On August 17, 2009, the US Securities and Exchange Commission (SEC) issued a release (the “New Proposal”)1 announcing that it had (i) re-opened the comment period on its prior release proposing alternative means for potentially regulating short sale price tests (the “Prior Proposal”)2 and (ii) proposed an additional price test for commenters’ consideration (an “alternative uptick rule”). The comment period for both the New Proposal and the Prior Proposal will end 30 days after the New Proposal is published in the Federal Register.

Unlike the price tests of the Prior Proposal, which limited the ability of a short-seller to sell short based on the current bid or sale price in relation to previous bid or sale prices, the newly proposed alternative uptick rule would require that all short sales be made at an increment higher than the current national best bid for the security.3 In the New Proposal, the SEC acknowledged that this requirement would place a higher burden on short selling than the previously proposed alternatives but indicated that it might be simpler and less costly to implement. The SEC held open the possibility of implementing the alternative tick test either as a market-wide price test or as a circuit breaker; the SEC also noted that it might call for a “policies and procedures” approach or a flat prohibition.

The issuance of the New Proposal and the SEC’s upcoming roundtable scheduled for September 30, 2009, suggest that short sale regulation will remain in flux in the United States for at least the near term.

If you have questions regarding these latest developments, or short selling in general, please contact the Mayer Brown attorney with whom you normally communicate or any of the following attorneys: Elizabeth M. Knoblock at +1 202 263 3263, Stephanie M. Monaco at +1 202 263 3379, or Jerome J. Roche at +1 202 263 3773.

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1. Amendments to Regulation SHO, Exchange Act Rel. No. 60,509 (Aug. 17, 2009).
2. See Amendments to Regulation SHO, Exchange Act Rel. No. 59,748 (Apr. 10, 2009) [74 FR 18042 (Apr. 20, 2009)]. The Prior Proposal sought comment on two market-wide price tests and three “circuit breakers.” See Mayer Brown Client Update, “US Securities and Exchange Commission Considers New Short Selling Regulation” (April 15, 2009). The Prior Proposal received over 4000 public comments before the period for public comment initially closed on June 19, 2009.
3. In the New Proposal, the SEC notes that it believes the same exceptions that were proposed for the “proposed modified uptick rule” under the Prior Proposal would apply to the alternative uptick rule. However, the SEC specifically recognized that because the alternative uptick rule was more restrictive than the proposed modified uptick rule, it was requesting comment on the importance of a market maker exception.