Client Alert

SEC Issues Emergency Orders Imposing Short Sale Restrictions and Temporary Ban on Short Sales of Designated Financial Companies

September 24, 2008

Michael L. Zuppone

On September 17 and 19, the Securities and Exchange Commission (SEC) in an unprecedented exercise of agency authority invoked its emergency powers under Section 12(k)(2) of the Securities Exchange Act of 1934, as amended (the Exchange Act), and issued a series of orders to combat unnecessary or artificial price movements based on unfounded rumors regarding the stability of financial institutions and other issuers exacerbated by naked short selling. The orders implement a short sale trading prohibition, impose a short sale disclosure requirement on institutional money managers, strengthen clearance and settlement delivery requirements and adopt an anti-fraud rule that proscribes deceptive conduct in connection with a sellers intention or ability to settle its sell orders.  A short sale for purposes of the orders is as defined in Rule 200(c) of regulation SHO, a sale of a security which the seller does not own (i.e. in which he does not have a net long position) or is settled with borrowed securities.

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