Introduction

As a result of recent developments affecting the financial markets, the SEC has concluded that there continues to exist a substantial threat of sudden and excessive fluctuations of securities prices and that it is necessary to promulgate temporary rules with respect to enhanced delivery, reporting and other matters involving the sale and ownership of equity securities and, in particular, equity securities of financial companies.

Below is a current summary of these temporary rules. Please note that the SEC may amend these temporary rules or promulgate additional rules in this area at any time.

T+3 Close-Out Requirement

Rule 204T requires broker-dealer or bank participants of a registered clearing agency to deliver all equity securities for settlement by settlement date (T+3) for every long and short sale executed on or after September 18, 2008 through October 1, 2008, unless extended by the SEC.

In the event a participant fails to deliver such securities by settlement date with respect to a short sale, the participant must close out the position by borrowing or buying the necessary securities no later than the beginning of regular trading hours on the next business day (T+4). If the failure to deliver is with respect to a long sale, the participant may buy (but not borrow) the necessary securities as late as the beginning of regular trading hours on the third business day following such failure to deliver (T+6).1 Participants have until the morning of T+36 to buy (but not borrow) with respect to failure to deliver positions in Rule 144 securities.

In the event the participant does not close out a failure to deliver any equity security within the prescribed timeframe, the participant and any broker-dealer from which it receives trades for clearance and settlement must not accept a short sale order in that security from any customer unless it “pre-borrows” such security. This restriction applies until the purchase for the purpose of closing out such failure has settled.

It appears that when a participant effects a timely buy-in on T+4, T+6 or T+36, there is no penalty even if the buy-in settles on a subsequent day.

New Anti-Fraud Rule Against Naked Short Selling

New Rule 10b-21 makes it unlawful to fail to deliver equity securities on or before the settlement date of a short sale after making affirmative statements to a broker-dealer, a participant of a registered clearing agency or a purchaser regarding the intention or ability to do so.

Although this rule is also effective only from September 18, 2008 through October 1, 2008, as the Preliminary Note to Rule 10b-21 suggests, it is likely that the behavior covered by Rule 10b-21 would also violate the general antifraud provisions of the federal securities laws, including Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Accordingly, while Rule 10b-21 highlights the SEC’s view that the conduct covered thereby is improper, the SEC’s ability to prosecute such conduct is in no way dependent upon the existence, continued or otherwise, of Rule 10b-21.

Reporting of Short Sales of Securities

Every investment manager that filed or was required to file reports on Form 13F for the calendar quarter ended June 30, 2008 will be required to file a Form SH with the SEC on the first business day of every week following a week in which the investment manager effected any short sale in a Section 13(f) security (other than an option). Reporting is not required, however, if (1) the applicable short position constitutes less than 0.25% of the relevant class of the issuer’s Section 13(f) securities issued and outstanding, and (2) the fair market value of the short position is less than $1,000,000. This reporting requirement applies only to short sales effected on or after September 22, 2008.

For each day covered by a Form SH, the investment manager must provide the following information for each short sale of Section 13(f) securities (other than options) effected on such day: (1) the name of the issuer and the CUSIP, (2) the start-of-day short position, (3) the number of securities sold short that day, (4) the value of the securities sold short that day, (5) the end-of-day short position, and (6) the largest intra-day short position and time of day of such position. The Form SH must be filed electronically and be labeled “NON-PUBLIC” in bold capital letters on the top and bottom of each page. Despite these labels, each Form SH will become publicly available on EDGAR two weeks after it is filed.

The first Form SH filing will be due from investment managers on September 29, 2008 (if the investment manager has effected transactions in reportable short positions on or after September 22, 2008). The Form SH filing requirement will expire at 11:59pm on October 2, 2008, unless extended by the SEC.

Emergency Ban on Short Selling of Certain Financial Companies

By emergency order and an amendment thereto issued yesterday, effective from September 19, 2008 through October 2, 2008, the SEC has banned short-selling of any publicly traded equity securities issued by several hundred banks, insurance companies and securities firms. Pursuant to the revised order, the specific securities subject to the ban will be selected by the national securities exchanges and posted on their respective websites. Any such issuer may opt out of the ban with respect to its securities. Please note that the lists published by the national securities exchanges may be amended at any time, so it is important to verify that you are working from the most up-to-date list.

Notwithstanding the order’s reference to “any publicly traded equity security,” it appears that short sales executed in foreign securities markets will only be encompassed by the order if the security trades in that market under the same symbol listed for such security on Appendix A of the order.

Under the order, “short sale” is defined by reference to Rule 200(a) of Regulation SHO, which defines this term to mean “any sale of a security which the seller does not own or any sale which is consummated by the delivery of a security borrowed by, or for the account of, the seller.” The SEC has specifically noted that sales of securities pursuant to Rule 144 are not to be considered “short sales” for purposes of the order.

The order does not apply to (1) short sales resulting from the automatic exercise or assignment of an equity option held prior to September 18, 2008, due to the expiration of the option, (2) short sales in connection with settlement of a futures contract held prior to September 18, 2008 due to the expiration of the futures contract, or (3) short sales by the writer of a call option as a result of assignment following exercise by the holder of the call.

The order also provides an exemption for market makers, including hedging activities by market makers. Note that this exception is not available to customer or counterparty positions in derivative securities that are established after 12:01a.m E.D.T. on September 22, 2008, if the market-maker knows that the transaction will result in the customer or counterparty establishing or increasing an economic short position (i.e. through actual positions, derivatives or otherwise). By virtue of the SEC’s statement that the exemption should be read “consonant with the short position restrictions of the U.K.’s Financial Services Authority,” it appears that the term “market maker” should be understood broadly consistent with the FSA’s statement that “a market maker is an entity ordinarily as part of their business dealings as principal in equities, options or derivatives (whether OTC or exchange-traded) [sic] to fulfill orders received from clients, to respond to a client’s request to trade or to hedge positions arising out of those dealings.”