The Securities and Exchange Commission today adopted new short selling rules aimed at
strengthening investor protections against “naked” short selling. The new rules apply to the
securities of all public companies, including all companies in the financial sector. The SEC’s
actions are effective as of 12:01 a.m. ET on Thursday, September 18, 2008. These actions are the
result of formal SEC rulemaking and go beyond the temporary short selling order issued last July,
which applied only to the securities of certain financial institutions and which expired on August
Hard T+3 Close-Out Requirement; Penalties for Violation Include Mandatory Pre-Borrow
The new rules require that short sellers and their broker-dealers deliver securities and
close out short sale transactions no later than the close of business on the settlement date (three
days after the transaction date, or T+3). These new rules effectively ban naked short selling.
If a broker-dealer violates this close out requirement, then it will be prohibited from
further short sales in the same security unless the shares are not only located but also preborrowed.
This prohibition will apply to all short sales in the same security effected by the brokerdealer,
not just future sales for the particular naked short seller.
The new close out requirement was adopted on an interim final basis, which means that
the rules will be effective immediately and the SEC will seek public comment before adopting
Repeal of Exception for Market Makers from Short Selling Close Out Provisions
The SEC also approved a final rule to eliminate the options market maker exception from
the close out requirement of Rule 203(b)(3) in Regulation SHO. As a result, options market
makers will be treated in the same way as all other market participants, and required to abide by
the hard T+3 close out requirements. This rule change will become effective five days after
publication in the Federal Register.
Short Selling Anti-Fraud Rule
Finally, the SEC adopted a new anti-fraud rule that expressly targets short selling
transactions. New Rule 10b-21 will prohibit short sellers from deceiving their broker-dealers or
other market participants about their intention or ability to deliver securities in time for settlement.
The new rule will be effective immediately.