SEC Votes on Regulation SHO Amendments and Proposals; Also Votes to Eliminate "Tick" Test<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

FOR IMMEDIATE RELEASE

2007-114

Washington, D.C., June 13, 2007 - The Securities and Exchange Commission today voted to take additional steps to better safeguard investors and protect the integrity of the markets during short selling transactions by closing loopholes in Regulation SHO and further reducing persistent failures to deliver stock by the end of the standard three-day settlement period for trades.

Erik Sirri, Director of the SEC's Division of Market Regulation, said, "Today the Commission voted on steps to streamline and tighten short selling provisions so that markets and investors are better served by our rules."

1. Final Amendments to Rules 200 and 203 of Regulation SHO

The Securities and Exchange Commission voted to adopt final amendments to Rules 200 and 203 of Regulation SHO (17 CFR 242.200 and 242.203). The amendments will further reduce fails to deliver in certain equity securities by eliminating the grandfather provision. The amendments also modify the close-out requirement for fails to deliver resulting from sales of threshold securities pursuant to Rule 144 of the Securities Act of 1933 (Securities Act). In addition, the amendments update the market decline limitation referenced in Regulation SHO. The amendments will be effective 60 days from the date of publication of the amendments in the Federal Register.

Regulation SHO, which became fully effective in January 2005, provides a regulatory framework governing short sales of securities and, among other things, includes the following:

• A definition of ownership for short sale purposes and a requirement to determine a short seller's net aggregate position.
   
• A locate requirement, which requires that before accepting or effecting a short sale order, brokers and dealers must (i) borrow securities, (ii) make arrangements to borrow securities, or (iii) have a reasonable basis to believe that securities can be borrowed in order to make timely delivery.
   
• Additional delivery or close-out requirements on designated "threshold securities." A threshold security means an equity security registered or required to file reports with the Commission for which there is an aggregate fail to deliver position for five consecutive settlement days at a registered clearing agency of 10,000 shares or more and that is equal to at least 0.5% of the issue's total shares outstanding. Where a clearing agency participant has a fail to deliver position in threshold securities that persists for 13 consecutive settlement days, the participant must take action to close out the position. Until the position is closed out, the participant, and any broker-dealer for which it clears transactions, including market makers, may not effect further short sales in the particular threshold security without borrowing or entering into a bona fide arrangement to borrow the security.
   
• A grandfather provision that provides that the requirement to close-out fail to deliver positions in threshold securities that remain for 13 consecutive settlement days does not apply to positions that were established prior to the security becoming a threshold security or prior to the effective date of Regulation SHO. The grandfather provision was adopted because the Commission was concerned about creating volatility where there were large pre-existing fail to deliver positions.

The amendments voted on today will:

• Eliminate the grandfather provision in Rule 203(b)(3)(i) so that all fail to deliver positions in threshold securities will have to be closed out within 13 consecutive settlement days, regardless of whether they occurred before the security became a threshold security.
   
• Permit previously-excepted grandfather positions that are threshold securities on the effective date of the amendment to be closed out within 35 settlement days of the effective date of the amendment.
   
• Amend Rule 203 of Regulation SHO to extend the close out requirement from 13 to 35 consecutive settlement days for fails to deliver resulting from sales of threshold securities pursuant to Rule 144 of the Securities Act.
   
• Amend Rule 200(e)(3) to (i) reference the NYSE Composite Index (NYA) instead of the Dow Jones Industrial Average (DJIA); (ii) add language to clarify that the two-percent limitation is to be calculated in accordance with NYSE Rule 80A; and (iii) provide that the market decline limitation will remain in effect for the remainder of the trading day.

2. Proposed and Re-proposed Amendments to Regulation SHO

The Commission voted to propose amendments to Rule 200 and re-propose amendments to Rule 203 of Regulation SHO (17 CFR 242.200 and 242.203). The proposed amendments would modify the long sale marking requirements of Regulation SHO to require that broker-dealers marking a sale as "long" document the present location of the securities being sold. The re-proposed amendments are intended to further reduce fails to deliver in certain equity securities by eliminating the options market maker exception to the close-out requirement of Regulation SHO. In addition, the Commission voted to solicit comment regarding two narrowly-tailored alternatives to elimination of the options market maker exception.

The comment period for the proposals will end 30 days from the date of publication of the proposed rules in the Federal Register.

The options market maker exception provides that any fail to deliver position in a threshold security resulting from short sales effected by a registered options market maker to establish or maintain a hedge on options positions that were created before the underlying security became a threshold security do not have to be closed out. Today's proposed amendments would eliminate this exception to the close-out requirement of Regulation SHO. In addition, the proposed amendments to eliminate the options market maker exception would include a one-time 35 consecutive settlement day phase-in period for previously-excepted fail to deliver positions.

3. Amendments to Rule 10a-1 and Regulation SHO

The Commission voted to adopt amendments to Rule 10a-1 (17 CFR 240.10a-1) and Regulation SHO (17 CFR 242.200 et seq.) that will remove Rule 10a-1 as well as any short sale price test of any self-regulatory organization (SRO). In addition, the amendments will prohibit any SRO from having a price test. The amendments will also include a technical amendment to Rule 200(g) of Regulation SHO that will remove the "short exempt" marking requirement of that rule. The amendments will be effective immediately upon publication of the release in the Federal Register.

The Commission adopted Rule 10a-1 in 1938 after several years of considering the effects of short selling in a declining market. Rule 10a-1 provides that, subject to certain exceptions, a security may be sold short (A) at a price above the price at which the immediately preceding sale was effected (plus tick), or (B) at the last sale price if it is higher that the last different price (zero-plus tick). Short sales are not permitted on minus ticks or zero-minus ticks, subject to narrow exceptions. The operation of these provisions is commonly described as the "tick test." The tick test applies only to listed securities, other than Nasdaq-listed securities, traded on an exchange, or otherwise.

In addition to the tick test of Rule 10a-1, the NASD and Nasdaq have adopted their own short sale price tests based on the last bid rather than on the last reported sale for purposes of determining the execution prices of short sales. These bid tests apply only to Nasdaq Global Market securities that are traded on Nasdaq or the over-the-counter market and reported to a NASD facility.

On July 28, 2004, the Commission issued an order creating a one-year pilot temporarily suspending the tick test and any short sale price test of any exchange or national securities association for certain securities. The pilot was created so that the Commission could study the effectiveness of short sale price tests. The Commission's Office of Economic Analysis and academic researchers provided the Commission with analyses of the empirical data obtained from the pilot. In addition, the Commission held a roundtable to discuss the results of the pilot. The general consensus from these analyses and the roundtable was that the Commission should remove price test restrictions because they modestly reduce liquidity and do not appear necessary to prevent manipulation. In addition, the empirical evidence did not provide strong support for extending a price test to either small or thinly-traded securities not currently subject to a price test.

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The full text of the detailed releases concerning these items will be posted to the SEC Web site as soon as possible.