SEC Votes 3-2 to Adopt Alternative Uptick Rule

General Prohibition

If the price of a covered security declines 10%, or more from the prior day’s closing price, short sales at or below the national best bid would be prohibited in that security for the remainder of the day and the following trading day.

Comment:  By restricting short sales to prices at an increment above the national best bid, short sellers (referred to as "liquidity takers") will come at the end of the line, after long sellers.

Securities Covered

Equity securities that are listed on a national securities exchange.

Comment:  Commissioner Casey expressed concern about the impact on equity derivatives.

Transactions Covered

Rule 201 will apply to short sales on an exchange or in the over-the-counter market.

Comment:  The SEC had proposed to include an exception for overseas transactions, unless the transaction was arranged in the United States.  It was unclear from today’s meeting whether the SEC will address the jurisdictional scope of the requirements in Rule 201 or the adopting release.

Proposed Exceptions

Although not an exclusive list, the staff noted that Rule 201 will include the following exceptions:

• Riskless principal transactions
• Domestic and international arbitrage transactions
• Odd-lot transactions
• Syndicate transactions in connection with over-allotments of securities or lay-off sales
• Eligible VWAP trades

Comment:  The SEC did not propose any exception for market making activities, and no mention of such an exception was made at today’s meeting.  In addition to non-U.S. transactions, the final rule will need to be reviewed for an exception for basket transactions and its application to pre- and after-hours trades.

Order Marking Requirements

Rule 200(g) will be amended to require that broker-dealers mark orders as "long," "short" or "short exempt."

Comment:  The SEC staff noted that broker-dealers will need policies and procedures to ensure and document accurate order marking, and reliance on an exception, if available.

Policies and Procedures

Trading centers[2] will be required to establish, maintain, and enforce written policies and procedures that are reasonably designed to prevent the execution or display of a prohibited short sale.

The SEC staff explained that this means that trading centers will be responsible for continuous monitoring, updating and enforcing their procedures to ensure that short sales are not displayed or effected in violation of Rule 201.  The intentional, reckless, or negligent execution or display of short sale orders at or below the national best bid when the circuit breaker is in effect will violate Rule 201.  

Comment:  Including a policy and procedures requirement in Rule 201 continues the SEC’s recent trend of embedding these requirements in its rules, and not relying on industry participants’ general supervisory and compliance obligations, or SRO requirements and responsibilities.

Effective and Compliance Dates

The Effective Date for the Alternative Uptick Rule and amended Rule 200(g) will be 60 days after publication of the adopting release in the Federal Register.

The Compliance Date for the Alternative Uptick Rule and amended Rule 200(g) will be six months following the Effective Date. 

Comment:  A six months implementation period is being provided in recognition of the programming requirements related to the new rule.  Trading centers that have no legacy price test programming, including most alternative trading systems, will face significant trading costs.  All trading centers, other broker-dealers, and hedge funds will want to review the policies and procedures to reflect the new requirements.