SEC Modifies Its Emergency Short Sale Rules And Suggests They May Be Extended

The SEC amended its emergency short sale rules in two orders entered on Sunday, September 21, 2008. First, the SEC made certain technical and conforming amendments to its order prohibiting short sales in shares of 799 financial institutions. The original order contained certain exceptions. Specifically, that order provided a limited exception for certain bona fide market makers, block positioners and other market makers obligated to quote in the over the counter markets. The order also provided an exception to allow short sale that occur from the automatic exercise of an equity option held prior to its effective date.

The order entered on Sunday left in place the initial exceptions, but adds a new limitation. Under the modified order, a market maker cannot sell short if he or she knows that the customer or counterparty is increasing an economic net short position in one of the shares of one of the listed financial institutions. This amendment conforms the Commission’s ban with one entered by the U.K. Financial Services Authority.

On September 18, 2008, the FSA entered an order which generally prohibits short selling in certain securities. That order applies to the shares of 32 companies. The order exempts from its prohibition and disclosure obligations regarding short positions transactions by market makers. It defines market makers as “an entity [who] ordinarily as part of their business dealing as principal in equities, options or derivatives … to fulfill orders received from clients, to respond to a client’s requests to trade or to hedge positions arising out of those dealings.” It is due to expire on January 16, 2009, in contrast to the SEC’s initial order which is due to expire on October 2, 2008.

The second order issued on Sunday suggests however, that the current expiration date may be extended. At the time the initial short sale ban was instituted last week, the Commission also imposed certain disclosure obligations on large institutional money managers discussed here. That order provided in part the disclosures would be made available to the public. Under the modification approved on Sunday, the SEC will delay disclosing the short positions of the funds for two weeks after filing.

The order also notes that the SEC may extend its emergency order beyond the initial ten business day period. However, any extension will not exceed more that “30 calendar days in total duration,” according to the order.