Monday, September 22, 2008

SEC Amends Orders Halting Short Selling in Stocks of Financial Institutions and Requiring Hedge Funds to Report Short Positions

The SEC has amended its emergency orders prohibiting short selling in 799 financial companies and requiring institutional money managers to report their new short sales of certain publicly traded securities.

The SEC issued a new disclosure rule requiring hedge funds and other large investors to disclose their short positions in order to ensure transparency in short selling. Hedge fund managers with more than $100 million invested in securities would be required to promptly begin public reporting of their daily short positions. Specifically, under the order, institutional investment manager who have to file a Form 13F for the calendar quarter ended June 30, 2008 will be required to file a report on new Form SH with the SEC on the first business day of every calendar week immediately following a week in which it effected short sales. Form SH must be filed electronically, but under the amended order, will not be publicly available on EDGAR for two weeks.

In the amending release, Release No. 34-58591A, the SEC said that Forms SH will be filed on a non-public basis. The Commission is permitting the non-public filing of Form SH in order to maintain fair and orderly securities markets and prevent substantial disruption in the securities markets. The Commission believes that the non-public submission of Form SH may help prevent artificial volatility in securities as well as further downward swings that are caused by short selling, while at the same time providing the Commission with useful information to combat market manipulation that threatens investors and capital markets. Two weeks after the due date for the Forms SH, the Commission will make the Forms available to the public. The SEC believes that by two weeks after the due date the reasons to maintain the information as non-public will have diminished.

Short Selling Order Amended.

The SEC banned short selling in the stocks of almost 800 financial institutions out of a concern that short selling in the securities of a wider range of financial institutions may be causing sudden and excessive fluctuations of the prices of such securities in such a manner so as to threaten fair and orderly markets.

In the later technical amendments to the order banning short selling in financial stocks, Release No. 58611, the SEC kept on place the exception contained in the original order for short selling related directly to bona fide market making in derivatives in the securities of any included financial firm. However, this exception now requires that, for new positions, a market maker may not sell short if the market maker knows a customer or counterparty is increasing an economic net short position in the shares of the included financial firm. The technical amendments thus incorporate concepts included in the limitations on increasing net short positions imposed by the U.K. Financial Services Authority in its response to short selling. The provisions are not identical because unlike the FSA, the Commission does not have statutory authority over swap contracts and other non-security over-the-counter derivatives.