On July 27, 2009, the Securities and Exchange Commission (“SEC”) adopted final Rule 204 of Regulation SHO (“Rule 204” or the “final rule”) under the Securities Exchange Act of 1934, making permanent, with minor changes, the firm delivery and close-out requirements for sales of equity securities contained in temporary Rule 204T of Regulation SHO (“temporary Rule 204T” or the “temporary rule”). Among the minor changes, the final rule provides broker-dealers with some limited increased flexibility by allowing them to close out fails by either borrowing or purchasing securities in certain situations where the temporary rule required purchases, and expanding the class of securities eligible for a 35-day close-out period to include certain securities the seller is deemed to own.

The rule is part of the SEC’s efforts to curtail potential “naked” short selling abuses and reduce fails to deliver. Rule 204 will become effective on July 31, 2009, upon the expiration of temporary Rule 204T.

In its press release regarding Rule 204, the SEC also indicated that it will not renew temporary Rule 10a-3T (Form SH), which is set to expire on August 1, 2009. Under this temporary rule, which has been in effect since September 2008, institutional investment managers have been required to report their short positions. In lieu of renewing temporary Rule 10a-3T, the SEC announced a joint effort with self-regulatory organizations (“SROs”) aimed at increasing public availability of short sale data by providing short sale volume and transaction data on SRO websites. Details regarding the program have not yet been announced, although it appears that the intent is not to publicly identify individual short sellers or position holders.

The SEC is also planning to hold a roundtable to discuss other potential reforms affecting securities lending and short sale markets. The SEC release did not address pending proposals to reinstate a short sale price test.

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