In a 3-to-2 vote, the SEC yesterday adopted amendments
to Rules 200(g) and 201 of Regulation SHO that will
restrict short selling in instances where a company’s
shares drop 10% or more in value in one day. The
Commission also voted unanimously to publish a statement
in support of a single set of globally accepted
accounting standards and to establish a work plan to
assist with the ongoing consideration of incorporating
international financial reporting standards into the
U.S. financial reporting system. The statement in
support of IFRS will be covered in detail in tomorrow’s
edition of SEC Today.
The Commission originally proposed the
alternative uptick rule last April, held a roundtable
discussion on it in May and then issued an additional
call for comments in August. The agency received more
than 4,300 comment letters on the controversial issue.
Under the newly-adopted rule, a circuit
breaker will be triggered any time a stock declines 10%
in one day and short selling will be permitted in that
security only if the price is above the current national
best bid. Once the circuit breaker has been triggered,
the rule would apply to short sale orders in that
security for the remainder of the day and the following
day.
The alternative uptick rule will apply to
equity securities that are listed on a national
securities exchange, whether traded on an exchange or in
the over-the-counter market. Under the rule, trading
centers will be required to establish, maintain and
enforce written policies and procedures that are
reasonably designed to prevent the execution or display
of a prohibited short sale.
Once the circuit breaker is triggered,
long sellers will have preferred access to the bid price
and will be permitted to sell their shares ahead of any
short sellers. Robert Cook, Director of the Division of
Trading and Markets, said that this part of the rule is
intended to boost investor confidence by assuring them
that sales are being made by investors taking a long
view of a company’s fundamentals.
SEC Chair Mary Schapiro acknowledged that
short selling can have a beneficial impact on the
market. However, the Commission is concerned that
excessive downward price pressure on individual
securities, accompanied by the fear of unconstrained
short selling, can destabilize markets and undermine
investor confidence. She believes the rule addresses
these concerns by preventing short selling, including
potentially manipulative short selling, from further
driving down the price of a security that has
experienced a 10% price decline. Limiting the potential
for abuse is an important goal of the new rules, she
said.
Commissioner Kathleen Casey opposed the
rule amendments, stating that there is no evidence to
support the claim that a circuit breaker can stop price
declines, or that it would boost investor confidence.
She referred to the amendments as
"regulation by placebo," where the agency is
putting a rule in place and hoping that it will convince
investors that everything will be alright.
Compliance costs for the rule will be in
the billions of dollars, she said, and she has no
confidence that the new rules will have a positive
effect. In her view, the rules will not have their
intended impact in the short term and will expose the
Commission to considerable criticism in the long term.
She believes that enhanced surveillance and enforcement
on abusive short selling is the appropriate course of
action.
Commissioner Elisse Walter supported the
rule changes, but acknowledged that it was a difficult
decision. Since becoming a commissioner, she has
received more calls on short selling than any other
topic, she said. Much of the feedback she has gotten is
that investors feel less confident putting their money
into the market because of short selling. We must listen
to investors, she said, even if the effect of short
selling is difficult to quantify.
She supported the amendments to Rule 201
because they take a measured, targeted approach and the
short selling restrictions will not apply to the
majority of traded securities at any one time. During
periods of low volatility, the staff expects the circuit
breaker to apply only to about 1.3% of covered
securities, Walter noted. Based on the comments the SEC
received, she expects many people to be disappointed
that the circuit breaker restricts short selling, while
others will claim that the rule does not go far enough.
Among the objections of Commissioner Troy
Paredes to the rule changes was that he feels a 10%
threshold is indiscriminate and not narrowly tailored as
suggested by the staff. He believes there is no evidence
to suggest that a 10% price decline is not just an
effective and appropriate revaluing of a publicly traded
security. He also feels that the central rationale that
the rule amendments will boost investor confidence is
speculative and unsubstantiated.
Cook responded that the staff’s
recommendation was based on many factors, including that
two-thirds of the comments it received expressed the
view that the rule would boost investor confidence.
Ultimately, the staff must make a judgment on data that
will never be perfect, he said. Henry Hu, Director of
the Division of Risk, Strategy and Financial Innovation,
concurred, noting that investor confidence is extremely
hard to quantify. Existing data is insufficient in
either direction, he said.