Article by Michael R. Butowsky , Eric J. Finseth , Charles M. Horn , Elizabeth M. Knoblock , Stephanie M. Monaco and Jerome J. Roche

Originally published July 29, 2009

Keywords: SEC, action, short sales, abusive short selling, public disclosure, short sale activity, Reg. SHO, Rule 204, Rule 204T, lending, pre-borrowing, short sale disclosures

On July 27, 2009, the US Securities and Exchange Commission (SEC) took several steps aimed at combating "abusive" short selling and increasing public disclosure of short sale activity.1

First, the SEC finalized Rule 204 under Reg. SHO,2 which was originally adopted as Interim Final Temporary Rule 204T in October 2008.3 Rule 204 generally requires broker-dealers to borrow or purchase securities to deliver on a short sale with the purpose of avoiding fails to deliver. Specifically, the rule imposes a "T+3" hard close-out requirement on all short sales, and penalizes broker-dealers that have not purchased or borrowed securities to close out the fail before the opening of the markets on T+4. Rule 204T was previously due to expire July 31, 2009.

Second, the SEC determined to allow Temporary Rule 10a-3T (which requires certain money managers to file Forms SH each week disclosing short sale activity to the SEC) to expire as scheduled on August 1, 2009. In its place, the SEC has announced that it will be cooperating with certain self-regulatory organizations (SROs) to make short sale "volume and transaction data" publicly available on SRO web sites. This information is expected to include: (i) daily disclosures of aggregate short sale activity in each individual equity security on that day; (ii) disclosure of individual short sale transactions in all exchange-listed equity securities on a one-month delayed basis; and (iii) twice-monthly disclosure on the SEC's web site of all fails to deliver.4

Third, the SEC announced that it will hold a roundtable on September 30, 2009, focusing on securities lending, pre-borrowing, and possible additional short sale disclosures. One topic for discussion may include a potential pilot program of a mandatory pre-borrow requirement, such as that recently called for by Senator Ted Kaufman (D-Del.) and others.5

We also note that SEC Chairman Mary Schapiro recently stated in testimony before the House Financial Services Committee on July 22, 2009, that the SEC expects to take action on its proposed short sale price tests and circuit breakers within the next two months.6


1. SEC Takes Steps to Curtail Abusive Short Sales and Increase Market Transparency" (July 27, 2009), available here.

2. Amendments to Regulation SHO, Exchange Act Rel. No. 60,388 (July 27, 2009), available here.

3. See Exchange Act Rel. No. 58,773 (Oct. 14, 2008), available here. See also Mayer Brown Client Update, "SEC Takes Formal Rulemaking Action Regarding Short Sales" (Oct. 16, 2008) available here. The SEC made only minor modifications from the original text of Rule 204T.

4. Fails information will be available here.

5. See "Senators Urge SEC to Consider Potential Solution to Abusive Short-Selling" (July 22, 2009) available here.

6. See Mayer Brown Client Update, "US Securities and Exchange Commission Considers New Short Selling Regulation" (April 15, 2009), available here.

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