The SEC adopted Rule 10b-21 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), substantially as proposed in March 2008 (see the March 25, 2008 Alert), and as included in the SEC’s emergency order of September 17, 2008 (see the September 18, 2008 Alert), which expired on October 17, 2008. Rule 10b-21 is intended to address failures to deliver securities sold short that have been associated with “naked” short selling. Rule 10b-21 forbids “any person to submit an order to sell an equity security if such person deceives a broker or dealer, a participant of a registered clearing agency, or a purchaser about its intention or ability to deliver the security on or before the settlement date, and such person fails to deliver the security on or before the settlement date.” Scienter (as understood under the existing anti-fraud standard of Exchange Act Rule 10b-5) is required for a violation of the Rule. Similar to Regulation SHO, the Rule applies only to equity securities.In the release adopting Rule 10b-21, the SEC noted that naked short selling as part of a manipulative scheme was already illegal under the general antifraud provisions of the federal securities laws, but that it believes that a rule further evidencing the illegality of these activities will focus the attention of market participants on such activities. To clarify the Rule’s relationship to other anti-fraud rules, SEC added a preliminary note to the Rule stating that Rule 10b-21 “is not intended to limit, or restrict, the applicability of the general antifraud provisions of the federal securities laws.” In response to comments received on Rule 10b-21 as proposed, the SEC noted that the courts have held that a private right of action exists with respect to Rule 10b-5 provided the essential elements constituting a violation of the rule are met. Thus, a private plaintiff able to prove all those elements in a situation covered by Rule 10b-21 would be able to assert a claim under Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Rule 10b-21 became effective on October 17, 2008.
Alert October 21, 2008