March 16, 2004
Amy N. Kroll, Esquire
Re: Rule 10a-1; Exemptive Relief under Short Sale Rule
Dear Ms. Kroll:
In your letter dated March 8, 2004, as supplemented by telephone conversations with the staff, you request exemptive relief regarding Rule 10a-1 under the Securities Exchange Act of 1934 (Exchange Act) for clients of Harborside Securities, L.L.C. (Harborside) that seek to execute short sale transactions that Harborside proposes to match prior to the opening of regular trading and execute after the close of regular trading at the volume-weighted average price (VWAP). This response is attached to the enclosed photocopy of your letter. By doing this, we avoid having to recite or summarize the facts set forth in your letter. Each defined term in this response has the same meaning as defined in your letter, unless otherwise noted.
Rule 3b-3 under the Exchange Act defines the term "short sale," and Rule 10a-1 governs short sales generally. Paragraph (a) of Rule 10a-1 applies to short sales of any exchange-listed security, if transactions in such security are reported pursuant to an "effective transaction reporting plan" (Listed Security). A short sale of a Listed Security may not be effected at a price either: (1) below the last reported price of a transaction reported in the consolidated transaction reporting system (minus tick); or (2) at the last reported price if that price is lower than the last reported different price (zero-minus tick).
Absent an exemption, short sales of Listed Securities effected by Harborside's clients on a VWAP basis must comply with paragraph (a)(1) of Rule 10a-1. The final execution price of such VWAP short sale transactions by Harborside's clients may be on a minus tick or a zero-minus tick with respect to the last sale in the consolidated transaction reporting system. Transactions under such circumstances in exchange-listed securities would not comply with Rule 10a-1. You state that the manner in which Harborside proposes to effect the proposed VWAP transactions should not give rise to any concerns with regard to possible short selling in an effort to manipulate or destabilize trading in any particular security. In particular, you note that the parties to each transaction will irrevocably agree to a transaction for which orders are matched before the opening of regular trading on the date of the transaction, and are executed after the close of regular trading at the volume-weighted average price (VWAP). Furthermore, the VWAP short sales agreed to before the opening of regular trading that are the subject of this letter will not be used as part of the VWAP calculation that day, and thus these transactions should not exert any downward pressure on the subject stock's price. These short sales will also be properly marked as "short exempt," and will be reported using a special VWAP trade modifier. Further, if one of the parties effected short sales in the market intraday, these short sales would be subject to Rule 10a-1.
Based upon your representations and the facts presented, but without necessarily concurring in your analysis, the Commission hereby grants an exemption from paragraph (a)(1) of Rule 10a-1 to permit short sale transactions in Listed Securities by Harborside's clients that have been guaranteed the VWAP by Harborside prior to the opening of regular trading, subject to the following conditions:
The foregoing exemption from Rule 10a-1 is based solely on your representations and the facts you have presented to the staff, and is strictly limited to the application of this rule to transactions under the circumstances described above. Such transactions should be discontinued, pending presentation of the facts for our consideration, in the event that any material change occurs with respect to any of those facts or representations. The exemption granted herein is subject to modification or revocation if at any time the Commission determines that such action is necessary or appropriate in furtherance of the purposes of the Exchange Act.3 In addition, your attention is directed to the anti-fraud and anti-manipulation provisions of the Exchange Act, particularly Sections 9(a) and 10(b), and Rule 10b-5 thereunder. Responsibility for compliance with these and other applicable provisions of the federal or state securities laws must rest with Harborside and with participants effecting VWAP short sale transactions. The Division expresses no view with respect to other questions that the proposed transactions may raise, including, but not limited to, the applicability of other federal and state laws to the proposed transactions.
For the Commission, by the Division of Market
|Home | Previous Page||