SEC Extends Short Sale Emergency Orders
October 3, 2008
On October 1 and October 2, 2008, the SEC extended its recent emergency orders regarding short selling activities and related matters, including:
- Temporary prohibition of short selling in publicly traded stocks of certain financial companies. This order will now expire at 11:59 p.m. (Eastern) on the third business day after enactment of the Emergency Economic Stabilization Act of 2008 (H.R. 1424), but in any case no later than 11:59 p.m. (Eastern) on October 17, 2008.
- Hard T+3 close-out requirement for naked short selling (Exchange Act Rule 204T). This order will now expire at 11:59 p.m. (Eastern) on October 17, 2008. However, the SEC stated that it intends to issue an interim final rule that will permit Rule 204T to remain in effect following the expiration of the order while it solicits public comment. In its order concerning Rule 204T, the SEC also ratified certain staff interpretations.[1]
- Temporary requirement that institutional money managers report new short sales of certain publicly traded securities. This order will now expire at 11:59 p.m. (Eastern) on October 17, 2008. However, the SEC stated that it intends to issue an interim final rule that will permit the reporting requirement to remain in effect following the expiration of the order while it solicits public comment. In addition, the SEC made technical amendments to Form SH and its instructions and posted new forms, which are available at http://www.sec.gov/about/forms/formsh.pdf and http://www.sec.gov/about/forms/formsh_instructions.pdf.
- Temporary easing of restrictions on the ability of securities issuers to repurchase their securities under Exchange Act Rule 10b-18. This order will now expire at 11:59 p.m. (Eastern) on October 17, 2008.
Some market participants had hoped that any extension of the order banning most short selling in certain financial issuer stocks would acknowledge that the order has adversely (and possibly unintentionally) affected the market for convertible bonds, and were disappointed that the extended order did not provide for a carve-out for short selling in connection with convertible bond arbitrage.
With regard to the short sale reporting requirement for institutional money managers, the SEC clarified that disclosure under the extended emergency order will be made only to the SEC and will remain non-public without the need to submit a confidential treatment request.
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See the SEC’s press release, which contains links to the orders themselves. For background materials and additional information regarding these matters, please refer to the following Davis Polk newsflashes:
- New Short Sale Reporting Requirements, (September 22, 2008);
- 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);
- SEC Issues Order Temporarily Banning Short Sales of Public Securities of 799 Financial Companies, (September 19, 2008); and
- SEC Issues New Rules on Naked Short Sales and Plans Further Actions to Combat Market Abuses, (September 18, 2008).
If you have any questions regarding this newsflash, please call your Davis Polk contact.