On Tuesday, July 29, 2008, the Securities and Exchange Commission (the “Commission”) extended by 10 trading days its emergency order (the “Order”) issued on July 15, 2008, requiring traders to borrow or arrange to borrow stock before shorting the securities of 19 specified financial services companies. The extended Order took effect at 12:01 a.m. EDT on Wednesday, July 30, 2008, and will terminate at 11:59 p.m. EDT on Tuesday, August 12, 2008. In extending the Order, the Commission noted that it “continues to remain concerned about the ongoing threat of market disruption and effects on investor confidence.”

According to the Commission, the next step will be for the Commission staff to collect and analyze data on the effect that the Order has had thus far. The Order will not be extended beyond August 12, but rather the Commission will immediately consider rulemaking which would become effective after a notice and comment period, “to provide additional protections against abusive naked short selling in the broader market, while allowing the legitimate short selling essential to efficient, highly liquid markets.” Several possible areas of additional rulemaking are:

  • Expansion of the Order to Cover Additional, and Perhaps All, Equity Securities. SEC Chairman Cox noted this possibility when first announcing the Order on July 15. In a July 25 op-ed in The Wall Street Journal, Chairman Cox again raised this possibility, and stated that the emergency Order’s “rationale extends to all public companies.” 
  • A New Requirement to Disclose Significant Short Positions. The Commission is exploring the possibility of a reporting requirement for large short positions. Chairman Cox noted that significant long positions already must be disclosed, though this is in the context of a statutory provision— Section 13f of the Securities Exchange Act of 1934—which requires institutional investment managers with $100 million or more under management to make quarterly disclosure of their holdings in most U.S.-listed equity securities. The U.K.’s Financial Services Authority recently started requiring disclosure of short positions constituting 0.25% of the company’s issued shares, but this disclosure rule only applies to the limited number of companies engaged in a rights offering at any given time. 
  • Imposition of Price Tests. The Commission also may consider imposing price tests which would limit short selling during certain specified market conditions. The “uptick rule”—abolished by the SEC in July 2007—had previously required that short sales be made at a higher price than the previous trade in the security, or at the same price as the prior trade if that trade was itself made on a plus tick. 
  • Explicit “Distort and Short” Prohibition. Rather than continue to rely upon the broad antifraud and antimanipulation provisions to address the dissemination of false rumors and trading on such information for profit, the Commission may consider promulgating an explicit prohibition against such activity.

The stocks subject to the Order are as follow:

  • BNP Paribas Securities Corp (BNPQF/BNPQY) 
  • Bank of America Corporation (BAC) 
  • Barclays PLC (BSC) 
  • 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/HSI) 
  • J.P. Morgan 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)

For additional SRZ Alerts related to short selling, see:

SEC Issues Emergency Order Restricting Short Selling

Regulators Investigating Market Rumors

UK FSA Issues on New Short Selling Rule

UK FSA Rule on Short Selling in Rights Issues, Effective 20 June 2008