Saturday, May 2, 2009

SEC Posts Study on Short Sales; Announces Panelists For May 5 Roundtable

Yesterday, the SEC issued a press release announcing the agenda and panelists for its May 5 roundtable on short sales, including short sale price tests and short sale circuit breakers. See the related rule proposal which the Commission released for public comment in April, Amendments to Regulation SHO, on which comments are due June 19.

The SEC also posted a Release yesterday in the form of a Notice of Roundtable Discussion/Request for Comment, which states: "In light of current instability in the financial markets and the erosion of investor confidence, the Commission is evaluating the issue of short sale price test restrictions and short sale circuit breakers. On April 8, 2009, the Commission unanimously voted to propose two new approaches to short selling regulation. The first approach proposes two permanent market-wide short sale price test restrictions. The second approach proposes three circuit breaker rules that, when triggered by a significant intraday decline in a security’s price, would impose either a temporary halt on short selling of an individual security, or a temporary price test restriction." The Release adds: "The Commission will accept comments regarding issues addressed in the roundtable discussion and otherwise regarding the proposed rule amendments until June 19, 2009."

SEC Posts OEA Memo: Analysis of Emergency Order
In a related development, the SEC posted on its website yesterday (according to SEC's "What's New" page for May 1) a 49-page Memorandum dated Jan. 14, 2009 entitled Analysis of the July Emergency Order Requiring a Pre-Borrow on Short Sales. The Emergency Order issued in July 2008, during the midst of the credit downturn, was controversial to some, in imposing a ban on 'naked short selling' of the stocks of 19 significant financial services institutions. (The full names of the 19 institutions are provided in Appendix A of the July 2008 Emergency Order; the Jan. 14, 2009 Memo abbreviates them.)

The Jan. 14, 2009 Memorandum, prepared by the SEC's Office of Economic Analysis (OEA), states: "The goal of this analysis was to evaluate the impact of the Emergency Order to understand the potential economic tradeoffs of a pre-borrow requirement such as the one in the Emergency Order.... We compared the experience of these stocks [the 19 issuers] to that of two control samples that were not subject to the Emergency Order. One control sample was composed of other financial stocks and the other was composed of large Non-Financial Control stocks. It is important to emphasize, at this point, that the Emergency Order was in effect for only seventeen trading days, making it difficult to draw strong conclusions for some of our measures."

The OEA Memorandum concludes: "Our results suggest that imposing a pre-borrow requirement may have had the intended effect of reducing fails but may have resulted in significant costs on all short sellers even those whose actions were not related to fails."

Additional information relating to this subject can be found on the SEC's Spotlight on Short Sales.

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