Today, the Securities and Exchange Commission (SEC) adopted new rules related to short selling. The new rule, an amendment to Rule 201 of Regulation SHO, will impose an "Alternative Uptick Circuit-Breaker" rule on short sales. Under this rule, if an equity security listed on a national market declines in price 10% or more in a day, a short sale may not be made at a price at or below the national best bid price for the rest of that trading day and the following trading day. Specifically, the new rule will require that trading centers establish and maintain a set of policies to reasonably likely to ensure that short sales in violation of the new amendments are not displayed or submitted to the national system.
The rule follows the release of five variations on two approaches to short sale regulation in April of last year. Later, in August of 2009, the SEC re-opened the comment period for the April release and issued a new proposal for consideration. In addition, the SEC held two roundtable discussions on short-sales, with representatives of issuers, broker-dealers, and retail investors taking part in the discussions.
In adopting the new rule, Chairman Schapiro stated that they will limit the potential for abusive short selling and enable long sellers to stand in the front of the line, and sell their shares before any short sellers once the circuit breaker is triggered. Commissioners Walter echoed these sentiments. While Commissioner Aguilar indicated his support, he repeated his call for greater statutory authority for the SEC to regulate derivative securities that can create positions substantially similar to traditional short sales. While Commissioners Casey and Paredes argued that there was no empirical evidence that short selling was implicated in the market volatility of last year, and that they were unsure of how the new rules would increase investor confidence in the markets.
In addition to the adoption of the new rules, during the open meeting the Staff of the SEC provided a report on the effect of efforts adopted in July of 2009 to address "abusive" short sales. In response to a question by Commissioner Casey, the staff indicated that fails to deliver – considered an indicator of naked short selling – had declined 83% in threshold securities, those with significant numbers of fails to deliver previously, and 65% across the board since the fall of 2008.
For more in depth coverage of the adopted rules, see Alston & Bird's Special Alert prepared for this topic.