Investment Management and Financial Markets Group
October 3, 2008
SEC Extends Deadline for Short Sales
The Securities and Exchange Commission (SEC) has extended the effective period for its emergency
orders regarding short sales. It also has approved actions to strengthen the existing ban on naked
short selling, which will remain in effect following the expiration of the emergency orders. The
announcement extends the effect of the orders, first issued on September 17 and 18, in light of the
SEC’s concern about possible disruption in the functioning of the securities market.
The following three emergency orders are extended until midnight on October 17:
•
Temporary prohibition of short selling in financial companies. The SEC extended this
emergency order to allow time to complete work on anticipated legislation. It will expire on the
earlier of October 17 or the third business day after enactment of the awaited legislation.
•
Temporary easing of restrictions on the ability of securities issuers to repurchase their
securities. An issuer or affiliated purchaser of the issuer, in connection with a Rule 10b-18
purchase or bid, will not violate Section 9(a)(2) of the Exchange Act or Rule 10b-5 under the
Exchange Act if the purchaser meets all of the conditions in the Rule, except that:
•
(i)
the time of purchase condition in paragraphs (b)(2)(i), (b)(2)(ii), and (b)(2)(iii) of the Rule
is suspended, and
(ii)
the volume of purchases condition in paragraph (b)(4) of the Rule is modified so that the
limit on purchases is 100% of the average daily trading volume for the security reported
during the four weeks preceding the week in which the purchase is effected.
Temporary requirement that institutional investment managers file with the SEC a new
Form SH reporting their short selling of certain publicly traded securities. The order
applies to institutional investment managers exercising investment discretion over accounts
holding Section 13(f) securities having an aggregate fair market value of at least $100 million on
the last trading day of a month. An institutional investment manager who has filed or was
required to file a Form 13F for the quarter ended June 30, 2008, under Section 13(f) of the
Exchange Act and Rule 13f-1(a) will be required to file a new Form SH with the SEC on the first
business day immediately following a week when it effected short sales. Though the order
expires on October 17, the SEC intends to have the order continue beyond this date as an
interim final rule. It will seek comments on the anticipated rulemaking.
CHICAGO ● SAN DIEGO● WASHINGTON
Other SEC actions designed to strengthen the existing ban on naked short selling will remain in effect
after the emergency orders expire. These surviving actions include:
•
Hard T+3 close-out requirement for naked short selling. This emergency order is also
extended until midnight on October 17 but will survive beyond that date as a final interim rule.
The rule requires that short sellers and their broker-dealers deliver securities by the settlement
date – three days after the sale transaction date (T+3). Short sales that violate this close-out
requirement will prohibit any broker-dealer acting on the short seller’s behalf from further short
sales in the same security unless the shares are located and pre-borrowed. The prohibition on
the broker-dealer’s activity applies both to short sales for the particular short seller, as well as all
short sales for any customer.
•
Repeal of exception for options market makers from short selling close-out provisions in
Regulation SHO. This exception, which permitted options market makers to maintain fail
positions indefinitely, was repealed on September 18, 2008.
•
Rule 10b-21 naked short selling anti-fraud rule. This new rule, effective September 18,
makes clear that short sellers who deceive broker-dealers or any other market participants
about their ability or intention to deliver securities in time for settlement will violate the law when
they do not deliver.
For further information, please contact Cheryl Allaire 858-509-7424, Cameron Avery 312-807-4302,
Kevin Bettsteller 312-807-4442, Paul Dykstra 312-781-6029, David Glatz 312-807-4295, Alan Goldberg 312-807-4227,
Mark Greer 312-807-4393, Elizabeth Hudson 312-807-4376, Stevens Kelly 312-807-4240, Molly Moynihan 202-955-7027,
Anna Paglia 312-781-7163, Joanne Phillips 202-955-6824, Paulita Pike 312-781-6027, Eric Purple 202-955-7081,
Bruce Rosenblum 202-955-7087, Donald Weiss 312-807-4303, Gwendolyn Williamson 202-955-7059, or
Stacy Winick 202-955-7040 of Bell, Boyd & Lloyd’s Investment Management and Financial Markets Group or
visit our Web site at www.bellboyd.com.
This publication has been prepared by the Investment Management and Financial Markets Group of Bell, Boyd & Lloyd LLP
for clients and friends of the firm and is for information only. It is not a substitute for legal advice or individual analysis of a
particular legal matter. Readers should not act without seeking professional legal counsel. Transmission and receipt of this
publication does not create an attorney-client relationship.
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