The US Securities and Exchange Commission recently proposed to amend several rules which would affect the regulation of short sales. Generally speaking, a short sale is the sale of a security which the seller does not own or any sale which is consummated by the delivery of a security borrowed by, or for the account of, the seller. Currently, Rule 10a-1(a)(1) under the Securities Exchange Act of 1934 (the Exchange Act) provides that a listed security may be sold short (A) at a price above the price at which the immediately preceding sale was effected (plus tick), or (B) at the last sale price if it is higher than the last different price (zero-plus tick) (the "tick test"). In the past, the SEC added exceptions and granted numerous written requests for relief from the rule's restrictions.

Based on studies of a pilot program, the SEC concluded that the current tick test has a limited impact on preventing manipulative short selling activities and that its elimination would have minimal negative impact on the market while improving market liquidity. Therefore, the SEC has proposed to remove the tick test and add Rule 201 of its Regulation SHO to provide that no price test, including any price test of any self-regulatory organization, or SRO, shall apply to short sales in any securities.

In a related proposed technical amendment, the SEC is proposing an amendment to Regulation SHO to remove its requirement to mark a sell order as "short exempt" if the seller is relying on an exception from a price test.

In addition, the SEC has proposed to tighten the restrictions of short sales associated with a public offering to address abuses which have a potentially negative impact on the capital raising process. Rule 105 of the SEC's Regulation M currently prohibits persons from covering a short sale with securities obtained in the offering, regardless of a short seller's intent, if the short sale occurred during the Rule 105 restricted period. The SEC proposes to make it unlawful for a person to effect a short sale during the Rule 105 restricted period and then purchase such security in the offering even if the purchase is not intended to cover the short sale. The proposed rule is intended to prevent certain abusive practices that have arisen to circumvent the current rule.

The SEC is seeking comments on these proposed amendments. The releases are available here.