SEC Announces Extension of Emergency Short Selling Orders and Related Action

This post is from James Morphy of Sullivan & Cromwell LLP.

The SEC recently issued a statement announcing that it was extending certain temporary emergency orders and describing other actions relating to short selling rules. The following temporary orders are being extended:

• The order prohibiting short selling in public financial companies specified by the securities exchanges on which the shares of those companies are listed. This order will be extended to 11:59 p.m. ET on the third business day after enactment of the legislation currently pending in Congress to stabilize credit markets and the financial system, but in no event later than 11:59 p.m. ET on October 17, 2008.

• The order requiring that institutional money managers report to the SEC their new short sales of certain publicly traded securities. This order will be extended to 11:59 p.m. ET on October 17, 2008, but the SEC intends that the order will continue in effect after that date without interruption in the form of an interim final rule. While the SEC will seek comments on the anticipated rulemaking, the rules will remain in effect during the comment period. The October 1 statement also provides that disclosure under the emergency order will be made only to the SEC.

• The order easing restrictions on the ability of securities issuers to repurchase their securities. This order will be extended to 11:59 p.m. ET on October 17, 2008.

For a fuller discussion of the emergency orders, please refer to my firm’s memoranda entitled “SEC Takes Temporary Action to Prohibit Most Short Sales in the Publicly Traded Shares of Certain Financial Firms and to Require Certain Institutional Investment Managers to Report Information Concerning Daily Short Sales” and “Temporary Emergency Order Eases Timing and Volume Conditions of Exchange Act Rule 10b-18”.

The SEC statement also announced the extension of temporary Rule 204T of Regulation SHO, adopted on an emergency basis on September 17, 2008. Rule 204T requires that short sellers and their brokerdealers deliver securities by the settlement date (three days after the transaction date, or T+3) and imposes penalties for failure to do so. If a short sale violates this close-out requirement, then any brokerdealer 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 not only to short sales for the particular naked short seller, but to all short sales for any customer. The order adopting the rule will be extended to 11:59 p.m. ET on October 17, 2008, but the SEC intends that the rule will continue in effect after that date without interruption in the form of an interim final rule. The SEC will seek comments on all aspects of the anticipated rulemaking.

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One Comment

  1. Anonymiss
    Posted Sunday, October 12, 2008 at 3:18 pm | Permalink

    Please forgive my denseness here: is the above suggesting that a short ban will be re-instituted? To my knowledge, it had expired last Thursday (being 3 days after the passage of the “bailout” legislation). And if so, will it be reinstated only through the 17th, or is the whole point of this to say that the “cap date” of the 17th will no longer apply (and thus that it will be extended for n days/weeks/months…indefinitely?!?)?

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