Alert July 30, 2008

SEC Extends Emergency Short Sale Order and Announces Intentions for Future Rulemaking Regarding Naked Short Selling

Citing continuing concerns “about the ongoing threat of market disruption and effects on investor confidence,” the SEC late yesterday evening issued an order (the “Extension Order”) extending its previous July 15, 2008 emergency order (the “Emergency Order”) regarding “naked” short selling of the stocks of 19 specified financial firms. The Extension Order extends the Emergency Order for an additional 10 business days ending at 11:59pm(EDT) on August 12, 2008. In the accompanying press release announcing the extension of the Emergency Order, the SEC stated that it will not extend the Emergency Order beyond August 12, 2008 but stated that, immediately following the expiration of the Emergency Order, it will begin consideration of a formal rulemaking regarding naked short selling in the broader market, which presumably would apply to all US publicly traded equities. The SEC stated that the purpose of this proposed rule, which would become effective only after full public notice and comment, will be “to provide additional protections against abusive naked short selling in the broader market, while allowing the legitimate short selling essential to efficient, highly liquid markets.”

As announced in the press release, SEC Chairman Christopher Cox separately stated that the SEC is exploring other remedies for the broader marketplace to further protect investors from traders engaging in “distort and short” tactics and last week reported to Congress that the SEC will soon consider rulemaking to apply additional protections against abusive naked short selling. While neither the Extension Order nor the accompanying press release gave details regarding what those other remedies or protections might entail, possible provisions that the SEC could consider include: (1) reinstating some or all of the provisions of the uptick rule that was eliminated in 2007, such as restricting short sales of a stock unless the last sale price for the stock was higher than the previous sale price, or (2) implementing circuit breakers that would restrict short sales of a stock for a designated period of time after the price of the stock had dropped by a certain pre-set amount (such as $0.05 or $0.10 per share) within a specified timeframe. However, until the SEC formally proposes a rulemaking on this issue, these and any other possible remedies or protections regarding naked short selling are purely speculative.

We will continue to monitor and report events in this area as they develop and encourage our clients and friends to contact us with any questions or comments regarding the matters covered in this Alert.