Effective immediately, the Securities and Exchange Commission (“SEC”) has banned short selling in the publicly traded securities of certain identified financial firms. In addition, beginning on September 29, 2008, anyone who was required to file a Form 13F for the period ended June 30, 2008 will be required to report certain information about short positions in all Section 13(f) securities (not just those of the identified financial firms) on a new Form SH. The orders banning shorting of the financial firms’ traded securities and the Form SH reporting requirements will terminate on October 2, 2008, subject to further extension by the SEC.

In addition, the SEC has suspended certain restrictions found in Rule 10b-18 to allow public issuers of securities to increase significantly their buybacks in the public markets without concern for violating the federal securities laws. This emergency liberalization for stock repurchases will also expire on October 2.

Ban on Shorting of Financials Firms’ Publicly Traded Securities

The SEC has specified that the term “short sale” and all order marking requirements will be those found in Rule 200 of Regulation SHO. (Click here for a copy of Rule 200). It is important to note that under Regulation SHO, the definition of short sales includes any sale where the seller is net short or flat. Therefore, if you have a boxed position, sale of the long side will constitute a “short sale.”

The ban applies to all “publicly traded securities” of specified financial institutions. By its terms this would not apply to swaps, certain other derivatives, ETFs and Rule 144A securities. The language of the order would include bonds, convertible bonds and preferred stocks, but we understand that SIFMA has advised that in conversations with the SEC, it has been told that all three are not covered. However, it is unclear how the SEC will ultimately view trading in any instruments that will have an impact on the trading value of the specified financial firms. In addition, trading in foreign markets may be viewed by the SEC as having an effect on the specified financial firms and therefore subject to the SEC’s regulatory authority. Please also refer to our Client Alert regarding the FSA’s newly adopted short sale rules (FSA Bans Short Selling in Financial Stocks and Requires Daily Short-Position Disclosures) and note that other jurisdictions around the world are adopting related rules. Many clients who trade in foreign issuers and markets or through foreign broker-dealers may be subject to these rules.

The list of financial firms subject to the short selling ban are included in the following link: http://www.sec.gov/rules/other/2008/34-58592.pdf

The SEC has acknowledged that the list is not complete and that it will be adding to this list. At this point in time we do not believe that issuers in the SIC categories referenced in the list are subject to the ban, but suggest you consult the updated list frequently.

Under Regulation SHO, an investment manager with discretion over multiple funds is generally required to aggregate the holdings of all funds in determining short exposure. For those clients which have “aggregation units” for purposes of Regulation SHO reporting, note that other jurisdictions may not recognize those as separate units and therefore require all of the manager’s positions to be aggregated for local law and regulatory purposes.

There also is a limited exemption from the short selling ban for registered market makers, block positioners or other market makers obligated to quote in the over-the-counter market. In addition, any short sale that occurs as the result of the automatic exercise or assignment of an equity option held prior to effectiveness of the order, due to expiration of the option, is exempt.

New Reporting Requirement—Form SH

The new Form SH will apply to short sales in all securities on the official list of Section 13(f) securities published by the SEC effected after the start of trading on Monday, September 22, and will need to be filed on September 29, 2008. This disclosure requirement is not limited to the securities of the abovementioned identified financial firms. Short positions will not need to be reported if the short position is less than 0.25% of the class of securities issued and outstanding and if the fair market value of the securities is less than $1,000,000. The form must be filed electronically and will need to include the number and value of securities sold short, except for short sales in options, and the opening short, closing short, largest intraday short position, and the time of the largest intraday short position, for that security during each calendar day of the prior week. We believe that there are general inconsistencies between the order imposing the disclosure rule and the General Instructions to Form SH. For example, the order reads that Form SH need not be filed if no short positions have been taken in Section 13(f) securities for the prior week; however, the General Instructions to Form SH indicate a filing is required if a covering transaction occurs. These inconsistencies regarding filing requirements hopefully will be clarified by the SEC.

The 13F List is available on the SEC’s website at http://www.sec.gov/divisions/investment/13flists.htm.  

Rule 10b-18

Finally, the SEC has liberalized share repurchases for companies by suspending or altering certain elements of Rule 10b-18. The timing restrictions have been lifted (paragraphs (b)(2)(i), (b)(2)(ii), and (b)(2)(iii)) and the volume of purchases may be up to 100% of ADTV for the purchases condition of paragraph (b)(4). The manner and price purchase conditions remaining in place.