This week, the SEC finalized its new rules relating to short-selling; two rules (rule #1 and rule #2), which were previously proposed were adopted in final form while two others were adopted as temporary final rules (temporary final rule #1 and temporary final rule #2). This marks the SEC’s latest step in cracking down on abusive short selling and market manipulation.

As we have previously noted, the SEC addressed the problem of naked short selling with its Emergency Orders beginning on September 17 2008, which included some tinkering, modifications and guidance along the way. At that time, the SEC created a hard T+3 close-out requirement, with penalties for violations, it eliminated the market-maker exception to the close-out provisions of Regulation SHO, and adopted a new short selling anti-fraud rule. It also mandated the reporting of all short sales by institutional investment advisors to the SEC on a new Form SH. With these latest releases, the SEC’s Emergency Orders have now been permanently adopted substantially as proposed, with a few notable exceptions, which will be discussed in a forthcoming advisory.