At an open meeting on March 4, 2008, the Securities and Exchange Commission (the “Commission”) voted to propose a new antifraud rule intended to proscribe abusive naked short selling practices. If adopted, proposed Rule 10b-21 (the “Proposed Rule”) would prohibit short sellers from misrepresenting their ability or intent to deliver securities to cover short sales by the settlement date where that deception results in a failure to deliver. Examples of the types of prohibited activities would include: (i) misrepresenting ownership of securities; (ii) misrepresenting having obtained a “locate” before effecting the short sale; and (iii) marking a sale ticket “long” when the seller does not actually own the security. The Proposed Rule would cover broker-dealers acting for their own accounts, but market makers engaging in normal market-making activity would not be subject to the Proposed Rule.
The staff of the Division of Trading and Markets stated that the Proposed Rule would not impose additional procedural or other requirements on broker-dealers that were already in compliance with the SEC’s Regulation SHO. The SEC’s General Counsel stated that a violation of the Proposed Rule could potentially be actionable as a private cause of action. Chairman Cox also noted that the Commission would make criminal referrals based on violations of Rule 10b-21 where appropriate.
The Commission, which currently consists of only 3 members, unanimously voted to issue the Proposed Rule for public comment. Chairman Cox supported the proposal, calling it a necessary step. Commissioner Atkins indicated that he hoped that commentators would discuss whether the Proposed Rule is necessary. He stated that the activities in question were already subject to the antifraud prohibitions in Rule 10b-5, and asked whether the Proposed Rule would add anything to the enforcement powers of the Commission. Commissioner Casey also appeared to support the Proposed Rule, but focused on specific questions regarding its application and the possibility of unintended consequences, such as inducing short sellers to execute trades in overseas markets.
This newsflash is based on statements made at the Commission meeting. The Proposed Rule has not yet been published. The Commission will shortly issue a release concerning the Proposed Rule and seek public comment.
If you have any questions regarding this newsflash, please call your Davis
Polk contact.