Short sale update: SEC extends
emergency actions through extraordinary
rulemaking; US short selling ban expires
Russell D. Sacks
Purpose – This paper aims to provide a detailed description of the four releases issued by the US
Securities and Exchange Commission (the ‘‘SEC’’) on October 14 and 15, 2008 in connection with the
three SEC emergency orders that were adopted on September 17 and 18, 2008, relating to the
regulation of short selling.
Design/methodology/approach – The paper presents a general overview of: Interim Final Temporary
Rule 204-T; Interim Final Temporary Rule 10a-3T; the Amendments to Regulation SHO; and the Final Rule
10b-21, each regulating short selling; and highlights each rule’s new requirements, the exceptions to
those requirements, and the material differences between the new rules and the rules as they were
Findings – The Interim Temporary Rules, the Amendments to Regulation SHO and the Final Rule 10b-21
are important because: Interim Final Temporary Rule 204-T imposes a penalty on any ‘‘participant’’ of a
‘‘registered clearing agency’’, as deﬁned below, and any associated broker-dealer for having a
fail-to-deliver position at a registered clearing agency in any equity security; Interim Final Temporary
Rule 10a-3T requires certain institutional investment managers to ﬁle a new form with the SEC on the last
business day of every calendar week subsequent to the manager effecting a short sale; the
Amendments to Regulation SHO eliminate the ‘‘options market maker exception’’ from Regulation SHO’s
close-out requirement; and Final Rule 10b-21 prohibits any person from intentionally deceiving a
broker-dealer, or a buyer as to the intention or ability of that person to deliver shares on the settlement
date. Each of these actions creates new day-to-day compliance responsibility for market participants
generally and for US-registered broker-dealers in particular.
Originality/value – The paper provides expert guidance on recent SEC releases by experienced
Keywords Securities, Regulation, Financial markets
Paper type Technical paper
On September 17 and 18, 2008, the US Securities and Exchange Commission (the ‘‘SEC’’)
adopted three emergency orders that implemented important but temporary steps
relating to the regulation of short selling. These steps were:
1. A ban on the short selling of securities of certain enumerated ﬁnancial institutions, which
expired at 11:59 p.m. on October 8, 2008.
2. A requirement that certain institutional money managers ﬁle a weekly form (‘‘Form SH’’)
disclosing short positions over a threshold amount.
3. The creation of penalties for maintaining a fail-to-deliver position.
4. The elimination of the ‘‘options market maker’’ exception to the close-out requirement
found in SEC Regulation SHO.
5. The adoption of a new antifraud rule, 10b-21, prohibiting any person from deceiving a
broker-dealer or purchaser about its intention or ability to deliver a security on the date
that delivery is due.
DOI 10.1108/15285810910948117 VOL. 10 NO. 1 2009, pp. 35-42, Q Emerald Group Publishing Limited, ISSN 1528-5812
JOURNAL OF INVESTMENT COMPLIANCE
Russell D. Sacks is based
at Shearman & Sterling LLP,
New York, New York, USA.
The author is grateful to
Erica J. Laudano and
Jennifer D. Morton, Associates
at Shearman & Sterling LLP, for
their assistance in the research
and drafting of this article.