On August 17, 2009, the SEC announced that it has reopened the comment period for the proposed Regulation SHO amendments. In addition to a renewed request for comment on its April proposals, the SEC is also soliciting additional feedback on an alternative price test that would allow short selling only at a price above the current national best bid.

For our readers who partake in short selling, below is a recap of the amendments proposed in April and more detail on the SEC’s latest request for additional comment.

Background: In April of this year, the SEC proposed amendments to Regulation SHO and issued for comment a proposed rule release with a number of alternative approaches to restrictions on short selling. The April proposal contained two alternative short sale price tests: one based on the current national best bid (the “national bid uptick rule”) and the second based on the last sale price (the “sale price uptick rule”).

In addition to the two price tests proposed, the SEC’s April proposal also sought comment on an alternative price test that would allow short selling only at an increment above the national best bid (the “alternative national bid uptick rule”).

During the initial comment period for the April proposal, the SEC received a number of comments in support of the alternative national bid uptick rule. As a result, the SEC wants to further consider the alternative national bid uptick rule and has reopened the comment period for 30 days.  Comments must be received on or before September 21, 2009.

Below is a brief discussion of the alternative national bid uptick rule.

The Alternative National Bid Uptick Rule

• The alternative national bid uptick rule would allow short selling only at a price above the current national best bid such that short selling would occur only at a higher price than the current national best bid.
• The alternative national bid uptick rule is similar to the national bid uptick rule proposed in April, in that both would use the current national best bid as a reference point for short sale orders; however, unlike the April national bid uptick rule, the alternative national bid uptick rule would NOT allow short selling at the current national best bid.
• Instead, in an advancing or declining market, the alternative national bid uptick rule would only permit short selling at an increment ABOVE the current national best bid (unless an applicable exception applies).
• Because it would only permit short selling at an increment above the national best bid, the alternative national bid uptick rule would NOT allow short sales to get immediate execution, even in an advancing market.
• Thus the alternative national bid uptick rule would restrict short selling to a greater extent than either the proposed modified uptick rule or the proposed uptick rule.
• However, because the alternative national bid uptick rule would reference only the current national best bid in determining permissible short sales, it would NOT require monitoring of the sequence of bids (i.e., whether the current national best bid is above or below the previous national best bid).

Initial Comments Received
During the initial comment period for the April proposal, which ended on June 19, 2009, the SEC received a number of comments in support of the alternative national bid uptick rule, many of which were based primarily on the fact that the alternative national bid uptick rule would not require monitoring of the sequence of bids. For this reason, certain commenters argued that the alternative national bid uptick rule (as compared to the proposed modified uptick rule and the proposed uptick rule) would be less costly to implement, easier to monitor and easier to program into trading and surveillance systems.

Reopening of Comment Period; Supplemental Request for Comment on Alternative National Bid Uptick Rule
As a result of these and other comments received, the SEC has decided it wants to further consider the alternative national bid uptick rule and whether adopting it would achieve its objectives. Accordingly, the SEC has published a supplemental request for comment and has reopened the comment period for 30 days to help ensure that the public has a full opportunity to provide comments on the April proposal, the alternative national bid uptick rule, and any other matters that may have an effect on the April proposal.

Comment Period: Comments to the SEC’s supplemental request must be received on or before September 21, 2009.