be able to sell at the NBB, to sell first in a declining market.  

The SEC is extending the compliance date in order to give certain national securities exchanges additional time to modify their procedures for conducting opening, reopening, and closing transactions for securities that trigger the circuit breaker, in a manner that is consistent with the goals and requirements of the new rule. According to the SEC, the extended compliance period also will give industry participants additional time to program and test for compliance with the new rule’s requirements. The Extension Release notes that the November 10 compliance date is just a few days away, and that a limited extension of the compliance date will facilitate the orderly implementation of Rule 201. However, because of the time constraint, full notice and comment could not be completed prior to November 10.