Division of Trading and Markets:
Guidance Regarding the Commission's Emergency Order Concerning Short Selling
I. Introduction
Pursuant to Section 12(k)(2) of the Securities Exchange Act of 1934, on July 15, 2008, the Securities and Exchange Commission ("Commission") issued an Emergency Order (the "Order") related to short selling securities of the companies identified in Appendix A of the Order. Also pursuant to Section 12(k)(2), on July 18, 2008, the Commission issued an amendment to the Order. The following questions and answers regarding the Order as amended have been prepared by and represent the views of the Staff of the Division of Trading and Markets ("Staff") to assist in the understanding and application of the Order. They are not rules, regulations, or statements of the Commission. Further, the Commission has neither approved nor disapproved these interpretive answers and is not bound by them.
II. Responses to Questions Regarding the Order
Question 1: What securities are covered by the Order?
Answer: The Order applies to the publicly traded securities traded under the ticker symbols listed in Appendix A to the Order.
Question 2: Is an "arrangement to borrow" the equivalent of having reasonable grounds to believe that the security can be borrowed so that it can be delivered on the date delivery is due as required in Rule 203(b)(1) of Regulation SHO?
Answer: No. An arrangement to borrow requires more than a reasonable grounds to believe that the security can be borrowed. An arrangement to borrow means a bona fide agreement to borrow the security such that the security being borrowed is set aside at the time of the arrangement solely for the person requesting the security.
Question 3: May a person effecting a short sale on behalf of a customer rely on a customer's representation that the customer has arranged to borrow the security from another source?
Answer: Yes. As permitted under Regulation SHO, a person effecting a short sale may obtain an assurance from a customer that such party has borrowed or arranged to borrow the security being sold short from another identified source provided the person effecting the short sale documents that it is relying on a customer's assurance and that the person effecting the short sale has reasonable grounds to believe that the customer has borrowed or arranged to borrow the security. Customers are reminded, however, that they are also subject to the requirements of the Order.
Question 4: How does the requirement to borrow or arrange to borrow securities apply to options exercises and assignments?
Answer: Footnote 3 of the Order states that "[s]hort sales to be effected as a result of a put options exercise are subject to the Order." Accordingly, any person that sells a security short pursuant to the exercise of a put option (including automatic exercises), where the exercise is not in connection with hedging activities by an options market maker, must comply with all the requirements of the Order. The exercise of a put option in a market maker account is exempt from the borrow or arrangement-to-borrow requirement but not from the delivery requirement.
A person will not have violated the Order if it sells short pursuant to the assignment of a call option and does not borrow or arrange to borrow the security prior to effecting such short sale. Such person, however, must deliver the security by settlement date.
Question 5: May a person effecting a short sale re-apply a borrow or arrangement to borrow for intra-day buy-to-cover trades?
Answer: Yes. A person effecting a short sale in a security of a company listed in Appendix A to the Order that has borrowed or arranged to borrow the security prior to effecting the short sale in compliance with the Order may re-apply the borrow or arrangement to borrow for an intra-day buy-to-cover trade as illustrated in the following scenario:
Prior to a customer's short sale of 100 shares of XYZ stock, at 10 a.m., the broker-dealer effecting the short sale arranges to borrow the shares. The short sale is then executed. Later that same day, at 11 a.m., the broker-dealer purchases 100 shares of XYZ stock for the same customer. As a result, the customer's net trading position becomes flat.
If the same customer wants to then sell short another 100 shares of XYZ stock that day, at 3 p.m., the broker-dealer effecting the short sale may apply the original arrangement to borrow shares to that later sale, provided that such subsequent short sale is for an amount of securities that is no greater than the amount of securities obtained in the original arrangement to borrow shares (thus, in the above example, the second short sale at 3 p.m. cannot exceed 100 shares unless the broker-dealer makes another arrangement to borrow additional shares prior to effecting the short sale).
Question 6: How does the Order apply to overseas transactions?
Answer: The Order provides that no person may effect a short sale in the securities of companies identified in Appendix A to the Order using the means or instrumentalities of interstate commerce unless the person or its agent has borrowed or arranged to borrow the security or otherwise has the security available to borrow in its inventory prior to effecting such short sale and delivers the security on settlement date. Accordingly, the Order applies to any short sale transaction in the publicly traded securities traded under the ticker symbols listed in Appendix A to the Order if the trade is agreed to in the United States, even if the trade is booked overseas. In addition, the Order applies to any short sale transaction involving a customer located in the United States and to any broker-dealer (regardless of whether the broker-dealer is registered with the Commission or relying on an exemption from registration) using the means or instrumentalities of interstate commerce in the United States to effect short sales in the publicly traded securities traded under the ticker symbols listed in Appendix A to the Order.
Question 7: How does the Order apply if a broker-dealer that has a delivery obligation with respect to a short sale of a security subject to this Order has a deficit in its possession-and-control obligation for that security under Exchange Act Rule 15c3-3(b)?
Answer: The broker-dealer must comply with the applicable provisions of Rule 15c3-3(b). Generally, a delivery of securities that are in a possession-and-control deficit is prohibited if it would create or increase a deficiency in the quantity of securities by class and issuer required to be in possession and control. The Commission staff has issued no-action relief from certain possession and control provisions of Rule 15c3-3 to broker-dealers that conduct a securities-borrowed-and-loan-"conduit" business. That relief also applies to the publicly traded securities traded under the ticker symbols listed in Appendix A to the Order.
Question 8: How can I comment on the Commission's emergency orders, or any potential rulemaking the Commission may undertake to expand the duration of the naked short sale protections or the number of companies covered?
Answer: The Commission welcomes such comments, which will be considered in any action the Commission may take with respect to naked short sales.
People wishing to submit such comments can use any of the following methods:
Electronic Comments:
Paper Comments:
Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090. All submissions should refer to File Number S7-20-08. This file number should be included on the subject line if e-mail is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (http://www.sec.gov/). Comments are also available for public inspection and copying in the Commission's Public Reference Room, 100 F Street, NE, Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly.
http://www.sec.gov/divisions/marketreg/emordershortsalesfaq.htm
