On February 24, 2010, the U.S. Securities and Exchange Commission ("SEC") adopted a new rule to restrict short sales under certain circumstances. Under the new rule, a circuit breaker will be imposed once the price of a security drops by 10% from the previous trading day’s closing price. The measure is intended to prevent short sales from being made once the circuit breaker is triggered, unless the price of the short sale exceeds the then current national best bid price. The restrictions remain in place through the end of the following trading day.
The rule applies to all "national market system securities", or essentially all securities (of both U.S. and foreign issuers) listed on a U.S. national stock exchange, including NASDAQ, regardless of whether the sale takes place on an exchange or over the counter. The rule does not apply to securities where U.S. trading is limited to the OTC Bulletin Board or other over-the-counter markets. The rule requires each U.S. regulated "trading center" to implement circuit breaker procedures reasonably designed to prevent the execution or display of a short sale order at or below the then current national best bid price after a 10% decline from the prior day’s closing price. The trading centers covered by the rule include U.S. stock exchanges and other trading markets of all types, as well as broker-dealers executing orders internally by trading as principal or crossing orders as agent.
The rule was adopted by a 3-2 vote of the SEC, following over a year of study, and is likely to be controversial. By limiting short sales to those above the best bid price after circuit breakers are imposed (following the so-called "alternate uptick rule"), the SEC is attempting to assure that "long" sellers have first access to liquidity in times of a market downturn. The SEC acknowledged that other instruments, such as credit default swaps and other derivatives, could be used in lieu of short sales and could limit the impact of its regulation of short sales.
Authored by Bonnie Roe.
If you have any questions regarding the foregoing, please contact Bonnie Roe (212.588.5543), Gerald Shepherd (212.588.5540) or Scott Tayne (212.588.5520) in our New York office, Patricia Olasker (416.863.5551) in our Toronto office or Neil Kravitz (514.841.6522) in our Montréal office.
Davies Ward Phillips & Vineberg LLP, with over 240 lawyers, practises nationally and internationally from offices in Toronto, Montréal and New York and is consistently at the heart of the largest and most complex commercial and financial matters on behalf of its North American and international clients.
The information and comments herein are for the general information of the reader and are not intended as advice or opinions to be relied upon in relation to any particular circumstance. For particular applications of the law to specific situations, the reader should seek professional advice.
