Short sale developments: “close‐out” requirement made permanent and additional regulatory initiatives expected from the Securities and Exchange Commission

Abstract

Purpose

The purpose of this paper is to explain the SEC's final rule, issued on July 27, 2009, making the “close‐out” requirement in Interim Temporary Final Rule 204T permanent and eliminating the short sale and position reporting requirements in Form SH.

Design/methodology/approach

The paper explains certain limited modifications to the Temporary Rule, including Rule 204(a)(1), which permits borrowing of securities to close out a fail to deliver position; Rule 204(a)(2), which defines an extended‐settlement provision for fail to deliver positions resulting from the sale of an equity security a person is “deemed to own”; Rule 204(b), which eliminates an exception for market makers; Rule 204(e), which permits a broker‐dealer to borrow a security for an early close‐out to claim a “pre‐fail credit”; and Rule 204(f), which explicitly prohibits “sham close‐out” practices. It explains the SEC's decision to eliminate the weekly requirement for certain managers to file weekly short sale and short position information on Form SH and instead to work with self‐regulatory organizations (SROs) to make short sale volume and transaction data available on their web sites.

Findings

The paper finds that the SEC intends to host a public roundtable in September 30, 2009 to discuss securities lending, pre‐borrowing and possible additional short sale disclosures.

Originality/value

The paper provides practical guidance from experienced securities lawyers.

Citation

Yim, S.J., Silva, T.F., Nicolas, S. and Smith, T.J. (2009), "Short sale developments: “close‐out” requirement made permanent and additional regulatory initiatives expected from the Securities and Exchange Commission", Journal of Investment Compliance, Vol. 10 No. 4, pp. 16-19. https://doi.org/10.1108/15285810911007345