July 16, 2008
The Securities and Exchange Commission issued Release No. 34-58107, Amendment to Regulation SHO, on July 7, 2008, to extend the comment period to August 13, 2008, for a proposed change to its short-selling rule. The proposed change to the July 2004 rule in Release No. 34-50103, Short Sales (Regulation SHO), is the latest attempt by the SEC to eliminate the persistent problem of fails to deliver of stocks that have been sold short. Fails result when a short seller can not close out a trade at the time of settlement, often because the seller never had title to the securities.
In the August 2007 final rule in Release No. 34-56212, the SEC got rid of one of two exceptions to Regulation SHO (17 CFR 242.200 et seq.), the grandfather provision. The proposal pending in Release No. 34-58107 would, if approved as a final rule, end the second loophole, the options market maker exception. Both provisions permitted short sellers to avoid closing out their positions under certain conditions.
A June 2008 study from the SEC's Office of Economic Analysis (OEA) said that fails to deliver on optionable securities increased sharply following the elimination of the grandfather provision. The data should permit interested parties to submit informed comments about the effect the options market maker exception has had on short selling, the agency said.
Release No. 34-58107 represents the third time regulators have opened up this particular amendment for public comment—the first two being the August 2007 proposal in Release No. 34-56213 and the July 2006 proposal in Release No. 34-54154.