Last week, the SEC extended a number of emergency orders intended to curb abusive short selling, in an effort to bring stability to securities markets. These orders include measures temporarily banning short selling in certain financial companies, requiring institutional money managers to report short sales of certain securities, and strengthening share delivery requirements for short sale transactions.
Temporary Prohibition of Short Selling
On October 2, the SEC extended an emergency order that temporarily prohibits any person from effecting a short sale in the publicly traded common equity securities of selected financial firms ("Covered Securities"). The order is currently scheduled to expire at 11:59 p.m., Wednesday, October 8 (three days after President Bush signed the Emergency Economic Stabilization Act of 2008). However, regulatory authorities in various other countries have enacted temporary rules prohibiting short sales of certain stocks (typically financial stocks). The length of the bans and type of securities included in the bans vary from country to country.
There are a few exceptions to the SEC's short-sale ban. For example, the SEC's order does not apply to:
- short sales that occur as a result of the exercise or assignment of an equity option, or in connection with settlement of a futures contract held prior to September 19, 2008, due to expiration of the option or futures contract;
- short sales that occur as a result of assignment to call writers upon exercise;
- a market maker that effects a short sale as part of a bona fide market making and hedging activity related directly to bona fide market making in (a) derivative securities based on Covered Securities or (b) exchange traded funds and exchange traded notes of which Covered Securities are a component, subject to certain limitations; or
- persons that effect sales of Covered Securities pursuant to Rule 144 under the Securities Act.
Reporting Short Sales on Form SH
On October 2, the SEC extended a previous temporary order that requires certain institutional investment managers to report on new Form SH information concerning daily short sales of securities. The short sale reporting requirements apply to institutional investment managers that exercise investment discretion with respect to accounts holding "section 13(f) securities" having an aggregate fair market value of at least $1 million. The Form SH must include disclosure of the number and value of securities sold short for each section 13(f) security, with certain exceptions. The Form SH must be filed electronically on EDGAR on the first business day of every calendar week immediately following a week in which the investment manager effected short sales. The Form SH filing requirement does not apply if (i) the short position constitutes less than 0.25% of the issuer's issued and outstanding securities and (ii) the fair market value of the short position is less than $1 million.
Eased Restrictions on Issuer Share Repurchases
Also on October 2, the SEC extended a temporary order allowing issuers additional flexibility pursuant to Rule 10b-18 under the Exchange Act to buy back their securities. Specifically, the SEC suspended the time of purchases condition in paragraphs (b)(2)(i)-(iii) of Rule 10b-18, and modified the volume conditions in Rule 10b-18(b)(4), so that the amount of Rule 10b-18 purchases must not exceed 100% of the average daily trading volume for the security.
Enhanced Short-Sale Share Delivery Requirements
On October 1, the SEC extended until October 17 temporary rules that enhance delivery requirements imposed on sales of securities. Pursuant to new Rule 204T of Regulation SHO, short sellers and their brokerdealers must deliver securities by the settlement date (three days after the sale transaction date, generally T +3). The Rule imposes certain penalties (including pre-borrowing requirements as a condition for future short sales) if the close-out requirement is not met. The emergency order expires on October 17, but the SEC intends that the order will continue in the form of an interim final rule. In addition, the SEC extended until October 17 new Rule 203(b)(3), which repealed the options market maker exception from the close-out requirement in Regulation SHO. The exception had permitted options market makers to maintain fail positions indefinitely.
New Naked Short Selling Anti-Fraud Rule
Also, on October 1, the SEC extended until October 17 new Rule 10b-21 under the Exchange Act, which makes it a securities fraud for a seller to deceive a broker or dealer, a participant of a registered clearing agency, or a purchaser about its intention or ability to deliver borrowed shares.