[Federal Register: September 23, 2008 (Volume 73, Number 185)]
[Notices]
[Page 54875-54877]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23se08-117]
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SECURITIES AND EXCHANGE COMMISSION
[Securities Exchange Act of 1934; Release No. 34-58572/ September 17,
2008]
Emergency Order Pursuant to Section 12(K)(2) of the Securities
Exchange Act of 1934 Taking Temporary Action To Respond to Market
Developments
The Commission continues to be concerned that there is a
substantial threat of sudden and excessive fluctuations of securities
prices and disruption in the functioning of the securities markets that
could threaten fair and orderly markets. As evidenced by our recent
publication of an emergency order under Section 12(k) of the Securities
Exchange Act of 1934 (the ``July Emergency Order''),\1\ we are
concerned about the possible unnecessary or artificial price movements
based on unfounded rumors regarding the stability of financial
institutions and other issuers exacerbated by ``naked'' short selling.
Our concerns, however, are no longer limited to just the financial
institutions that were the subject of the July Emergency Order. In
addition, we have become concerned that some persons may take advantage
of issuers that have become temporarily weakened by current market
conditions to engage in inappropriate short selling in the securities
of such issuers.
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\1\ See Exchange Act Release No. 58166 (July 15, 2008).
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Given the importance of confidence in our financial markets as a
whole, we have become concerned about sudden and unexplained declines
in the prices of securities. Such price declines can give rise to
questions about the underlying financial condition of an issuer, which
in turn can create a crisis of confidence without a fundamental
underlying basis. This crisis of confidence can impair the liquidity
and ultimate viability of an issuer, with potentially broad market
consequences.
As a result of these recent developments, the Commission concluded
that there continues to exist a substantial threat of sudden and
excessive fluctuations of securities prices generally and disruption in
the functioning of the securities markets that could threaten fair and
orderly markets. Based on this conclusion, the
[[Page 54876]]
Commission is exercising its powers under Section 12(k)(2) of the
Securities Exchange Act of 1934.\2\ Pursuant to Section 12(k)(2), in
appropriate circumstances the Commission may issue summarily an order
to alter, supplement, suspend, or impose requirements or restrictions
with respect to matters or actions subject to regulation by the
Commission.
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\2\ This finding of an ``emergency'' is solely for purposes of
Section 12(k)(2) of the Exchange Act and is not intended to have any
other effect or meaning or to confer any right or impose any
obligation other than set forth in this Order.
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We have concluded that it is necessary to impose enhanced delivery
requirements on sales of all equity securities, by adding and making
immediately effective a temporary rule to Regulation SHO, Rule 204T.
The temporary rule imposes a penalty on any participant \3\ of a
registered clearing agency,\4\ and any broker-dealer from which it
receives trades for clearance and settlement, for having a fail to
deliver position at a registered clearing agency in any equity
security. In addition, we have concluded it is necessary to make
immediately effective amendments to Rule 203(b)(3) of Regulation SHO
that eliminate the options market maker exception from Regulation SHO's
close-out requirement. We are also making immediately effective Rule
10b-21, a ``naked'' short selling antifraud rule.\5\ We intend these
enhanced delivery requirements and the antifraud rule to impose
powerful disincentives to those who might otherwise exacerbate
artificial price movements through ``naked'' short selling.
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\3\ The term ``participant'' has the same meaning as in section
3(a)(24) of the Exchange Act. See 15 U.S.C. 78c(a)(24).
\4\ The term ``registered clearing agency'' means a clearing
agency, as defined in section 3(a)(23)(A) of the Exchange Act, that
is registered as such pursuant to section 17A of the Exchange Act.
See 15 U.S.C. 78c(a)(23)(A) and 78q-1, respectively.
\5\ Rule 204T, as set forth in this Order, applies only to fails
to deliver resulting from trades that occur after this Order becomes
effective. Rule 203(b)(3) of Regulation SHO, as amended by this
Order, continues to apply to fails to deliver that occurred prior to
the Order becoming effective. For example, if a participant has a
fail to deliver position in a threshold security that has persisted
for six consecutive settlement days prior to the effective date of
this Order and the fail continues to persist until the thirteenth
settlement day, the participant must still close out its position
pursuant to Rule 203(b)(3).
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In addition, in these unusual and extraordinary circumstances, we
believe such requirements are in the public interest and for the
protection of investors to maintain fair and orderly securities
markets, and to prevent substantial disruption in the securities
markets.
This emergency requirement should significantly reduce any
possibility that ``naked'' short selling may contribute to the
disruption of markets in these securities. We described in the releases
in which we proposed and adopted Regulation SHO the bases for the
current delivery requirements Regulation SHO imposes. We believe,
however, that the unusual circumstances we now confront require the
enhanced requirements we are imposing today.
It is ordered that, pursuant to our Section 12(k)(2) powers, we are
adding Sec. 242.204T to read as follows:
Sec. 242.204T Short Sales.
(a) A participant of a registered clearing agency must deliver
securities to a registered clearing agency for clearance and settlement
on a long or short sale in any equity security by settlement date, or
if a participant of a registered clearing agency has a fail to deliver
position at a registered clearing agency in any equity security for a
long or short sale transaction in that equity security, the participant
shall, by no later than the beginning of regular trading hours on the
settlement day following the settlement date, immediately close out the
fail to deliver position by borrowing or purchasing securities of like
kind and quantity; Provided, however:
(1) If a participant of a registered clearing agency has a fail to
deliver position at a registered clearing agency in any equity security
and the participant can demonstrate on its books and records that such
fail to deliver position resulted from a long sale, the participant
shall by no later than the beginning of regular trading hours on the
third consecutive settlement day following the settlement date,
immediately close out the fail to deliver position by purchasing
securities of like kind and quantity; or
(2) If a participant of a registered clearing agency has a fail to
deliver position at a registered clearing agency in any equity security
sold pursuant to Sec. 230.144 of this chapter for thirty-five
consecutive settlement days after the settlement date for a sale in
that equity security, the participant shall, by no later than the
beginning of regular trading hours on the thirty-sixth consecutive
settlement day following the settlement date for the transaction,
immediately close out the fail to deliver position by purchasing
securities of like kind and quantity;
(b) If a participant of a registered clearing agency has a fail to
deliver position in any equity security at a registered clearing agency
and does not close out such fail to deliver position in accordance with
the requirements of paragraph (a) of this section, the participant and
any broker or dealer from which it receives trades for clearance and
settlement, including any market maker that would otherwise be entitled
to rely on the exception provided in Sec. 242.203(b)(2)(iii), may not
accept a short sale order in the equity security from another person,
or effect a short sale in the equity security for its own account, to
the extent that the broker or dealer submits its short sales to that
participant for clearance and settlement, without first borrowing the
security, or entering into a bona-fide arrangement to borrow the
security, until the participant closes out the fail to deliver position
by purchasing securities of like kind and quantity and that purchase
has cleared and settled at a registered clearing agency;
(c) The participant must notify any broker or dealer from which it
receives trades for clearance and settlement, including any market
maker that would otherwise be entitled to rely on the exception
provided in Sec. 242.203(b)(2)(iii):
(1) That the participant has a fail to deliver position in an
equity security at a registered clearing agency that has not been
closed out in accordance with the requirements of paragraph (a) of this
section; and
(2) When the purchase that the participant has made to close out
the fail to deliver position has cleared and settled at a registered
clearing agency; and
(d) Definitions: (1) For purposes of this section, the term
settlement date shall mean the business day on which delivery of a
security and payment of money is to be made through the facilities of a
registered clearing agency in connection with the sale of a security.
(2) For purposes of this section, the term regular trading hours
has the same meaning as in Rule 600(b)(64) of Regulation NMS (17 CFR
242.600(b)(64).
It is further ordered that, pursuant to our Section 12(k)(2)
powers, Sec. 242.203(b)(3)(iii) of Regulation SHO is amended by
revising paragraphs (b)(3)(iii) and (b)(3)(v) to read as follows:
(iii) Provided, however, that a participant of a registered
clearing agency that has a fail to deliver position at a registered
clearing agency in a threshold security on the effective date of this
amendment and which, prior to the effective date of this amendment, had
been previously excepted from the close-out requirement in paragraph
(b)(3) of this section (i.e., because the participant of a registered
clearing agency had a fail to deliver position in
[[Page 54877]]
the threshold security that is attributed to short sales effected by a
registered options market maker to establish or maintain a hedge on
options positions that were created before the security became a
threshold security), shall immediately close out that fail to deliver
position, including any adjustments to the fail to deliver position,
within 35 consecutive settlement days of the effective date of this
amendment by purchasing securities of like kind and quantity;
* * * * *
(v) If a participant of a registered clearing agency entitled to
rely on the 35 consecutive settlement day close-out requirement
contained in paragraph (b)(3)(i), (b)(3)(ii), or (b)(3)(iii) of this
section has a fail to deliver position at a registered clearing agency
in the threshold security for 35 consecutive settlement days from the
effective date of the amendment, the participant and any broker or
dealer for which it clears transactions, including any market maker,
that would otherwise be entitled to rely on the exception provided in
paragraph (b)(2)(iii) of this section, may not accept a short sale
order in the threshold security from another person, or effect a short
sale in the threshold security for its own account, without borrowing
the security or entering into a bona-fide arrangement to borrow the
security, until the participant closes out the fail to deliver position
by purchasing securities of like kind and quantity;
It is further ordered that, pursuant to our Section 12(k)(2)
powers, we are adding Sec. 240.10b-21 to read as follows:
Sec. 240.10b-21 Deception in connection with a seller's ability or
intent to deliver securities on the date delivery is due.
PRELIMINARY NOTE to rule 10b-21: This rule is not intended to
limit, or restrict, the applicability of the general antifraud
provisions of the federal securities laws, such as section 10(b) of the
Act and rule 10b-5 thereunder.
It shall also constitute a ``manipulative or deceptive device or
contrivance'' as used in section 10(b) of this Act for any person to
submit an order to sell an equity security if such person deceives a
broker or dealer, a participant of a registered clearing agency, or a
purchaser about its intention or ability to deliver the security on or
before the settlement date, and such person fails to deliver the
security on or before the settlement date. For purposes of this
section, settlement date is as defined in Sec. 242.204T of this
chapter.
This Order shall be effective at 12:01 a.m. EDT on September 18,
2008, and shall terminate at 11:59 p.m. on October 1, 2008 unless
further extended by the Commission.
By the Commission.
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-22166 Filed 9-22-08; 8:45 am]
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