SEC Emergency Order Concerning Short Selling

22 July 2008 Publication

Legal News Alert: Securities, Commodities & Exchange Regulation

Last week, as widely reported, the U.S. Securities and Exchange Commission (SEC) issued an Emergency Order (Order)1 pursuant to its power under Section 12(k)(2) of the Securities Exchange Act of 1934, related to short-selling of securities of certain major financial institutions identified in Appendix A of the Order (Appendix A Securities). Less well publicized are a July 18, 2008 amendment to the Order (Amendment)2, also pursuant to 12(k)(2), and concurrent Division of Trading and Markets guidance on the Order and the Amendment (T&M FAQs)3.

The SEC issued the Order, the Amendment, and the T&M FAQs as part of a multi-faceted effort to restrict naked short selling which could negatively impact the securities markets.

The Order mandates that no person may effect a short sale in Appendix A Securities using the means or instrumentalities of interstate commerce, unless such person has borrowed or arranged to borrow the security or otherwise has the security available to borrow in its inventory, and delivers the security on the settlement date. The Order took effect at 12:01 a.m. EDT on Monday, July 21, 2008, and terminates on Tuesday, July 29, 2008 unless the SEC extends the Order. We understand that the SEC already is working on rulemaking that would extend the Order for a longer period, or perhaps codify permanently the substance of the Order.

The Amendment clarifies four aspects of the Order: (1) Registered market makers, block positioners, and other market makers obligated to quote in the over-the-counter (OTC) markets are not subject to the borrow/arrangement-to-borrow requirements implemented in the Order, if they are selling short as part of bona fide market making and related hedging activities (“the market maker exception”); (2) brokers and dealers may use the same processes and procedures to document compliance with the Order as those used to show compliance with Regulation SHO; (3) the Order does not apply to short sales of Appendix A Securities effected pursuant to Rule 144 of the Securities Act of 1933; and (4) the Order does not apply to short sales by underwriters, or members of a group participating in distributions of Appendix A Securities, in connection with an over-allotment of securities, or any lay-off sale by such a person in connection with a distribution of such securities through a rights or standby underwriting commitment.

The T&M FAQs clarify additional points, including, but not limited to: (1) an “arrangement-to-borrow” requires a bona fide agreement to borrow the security such that the security is set aside at the time of the arrangement solely for the benefit of the borrower; (2) broker-dealers may rely on customers’ assurances that they have borrowed or arranged to borrow from an identified source; (3) customers, like broker-dealers, are subject to the Order’s requirements; (4) short sales effected as a result of exercise of a put option (even if an automatic exercise) are subject to the Order, unless in connection with hedging by a bona fide options market maker, and even if exempt from the borrow requirement, the exercise of a put option in a market maker account triggers the delivery requirement of the Order; (5) a short sale pursuant to assignment of a call option without a prior borrow/arrangement-to-borrow will not violate the Order; however, the delivery of the security by settlement date is required; (6) borrows/arrangements-to-borrow may be reapplied for certain intraday buy and cover trades; (7) the SEC considers the Order applicable to certain offshore transactions; and (8) broker-dealers must attend to Rule 15c3-3(b) to ensure that they comply with possession and control provisions in connection with their efforts to comply with the Order.


1 Release No. 34-58166, July 15, 2008.

2 Release No. 34-58190, July 18, 2008.

3 Available at

Legal News Alert is part of our ongoing commitment to providing up-to-the minute information about pressing concerns or industry issues affecting our securities, commodities and exchange regulation clients and our colleagues.

Please contact the following attorneys for additional information on this or other securities, commodities and exchange regulation-related matters: 

Michael D. Wolk
Washington, D.C.

George T. Simon
Chicago, IL

Amy N. Kroll
Washington, D.C.