Short Selling Update: The SEC Abandons Rule 10a-3T. Plan B to Follow?

July 30, 2009

On July 27, 2009, the Securities and Exchange Commission took several actions relating to short selling in anticipation of the expiration of interim final temporary Rules 10a-3T under the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 204T of Regulation SHO.  The full text of the press release can be found here.  The most  significant development is that, after July 31, 2009, institutional investment managers will no longer be required to report short sale and short position information to the SEC on Form SH.  The following is a summary of the SEC’s actions.

Expiration of Short Sale and Short Position Reporting

In October 2008, the SEC adopted interim final temporary Rule 10a-3T, which requires certain institutional investment managers to make disclosures on temporary Form SH concerning their short sales of and short positions in Exchange Act 13(f) securities (other than options).  The Commission will let the rule expire this Friday, July 31. 

We have confirmed with the SEC staff that institutional investment managers subject to Rule 10a-3T will file their last Form SH with the Commission on July 31, 2009 for short sales and short positions effected during the calendar week beginning July 19, 2009.

New Public Disclosure of Short Sale Data

In lieu of retaining Rule 10a-3T, the SEC is working with several self-regulatory organizations ("SROs") to increase the amount of publicly available information about short sales and fails to deliver.  In particular, the SEC expects that the following information will be published within the next few weeks:

  • Daily aggregate short selling volume in each individual equity security for that day will be published by the SROs on their Web sites;
  • Individual short sale transactions in all exchange-listed equity securities will be published by the SROs on their Web sites on a one-month delayed basis; and
  • Information about fails to deliver for all equity securities, regardless of the amount of fails, will be published on the SEC’s Web site twice monthly. 

September Roundtable on Short Sale Transparency

The SEC is considering whether additional measures are needed to increase market quality and transparency, particularly in connection with short selling activity.  Accordingly, the Commission will hold a public roundtable on September 30, 2009, and is in the early stages of determining potential panelists, who will include representatives of investors, issuers, financial services firms, SRO and academics. 

General topics of discussion are expected to include:

  • Additional means to foster transparency, such as adding a short sale indicator to transaction reporting tapes for exchange-listed securities, and requiring public disclosure of individual large short positions;
  • The appropriateness of imposing a pre-borrow or enhanced "locate" requirement on short sellers, at least initially on a pilot basis; and
  • Issues related to securities lending, including compensation arrangements, disclosure practices and methods of collateral and cash-reinvestment.

As with prior SEC roundtables, there likely will be an opportunity to submit comment letters on these topics in advance of the meeting.

Rule 204 of Regulation SHO to Be Permanent Effective July 31

On July 31, 2009, Rule 204 becomes a permanent rule.  The Commission’s action was largely expected in light of consistent staff comments, including recent remarks by James A. Brigagliano, Co-Acting Director of the SEC’s Division of Trading and Markets (the "Division"), before the Security Traders Association on May 5, 2009, regarding Rule 204T’s effectiveness in reducing fails to deliver.

The SEC modified Rule 204 only slightly, including by:

  • Permitting borrows as well as purchases to be used to close out a fail to deliver position; provided that (1) the borrow or purchase is bona fide; (2) the borrow or purchase is executed after trade date, by no later than the end of regular trading hours on the transaction’s settlement date (i.e., no later than T+3); (3) the borrow or purchase is of a sufficient quantity to cover the entire amount of the open short position in that security; and (4) the broker-dealer is net flat or net long in that security on its books and records on the day of the purchase and can demonstrate its compliance with this requirement.[1]
  • Extending the exemption for fails to deliver relating to processing delays in connection with sales of Rule 144 securities to fails to deliver resulting from the sale of any equity security that a person is deemed to own pursuant to Rule 200 of Regulation SHO, and that such person intends to deliver as soon as all restrictions on deliver have been removed.  Accordingly, in addition to Rule 144 securities, the exemption will apply to convertible securities, options, and warrants that have been tendered for conversion or exchange, but for which the underlying security is not reasonably expected to be received by settlement date.  The close-out period for these securities will be 35 calendar days following the transaction’s trade date.[2]
  • Granting the Division’s Director  delegated authority to grant conditional and unconditional exemptions from Rule 204.[3]

The Commission declined to exempt securities other than debt securities, but said it will consider on a case-by-case basis whether the provisions of Rule 204 and Regulation SHO more generally, should apply to particular securities, including various structured products.

No Decision on a Price Test or Circuit Breakers

In April 2009, the SEC published proposed amendments to Regulation SHO to adopt one of five alternatives for restricting short selling, including two variations of a price test, and three variations of circuit breaker restrictions.  By the expiration of the comment period on June 19, 2009, the Commission had received in excess of 5000 comment letters.  Not surprisingly, the Commission is continuing to actively consider proposals on a short sale price test and circuit breaker restrictions.   

[1]   See Rule 204(e).

[2]   See Release No. 34-60388, n141.

[3]   See Rule 30-3(a)(11). 

Gibson, Dunn & Crutcher LLP

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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])
Amy L. Goodman (202-955-8653, [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])

James J. Moloney (949-451-4343, [email protected])

New York
Dennis J. Friedman (212-351-3900, [email protected])
Mark K. Schonfeld (212-351-2433, [email protected]
George A. Schieren (212-351-4050, [email protected])

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