SEC Announces Extension of Short Selling Orders
October 3, 2008 Supplement1
On October 1, 2008 the Securities and Exchange Commission released a statement concerning short selling in which it announced that it was extending the effectiveness of the four short selling orders in order to “provide clarity about the future expiration of these actions . . . [and] to allow time for the completion of work on the anticipated passage of legislation.”2 In the same statement, the SEC also announced that it intends to release interim final rules to continue some of the requirements without interruption following the expiration of the relevant orders. This update examines how this latest announcement from the SEC affects each of the emergency orders that were set to expire this week.3
Temporary Ban on Short Selling in Financial Companies
The SEC has announced that it will extend the effectiveness of the temporary ban on short selling in financial companies in order to allow time for the completion of the anticipated financial rescue legislation. The ban will now remain in effect through the earlier of:
- three business days from the President’s signing of the Economic Stabilization Act of 2008 (H.R. 1424); or
- 11:59 PM EDT on October 17, 2008.4
Required Disclosure of Short Sales in Certain Securities
The SEC has also stated that it will extend the effectiveness of the temporary requirement that certain institutional investment managers report information regarding daily short sales of securities through 11:59 PM EDT on October 17, 2008. As a result of the extension, Forms SH will be required to be filed on Monday, October 6, 2008 and Tuesday, October 14, 2008 (October 13 being a holiday).5
The SEC has also announced that it intends to adopt an interim final rule in order that the requirements of the disclosure order will remain in effect uninterrupted following the expiration of the emergency order. The SEC press release notes that the SEC will be seeking comments on all aspects of the rulemaking.
Although the SEC stated previously that it would make the disclosures on Form SH public two weeks after they were due, the SEC has now determined that such disclosures will remain non-public, stating:
The [SEC] believes that the nonpublic submission of Form SH may help prevent artificial volatility in securities as well as further downward swings that are caused by short selling, while at the same time, providing the [SEC] with useful information to combat market manipulation that threatens investors and capital markets. Also, the [SEC] has considered further the reasons to maintain the information as nonpublic in the current market environment, and is concerned that publicly available Form SH data could give rise to additional, imitative short selling that was not intended by the [SEC]’s Order. Accordingly, the [SEC] has determined that Forms SH filed under the [Disclosure Order] including those that were due on September 29, 2008 will remain nonpublic to the extent permitted by law without the filer needing to submit a confidential treatment request.
Easing of Restrictions on Issuers Repurchasing Their Own Securities
Without any additional commentary, the SEC announced that it is extending the order easing the restrictions on issuers seeking to repurchase their own securities through 11:59 PM EDT on October 17, 2008.6
Restrictions on Naked Short Selling
The SEC has also extended the effectiveness of the hard T+3 close out requirement for naked short selling and the penalties for violation through 11:59 PM EDT on October 17, 2008.7 The SEC has also announced that it intends to adopt an interim final rule in order that the naked short selling restrictions adopted in the emergency order will remain in effect uninterrupted following the expiration of the emergency order. The SEC press release notes that the SEC will be seeking comments on all aspects of the rulemaking.
The extension order also specifically incorporates and adopts the Division of Trading and Markets: Guidance Regarding the Commission’s Emergency Order Concerning Rules to Protect Investors Against “Naked” Short Selling Abuses8 and the Division of Trading and Markets Guidance Regarding Sale of Loaned but Recalled Securities9 to apply through the duration of this emergency order.
The Future of Short Selling Regulation
There are two final noteworthy aspects of the SEC’s statement concerning short selling. First, the SEC specifically states that short selling plays an important role in the market:
The [SEC] notes that short selling plays an important role in the market for a variety of reasons, including contributing to efficient price discovery, mitigating market bubbles, increasing market liquidity, promoting capital formation, facilitating hedging and other risk management activities, and importantly, limiting upward market manipulations.
The SEC also notes that there are also circumstances in which short selling can be abusive, and explains that the emergency orders were designed to minimize the possibility of abusive short selling.
Second, the SEC states that its “actions have been taken in consultation with regulators of the major developed securities markets around the world, with whom we have coordinated in monitoring market reactions.”
Although it is not possible to predict with certainty whether the SEC will continue to allow short selling, or what limits may be imposed if it does, one thing is certain: the SEC will be looking closely at what the rest of the world’s financial regulators are doing.
1) This DechertOnPoint supersedes the DechertOnPoint of the same title published on October 2, 2008 and speaks as of 12:00 PM EDT on October 3, 2008. Further changes may be made without notice as market and regulatory events continue to unfold. The version of this DechertOnPoint will be the most up to date version available at the time it is viewed. You should not rely on this DechertOnPoint without first checking online for further updates.
2) Statement of Securities and Exchange Commission Concerning Short Selling, Press Release 2008-235 (October 1, 2008).
3) More information regarding the temporary ban on short selling in financial companies, the requirements to disclose short sales, and the easing of restrictions on the ability of issuers to repurchase their own securities can be found in DechertOnPoint, Issue 24. Further information regarding the restrictions related to naked short selling can be found in DechertOnPoint, Issue 23.
4) Order Extending Emergency Order Pursuant to Section 12(k)(2) of the Securities Exchange Act of 1934 Taking Temporary Action to Respond to Market Developments, SEC Rel. No. 34-58723 (Oct. 2, 2008).
5) Amendment to Order and Order Extending Emergency Order Pursuant to Section 12(k)(2) of the Securities Exchange Act of 1934 Taking Temporary Action to Respond to Market Developments, SEC Rel. No. 34-58724 (Oct. 2, 2008).
6) Order Extending Emergency Order Pursuant to Section 12(k)(2) of the Securities Exchange Act of 1934 Taking Temporary Action to Respond to Market Developments, SEC Rel. No. 34-58703 (October 1, 2008).
7) Order Extending Emergency Order Pursuant to Section 12(k)(2) of the Securities Exchange Act of 1934 Taking Temporary Action to Respond to Market Developments, SEC Rel. No. 34-58711 (October 1, 2008).
8) Available at www.sec.gov/divisions/marketreg/204tfaq.htm.
9) Available at www.sec.gov/divisions/marketreg/loanedsecuritiesfaq. htm.