Summary

The SEC issued an emergency order on July 15, 2008 (modified July 18, 2008) designed to limit “naked” short selling in the publicly traded securities of Fannie Mae, Freddie Mac and 17 other primary dealers that are part of commercial and investment banks (see list below). The order requires a person to borrow or arrange to borrow, or otherwise have the security available to borrow from its inventory, prior to executing a short sale in the relevant securities. This requirement is much more stringent than Regulation SHO, which only requires a person to locate shares prior to executing a short sale. Through discussion with industry groups, the SEC is expected to agree to some limited exemptions to this requirement which are discussed in more detail below.

The order does not apply to short sales effected pursuant to Rule 144 of the Securities Act of 1933. It does not apply to short sales by underwriters, members of a syndicate or group participating in distributions of the relevant securities in connection with an over-allotment of securities, or any lay-off sale through a rights or a standby underwriting commitment.

The order takes effect at 12:01 a.m. Eastern Time on Monday, July 21, 2008, and terminates at 11:59 p.m. Eastern Time on Tuesday, July 29, 2008, unless it is extended further by the SEC. The SEC can (and likely will) extend the order up to a total of 30 calendar days.

The order presents compliance implications for both sell-side and buy-side firms. Industry groups and the SEC are still in discussions with respect to certain aspects of the order, which may result in modification of the order.

Analysis

The following information is based on verbal discussions between the SEC staff and the industry. Of course, the statements from the SEC staff are not necessarily the views of the Commission.

Broker-dealers and their customers will be required to pre-borrow or have arranged for a pre-borrow, rather than locate the securities on the attached list. We understand that these securities will not be on broker-dealers’ “easy to borrow” lists.

Market makers, option market makers, ETF market makers, specialists and block positioners who are registered as such will be exempt from the borrow requirement, but will be expected to deliver securities by settlement date.

Brokers will expect buy-side customers to indicate, electronically or otherwise, the source of the borrow. Brokers who have no reason to doubt such a representation will be able to rely on it. However, the SEC expects all deliveries in these securities to occur by settlement date. Failure to deliver would likely make any further reliance on such representations unreasonable.

Executing brokers will likely be able to rely on the order entry or originating broker to comply with the borrow requirements. Similarly, clearing brokers will be able to rely on executing brokers to comply with the borrow requirements. We recommend that these arrangements be documented in some fashion.

 Arrangements to borrow securities include “Pay-to-Hold” arrangements or similar arrangements. In addition, a firm’s inventory is deemed to include the pending settlement of positions.

Following are the securities identified in the Commission's order:

Company (Ticker Symbol(s)):

BNP Paribas (BNPQF or BNPQY)

Bank of America Corporation (BAC)

Barclays PLC (BCS)

Citigroup Inc. (C)

Credit Suisse Group (CS)

Daiwa Securities Group Inc. (DSECY)

Deutsche Bank Group AG (DB)

Allianz SE (AZ)

Goldman, Sachs Group Inc. (GS)

Royal Bank ADS (RBS)

HSBC Holdings PLC ADS (HBC)

JPMorgan Chase & Co. (JPM)

Lehman Brothers Holdings Inc. (LEH)

Merrill Lynch & Co., Inc. (MER)

Mizuho Financial Group, Inc. (MFG)

Morgan Stanley (MS)

UBS AG (UBS)

Freddie Mac (FRE)

Fannie Mae (FNM)