October 2, 2008

SEC Extends Emergency Short Sale Orders and Announces Intentions for Interim Final Rules

Last night the SEC extended each of the emergency orders it issued on September 17 and September 18, 2008.  The SEC said it was extending the orders “to allow time for completion of work on the anticipated passage of legislation,” referring to the financial services bail-out legislation that was passed by the U.S. Senate last night and which is currently being considered by the House of Representatives.

The SEC extended the emergency orders as follows:

  1. September 18th Emergency Order temporarily banning short selling of specified financial companies.  This Emergency Order, which currently bans short selling of the common stock of approximately 950 “financial companies” as determined by the listing exchanges, will be extended to allow for the bail-out legislation to continue to be considered by Congress.  The SEC has said that this Order will expire at 11:59 p.m. ET on the third business day after enactment of the bail-out legislation, but in any case no later than 11:59 p.m. ET on October 17, 2008.  Because it is uncertain whether or when the House will pass the bail-out legislation, we can not say at this time when the third business day after enactment will be, but it seems likely that the legislation will be voted on by the House (and either pass or fail) tomorrow.  If it does pass tomorrow (Friday, October 3, 2008), the President is very likely to sign it into law as soon as possible, maybe even on the same day it is passed, which would mean that the earliest the short sale ban would be lifted would be at midnight next Wednesday, October 8, 2008.  This would allow for short selling of financial stocks as early as Thursday, October 9th.  If no legislation is passed, the ban will expire on October 17, 2008.
  2. Form SH Reporting.  The Emergency Order requiring institutional money managers to report to the SEC on Form SH their short sale positions in “13f” publicly traded securities will be extended through 11:59 p.m. ET on October 17, 2008.  However, the SEC has stated that it intends for this reporting obligation to continue uninterrupted after October 17th and will adopt the Form SH reporting rule on a permanent basis by means of an interim final rulemaking.  Interim final rules are effective immediately upon issuance by the SEC even without a prior notice and comment period (i.e., no proposed rule or proposing release is required prior to effectiveness of an interim final rule).  The SEC has indicated, however, that there will be a post-effective comment period for the new Form SH filing rule, which will give market participants an opportunity to comment on the interim final rule and will give the SEC a chance to amend the rule based on the comments received.  Importantly, the SEC has said that Form SH disclosures made under the Emergency Order will only be made to the SEC and will not be public.  This seems to imply that the SEC will make Form SH filings public after the Form SH rule becomes permanent by interim final rule, but it is not certain at this point given that many market participants, particularly hedge funds, are pushing the SEC to not make these disclosures public once the rule goes interim final.
  3. Rule 204T under Regulation SHO - Hard T+3 close-out requirement for naked short selling.  The September 17th Emergency Order adopting Rule 204T, which implements a new T+3 delivery and close-out requirement on both long and short sales and imposes pre-borrow penalties for violations, will be extended through 11:59 p.m. ET on October 17, 2008.  However, the SEC has stated that it intends to make this rule permanent by interim final rulemaking, which means the rule will be effective upon issuance by the SEC and there will be no gap between the Emergency Order implementing Rule 204T and the interim final Rule 204T.  As with the Form SH interim final rule, the SEC will allow for a post-effective comment period for interim final Rule 204T, which could lead to future amendments to Rule 204T by the SEC.
  4. Issuer Repurchases.  The Emergency Order temporarily easing certain restrictions under Rule 10b-18 on the ability of issuers to repurchase their securities will be extended through 11:59 p.m. ET on October 17, 2008.  It is not expected that the SEC will make these temporary amendments into a final rule.
  5. Rule 10b-21 Naked Shorting Anti-fraud Rule and Elimination of the Options Market Maker Exception to Regulation SHO Close-Out Requirement.  Both of these rules will be made permanent.  Unlike the Form SH filing rule and Rule 204T, these two rule amendments will not be finalized on an interim final basis, because both were previously proposed with full notice and comment.  Thus, the SEC can make them final without using the interim final process.