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Fact Sheet Open Meeting of the U.S. Securities and Exchange Commission Washington, D.C. April 8, 2009

(LAWFUEL) – The Commission today will consider whether to propose two approaches to restrictions on short selling. One would apply on a market wide and permanent basis, while the other would apply only to a particular security during severe market declines in that security. They include:

Market Wide, Permanent Approach

*Bid Test: A market-wide short sale price test based on the national best bid (a proposed modified uptick rule).

*Price Test: A market-wide short sale price test based on the last sale price or tick (a proposed uptick rule).

Security-Specific, Temporary Approach

*Circuit Breaker: A circuit breaker that would:

ban short selling in a particular security for the remainder of the day if there is a severe decline in price in that security (a proposed circuit breaker halt rule)

impose a short sale price test based on the national best bid in a particular security for the remainder of the day if there is a severe decline in price in that security (a proposed circuit breaker modified uptick rule)

impose a short sale price test based on the last sale price in a particular security for the remainder of the day if there is a severe decline in price in that security (a proposed circuit breaker uptick rule).

In June 2007, the SEC voted to eliminate price restrictions. The Commission is re-evaluating the issue at a time of extreme market conditions and a deterioration in investor confidence.

In addition, the Commission will consider whether to propose amendments to Regulation SHO to require that a broker-dealer mark a sell order “short exempt” if the seller is relying on an exception to a short sale price test restriction or a circuit breaker rule.

Background
In 2004, the Commission initiated a year-long pilot that eliminated short sale price test restrictions from approximately one-third of the largest stocks. The purpose of the pilot was to study how the removal of such short sale price test restrictions impacted the market for those subject securities.

Short sale data was made publicly available during this pilot to allow the public and Commission staff to study the effects of eliminating short sale price test restrictions. Third-party researchers analyzed the publicly available data and presented their findings in a public Roundtable discussion in September 2006. The Commission staff also studied the pilot data extensively and made its findings available in draft form in September 2006, and final form in February 2007.

At the time the SEC acted in 2007, there were two different types of price tests in place, covering significant numbers of securities. The Nasdaq “bid” test, which was based on the national best bid, covered approximately 2,900 Nasdaq securities in 2005 (or 44 million short sales). The SEC’s former uptick test (former Rule 10a-1), based on the last sale price, covered approximately 4,000 exchange-listed securities (or 68 million short sales).

In July 2008, when the restrictions were no longer in place, the SEC issued an emergency order imposing borrowing and delivery requirements on short sales of the equity securities of certain financial institutions. And, in September 2008, the SEC issued another emergency order prohibiting short selling in the publicly traded securities of certain financial institutions.

Proposed Short Sale Price Test Restrictions

The Commission will consider a proposed modified uptick rule based on the national best bid, similar to the former Nasdaq “bid” test. This proposal would require trading centers to establish and enforce policies and procedures reasonably designed to prevent the execution or display of a short sale order of an NMS stock, absent an exception, at a down-bid price. Trading centers, which include broker-dealers and exchanges that execute short sales, must regularly surveil for effectiveness of policies and procedures and take action to remedy deficiencies.

The proposed uptick rule is similar to former Rule 10a-1, and based on the last sale price. This proposal would prohibit any person from effecting a short sale (1) below the last sale price or (2) at the last sale price, unless such price is above the next preceding different price.

Both the proposed modified uptick rule and the proposed uptick rule include exceptions that are based on exceptions to, or exemptions granted under, former Rule 10a-1. These exceptions would be limited to activities that promote liquidity and foster the workability of the proposed rules without undermining the effectiveness of the proposals. The Commission would seek specific comment regarding how each proposed short sale price test would work in the context of today’s markets.

Proposed Circuit Breaker Rules

The proposed circuit breaker rules being considered by the Commission would be triggered by a specified ten percent decline (as reported in the consolidated system) in a particular NMS stock. Each proposed rule, however, would impose different short sale restrictions when triggered. The proposed circuit breaker halt rule, when triggered, would prohibit any person from selling short in that security for the remainder of the day.

The proposed circuit breaker modified uptick rule, when triggered, would require trading centers to enforce established policies and procedures designed to prevent the execution or display of a short sale order at a down-bid price for the remainder of the day. The proposed circuit breaker uptick rule, when triggered, would prohibit any person from effecting a short sale (1) below the last sale price or (2) at the last sale price, unless such price is above the next preceding different price, for the remainder of the day. To avoid potential market disruption, the proposed circuit breaker rules would not be triggered if the price of a covered security reaches the specified ten percent decline threshold within thirty minutes of the end of regular trading hours.

The proposed circuit breaker rules would include several exceptions. As with the short sale price test proposals, these exceptions would be limited to activities that promote liquidity and foster the workability of the proposed rules without undermining the effectiveness of the proposals. The Commission would seek specific comment regarding how each proposed circuit breaker rule would work in the context of today’s markets.

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