On February 24, 2010, the US Securities and Exchange Commission (SEC) adopted amendments to Regulation SHO under the Securities Exchange Act of 1934, aimed at restricting short selling under certain limited circumstances. After proposing a number of different short sale controls, the SEC voted 3-2 to adopt the “alternative uptick rule.” The rule imposes a limited price test triggered only with respect to individual securities that trip a “circuit breaker,” rather than a permanent, market-wide ban or restriction.

Specifically, the rule applies a price test on short sales of any particular “NMS stock” (which includes all securities traded on any national securities exchange) that experiences a 10 percent drop in price in any given trading day from the price at the prior day’s close of trading. Once the circuit breaker is triggered, it will remain in effect for the remainder of that trading day and the following trading day.

While the price test is in effect for a security, the security may not be sold short at or below the national best bid — i.e., any short sale must be at a price above the current national best bid. Trading centers (e.g., broker-dealers that execute trades as principal or cross trades as agent, national securities exchanges, and certain types of market makers) will be required to have policies and procedures in place that are reasonably designed to prevent the execution or display of short sales at or below the national best bid (absent an exemption).

The rule will go into effect 60 days after publication in the Federal Register, and market participants will have an additional 6 months to comply with the rule’s requirements.

If you have questions regarding these latest developments, or short selling in general, please contact the Mayer Brown attorney with whom you normally communicate.