Short Selling Update: Developments from Global Regulators

January 19, 2009

Responding to market conditions in September 2008, the U.S. Securities and Exchange Commission (the "SEC" or "Commission") and other regulatory and governmental authorities around the globe took dramatic steps to address the market turmoil resulting from potentially manipulative short selling.  The measures released in September 2008 have been updated, particularly in the U.K. in recent weeks.

With a view to U.S. market conditions in September, the U.K.’s Financial Services Authority ("FSA"), German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – "BaFin") and other financial services regulators around the globe took emergency action to prohibit certain short selling and require disclosure of certain short positions. 

These updates are discussed below and the attached chart summarizing recent global short sale-related developments has been updated to reflect amendments to the regimes.

UK:

• FSA has ended the short selling ban with expiry of the emergency measure on 16 January 2009
• FSA extends short selling disclosure regime to 30 June 2009 (with amendment to additional disclosures required after the initial disclosure)
• Disclosure regime for short positions during rights issue periods currently remains unaltered
• FSA announces a further consultation will be published in February setting out the regulators long term proposals for the short selling regime

On 5 January 2009, the FSA published a consultation paper entitled: "Temporary short selling measures" (CP09/1). In CP09/1, the FSA considered the short selling measures it introduced on 18 September 2008 "on an emergency basis" which relate to stocks in UK financial sector companies, due to expire on 16 January 2009. These measures banned the active creation or increase of net short positions of 0.25% or more in the stocks of UK financial sector companies, and required disclosure to the market of significant short positions in those stocks. The FSA introduced these measures due to concerns that short selling of such stocks could result in market abuse and disorderly markets.

The consultation period for the proposals in CP09/1[1] was short, as the FSA needed to be able to put the new measures in place before the expiration of the September 2008 measure on 16 January 2009. Comments were only permitted until 9 January 2009 and a draft Short Selling (No 5) Instrument 2009 was attached as Appendix 1 to CP09/1.

On 14 January 2009 the FSA confirmed it would proceed on the basis of the proposal in CP09/1 and that the amendments to the FSA Handbook would come into force on 16 January 2009. The final Short Selling (No 5) Instrument 2009 is set out in Appendix 1 to PS09/1[2] and has now been published on the FSA’s website although at the time of writing the FSA Handbook has not yet been updated. The FSA also updated its FAQs in relation to the UK financial sector short selling restrictions on 14 January 2009.[3]

The FSA has now:

• Extended the application of the short selling disclosure obligation (which requires the disclosure of net short positions of 0.25% or more of the issued share capital of UK financial sector companies) until 30 June 2009. It considers that "maintaining the enhanced transparency regime will help continue to minimise the potential for market abuse and disorderly markets in UK financial sector stocks".
• Amended the disclosure obligation, to provide that once a disclosure has been made, further disclosures would only be required if a short position changes significantly; namely if any threshold of 0.1% above the 0.25% disclosure threshold is reached (whether through an increase or decrease), i.e., 0.35%, 0.45%, 0.55%, etc.[4]   
• Retained the scope of the disclosure regime, applying to prescribed markets and decided not to extend it to other financial institutions (not falling within the current definition of a quoted "UK financial sector company") or to have any other broader application.
• Allowed the ban on short selling of stocks in UK financial sector companies to expire on 16 January 2009, which has now occurred. The FSA considers that the special circumstances leading to the introduction of the ban have changed, although the FSA says that it intends to keep the position under review and is prepared to reintroduce the ban should this be required (without consultation if urgent action is necessary).

 The FSA also plans to publish another consultation paper on short selling in the next month. In this consultation paper, the FSA will set out its longer-term proposals for the short selling regime.

U.S.:

The U.S. Securities and Exchange Commission ("SEC") has taken no further rulemaking action since last October, but short selling regulation is expected to be on the new administration’s agenda. The comment periods for Securities Exchange Act of 1934 ("Exchange Act") interim final temporary Rules 204T[5]  and 10a-3[6] expired last December. In particular, the short sale and short position disclosure requirements for Rule 10a-3’s Form SH prompted significant comments, including concerns about the frequency of reporting, and confusion over the definitions of "short sale" and "short position". Separately, on January 8, 2009, Rep. Gary Ackerman (D-NY) introduced H.R. 302[7] before the House Financial Services Committee, which would require the SEC to reinstate Exchange Act Rule 10a-1, the "uptick" rule, within 90 days of the legislation’s passage.

France:

The rules in France remain unchanged based on current market conditions. The French AMF will reassess its rules in mid-February 2009.

Germany:

By order dated December 17, 2008, BaFin prolonged its general decrees dated September 19 and 21, 2008 without any further amendments.[8] Now the ban on short selling is scheduled to expire on March 31, 2009. BaFin stated that the reasons for the ban (the risk of undesirable developments that may adversely affect the orderly conduct of trading in securities and the stability of the financial system) still persist. 

Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have about these developments.  Please contact the Gibson Dunn attorney with whom you work, or any of the following:

Washington, D.C.
 K. Susan Grafton (202-887-3554, [email protected])
Barry R. Goldsmith (202-955-8580, [email protected])
Brian J. Lane (202-887-3646, [email protected]) 
Ronald O. Mueller (202-955-8671, [email protected]) 
John F. Olson (202-955-8522, [email protected]) 
John H. Sturc (202-955-8243, [email protected])

New York
Dennis J. Friedman (212-351-3900, [email protected])
Adam H. Offenhartz (212-351-3808, [email protected])
Eduardo Gallardo (212-351-3847, [email protected])

London
Selina Sagayam (+44 20 7071 4263, [email protected])
Eleanor Shanks (+44 20 7071 4279, [email protected])
James Barabas (+44 20 7071 4253, [email protected]) 
Alan Samson (+44 20 7071 4222 , [email protected]) 

Paris
Benoît Fleury (+33 1 56 43 13 00, [email protected])  
Mylène Blanc-Gallaud (+33 1 56 43 13 00, [email protected])

Munich
Philip Martinius (+49 89 189 33-121, [email protected])

Dubai
Peter L. Baumbusch (+971 4 365 0470, [email protected])

Singapore
Jai S. Pathak (213-229-7657, [email protected])
Emad H. Khalil (+65 6507 3682, [email protected])

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