On February 24, 2010, the Securities and Exchange Commission (SEC) adopted amendments to Regulation SHO under the Securities Exchange Act of 1934. The new short sale rule is designed as a circuit breaker that is triggered if the price of a covered security decreases by 10% or more from the covered security’s closing price as determined by the listing market for the covered security as of the end of regular trading hours on the prior day. Once it is triggered, the alternative uptick rule will impose a restriction on the prices at which securities may be sold short. Specifically, the rule requires that a trading center establish, maintain, and enforce written policies and procedures reasonably designed to prevent the execution or display of a short sale order of a covered security at a price that is less than or equal to the current national best bid if the trigger is in effect. The alternative uptick rule is designed to remain in effect for the remainder of the day and the following day. It is worth highlighting that the alternative uptick rule applies to individual securities and not the market as a whole. The SEC believes that any negative impact on the ability of short sellers to provide liquidity to the markets and contribute to price efficiency that results from application of the alternative uptick rule is justified by the benefits provided by the rule in preventing short selling, including potentially manipulative or abusive short selling, from driving down further the price of a security that has already experienced a significant intra-day price decline. Further, the SEC amended Regulation SHO to provide that a broker-dealer may mark certain qualifying sell orders “short exempt.” In particular, if the broker-dealer chooses to rely on its own determination that it is submitting the short sale order to the trading center at a price that is above the current national best bid at the time of submission or to rely on an exception specified in the Rule, it must mark the order as “short exempt.” The SEC believes that this “short exempt” marking requirement will aid surveillance by self-regulatory organizations and the SEC for compliance with the provisions of Rule 201 of Regulation SHO. These new rules become effective on May 10, 2010, and market participants must comply by November 10, 2010. If you have questions about the newly adopted alternative uptick rule or would like to discuss it in more detail, contact Jeffrey Wittenberg at 877-352-2010.
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SEC Adopted the “Alternative Uptick Rule” Limiting Short Selling
