SEC Issues Emergency Order To Limit "Naked" Short Sales In Certain Financial Securities.Summary The SEC issued an emergency order on July 15, 2008 (modified July 18, 2008) designed to limit "naked" short selling Short Selling The selling of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller. Short sellers assume that they will be able to buy the stock at a lower amount than the price at which they sold short. in the publicly traded securities of Fannie Mae Fannie Mae: see Federal National Mortgage Association. , Freddie Mac Freddie Mac: see Federal Home Loan Mortgage Corporation. and 17 other primary dealers that are part of commercial and investment banks The following is a list of investment banks Financial conglomerates Large financial-services conglomerates combine commercial banking and investment banking, and sometimes insurance. (see list below). The order requires a person to borrow or arrange to borrow, or otherwise have the security available to borrow from its inventory, prior to executing a short sale in the relevant securities. This requirement is much more stringent than Regulation SHO Regulation SHO A regulatory addition by the Securities & Exchange Commission, expanding and updating the restrictions placed on short sale transactions. The updated regulations came into effect on Jan 3, 2005 and help to address several key issues in the short sale market. , which only requires a person to locate shares prior to executing a short sale. Through discussion with industry groups, the SEC is expected to agree to some limited exemptions to this requirement which are discussed in more detail below. The order does not apply to short sales effected pursuant to Rule 144 of the Securities Act of 1933. It does not apply to short sales by underwriters, members of a syndicate or group participating in distributions of the relevant securities in connection with an over-allotment of securities, or any lay-off sale through a rights or a standby underwriting standby underwriting An agreement by underwriters to purchase the portion of a new securities issue that remains after the public offering. Standby underwriting eliminates the issuer's risk of not selling the issue out, but it increases the investment commitment. The order takes effect at 12:01 a.m. Eastern Time on Monday, July 21, 2008, and terminates at 11:59 p.m. Eastern Time on Tuesday, July 29, 2008, unless it is extended further by the SEC. The SEC can (and likely will) extend the order up to a total of 30 calendar days. The order presents compliance implications for both sell-side and buy-side firms. Industry groups and the SEC are still in discussions with respect to certain aspects of the order, which may result in modification of the order. Analysis The following information is based on verbal discussions between the SEC staff and the industry. Of course, the statements from the SEC staff are not necessarily the views of the Commission. Broker-dealers and their customers will be required to pre-borrow or have arranged for a pre-borrow, rather than locate the securities on the attached list. We understand that these securities will not be on broker-dealers' "easy to borrow" lists. Market makers, option market makers, ETF ETF See Exchange Traded Fund. ETF See exchange-traded fund (ETF). market makers, specialists and block positioners who are registered as such will be exempt from the borrow requirement, but will be expected to deliver securities by settlement date. Brokers will expect buy-side customers to indicate, electronically or otherwise, the source of the borrow. Brokers who have no reason to doubt such a representation will be able to rely on it. However, the SEC expects all deliveries in these securities to occur by settlement date. Failure to deliver would likely make any further reliance on such representations unreasonable. Executing brokers will likely be able to rely on the order entry or originating broker to comply with the borrow requirements. Similarly, clearing brokers will be able to rely on executing brokers to comply with the borrow requirements. We recommend that these arrangements be documented in some fashion. Arrangements to borrow securities include "Pay-to-Hold" arrangements or similar arrangements. In addition, a firm's inventory is deemed to include the pending settlement of positions. Following are the securities identified in the Commission's order: > The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Ms Janet Angstadt Katten Muchin Rosenman Katten Muchin Rosenman LLP is a law firm with offices in Chicago; New York; Los Angeles; Washington, D.C.; Charlotte, North Carolina; Palo Alto, California; and Irving, Texas; and an affiliated entity—Katten Muchin Rosenman Cornish LLP—in London, England. LLP LLP - Lower Layer Protocol 525 West Monroe West Monroe, city (1990 pop. 14,096), Ouachita parish, N La., on the Ouachita River, opposite Monroe, in a forest and lake area; inc. 1851. Its chief industries are lumber and paper milling. Street Suite 1600 Chicago IL 60661 UNITED STATES Tel: 3125778469 Fax: 3125774678 E-mail: Claire.slattery@kattenlaw.com URL URL in full Uniform Resource Locator Address of a resource on the Internet. The resource can be any type of file stored on a server, such as a Web page, a text file, a graphics file, or an application program. : www.kattenlaw.com Click Here for related articles (c) Mondaq Ltd, 2008 - Tel. +44 (0)20 8544 8300 - http://www.mondaq.com |
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