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SEC Press Release on Proposed Short Sale Price Test

Client Advisory

April 9, 2009
by Morris Simkin, Guy P. Lander and Steven J. Glusband

The Securities and Exchange Commission issued Press Release 2009-76 on April 8, 2009 announcing it will propose two approaches to restrict short sales. (http://www.sec.gov/news/press/2009/2009-76.htm).

  • The first approach is a market wide approach. It would consist of a modified up-tick rule limiting short sales based on the national best bid. An alternative proposal would limit short sales based on the last sale price or tick.
  • The second approach is a temporary short sale ban on a specific security if a circuit breaker was tripped. This approach would provide that the self-regulatory organizations would adopt rules for a circuit breaker with one of three proposed methodologies. The first proposal under this second approach would bar short sales for the remainder of the day if there was a significant decline in the price of that security. A second proposal would bar short sales below the national best bid if there was a severe price decline in a security. The third proposal would limit short sales based on the last sale price in a security for the remainder of the day if there was a severe price decline in the security.

In her opening remarks Chairman Schapiro stated that the Commission will hold a roundtable on the proposals on May 5. The comments of various Commissioners made clear that there were divergent views a to whether the proposed measures would help promote market stability. Concern was expressed that actions outside of the Commission’s authority, such as reverse equity swaps and credit default swaps, could circumvent or evade any restrictions on short selling. The discussion at the open meeting indicated several other things. The short sale rule will only apply to national market system securities -- equity securities traded on a stock exchange. Second, the proposal by several stock exchanges for a market wide short sale ban when a market index declines by designated percentage was not included in the proposals.

There will be a 60 day comment period from when the SEC’s rule proposal is published in the Federal Register. It was also indicated that there will be a 90 day period from when a rule is adopted until it becomes effective. This suggests, even under the fastest of circumstances, it is not likely that a short sale rule will become effective until October.


Questions regarding this advisory should be addressed to Morris N . Simkin (212-238-8708, simkin@clm.com), Guy P. Lander (212-238-8619, lander@clm.com) or Steven J. Glusband (212-238-8605, glusband@clm.com).

Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion. This document was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. © 2017 Carter Ledyard & Milburn LLP.
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