Corporate & Securities Law

By Jim Hamilton

SEC Approves Short Selling Restrictions

The SEC adopted a new rule restricting short selling when a stock is experiencing significant downward price pressure. The alternative uptick rule is designed to restrict short selling from further driving down the price of a stock that has dropped more than 10 percent in one day. It will enable long sellers to "stand in the front of the line" and sell their shares before any short sellers once the circuit breaker is triggered. Under the new alternative uptick rule, Rule 201, short selling would be permitted if the price of the security is above the current national best bid.

Rule 201 includes the following features:

Short Sale-Related Circuit Breaker: The circuit breaker would be triggered for a security any day in which the price declines by 10 percent or more from the prior day's closing price.

Duration of Price Test Restriction: Once the circuit breaker has been triggered, the alternative uptick rule would apply to short sale orders in that security for the remainder of the day as well as the following day.

Securities Covered by Price Test Restriction: The rule generally applies to all equity securities that are listed on a national securities exchange, whether traded on an exchange or in the over-the-counter market.

Implementation: The rule requires trading centers to establish, maintain, and enforce written policies and procedures that are reasonably designed to prevent the execution or display of a prohibited short sale.

The rule will become effective 60 days after the date of publication of the release in the Federal Register, and then market participants will have six months to comply with the requirements.

.

Full post as published by Jim Hamilton's World of Securities Regulation on February 24, 2010 (boomark / email).