Wednesday, July 29, 2009

SEC Updates "Naked" Short Selling Rules, Works to Improve Short Sale Transparency

On July 27, 2009, the SEC announced various steps it is taking to address abusive "naked" short sales and provide the public with more information on the short sale practices of equity market participants.

First, the SEC made permanent Rule 204T under Regulation SHO, which aims to reduce failures to deliver securities (known as "fails to deliver") resulting from sales of any equity security and provides a disincentive to those who might engage in potentially abusive "naked" short selling. A "naked" short sale generally refers to selling short without having borrowed the securities to make delivery to the buyer by the settlement date (typically three days after the trade, known as T+3). Under new Rule 204, a broker-dealer must purchase or borrow securities to close out any "fails to deliver" resulting from short sales by no later than the beginning of trading on the day after the fail to deliver occurs (typically T+4). Until the "fail to deliver" position is closed out, a broker-dealer may not short sell the security either for itself or the account of another without first borrowing or arranging to borrow the security. Investment managers engaged in short selling activity should be cognizant of the constraints Rule 204 places on their broker-dealer and take care not to compromise their broker-dealer's ability to satisfy its requirements or the requirements of Regulation SHO in general.

Second, the SEC is working with several self-regulatory organizations ("SROs") to provide short sale volume and transaction data on the SROs' websites. The available information is expected to include:

  • daily publication of the aggregate short sale volume in each individual equity security;
  • monthly publication (on a one-month delayed basis) of individual short sale transactions in all exchange-listed equity securities; and
  • twice monthly publication of fails to deliver information for all equity securities.

This information will supplant the nonpublic short sale information currently provided to the SEC by certain institutional investment managers on Form SH under temporary Rule 10a-3T, which is set to expire on August 1.

Third, on September 30 the SEC intends to hold a roundtable discussion on securities lending, pre-borrowing, and possible additional short sale disclosures. The discussion will address, among other things, possible additional measures to improve transparency. Such measures could include, for example, adding a short sale indicator to the tapes to which transactions are reported for exchange-listed securities and requiring public disclosure of individual large short positions.

Link to SEC press release
Link to SEC Release adopting Rule 204