SEC Amends Order Temporarily Banning Short Sales of Financial Companies to Modify Scope of Covered Securities and Expand Exemption for Derivatives Market Makers
September 22, 2008
On September 21, 2008, the SEC amended its September 18 emergency order banning short selling of publicly traded stocks of specified financial companies to address a range of concerns that were raised by industry participants and issuers.
Specifically, the amended order:
The amendment is important because it will permit market makers in listed options and OTC market makers in Covered Securities to continue to provide liquidity to the markets during the full term of the order. (The amended order did not alter the provision of the original order which provides exemptions for registered market makers, block positioners, or other market makers obligated to quote in the over-the-counter market that are selling short as part of bona fide market making in a Covered Security.) The other significant aspect of the amended order is that it will result in adjustments to the list of securities subject to the order to accommodate financial institution issuers who felt that they were improperly excluded from the original list, as well as those who do not wish to be included.
The amended order did not go as far as some market participants would have liked in exempting specified types of short sales. In particular, many market participants urged the SEC to adopt a standard that permitted all short sales for hedging purposes so long as the seller was not establishing or increasing its “net short” position.
There are also a number of significant ambiguities. For example, the derivatives market making exemption permits short sales related to bona fide market making activities in “derivative securities” based on Covered Securities. However, it does not make clear whether the term “derivative securities” includes security-based swaps that are not technically “securities.” Although the definitional provisions in the federal securities laws exclude certain security-based swaps from the definition of “securities,” such swaps are taken into account for other purposes. Also, where the amended order refers to “market makers,” it is not clear whether it is intended to include only entities that meet the definition of market maker contained in the Exchange Act, or whether a more liberal interpretation is intended. In addition, market makers are not given guidance concerning how they are to establish that they do not have knowledge of a customer or counterparty’s intention to use a derivative instrument to establish or increase an economic short position.
The term of the order was not altered, and the order expires at 11:59 p.m. (Eastern) on October 2, 2008, unless extended by the SEC.
In a separate action, the SEC amended its order concerning reporting of short sales and short positions by certain institutional investment managers to provide that the filings will initially be non-public, and that the disclosures will only be made publicly available after two weeks.
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The amended order banning short sales in Covered Securities is available at http://sec.gov/rules/other/2008/34-58611.pdf. The SEC’s order amending reporting requirements for institutional investment managers is available at http://sec.gov/rules/other/2008/34-58591a.pdf.
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