The Securities and Exchange Commission (SEC) voted 3-2 on Feb. 24, 2010, to adopt amendments to Regulation SHO that place restrictions on short selling when a security has triggered a “circuit breaker.” Under the rule, a circuit breaker is triggered for a security on any day on which its price declines by 10 percent or more. Once a circuit breaker is triggered, the rule restricts short sales of the security that are less than or equal to the national best bid for the remainder of the day, as well as the next day. Additionally, the amendments to Regulation SHO require a broker-dealer to mark qualifying sell orders “short exempt” if the broker-dealer is submitting a short sale order at a price that is above the current national best bid at the time of submission or relying on another exception specified in the rule. SEC Chairman Mary Schapiro noted that the rule recognizes the potential beneficial and harmful impacts that short selling can have on markets and is intended to promote market stability and preserve investor confidence.

The rule generally applies to all equity securities listed on a national securities exchange (including those traded in the over-the-counter market) and requires trading centers to establish, maintain and enforce policies and procedures reasonably designed to prevent the execution or display of a prohibited short sale. The rule will become effective 60 days after the date of publication of the release in the Federal Register. Market participants will be required to comply with the new rule six months after it becomes effective.