SEC Adopts Modified Short Sale Ban

March 2, 2010. In a 3-2 vote, the SEC last week barred short sales of stocks that have dropped by more than 10% in a single trading day. The new rule, a variant of the "uptick" rule that was suspended in 2007, creates a "circuit breaker" prohibiting short sales of those declining stocks for the rest of that trading day and the following trading day. Trading centers will be responsible for putting in place the appropriate procedures to comply with the Rule.

Alluding to the rapid stock market declines experienced during the end of 2008 and early 2009, most notably the decline in Lehman Brother's stock in September of 2009, the SEC said that "it is appropriate at this time to adopt a short sale-related circuit breaker because, when triggered, it will prevent short selling, including potentially manipulative or abusive short selling, from driving down further the price of a security that has already experienced a significant intra-day price decline, and will facilitate the ability of long sellers to sell first upon such a decline."

"This approach," the SEC said, "establishes a narrowly-tailored rule that will target only those securities that are experiencing significant intra-day price declines. We believe that addressing short selling in connection with such declines in individual securities will help address erosion of investor confidence in our markets generally."

The full text of the adopting release is available on the SEC's website at
http://www.sec.gov/ and becomes effective within 60 days of its publication in the Federal Register. Compliance with the rule is required within 6 months thereafter.