The U.S. Securities and Exchange Commission (SEC) extended the emergency rules that strengthen the ban on naked short selling, temporarily halt short selling in financial stocks, temporarily require money managers to report new short sales, and temporarily ease existing restrictions on issuers repurchasing their securities. These rules, which became effective between Thursday, September 18, 2008 and Monday, September 22, 2008, are now extended. The SEC has not reinstituted the uptick rule for short-sale transactions, nor has the SEC provided relief for parties wishing to conduct cashless exercises of employee stock options for financial institutions.
The ban on short selling in financial stocks has been extended to expire at 11:59 p.m. on the third business day after enactment of the pending “bailout” bill, but in any case, no later than 11:59 p.m. on October 17, 2008.
The requirement that institutional money managers report their short sales to the SEC is extended to 11:59 p.m. on October 17, 2008. The SEC disclosed its intention to extend this order for a longer period of time through adoption of an interim final rule. This rule is likely to become permanent.
The easing of restrictions on the ability of issuers to repurchase their securities is extended to 11:59 p.m. on October 17, 2008.
The rule that requires short sales to be settled on the third day after the trade date (the short sale closeout requirement) is extended to now expire at 11:59 p.m. on October 17, 2008. The SEC disclosed that it intends to adopt an interim rule that would extend this rule beyond October 17, 2008. The other similar rule, the naked short selling anti-fraud rule, Rule 10b-21, became permanent on September 18, 2008.
These rules, which have been summarized in previous Legal News Alerts, are summarized again below.
Rules on Naked Short Selling
Short Sale Closeout Requirement and Penalties for Violation
The SEC has added new provisions to Regulation SHO requiring that short sellers and their broker-dealers deliver securities by the close of business on the settlement date (three days after the sale transaction date or T+3). If a short sale violates this closeout requirement, then any broker-dealer acting on the short seller’s behalf will be prohibited from further short sales in the same security unless the shares are not only located but also pre-borrowed. The prohibition on the broker-dealer’s activity applies to all short sales of the same security for any customer, and not simply the short sales of the naked short seller.
Rule 10b-21 Short Selling Anti-Fraud Rule
The SEC also has adopted Rule 10b-21, which expressly targets fraudulent short-selling transactions. The new rule covers short sellers who deceive broker-dealers or any other market participants. The new rule makes clear that lying about the intention or ability to deliver securities in time for settlement and failing to deliver the securities constitutes an unlawful manipulative or deceptive device or contrivance.
Ban on Short Selling in Financial Stocks
The SEC has imposed an immediate ban on short-selling transactions involving the securities of financial institutions. The SEC initially published a list of financial institutions covered by the ban but later delegated this duty of listing companies covered by the ban to the exchanges. The SEC’s emergency orders established certain limited exceptions for market makers. The SEC enacted its ban in concert with the United Kingdom’s Financial Services Authority, which imposed a similar ban in its markets. The text of the new rules can be found at: http://www.sec.gov/rules/other/2008/34-58592.pdf.
Money Managers to Report New Short Sales
Citing concerns about possible price movements based upon unfounded rumors, the SEC has temporarily instituted a new rule that requires institutional money managers to report short sales. Money managers that exercise investment discretion with respect to accounts holding Section 13(f) securities (publicly traded securities) that filed or were required to file a Form 13F for the quarter ended June 30, 2008, must now file new Form SH with the SEC. This impacts all money managers who managed accounts as of June 30, 2008, having an aggregate fair market value of at least $100,000,000. Form SH will be required on the first business day of every week immediately following a week in which the money manager effected a short sale. If no short sales occurred, no form will need to be filed. Earlier short sales will not need to be reported, and short sales in options are exempted from reporting. In addition, managers need not report a short position otherwise reportable if the short position constitutes less than one-quarter of one percent (0.25 percent) of the issued and outstanding shares of that particular class of securities and the fair market value of the short position is less than $1,000,000. The following information will be required for each security sold short:
The text of the new rules can be found at: http://www.sec.gov/rules/other/2008/34-58591.pdf.
Easing of Restrictions on Issuer Repurchases
Recognizing that issuer repurchases represent an important source of liquidity during times of market volatility, the SEC has temporarily amended Rule 10b-18. Rule 10b-18 provides issuers a safe harbor from liability for market manipulation if repurchases are done in conformity with the requirements of Rule 10b-18. Specifically, the SEC has suspended the time of purchase rules that prohibited purchases from the opening purchase as well as from the last 10 to 30 minutes before the closing of trading, depending upon the trading volume of the security. The SEC also has temporarily increased the volume of permitted purchases to now be up to 100 percent of the average daily trading volume, calculated based upon the average daily trading volume during the four calendar weeks preceding the week in which the purchase is to be effected. The text of the new rules can be found at: http://www.sec.gov/rules/other/2008/34-58588.pdf.
Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues.
If you have any questions about this alert or would like to discuss the topic further, please contact your Foley attorney or the following individuals:
Michael B. Kirwan