that a sale order be marked ``short exempt'' only if the provisions in
paragraph (c) or (d) of the proposed modified uptick rule (or paragraph
(c) or (d) of the proposed circuit breaker modified uptick rule) are
met,\329\ or if the seller is relying on an exception in paragraph (c)
of the proposed uptick rule (or paragraph (c) of the proposed circuit
breaker uptick rule),\330\ or if the seller is relying on an exception
in paragraph (c) of the proposed circuit breaker halt rule.\331\ The
purpose of the information collected would be to enable the Commission
and SROs to monitor whether a person entering a sell order covered by
the proposed amendments to Rule 201 is acting in accordance with one of
the provisions contained in paragraph (c) or (d) of the proposed
modified uptick rule (or paragraph (c) or (d) of the proposed circuit
breaker modified uptick rule), or if the seller is relying on an
exception in paragraph (c) of the proposed uptick rule (or paragraph
(c) of the proposed circuit breaker uptick rule), or if the seller is
relying on an exception in paragraph (c) of the proposed circuit
breaker halt rule. In particular, the ``short exempt'' marking
requirement would provide a record that would aid in surveillance for
compliance with the provisions of proposed Rule 201. It also would
provide an indication to a trading center regarding whether or not it
must execute or display a short sale order in accordance with the price
test restrictions of the proposed modified uptick rule (or the proposed
circuit breaker modified uptick rule). It also would help a trading
center determine whether its policies and procedures were reasonable
and whether its surveillance was effective.
---------------------------------------------------------------------------

    \328\ See proposed Rule 200(g).
    \329\ See proposed Rule 200(g)(2) of the proposed modified
uptick rule (and the proposed circuit breaker modified uptick rule).
Paragraphs (c) and (d) of the proposed modified uptick rule (and the
proposed circuit breaker modified uptick rule) set forth when a
broker-dealer may mark a short sale order ``short exempt.'' See
proposed Rules 201(c) and (d).
    \330\ See proposed Rule 200(g)(2) of the proposed uptick rule
(and the proposed circuit breaker uptick rule). Paragraph (c) of the
proposed uptick rule (and paragraph (c) of the proposed circuit
breaker uptick rule) sets forth when a broker-dealer may mark a
short sale order ``short exempt'' in accordance with the proposed
uptick rule (or the proposed circuit breaker uptick rule). See
proposed Rule 201(c).
    \331\ See proposed Rule 200(g)(2) of the proposed circuit
breaker halt rule. Paragraph (c) of the proposed circuit breaker
halt rule sets forth when a broker-dealer may mark a short sale
order ``short exempt'' in accordance with the proposed circuit
breaker halt rule. See proposed Rule 201(c).
---------------------------------------------------------------------------

D. Respondents

    As discussed below, the Commission has considered each of the
following respondents for the purposes of calculating the reporting
burdens under the proposed amendments to Rules 200(g) and 201 of
Regulation SHO. The Commission requests comment on the accuracy of
these figures.
1. Policies and Procedures Requirement Under Proposed Modified Uptick
Rule
    The proposed modified uptick rule would require each trading center
to establish, maintain, and enforce written policies and procedures
reasonably designed to prevent the execution or display of a short sale
order at a down-bid price.\332\ A ``trading center'' is defined as ``a
national securities exchange or national securities association that
operates an SRO trading facility, an alternative trading system, an
exchange market maker, an OTC market maker, or any other broker-dealer
that executes orders internally by trading as principal or crossing
orders as agent.'' \333\ Because the proposed modified uptick rule
would apply to any trading center that executes or displays a short
sale order in a covered security, the proposed modified uptick rule
would apply to 10 registered national securities exchanges that trade
NMS stocks and one national securities association (or ``SRO trading
centers''),\334\ and approximately 372 broker-dealers (including ATSs)
registered with the Commission (or ``non-SRO trading centers'').\335\
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    \332\ See proposed Rule 201(b)(1).
    \333\ See 17 CFR 242.600(b)(78).
    \334\ There are 10 national securities exchanges (BX, BATS,
CBOE, CHX, ISE, NASDAQ, NSX, NYSE, NYSE Amex, and NYSE Arca) and one
national securities association (FINRA) that operate an SRO trading
facility for NMS stocks and thus would be subject to the Rule.
    \335\ This number includes the approximately 325 firms that were
registered equity market makers or specialists at year-end 2007
(this number was derived from annual FOCUS reports and discussion
with SRO staff), as well as the 47 ATSs that operate trading systems
that trade NMS stocks. The Commission believes it is reasonable to
estimate that in general, firms that are block positioners--i.e.,
firms that are in the business of executing orders internally--are
the same firms that are registered market makers (for instance, they
may be registered as a market maker in one or more Nasdaq stocks and
carry on a block positioner business in exchange-listed stocks),
especially given the amount of capital necessary to carry on such a
business.
---------------------------------------------------------------------------

2. Identification of Short Sale Orders and Policies and Procedures
Requirements Under the Proposed ``Broker-Dealer'' and ``Riskless
Principal'' Provisions
    The collection of information that would be required in the
proposed ``broker-dealer'' provision in proposed Rule 201(c)(1) of the
proposed modified uptick rule, the ``riskless principal'' provision in
proposed Rule 201(d)(6) of the proposed modified uptick rule, and the
``riskless principal'' exception in proposed Rule 201(c)(9) of the
proposed uptick rule would apply to all the 5,561 \336\ registered
brokers-dealers submitting short sale orders in reliance on these
proposed provisions.
---------------------------------------------------------------------------

    \336\ This number is based on OEA's review of 2007 FOCUS Report
filings reflecting registered broker-dealers, including introducing
broker-dealers. This number does not include broker-dealers that are
delinquent on FOCUS Report filings.
---------------------------------------------------------------------------

3. Proposed Marking Requirements
    The collection of information that would be required pursuant to
the proposed ``short exempt'' marking requirements would apply to all
the 5,561 \337\ registered brokers-dealers submitting short sale orders
marked ``short exempt'' in accordance with the provisions contained in
paragraph (c) or (d) of the proposed modified uptick rule (or paragraph
(c) or (d) of the proposed

circuit breaker modified uptick rule), or in reliance on an exception
contained in paragraph (c) of the proposed uptick rule (or paragraph
(c) of the proposed circuit breaker uptick rule), or in reliance on an
exception contained in paragraph (c) of the proposed circuit breaker
halt rule.
---------------------------------------------------------------------------

    \337\ See id.
---------------------------------------------------------------------------

E. Total Annual Reporting and Recordkeeping Burdens

1. Policies and Procedures Requirement under Proposed Modified Uptick
Rule
    The proposed modified uptick rule would require each trading center
to establish, maintain, and enforce written policies and procedures
reasonably designed to prevent the execution or display of a short sale
order of a covered security at a down-bid price.\338\ In addition, a
trading center would need to have policies and procedures reasonably
designed to permit the execution or display of a short sale order of a
covered security marked ``short exempt'' without regard to whether the
order is at a down-bid price.\339\ Thus, trading centers would be
required to develop written policies and procedures reasonably designed
to permit the trading center to be able to determine whether or not the
short sale order is priced in accordance with the provisions of
proposed Rule 201(b)(1) and to recognize when an order is marked
``short exempt'' such that the trading center's policies and procedures
do not prevent the execution or display of such orders on a down-bid
price in accordance with proposed Rule 201(b)(1)(ii).\340\ A trading
center's policies and procedures would not, however, have to include
mechanisms to determine on which provision a broker-dealer is relying
in marking an order ``short exempt'' in accordance with paragraph (c)
or (d) of the proposed modified uptick rule.
---------------------------------------------------------------------------

    \338\ See proposed Rule 201(b)(1). This would include a trading
center taking such steps as would be necessary to enable it to
enforce its policies and procedures effectively, including the
proposed requirement to regularly surveil to ascertain the
effectiveness of its policies and procedures and taking prompt
remedial steps. See proposed Rule 201(b)(2).
    \339\ See proposed Rule 201(b)(1)(ii). See also Sections III.A.
and V, above, discussing short sale orders marked ``short exempt.''
    \340\ See proposed Rule 201(b)(1)(ii).
---------------------------------------------------------------------------

    Although the exact nature and extent of the policies and procedures
that a trading center would be required to establish likely would vary
depending upon the nature of the trading center (e.g., SRO vs. non-SRO,
full service broker-dealer vs. market maker), we preliminarily estimate
that it initially would take an SRO trading center approximately 220
hours \341\ of legal, compliance, information technology and business
operations personnel time,\342\ and a non-SRO trading center
approximately 160 hours of legal, compliance, information technology
and business operations personnel time,\343\ to develop the required
policies and procedures.
---------------------------------------------------------------------------

    \341\ For purposes of this Release, we are basing our estimates
on the burden hour estimates provided in connection with the
adoption of Regulation NMS because the policies and procedures
developed in connection with that Regulation's order protection rule
are in many ways similar to what a trading center would need to do
to comply with the proposed modified uptick rule. See Securities
Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496 (June 29,
2005). We note, however, that these estimates may be on the high end
because trading centers have already had to establish similar
policies and procedures to comply with Regulation NMS.
    \342\ Based on experience and estimates provided in connection
with Regulation NMS, we anticipate that of the 220 hours we
preliminarily estimate would be spent to establish the required
policies and procedures, 70 hours would be spent by legal personnel,
105 hours would be spent by compliance personnel, 20 hours would be
spent by information technology personnel and 25 hours would be
spent by business operations personnel of the SRO trading center.
    \343\ Based on experience and the estimates provided in
connection with Regulation NMS, we anticipate that of the 160 hours
we preliminarily estimate would be spent to establish policies and
procedures, 37 hours would be spent by legal personnel, 77 hours
would be spent by compliance personnel, 23 hours would be spent by
information technology personnel and 23 hours would be spent by
business operations personnel of the non-SRO trading center.
---------------------------------------------------------------------------

    In addition to this estimate (of 220 hours for SRO respondents and
160 hours for non-SRO respondents), we expect that SRO and non-SRO
respondents may incur one-time external costs for outsourced legal
services. While we recognize that the amount of legal outsourcing
utilized to help establish written policies and procedures may vary
widely from entity to entity, we preliminarily estimate that on
average, each trading center would outsource 50 hours of legal time in
order to establish policies and procedures in accordance with the
proposed amendments.\344\
---------------------------------------------------------------------------

    \344\ As discussed above, we base our burden estimate of 50
hours of outsourced legal time on the burden estimate used for
Regulation NMS because the policies and procedures developed in
connection with that Regulation's order protection rule are in many
ways similar to what a trading center would need to do to comply
with the proposed modified uptick rule.
---------------------------------------------------------------------------

    We estimate that there would be an initial one-time burden of 220
(not including the outsourced 50 hours of legal time) burden hours per
SRO trading center or 2,420 hours,\345\ and 160 (not including the
outsourced 50 hours of legal time) burden hours per non-SRO trading
center \346\ or 59,520 hours, for a total of 61,940 burden hours to
establish the required written policies and procedures.\347\ We
estimate a cost of approximately $7,660,000 for both SRO and non-SRO
trading centers resulting from outsourced legal work.\348\
---------------------------------------------------------------------------

    \345\ The estimated 2,420 burden hours necessary for SRO trading
centers to establish policies and procedures are calculated by
multiplying 11 times 220 hours (11 x 220 hours = 2,420 hours).
    \346\ The estimated 59,520 burden hours necessary for non-SRO
trading centers to establish policies and procedures are calculated
by multiplying 372 times 160 hours (372 x 160 hours = 59,520 hours).
    \347\ Proposed Rule 201(b)(1). Proposed Rule 201(b)(1) requires
that ``A trading center shall establish, maintain, and enforce
written policies and procedures reasonably designed to prevent the
execution or display of a short sale order at a down-bid price.''
    \348\ This figure was calculated as follows: (50 legal hours x
$400 x 11 SRO trading centers) + (50 legal hours x $400 x 372 non-
SRO trading centers) = $7,660,000. Based on industry sources, OEA
estimates that the average hourly rate for outsourced legal services
in the securities industry is $400.
---------------------------------------------------------------------------

    Once a trading center has established the required written policies
and procedures, we preliminarily estimate that it would take the
average SRO and non-SRO trading center each approximately two hours per
month of ongoing internal legal time and three hours of ongoing
internal compliance time to ensure that its written policies and
procedures are up-to-date and remain in compliance with the proposed
amendments to Rule 201, or a total of 60 hours annually per
respondent.\349\ In addition, we preliminarily estimate that it would
take the average SRO and non-SRO trading center each approximately 16
hours per month of ongoing compliance time, 8 hours per month of
ongoing information technology time, and 4 hours per month of ongoing
legal time associated with ongoing monitoring and surveillance for and
enforcement of trading in compliance with the proposed modified uptick
rule, or a total of 336 hours annually per respondent.\350\
---------------------------------------------------------------------------

    \349\ This figure was calculated as follows: (2 legal hours x 12
months) + (3 compliance hours x 12 months) = 60 hours annually per
respondent. As discussed above, this burden estimate of 60 hours is
based on experience and what was estimated for Regulation NMS to
ensure that written policies and procedures were up-to-date and
remained in compliance.
    \350\ This figure was calculated as follows: (16 compliance
hours x 12 months) + (8 information technology hours x 12 months) +
(4 legal hours x 12 months) = 336 hours annually per respondent. As
discussed above, this preliminary burden estimate of 336 hours is
based on experience and what was estimated for Regulation NMS
regarding similarly required ongoing monitoring and surveillance for
and enforcement of trading in compliance with that regulation's
policies and procedures requirement.
---------------------------------------------------------------------------

    As mentioned above, we realize that the exact nature and extent of
the policies and procedures that a trading

center would be required to establish likely would vary depending upon
the type, size, and nature of the trading center. Thus, while we have
based our burden estimates, in part, on the burden estimates provided
in connection with the adoption of Regulation NMS, we note that these
estimates may be on the high end because trading centers have already
had to establish policies and procedures in connection with that
Regulation's order protection rule, which could help form the basis for
the policies and procedures for the proposed modified uptick rule. We
realize, however, that these estimates may be on the low end for
smaller trading centers with less familiarity with having had to
establish policies and procedures in connection with Regulation NMS's
order protection rule. Thus, we seek specific comment as to whether the
proposed burden estimates are appropriate or whether such estimates
should be increased or reduced, and for which entities. If they should
be increased or decreased, please address by how much, in order to be
able to comply with the proposed modified uptick rule's required
policies and procedures, if adopted.
2. Identification of Short Sale Orders and Policies and Procedures
Requirements Under the Proposed ``Broker-Dealer'' and ``Riskless
Principal'' Provisions
    To rely on the proposed modified uptick rule's Rule 201(c)(1)
``broker-dealer'' provision, a broker-dealer marking a short sale order
in a covered security ``short exempt'' under proposed Rule 201(c)(1)
must identify the order as not being a down-bid price at the time the
order is submitted to the trading center and must establish, maintain,
and enforce written policies and procedures that are reasonably
designed to prevent the incorrect identification of orders as not being
submitted to the trading center at a down-bid price.\351\ At a minimum,
the broker-dealer's policies and procedures would need to be reasonably
designed to enable a broker-dealer to monitor, on a real-time basis,
the national best bid, and whether the current national best bid is an
up- or down-bid from the last differently priced national best bid, so
as to determine the price at which the broker-dealer may submit a short
sale order to a trading center in compliance with the requirements of
proposed Rule 201(c)(1). In addition, a broker-dealer would also need
to take such steps as would be necessary to enable it to enforce its
policies and procedures effectively.\352\
---------------------------------------------------------------------------

    \351\ See proposed Rule 201(c)(1).
    \352\ This would include the proposed requirement that broker-
dealer regularly surveil to ascertain the effectiveness of its
policies and procedures and taking prompt remedial steps. See
proposed Rule 201(c)(2).
---------------------------------------------------------------------------

    To rely on proposed Rule 201(d)(6)'s ``riskless principal''
provision under the proposed modified uptick rule or Rule 201(c)(9)'s
``riskless principal'' exception to the proposed uptick rule, a broker-
dealer would be required to have written policies and procedures in
place to assure that, at a minimum, the customer order was received
prior to the offsetting transaction and that it has supervisory systems
in place to produce records that enable the broker-dealer to accurately
and readily reconstruct, in a time-sequenced manner, all orders on
which a broker-dealer relies pursuant to these provisions.
    Although the exact nature and extent of the required policies and
procedures that a broker-dealer would be required to establish under
the ``broker-dealer'' or the ``riskless principal'' provisions likely
would vary depending upon the nature of the broker-dealer (e.g., full
service broker-dealer vs. market maker), we preliminarily estimate that
it initially would take a broker-dealer approximately 160 hours \353\
of legal, compliance, information technology and business operations
personnel time,\354\ to develop the required policies and procedures.
In addition to this estimate of 160 hours, we expect that broker-
dealers may incur one-time external costs for outsourced legal
services. While we recognize that the amount of legal outsourcing
utilized to help establish written policies and procedures may vary
widely from entity to entity, we preliminarily estimate that on
average, each broker-dealer would outsource 50 hours \355\ of legal
time in order to establish policies and procedures in accordance with
the ``broker-dealer'' provision in proposed Rule 201(c)(1) of the
proposed modified uptick rule, the ``riskless principal'' exception in
201(c)(9) of the proposed uptick rule, and the ``riskless principal''
provision in 201(d)(6) of the proposed modified uptick rule.
---------------------------------------------------------------------------

    \353\ We base this estimate of 160 hours on the estimated burden
hours we preliminarily believe it would take a non-SRO trading
center (which would include broker-dealers) to develop similarly
required policies and procedures, since the policies and procedures
required under the proposed broker-dealer provisions would be
similar to those required for non-SRO trading centers in complying
with paragraph (b) of the proposed modified uptick rule.
    \354\ Based on experience and the estimates provided in
connection with Regulation NMS, we anticipate that of the 160 hours
we estimate would be spent to establish policies and procedures; 37
hours would be spent by legal personnel, 77 hours would be spent by
compliance personnel, 23 hours would be spent by information
technology personnel and 23 hours would be spent by business
operations personnel of the broker-dealer.
    \355\ As discussed above, we base our burden estimate of 50
hours of outsourced legal time on the burden estimate used for
Regulation NMS because the policies and procedures developed in
connection with that Regulation's order protection rule are in many
ways similar to what a broker-dealer would need to do to comply with
the policies and procedures required under the proposed broker-
dealer provision of the proposed modified uptick rule.
---------------------------------------------------------------------------

    We preliminarily estimate that there would be an initial one-time
burden of 160 burden hours per broker-dealer or 889,760 hours \356\ to
establish policies and procedures that would be required to rely on the
proposed modified uptick rule's ``broker-dealer'' provision in proposed
Rule 201(c)(1), the ``riskless principal'' exception in Rule 201(c)(9)
of the proposed uptick rule, or the ``riskless principal'' provision in
201(d)(6) of the proposed modified uptick rule. We preliminarily
estimate a cost of approximately $111,220,000 for broker-dealers
resulting from outsourced legal work.\357\
---------------------------------------------------------------------------

    \356\ As discussed above, we base this estimate of 160 hours on
the estimated burden hours we preliminarily believe it would take a
non-SRO trading center (which would include broker-dealers) to
develop similarly required policies and procedures since the
policies and procedures required under the proposed broker-dealer
provisions would be similar to those required for non-SRO trading
centers in complying with paragraph (b) of the proposed modified
uptick rule.
     The estimated 889,760 burden hours necessary for a broker-
dealer to establish policies and procedures are calculated by
multiplying 5,561 times 160 hours (5,561 x 160 hours = 889,760
hours).
    \357\ This figure was calculated as follows: (50 legal hours x
$400 x 5,561 broker-dealers) = $111,220,000. Based on industry
sources, OEA estimates that the average hourly rate for outsourced
legal services in the securities industry is $400.
---------------------------------------------------------------------------

    Once a broker-dealer has established written policies and
procedures that would be required so that it could rely on proposed
201(c)(1) of the proposed modified uptick rule, 201(c)(9) of the
proposed uptick rule, or 201(d)(6) of the proposed modified uptick
rule, we preliminarily estimate that it would take the average broker-
dealer approximately two hours per month of internal legal time and
three hours of internal compliance time to ensure that its written
policies and procedures are up-to-date and remain in compliance with
proposed 201(c)(1) of the proposed modified uptick rule, 201(c)(9) of
the proposed uptick rule, or 201(d)(6) of the proposed modified uptick
rule, or a total of 60 hours annually per respondent.\358\

In addition, we preliminarily estimate that it would take the average
broker-dealer each approximately 16 hours per month of ongoing
compliance time, 8 hours per month of ongoing information technology
time, and 4 hours per month of ongoing legal time associated with
ongoing monitoring and surveillance for and enforcement of trading in
compliance with the proposed modified uptick rule, or a total of 336
hours annually per respondent.\359\
---------------------------------------------------------------------------

    \358\ This figure was calculated as follows: (2 legal hours x 12
months) + (3 compliance hours x 12 months). As discussed above, this
burden estimate of 60 hours is based on experience and what was
estimated for a Regulation NMS respondent to ensure that its written
policies and procedures were up-to-date and remained in compliance.
    \359\ This figure was calculated as follows: (16 compliance
hours x 12 months) + (8 information technology hours x 12 months) +
(4 legal hours x 12 months) = 336 hours annually per respondent. As
discussed above, this preliminary burden estimate of 336 hours is
based on experience and what was estimated for Regulation NMS for
similarly required ongoing monitoring and surveillance for and
enforcement of trading in compliance with that regulation's policies
and procedures requirement.
---------------------------------------------------------------------------

    As mentioned above, we realize that the exact nature and extent of
the policies and procedures that a broker-dealer would be required to
establish likely would vary depending upon the type, size, and nature
of the broker-dealer. Thus, while we have based our burden estimates on
the burden estimates provided in connection with the adoption of
Regulation NMS with respect to non-SRO trading centers (which includes
broker-dealers), we note that these estimates may be on the high end
for those broker-dealers that have already had to establish policies
and procedures in connection with that Regulation's order protection
rule, which could help form the basis for the policies and procedures
for the proposed broker-dealer provision of the modified uptick rule,
or the riskless principal provisions under the proposed modified uptick
rule and the proposed uptick rule. We realize, however, that these
estimates may be on the low end for some broker-dealers with less
familiarity with having had to establish policies and procedures in
connection with Regulation NMS's order protection rule. Thus, we seek
specific comment as to whether the proposed burden estimates are
appropriate or whether such estimates should be increased or reduced,
and for which broker-dealers. If they should be increased or decreased,
please address by how much, in order to be able to comply with the
proposed provisions' required policies and procedures, if adopted.
3. Proposed Marking Requirements
    Proposed Rule 200(g) would impose a ``short exempt'' marking
requirement.\360\ In addition, proposed Rule 200(g)(2) would require a
broker-dealer to mark all sell orders of a covered security ``short
exempt'' only if the provisions contained in paragraph (c) or (d) of
the proposed modified uptick rule (or paragraph (c) or (d) of the
proposed circuit breaker modified uptick rule) are met, or if the
seller is relying on one of the exceptions contained in paragraph (c)
of the proposed uptick rule (or paragraph (c) of the proposed circuit
breaker uptick rule), or if the seller is relying on one of the
exceptions contained in paragraph (c) of the proposed circuit breaker
halt rule.\361\ While not all broker-dealers likely would enter sell
orders in securities covered by the proposed amendments to Rules 200(g)
and 201 in a manner that would subject them to this collection of
information, we estimate, for purposes of the PRA, that all of the
approximately 5,561 registered broker-dealers would do so.\362\ For
purposes of the PRA, the Commission staff has estimated that a total of
approximately 12.9 billion ``short exempt'' orders would be entered
annually.\363\
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    \360\ See proposed Rule 200(g).
    \361\ See proposed Rule 200(g)(2).
    \362\ We also note that, because the proposed circuit breaker
halt rule, if adopted, would not be in place at all times or for all
securities and because there would be fewer exceptions that would be
available and they would apply only when the restrictions of the
proposed circuit breaker halt rule are triggered, the frequency and,
therefore, the estimate burden of marking ``short exempt'' would be
expected to be lower under the proposed circuit breaker halt rule.
    \363\ There are approximately 45.4 billion short sale orders
entered annually. OEA calculates that there were about 263 million
short sale trades during August 2008 for Amex, FINRA, Nasdaq,
NYSEArca, and NYSE market centers. We gross up 263 million by 14.4
which is the ratio of orders to trades. The ratio is derived from
Rule 605 reports from the three largest market centers during August
2008. This yields 3.8 billion short sale orders during August 2008
or an annualized figure of 45.4 billion. OEA believes that August
2008 data is representative of a normal month of trading. We
estimate that approximately 28.5% of short sale orders are short
exempt using Nasdaq short sale data from January to April 2005. We
multiply 45.4 billion times 0.285 to obtain our estimate of 12.9
billion short exempt orders.
---------------------------------------------------------------------------

    This would be an average of approximately 2,319,727 annual
responses by each respondent.\364\ Each response of marking sell orders
``short exempt'' would take approximately .000139 hours (.5 seconds) to
complete.\365\ We base this estimate on the fact that, in accordance
with the current marking requirements of Rule 200(g) of Regulation SHO,
broker-dealers are already required to mark a sell order either
``long'' or short''; the fact that most broker-dealers already have the
necessary mechanisms and procedures in place and are already familiar
with processes and procedures to comply with the marking requirements
of Rule 200(g) of Regulation SHO; and the fact that broker-dealers
would be able to continue to use the same mechanisms, processes and
procedures to comply with proposed Rules 200(g) and 200(g)(2).
---------------------------------------------------------------------------

    \364\ This figure was calculated as follows: 12.9 billion
``short exempt'' orders divided by 5,561 broker-dealers.
    \365\ This estimate is based on the same time estimate for
marking sell orders ``long'' or ``short'' under current Rule 200(g)
under Regulation SHO. See 2004 Regulation SHO Adopting Release, 69
FR at 48023; see also 2003 Regulation SHO Proposing Release, 68 FR
at 63000 n. 232.
---------------------------------------------------------------------------

    Thus, the total approximate estimated annual hour burden per year
would be 1,793,100 burden hours (12,900,000,000 orders marked ``short
exempt'' @ 0.000139 hours/order marked ``short exempt''). Our estimate
for the paperwork compliance for the proposed amendments order marking
requirement for each broker-dealer would be approximately 322 burden
hours (2,319,727 responses @ 0.000139 hours/responses) or (a total of
1,793,100 burden hours/5,561 respondents).

F. Collection of Information Is Mandatory

1. Proposed Policies and Procedures Requirements
    The collection of information that would be required under the
proposed modified uptick rule's (and proposed circuit breaker modified
uptick rule's) policies and procedures requirement in proposed Rule
201(b)(1) would be mandatory for trading centers executing and
displaying short sale orders in covered securities. The collection of
information that would be required under the proposed modified uptick
rule's (and proposed circuit breaker modified uptick rule's) policies
and procedures requirements in connection with the proposed broker-
dealer provision in proposed Rule 201(c)(1) and the ``riskless
principal'' provision in proposed Rule 201(d)(6), and the collection of
information that would be required under the proposed uptick rule's
(and proposed circuit breaker uptick rule's) policies and procedure
requirement in connection with the proposed ``riskless principal''
exception in proposed Rule 201(c)(9) would be mandatory for broker-
dealers relying on these provisions.
2. Proposed Marking Requirements
    The collection of information would be mandatory for all broker-
dealers submitting sell orders marked ``short exempt'' in reliance on
one of the proposed provisions contained in paragraph (c) or (d) of the
proposed modified uptick rule (or paragraph (c) or

(d) of the proposed circuit breaker modified uptick rule), or in
reliance on an exception in paragraph (c) of the proposed uptick rule
(or paragraph (c) of the proposed circuit breaker uptick rule), or in
reliance on an exception in paragraph (c) of the proposed circuit
breaker halt rule.

G. Confidentiality

1. Proposed Policies and Procedures Requirements
    We expect that the information collected pursuant to the proposed
modified uptick rule's (and the proposed circuit breaker modified
uptick rule's) required policies and procedures would be communicated
to the members, subscribers, and employees (as applicable) of all
trading centers. To the extent this information is made available to
the Commission, it would not be kept confidential. The information
collected pursuant to the proposed modified uptick rule's (or proposed
circuit breaker modified uptick rule's) ``broker-dealer'' provision and
the ``riskless principal'' provisions under the proposed short sale
price tests (or under the proposed circuit breaker price tests) would
be retained and would be available to the Commission and SRO examiners
upon request, but not subject to public availability.
2. Proposed Marking Requirements
    The information collected pursuant to the ``short exempt'' marking
requirements in proposed Rules 200(g) and 200(g)(2) would be submitted
to trading centers and would be available to the Commission and SRO
examiners upon request.

H. Record Retention Period

1. Proposed Policies and Procedures Requirements
    Any records generated in connection with the proposed short sale
price tests' requirements to establish written policies and procedures
and the proposed circuit breaker rules would be required to be
preserved in accordance with, and for the periods specified in,
Exchange Act Rules 17a-1 for SRO trading centers and 17a-4(e)(7) for
non-SRO trading centers.
2. Proposed Marking Requirements
    The proposed amendments to Rule 200(g) and 200(g)(2) do not contain
any new record retention requirements. All registered broker-dealers
that would be subject to the proposed amendments are currently required
to retain records in accordance with Rule 17a-4(e)(7) of the Exchange
Act.\366\
---------------------------------------------------------------------------

    \366\ 17 CFR 240.17a-4.
---------------------------------------------------------------------------

I. Request for Comment

    We invite comment on these estimates. Pursuant to 44 U.S.C.
3506(c)(2)(B), we request comment in order to: (a) Evaluate whether the
collection of information is necessary for the proper performance of
our functions, including whether the information will have practical
utility; (b) evaluate the accuracy of our estimate of the burden of the
collection of information; (c) determine whether there are ways to
enhance the quality, utility and clarity of the information to be
collected; and (d) evaluate whether there are ways to minimize the
burden of the collection of information on those who respond, including
through the use of automated collection techniques or other forms of
information technology.
    Persons submitting comments on the collection of information
requirements should direct them to the Office of Management and Budget,
Attention: Desk Officer for the Securities and Exchange Commission,
Office of Information and Regulatory Affairs, Washington, DC 20503, and
should also send a copy of their comments to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090, with reference to File No. [S7-08-09].
Requests for materials submitted to OMB by the Commission with regard
to this collection of information should be in writing, with reference
to File No. [S7-08-09], and be submitted to the Securities and Exchange
Commission, Records Management, 100 F Street, NE., Washington, DC
20549. As OMB is required to make a decision concerning the collections
of information between 30 and 60 days after publication, a comment to
OMB is best assured of having its full effect if OMB receives it within
30 days of publication.

IX. Cost-Benefit Analysis

    We are sensitive to the costs and benefits of our rules. We request
comment on the costs and benefits associated with the proposed
amendments. In particular, we request comment on the potential costs
for any modification to both computer systems and surveillance
mechanisms and for information gathering, management, and recordkeeping
systems or procedures, as well as any potential benefits resulting from
the proposed amendments for registrants, issuers, investors, brokers or
dealers, other securities industry professionals, regulators, and
others. We also request comment as to the extent to which placing price
restrictions on short selling could impact or lessen some of the
benefits of legitimate short selling or could lead to a decrease in
market efficiency, price discovery, or liquidity. Commenters should
provide analysis and data to support their views on the costs and
benefits associated with the proposed amendments to Rules 200(g) and
201.

A. Benefits

    As discussed above, we believe it is appropriate at this time to
examine and seek comment on whether to restore short sale price test
restrictions or adopt circuit breaker rules in light of the extreme
market conditions that we are currently facing and the resulting
deterioration in investor confidence.
    The proposed amendments to Rule 201 include two alternative price
tests that would place restrictions on the prices at which certain
securities would be able to be sold short.\367\ The first test would be
the proposed modified uptick rule that would be based on the national
best bid and would require trading centers to have policies and
procedures reasonably designed to prevent the execution or display of
short sales at impermissible prices. The second test would be the
proposed uptick rule that would be based on the last sale price,
similar to the tick test under former Rule 10a-1, and would prohibit
any person from effecting short sales at impermissible prices.
---------------------------------------------------------------------------

    \367\ See proposed Rule 201.
---------------------------------------------------------------------------

    We are also proposing circuit breaker rules that would establish
limitations on short selling in a particular security during severe
market declines in the price of that security.\368\ The proposed
circuit breaker halt rule, when triggered by a severe price decline in
a particular security, would temporarily prohibit any person from
selling short that security during the effectiveness of the circuit
breaker.\369\ The proposed circuit breaker modified uptick rule, when
triggered by a severe market decline in a particular security, would
temporarily impose the proposed modified uptick rule, as described in
detail above, for that security. The proposed circuit breaker uptick
rule, when triggered by a severe market decline in a particular
security, would temporarily impose the

proposed uptick rule, as described in detail above, for that
security.\370\
---------------------------------------------------------------------------

    \368\ See proposed Rule 201.
    \369\ The proposed circuit breaker halt rule could be imposed in
place of, or in addition to, a short sale price rule.
    \370\ A circuit breaker that triggers a short sale price test
rule would be adopted in place of a short sale price test rule.
---------------------------------------------------------------------------

    In addition, we are proposing amendments to Rule 200(g) of
Regulation SHO to impose a ``short exempt'' marking requirement and to
Rule 200(g)(2) of Regulation SHO to require broker-dealers to mark a
sell order ``short exempt'' only if the provisions in paragraph (c) or
(d) of the proposed modified uptick rule (or paragraph (c) or (d) of
the proposed circuit breaker modified uptick rule) are met, or if the
seller is relying on an exception in paragraph (c) of the proposed
uptick rule (or paragraph (c) of the proposed circuit breaker uptick
rule), or if the seller is relying on an exception in paragraph (c) of
the proposed circuit breaker halt rule.
1. Proposed Short Sale Price Tests
    The two alternative short sale price tests proposed would be
designed to allow relatively unrestricted short selling in an advancing
market. In addition, the proposed short sale price tests would be
designed to restrict short selling at successively lower prices and,
thereby, help prevent short selling, including potentially abusive or
manipulative short selling, from being used as a tool for driving the
market down or from being used to accelerate a declining market by
exhausting all remaining bids at one price level, causing successively
lower prices to be established by long sellers. Further, the two
alternative short sale price tests would be designed to help restore
investor confidence in the securities markets.\371\
---------------------------------------------------------------------------

    \371\ See, e.g., supra note 56 (citing comment letters
suggesting that reinstatement of short price test restrictions in
some format would help restore investor confidence in the market).
---------------------------------------------------------------------------

    In particular, by requiring trading centers to have policies and
procedures reasonably designed to prevent the execution or display of
short sale orders at a down-bid price, unless the order is marked
``short exempt,'' and by requiring them to regularly surveil to
ascertain the effectiveness of the policies and procedures and to take
prompt remedial action to remedy deficiencies in such policies and
procedures, the proposed modified uptick rule might help to prevent
short selling, including potentially abusive or manipulative short
selling, from driving the market down and from being used as a tool to
accelerate a declining market. Similarly, for the proposed uptick rule,
by prohibiting the execution of short sale orders below the last sale
price, unless an exception applies, the alternative proposed uptick
rule might also help to prevent short selling, including potentially
abusive or manipulative short selling, from being used as a tool to
drive the market down and accelerate a declining market.
    At the same time, the proposed short sale price tests might help to
preserve instant execution and liquidity, by allowing relatively
unrestricted short selling in an advancing market. As discussed above,
one of the benefits of legitimate short selling is that it may provide
market liquidity by, for example, adding to the selling interest of
stock available to purchasers, and, when sellers are covering their
short sales, adding to the buying interest of stock available to
sellers.
    In seeking to advance these goals, the proposed short sale price
tests might help address the erosion of investor confidence in our
markets. Bolstering investor confidence in the markets should help to
encourage investors to be more willing to invest in the market, thus
adding depth and liquidity to the markets. Moreover, as discussed
above, prior research on the uptick rule indicates that price test
restrictions might help improve market depth, especially at the offer,
and could also dampen intraday volatility.\372\ For example, as
discussed above, OEA found that price test restrictions resulted in an
increase in the quote depths.\373\
---------------------------------------------------------------------------

    \372\ See supra note 35 (referencing OEA Staff's Summary Pilot
Report, at 55 n. 61-63 and supporting text).
    \373\ See supra note 37 (referencing OEA Staff's Summary Pilot
Report, at 55 n. 61-63 and supporting text).
---------------------------------------------------------------------------

2. Proposed Circuit Breaker Halt Rule
    The proposed circuit breaker halt rule, when triggered by a severe
price decline in a particular security, would temporarily prohibit any
person from selling short a particular NMS stock during a severe
decline in the price of that security.\374\ By targeting only those
securities that experience severe intraday declines, the proposed
circuit breaker halt rule would be designed to help prevent short
selling, including potentially abusive or manipulative short selling,
from being used to drive the price of a security down, or to accelerate
the decline in the price of those securities when needed most. By
applying only to those individual securities that are facing a severe
intraday decline in share price, the proposed circuit breaker halt rule
might benefit the market as a narrowly tailored response to
extraordinary circumstances.\375\ It also might benefit the market by
allowing participants an opportunity to reevaluate circumstances and
respond to volatility.\376\
---------------------------------------------------------------------------

    \374\ See proposed Rule 201.
    \375\ See 1998 Release, 63 FR 18477 (April 15, 1998) supra note
230.
    \376\ See id.
---------------------------------------------------------------------------

    We believe that the proposed circuit breaker halt rule also would
be narrowly tailored to help restore investor confidence and stabilize
the market for individual securities during times of substantial
uncertainty.\377\ By halting short selling for the remainder of the
trading day following a significant decline in a security's price, we
believe the proposed circuit breaker halt rule might provide sufficient
time to re-establish equilibrium between buying and selling interests
in the individual security in an orderly fashion. It might also help to
ensure that market participants have a reasonable opportunity to become
aware of, and respond to, a significant decline in a security's price.
By providing a pause in short selling resulting from a significant
decline in the price of an individual equity security, we believe the
proposed circuit breaker halt rule might provide a measure of stability
to the markets. We believe that the proposed circuit breaker halt rule
might help to restore investor confidence during times of substantial
uncertainty.
---------------------------------------------------------------------------

    \377\ See id.
---------------------------------------------------------------------------

    Moreover, unlike the proposed short sale price test restrictions,
the proposed circuit breaker halt rule would halt all short selling for
an individual security only for a specified period of time. Thus, the
proposed circuit breaker halt rule would also be narrowly tailored to
help address the issue of ``bear raids'' while limiting the potential
negative market quality impact that may arise from the proposed short
sale price test restrictions.\378\
---------------------------------------------------------------------------

    \378\ See 1998 Release, 63 FR 18477.
---------------------------------------------------------------------------

3. Proposed Circuit Breaker Price Test Rules
    The alternative proposed circuit breaker price test rules, when
triggered by a severe market decline in a particular security, would
temporarily impose either the proposed circuit breaker modified uptick
rule or the proposed circuit breaker uptick rule, as each rule is
described above, for a particular NMS stock during a severe market
decline in that security, and would remain in place for the remainder
of the trading day.\379\
---------------------------------------------------------------------------

    \379\ For instance, a circuit breaker resulting in the proposed
modified uptick rule would require that trading centers implement
and enforce policies and procedures reasonably designed to prevent
short selling at a down-bid price in a particular security, when
triggered by a decline in the price of that security. Broker-dealer
could mark certain short sale orders ``short-exempt'' under the
conditions set forth above. A circuit breaker resulting in the
proposed uptick rule would, once triggered by a decline in the price
of a particular security, prohibit any person from selling short on
a downtick.

---------------------------------------------------------------------------

    We believe that the proposed circuit breaker price test rules would
be narrowly tailored to help restore investor confidence and stabilize
the market for individual securities. The proposed circuit breaker
price test rules might also help prevent short selling, including
potentially abusive or manipulative short selling, from being used as a
tool for driving the market down or from being used to accelerate a
declining market by exhausting all remaining bids at one price level,
causing successively lower prices to be established by long sellers.
Further, we also believe that allowing short selling to continue with
price test restrictions once a circuit breaker is triggered might also
have less impact on legitimate short selling and normal market activity
including price discovery and the provision of liquidity than a circuit
breaker that halts short selling. To that end, we believe that the
proposed circuit breaker price test rules might also alleviate some
concerns over the possibility of artificial downward pressure that
might arise from a ``magnet effect'' prior to reaching the trigger
threshold.\380\
---------------------------------------------------------------------------

    \380\ See, e.g., letter from Credit Suisse (discussing ``magnet
effect'').
---------------------------------------------------------------------------

4. Proposed Marking Requirements
    In addition, the ``short exempt'' marking requirements under Rule
200(g)(2) would provide a record that a broker-dealer is availing
itself of the provisions of paragraph (c) or (d) of the proposed
modified uptick rule (or paragraphs (c) or (d) of the proposed circuit
breaker modified uptick rule), or that short sellers are availing
themselves of the various exceptions to the application of the
restrictions of the proposed uptick rule (or the proposed circuit
breaker uptick rule), or that short sellers are availing themselves of
the various exceptions to the application of the proposed circuit
breaker halt rule. Thus, the records created pursuant to the ``short
exempt'' marking requirements of proposed Rule 200(g) of the proposed
short sale price test rules or the proposed circuit breaker rules would
aid surveillance by SROs and the Commission for compliance with the
provisions of those short sale price tests or circuit breaker rules. In
addition, if the Commission were to adopt a policies and procedures
approach, such as is proposed in conjunction with the proposed modified
uptick rule (or proposed circuit breaker modified uptick rule), the
proposed ``short exempt'' marking requirement would provide an
indication to a trading center regarding whether it must execute or
display a short sale order with regard to whether the short sale order
is at a down-bid price.

B. Costs

1. Proposed Short Sale Price Test Restrictions
    We recognize that the proposed amendments, if adopted, would impose
costs on market participants to implement and assure compliance with
the proposed short sale price test requirements. These costs could, in
sum, increase the costs of legitimate short selling. We believe,
however, that such costs might be justified by the design of the
proposed short sale price tests to restrict short selling at
successively lower prices and, thereby, help prevent short selling,
including potentially abusive or manipulative short selling, from being
used as a tool for driving the market down or from being used to
accelerate a declining market by exhausting all remaining bids at one
price level, causing successively lower prices to be established by
long sellers. Further, by seeking to advance these goals, the proposed
price test restrictions might help restore investor confidence in the
securities markets.
    We recognize that, to the extent that the proposed short sale price
test restrictions could result in increased costs of short selling in
NMS stocks, it might lessen some of the benefits of legitimate short
selling and, thereby, could result in a reduction in short selling
generally. Such a reduction might lead to a decrease in market
efficiency and price discovery, less protection against upward stock
price manipulations, a less efficient allocation of capital, an
increase in trading costs, and a decrease in liquidity. Restricting
short selling may also reduce ``long'' activity where it is part of the
same strategy, thus adversely affecting liquidity. Thus, we believe
there might be potential costs associated with the proposed short sale
price tests in terms of potential impact of such price tests on quote
depths, spread widths, and market liquidity.
    We also believe costs might be incurred in terms of execution and
pricing inefficiencies. For example, allowing all short sales to be
executed or displayed at or above the best bid (or last sale price) in
an advancing market, and above the best bid (or last sale price) in a
declining market might slow the speed of executions and impose
additional costs on market participants, including buyers.\381\
---------------------------------------------------------------------------

    \381\ As discussed above, on the day the Pilot went into effect,
listed Pilot securities underperformed listed control group
securities by approximately 24 basis points. The Pilot and control
group securities, however, had similar returns over the first six
months of the Pilot. See supra note 36 (referencing OEA Staff's
Summary Pilot Report at 8).
---------------------------------------------------------------------------

    In addition, we recognize that imposing short sale price
restrictions when, currently, there is an absence of any short sale
price test restrictions may result in costs in terms of modifications
to systems and surveillance mechanisms, as well as changes to processes
and procedures. We anticipate that these changes would likely result in
immediate implementation costs for trading centers and SROs and other
market participants associated with reprogramming trading and
surveillance systems to now account for price test restrictions based
on either last sale or best bid information, as discussed in more
detail below. We also believe the proposed amendments may impose costs
to trading centers and SROs and other market participants related to
systems changes to computer hardware and software, reprogramming costs,
and surveillance and compliance costs, as well as staff time and
technology resources, associated with monitoring compliance with the
proposed short sale price test restrictions, as discussed below.
    Moreover, imposing price test restrictions when there are currently
no short sale price restrictions in place also could mean that staff
(compliance personnel, associated persons, etc.) might need to be
trained or re-trained regarding rules related to price test
restrictions. Also, trading centers and SROs and other market
participants could be required to hire additional staff (and train or
re-train them) to comply with the proposed rules related to short sale
price test restrictions. As such, we believe the proposed amendments,
if adopted, might impose training and compliance costs for trading
centers, SROs, and other market participants.
a. Proposed Modified Uptick Rule
    The proposed modified uptick rule, in particular, would require
each trading center to establish, maintain, and enforce written
policies and procedures reasonably designed to prevent the execution or
display of a short sale order at a down-bid price.\382\ In addition, a
trading center would be required to have policies and procedures
reasonably designed to

permit the execution or display of a short sale order of a covered
security marked ``short exempt'' without regard to whether the order is
at a down-bid price.\383\ A trading center's policies and procedures
would not, however, have to include mechanisms to determine on which
provision a broker-dealer is relying in marking an order ``short
exempt'' in accordance with paragraph (c) or (d) of the proposed
modified uptick rule. In addition, trading centers also would be
required to surveil the effectiveness of their written policies and
procedures and take prompt action to remedy any deficiencies in their
policies and procedures.
---------------------------------------------------------------------------

    \382\ See proposed Rule 201(b)(1).
    \383\ See proposed Rule 201(b)(1)(ii). See also Sections
III.A.2. and V, above, discussing short sale orders marked ``short
exempt.''
---------------------------------------------------------------------------

    As detailed in the PRA section, VIII, above, although the exact
nature and extent of the required policies and procedures that a
trading center would be required to establish likely would vary
depending upon the nature of the trading center (e.g., SRO vs. non-SRO,
full service broker-dealer vs. market maker), we preliminarily estimate
a total one-time initial cost of $26,393,412 \384\ for all trading
centers subject to the proposed modified uptick rule to establish the
written policies and procedures reasonably designed to help prevent the
execution or display of short sale orders not priced in accordance with
the provisions of proposed Rule 201(b)(1).
---------------------------------------------------------------------------

    \384\ This figure was calculated by adding $18,733,412 and
$7,660,000 (for outsourced legal work). The $18,733,412 figure was
calculated as follows: (70 legal hours x $305) + (105 compliance
hours x $313) + (20 information technology hours x $292) + (25
business operation hours x $273) = $66,880 per SRO x 11 SROs =
$735,680 total cost for SROs; (37 legal hours x $305) + (77
compliance hours x $313) + (23 information technology hours x $292)
+ (23 business operation hours x $273) = $48,381 per broker-dealer x
372 broker-dealers = $17,997,732 total cost for broker-dealers;
$735,680 + $17,997,732 = $18,733,412. The $7,660,000 figure for
outsourced legal work was calculated as follows: (50 legal hours x
$400 x 11 SROs) + (50 legal hours x $400 x 372 broker-dealers) =
$7,660,000.
    Based on industry sources, OEA estimates that the average hourly
rate for outsourced legal services in the securities industry is
$400. For in-house legal services, we estimate that the average
hourly rate for an attorney in the securities industry is
approximately $305 per hour. The $305/hour figure for an attorney is
from SIFMA's Management & Professional Earnings in the Securities
Industry 2008, modified by Commission staff to account for an 1800-
hour work-year and multiplied by 5.35 to account for bonuses, firm
size, employee benefits and overhead. In addition, OEA estimates
that the average hourly rate for an assistant compliance director, a
senior computer programmer, a senior operations manager, in the
securities industry is approximately $313, $292, and $273 per hour,
respectively. These figures are from SIFMA's Management &
Professional Earnings in the Securities Industry 2008, modified by
Commission staff to account for an 1800-hour work-year and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
---------------------------------------------------------------------------

    Once a trading center has established written policies and
procedures reasonably designed to help prevent the execution or display
of a short sale order at a down-bid price, we preliminarily estimate a
total annual ongoing cost of $7,119,204 \385\ for all trading centers
subject to the proposed modified uptick rule to ensure that their
written policies and procedures are up-to-date and remain in compliance
with the proposed amendments to Rule 201. In addition, with regard to
ongoing monitoring for and enforcement of trading in compliance with
the proposed modified uptick rule, as detailed in the PRA section,
VIII, above, we preliminary believe that, once the tools necessary to
carry out on-going monitoring have been put in place, a trading center
would be able to incorporate ongoing monitoring and enforcement within
the scope of its existing surveillance and enforcement policies and
procedures without a substantial additional burden. We recognize,
however, that this ongoing compliance would not be cost-free, and that
trading centers would incur some additional annual costs associated
with ongoing compliance, including compliance costs of reviewing
transactions. We preliminarily estimate that each trading center would
incur an average annual ongoing compliance cost of $102,768, for a
total annual cost of $39,360,144 for all trading centers.\386\
---------------------------------------------------------------------------

    \385\ This figure was calculated as follows: (2 legal hours x 12
months x $305) x (11 + 372) + (3 compliance hours x 12 months x
$313) x (11 + 372) = $7,119,204.
    \386\ We preliminarily estimate that each trading center would
incur an average annual ongoing compliance cost of $102,768 for a
total annual cost of $39,360,144 for all trading centers. This
figure was calculated as follows: (16 compliance hours x $313) + (8
information technology hours x $292) + (4 legal hours x $305) x 12
months = $102,768 per trading center x 383 trading centers =
$39,360,144. As discussed above, we base our burden hour estimates
on the estimates used for Regulation NMS because it requires similar
ongoing monitoring and surveillance for and enforcement of trading
in compliance with that regulation's policies and procedures
requirement.
    For in-house legal services, we estimate that the average hourly
rate for an attorney in the securities industry is approximately
$305 per hour. The $305/hour figure for an attorney is from SIFMA's
Management & Professional Earnings in the Securities Industry 2008,
modified by Commission staff to account for an 1800-hour work-year
and multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead. In addition, OEA estimates that the average
hourly rate for an assistant compliance director, a senior computer
programmer, a senior operations manager, in the securities industry
is approximately $313, $292, $273 per hour, respectively. These
figures are from SIFMA's Management & Professional Earnings in the
Securities Industry 2008, modified by Commission staff to account
for an 1800-hour work-year and multiplied by 5.35 to account for
bonuses, firm size, employee benefits and overhead.
---------------------------------------------------------------------------

    As detailed in the PRA section, VIII, above, we realize that the
exact nature and extent of the policies and procedures that a trading
center would be required to establish would likely vary depending upon
the type, size, and nature of the trading center. Thus, while we have
based our estimates on the burden estimates provided in connection with
the adoption of Regulation NMS, we note that these estimates may be on
the high end because trading centers have already had to establish
policies and procedures in connection with that Regulation's order
protection rule, which could help form the basis for the policies and
procedures for the proposed modified uptick rule. We realize, however,
that these estimates may be on the low end for some trading centers.
Thus, we seek specific comment as to whether these estimates are
appropriate or whether such estimates should be increased or reduced
and for which entities. If they should be increased or decreased,
please address by how much, in order to be able to comply with the
proposed modified uptick rule's required policies and procedures, if
adopted.
    As detailed in the PRA section, VIII, above, although the exact
nature and extent of the required policies and procedures that a
broker-dealer would be required to establish under the ``broker-
dealer'' provision in proposed Rule 201(c)(1) of the proposed modified
uptick rule, as well as under the ``riskless principal'' provision in
proposed Rule 201(d)(6) of the proposed modified uptick rule and the
``riskless principal'' exception in proposed Rule 201(c)(9) of the
proposed uptick rule, likely would vary depending upon the nature of
the broker-dealer (e.g., full service broker-dealer vs. market maker),
we preliminarily estimate a total one-time initial cost of $380,266,741
for all broker-dealers relying on the broker-dealer provision in
proposed Rule 201(c)(1) of the proposed modified uptick rule; the
``riskless principal'' provisions in proposed Rules 201(d)(6) of the
proposed modified uptick rule; or 201(c)(9) of the proposed uptick
rule, to establish the written policies and procedures reasonably
designed to prevent the incorrect identification of orders as being
priced in accordance with the broker-dealer provision or, in the case
of the ``riskless principal'' provisions, to assure that, at a minimum,
the customer order was received prior to the offsetting transaction and
to assure the broker-dealer has supervisory systems in place

to produce records that enable the broker-dealer to accurately and
readily reconstruct, in a time-sequenced manner, all orders on which a
broker-dealer relies pursuant to these provisions of the proposed price
tests.\387\
---------------------------------------------------------------------------

    \387\ This figure was calculated by adding $269,046,741 and
$111,220,000 (for outsourced legal work). The $269,046,741 figure
was calculated as follows: (37 legal hours x $305) + (77 compliance
hours x $313) + (23 information technology hours x $292) + (23
business operation hours x $273) = $48,381 per broker-dealer x 5,561
broker-dealers = $ 269,046,741 total cost for broker-dealers. The
$111,220,000 figure was calculated as follows: (50 legal hours x
$400 x 5,561) = $111,220,000.
    Based on industry sources, OEA estimates that the average hourly
rate for outsourced legal services in the securities industry is
$400. For in-house legal services, we estimate that the average
hourly rate for an attorney in the securities industry is
approximately $305 per hour.
    The $305/hour figure for an attorney is from SIFMA's Management
& Professional Earnings in the Securities Industry 2008, modified by
Commission staff to account for an 1800-hour work-year and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead. In addition, OEA estimates that the average
hourly rate for an assistant compliance director, a senior computer
programmer, a senior operations manager, in the securities industry
is approximately $313, $292, $273 per hour, respectively. These
figures are from SIFMA's Management & Professional Earnings in the
Securities Industry 2008, modified by Commission staff to account
for an 1800-hour work-year and multiplied by 5.35 to account for
bonuses, firm size, employee benefits and overhead.
---------------------------------------------------------------------------

    Once a broker-dealer has established written policies and
procedures that would be required so that it could rely on the proposed
modified uptick rule's ``broker-dealer provision'' in proposed Rule
201(c)(1); the ``riskless principal'' exception in proposed Rule
201(c)(9) of the proposed uptick rule; or the ``riskless principal''
provision in proposed Rule 201(d)(6) of the proposed uptick rule, we
estimate a total annual on-going cost of $103,367,868 for all broker-
dealers relying on any of these three provisions to ensure that its
written policies and procedures are up-to-date and remain in compliance
with the proposed amendments to Rule 201.\388\ In addition, with regard
to ongoing monitoring for and enforcement of trading in compliance with
the proposed modified uptick rule's ``broker-dealer'' provision in
proposed Rule 201(c)(1), as detailed in the PRA section, VIII, above,
we preliminary believe that, once the tools necessary to carry out on-
going monitoring would have been put in place, a broker-dealer would be
able to incorporate ongoing monitoring and enforcement within the scope
of its existing surveillance and enforcement policies and procedures
without a substantial additional burden. We recognize, however, that
this ongoing compliance would not be cost-free, and that broker-dealers
would incur some additional annual costs associated with ongoing
compliance, including compliance costs of reviewing transactions. We
estimate that each broker-dealer would incur an average annual ongoing
compliance cost of $102,768, for a total annual cost of $571,492,848
for all broker-dealers.\389\
---------------------------------------------------------------------------

    \388\ This figure was calculated as follows: (2 legal hours x 12
months x $305) x 5,561 + (3 compliance hours x 12 months x $313) x
5,561 = $103,367,868.
    \389\ We estimate that each broker-dealer would incur an average
annual ongoing compliance cost of $102,768 for a total annual cost
of $571,492,848 for all broker-dealers. This figure was calculated
as follows: (16 compliance hours x $313) + (8 information technology
hours x $292) + (4 legal hours x $305) x 12 months = $102,768 per
broker-dealer x 5,561 broker-dealers = $571,492,848. As discussed
above, we base our estimate of burden hours on the estimates used
for Regulation NMS because it requires similar ongoing monitoring
and surveillance for and enforcement of trading in compliance with
that regulation's policies and procedures requirement.
    For in-house legal services, we estimate that the average hourly
rate for an attorney in the securities industry is approximately
$305 per hour. The $305/hour figure for an attorney is from SIFMA's
Management & Professional Earnings in the Securities Industry 2008,
modified by Commission staff to account for an 1800-hour work-year
and multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead. In addition, OEA estimates that the average
hourly rate for an assistant compliance director, a senior computer
programmer, a senior operations manager, in the securities industry
is approximately $313, $292, $273 per hour, respectively. These
figures are from SIFMA's Management & Professional Earnings in the
Securities Industry 2008, modified by Commission staff to account
for an 1800-hour work-year and multiplied by 5.35 to account for
bonuses, firm size, employee benefits and overhead.
---------------------------------------------------------------------------

    As discussed above in connection with the PRA, we realize that the
exact nature and extent of the policies and procedures that a broker-
dealer would be required to establish likely would vary depending upon
the type, size, and nature of the broker-dealer. Thus, while we have
based our estimates on the burden estimates provided in connection with
the adoption of Regulation NMS, we note that these estimates may be on
the high end because broker-dealers have already had to establish
policies and procedures in connection with that Regulation's order
protection rule, which could help form the basis for the policies and
procedures for the proposed modified uptick rule's ``broker-dealer''
provision's policies and procedures requirement in proposed Rule
201(c)(1). We realize, however, that these estimates may be on the low
end for some broker-dealers that may have less familiarity with a
policies and procedures approach. Thus, we seek specific comment as to
whether these estimates are appropriate or whether such estimates
should be increased or reduced. If they should be increased or
decreased, please address by how much, in order to be able to comply
with the proposed modified uptick rule's required policies and
procedures, if adopted.
    In addition, we anticipate that each trading center would incur
initial up-front costs associated with taking action necessary to
implement the written policies and procedures it has developed, which
would include surveillance and reprogramming costs for enforcing,
monitoring, and updating their trading, execution management, and
surveillance systems under the proposed modified uptick rule, systems
changes to computer hardware and software, as well as staff time and
technology resources.\390\ However, we note that the policies and
procedures that would be required to be implemented are similar to
those that are required under Regulation NMS.\391\ In accordance with
Regulation NMS, trading centers must have in place written policies and
procedures in connection with that Regulation's order protection rule,
which could help form the basis for the policies and procedures

for the proposed modified uptick rule.\392\ Thus, we believe trading
centers may already be familiar with establishing, maintaining, and
enforcing trading-related policies and procedures, including
programming their trading systems in accordance with such policies and
procedures.
---------------------------------------------------------------------------

    \390\ For instance, to implement the proposed modified uptick
rule would require that each ATS reprogram their trading engine, as
would any broker-dealer who executes trades as an OTC market maker.
Moreover, one commenter indicated that programming costs across
sell-side firms could range from $200,000 to $2 million. See, e.g.,
2007 Price Test Adopting Release, 72 FR at 36350 n. 113 (citing
comment letter from SIFMA stating that cost estimates for firms to
program for the changes that were necessary to meet the policies and
procedures requirements of Regulation NMS varied, from as low as
approximately $200,000 for some firms to as high as $2 million for
others. See also supra note 46 (citing to 2007 SIFMA letter) and
text accompanying note 208. Additionally, because they might require
trading centers and other market participants a significant amount
of time in which to reprogram and test their systems to comply with
the proposed amendments, these systems and programming costs might
be higher without a sufficient implementation period. For example,
this same commenter indicated that it would take six to nine months
to implement a new version of the bid test. See id.
    See letter from Credit Suisse (discussing need for a longer
implementation period, particularly for smaller broker-dealers, in
terms of having to build systems to be able to track upticks or
upbids in their smart order routers in accordance with any new rules
and then preserve this history so that regulators can audit it).
According to this commenter, ``[b]uilding such systems would likely
be as expensive and challenging as Reg NMS implementation was from
2005-2007, and would likely take more than a year to implement * * *
It is also likely that the compliance costs would disproportionately
burden smaller BDs, who would likely be forced to route their order
flow through a handful of larger brokers, impeding competition and
adding to systemic risk as flow is consolidated among fewer
players''. Id.
    We also recognize that the proposed amendments, if adopted,
would require the commitment of resources associated with compliance
oversight, market surveillance, and enforcement, with attendant
opportunity costs.
    \391\ See Regulation NMS Adopting Release, 70 FR 37496. See also
17 CFR 242.611.
    \392\ See id.
---------------------------------------------------------------------------

    We believe this familiarity may reduce the implementation costs of
the proposed modified uptick rule on trading centers and may make the
proposed modified uptick rule less burdensome to implement. Moreover,
because trading centers have already developed or modified their
surveillance mechanisms in order to comply with Regulation NMS's
policies and procedures requirement, trading centers may already have
retained and trained the necessary personnel to ensure compliance with
that Regulation's policies and procedures requirements and, therefore,
may already have in place most of the infrastructure and potential
policies and procedures necessary to comply with the proposed modified
uptick rule.\393\
---------------------------------------------------------------------------

    \393\ We also believe some trading centers may have retained
personnel familiar with the former SRO bid tests, which may make the
proposed modified uptick rule less burdensome to implement. See,
e.g., supra note 125 and accompanying text.
---------------------------------------------------------------------------

    Thus, while we believe there would be costs associated with systems
modifications and training staff that would be affected by these
systems modifications, because most trading centers would already have
in place systems, written policies and procedures in order to comply
with Regulation NMS's order protection rule, we believe trading centers
would already be familiar with establishing, maintaining, and enforcing
trading-related policies and procedures, including programming their
trading and surveillance systems in accordance with such policies and
procedures.
    Moreover, the proposed modified uptick rule's written policies and
procedures requirement are designed to provide trading centers with
significant flexibility in determining how to comply with the
requirements of the proposed modified uptick rule. For example, the
proposed modified uptick rule is designed to provide trading centers
and their customers with flexibility in determining how to handle
orders that are not immediately executable or displayable by the
trading center because the order is impermissibly priced. Thus, if an
order were impermissibly priced, the trading center could, in
accordance with policies and procedures reasonably designed to prevent
the execution or display of a short sale at a down-bid price, re-price
the order at the lowest permissible price and hold it for later
execution at its new price or better.\394\ As quoted prices change, the
proposed modified uptick rule would allow a trading center to
repeatedly re-price and display an order at the lowest permissible
price down to the order's original limit order price (or, if a market
order, until the order is filled). Because a trading center could re-
price and display a previously impermissibly priced short sale order,
the proposed modified uptick rule may allow for the more efficient
functioning of the markets because trading centers would not have to
reject or cancel impermissibly priced orders unless instructed to do so
by the trading center's customer submitting the short sale order.
---------------------------------------------------------------------------

    \394\ For example, if a trading center received a short sale
order priced at $47.00 when the current national best bid in the
security is $47.00, but the immediately preceding national best bid
was $47.01 (i.e., the current bid is below the previous bid), the
trading center could re-price the order at the permissible offer
price of $47.01, and display the order for execution at this new
limit price.
---------------------------------------------------------------------------

    Moreover, while latencies in obtaining data regarding the national
best bid from consolidated market data feeds, as discussed in detail
above, could impact implementation costs associated with the proposed
modified uptick rule, a trading center could have policies and
procedures that could provide a snapshot of the market to identify the
current national best bid at the time of execution or display of a
short sale order. Such snapshots may cause a reduction in costs for
trading centers by helping to verify whether a short sale order was
executed or displayed at a permissible price.
b. Proposed Uptick Rule
    The alternative proposed uptick rule would be based on the last
sale price, rather than the national best bid, as the reference point
for short sale orders, similar to former Rule 10a-1. However, the
proposed uptick rule would not include an explicit policies and
procedures requirement. Instead, the proposed uptick rule would
prohibit any person from effecting a short sale below the last sale
price, unless an exception applies. Because the proposed uptick rule
would be a modernized version of the former Rule 10a-1, it would also
provide the public with an opportunity to comment on the utility of
such a price test, especially in light of recent changes in market
conditions.\395\
---------------------------------------------------------------------------

    \395\ See supra Section II discussing the history of short sale
price test regulation in the United States and the changes in market
conditions and resulting erosion of investor confidence.
---------------------------------------------------------------------------

    We recognize that due to the extensive systems changes that have
occurred in the last couple of years in response to Regulation NMS,
programming systems for the proposed uptick rule could be
burdensome.\396\ In particular, because the proposed uptick rule does
not take a policies and procedures approach, market participants would
not be able to rely to the same extent on the policies and procedures
they already have in place under Regulation NMS. Instead, the proposed
uptick rule would prohibit any person from effecting a short sale in
contravention of the rule's limitations. However, because the proposed
uptick rule would apply to any person effecting a short sale, rather
than just to trading centers, the proposed uptick rule might impose
costs on more market participants than the proposed modified uptick
rule. However, the proposed uptick rule, which is similar to the price
test of former Rule 10a-1, would be familiar to many market
participants because it would be based on a rule which was in existence
for almost 70 years, and was only recently eliminated. We believe this
familiarity may help to reduce the implementation costs of the proposed
uptick rule on market participants and, therefore, should decrease the
costs of implementation of the proposed uptick. For example, we believe
some market participants may have retained personnel familiar with
former Rule 10a-1,\397\ and may also have in place some of the systems
and surveillance mechanisms used in connection with former Rule 10a-1
that could be used to comply with the proposed uptick rule. We believe,
however, that most market participants would incur costs associated
with having to implement or modify their trading systems and
surveillance

mechanisms in order to comply with the proposed uptick rule, including
a period of time in which to make such changes.\398\ However, we
believe familiarity with a price test that would be based on a
modernized version of former Rule 10a-1 might more readily help address
investor confidence in our markets.
---------------------------------------------------------------------------

    \396\ See, e.g., 2007 Price Test Adopting Release, 72 FR at
36350 n. 113 (citing to comment letter from SIFMA stating that cost
estimates for firms to program for the changes that were necessary
to meet the policies and procedures requirements of Regulation NMS
varied, from as low as approximately $200,000 for some firms to as
high as $2 million for others. See SIFMA Letter. Additionally,
because they might require trading centers, SROs, and other market
participants a significant amount of time in which to reprogram and
test their systems to comply with a price test restriction, these
systems and programming costs might be higher without a sufficient
implementation period. For example, one commenter indicated that it
would take six to nine months to implement a new version of the
price test. See id. (discussing SIFMA comment letter) and see also
supra note 208.
    \397\ Likewise, we believe some market participants may have
retained personnel familiar with former SRO bid tests. See, e.g.,
supra note 125 and accompanying text.
    \398\ See, e.g., supra note 346.
---------------------------------------------------------------------------

c. Additional Mitigating Price Test Costs Features
    While we recognize that either proposed price test alternatives
would create costs for trading centers that execute or display short
sale orders in covered securities, as well as other market participants
that engage in short selling, we believe there are several additional
mitigating costs features that might help to reduce costs associated
with a proposed price test if adopted.
    First, we believe that the fact that either proposed price test
alternative, if adopted, would apply a uniform price test \399\ might
help to reduce compliance costs for market participants. For example,
by applying a uniform price test, the proposed short sale price test
restrictions would be designed so as to not result in the type of
disparate short sale regulation that existed under former Rule 10a-1,
in which different price tests were applied in different markets,
resulting in confusion, compliance difficulties, regulatory arbitrage,
and an un-level playing field among market participants.\400\ Moreover,
subsection (e) of proposed Rule 201 of the proposed modified uptick
rule and subsection (d) of proposed Rule 201 of the proposed uptick
rule, if adopted, would include a requirement that no SRO may have any
rule that is not in conformity with, or conflicts with, the proposed
short sale price test requirements.\401\ Thus, we believe a uniform
rule might reduce compliance costs, and also could reduce regulatory
arbitrage. Also, there might be a reduction in costs associated with
systems and surveillance mechanisms that would have to be programmed to
consider only a single test based on the national best bid (or on the
last sale price if the proposed uptick rule is adopted) instead of
different tests for different markets.
---------------------------------------------------------------------------

    \399\ As discussed above, unlike the former Rule 10a-1, the
proposed short sale price test restrictions, if adopted, would apply
a uniform rule to trades in the same securities that occur in
multiple, dispersed, and diverse markets. Under the proposed short
sale price test restrictions, all covered securities, wherever
traded, would be subject to the same short sale price test.
    \400\ See supra note 27 (discussing the different tests under
former Rule 10a-1).
    \401\ See proposed Rule 201(e) of the proposed modified uptick
rule, and proposed Rule 201(d) of the proposed uptick rule.
---------------------------------------------------------------------------

    Second, the proposed three month implementation period would be
designed to provide trading centers and market participants with a
sufficient amount of time in which to modify their systems and
procedures in order to comply with the requirements of a proposed short
sale price test if adopted and, thus, might help reduce some of the
costs and help to alleviate some of the potential disruptions that
might be associated with implementing either proposed price test. We
recognize, however, that a longer implementation period may be more
manageable or preferable, particularly to smaller broker-dealers that
might be disproportionately burdened by any implementation and
compliance costs associated with the proposed short sale price test
restrictions, as well as competitively disadvantaged in terms of
reduced order flow as a result.\402\ Thus, we seek comment as to what
length of implementation period would be necessary or appropriate, and
why, such that trading centers would be able to meet the proposed short
sale price test restrictions, if adopted.
---------------------------------------------------------------------------

    \402\ See supra note 390 and accompanying text (discussing
letters from SIFMA and Credit Suisse, respectively, regarding cost
estimates and the need for a longer implementation period,
particularly for smaller broker-dealers).
---------------------------------------------------------------------------

    Third, as described below, we believe the ``broker-dealer''
provision in proposed Rule 201(c)(1) of the proposed modified uptick
rule and the provisions contained in paragraph (d) of the proposed
modified uptick rule, as well as the exceptions contained in paragraph
(c) of the proposed uptick rule might also help to minimize any
potential price distortions or costs associated with the proposed short
sale price restrictions. These provisions also would be designed to
help promote the workability of the proposed price tests, while at the
same time furthering the Commission's stated goals of short sale price
test regulation.
    For example, as discussed above, proposed Rule 201(c)(1) of the
proposed modified uptick rule would provide that a broker-dealer may
mark a short sale order in a covered security ``short exempt'' and send
it to a trading center if the broker-dealer has identified the order as
not being at a down-bid price at the time of submission of the order to
the trading center. This provision would provide broker-dealers with
the option to manage their order flow, rather than having to always
rely on their trading centers to manage their order flow on their
behalf. In addition, we note that this provision would not undermine
the Commission's goals for short sale regulation because any broker-
dealer marking an order ``short exempt'' in accordance with this
provision would have to ensure that its short sale order was not on a
down-bid price at the time of submission of the order to a trading
center. We believe that this provision also might help to preserve
instant execution and liquidity by allowing relatively unrestricted
short selling in an advancing market.
    Proposed Rule 201(d)(1) of the proposed modified uptick rule would
provide an exception if the seller owns a security and would provide
that a short sale order of a covered security may be marked ``short
exempt,'' thereby allowing it to be displayed or executed at a down-bid
price, if the broker-dealer has a reasonable basis to believe that the
seller owned the security being sold and that the seller intended to
deliver the security as soon as all the restrictions on delivery have
been removed. Similarly, proposed Rule 201(c)(1) of the proposed uptick
rule would provide an exception for sales of owned securities. As a
result, these provisions would allow for sales of securities that
although owned, were subject to the provisions of Regulation SHO
governing short sales due solely to the seller being unable to deliver
the security to its broker-dealer prior to settlement due to
circumstances outside the seller's control.
    Proposed Rule 201(d)(2) of the proposed modified uptick rule would
allow a broker-dealer to mark a short sale order ``short exempt'' if
the broker-dealer has a reasonable basis to believe that the short sale
order is by a market maker to off-set a customer odd-lot order or to
liquidate an odd-lot position by a single round lot sell order that
changed such broker-dealer's position by no more than a unit of trading
and, thereby, may be permitted to be executed or displayed at a down-
bid price. Similarly, in proposed Rule 201(c)(3) of the proposed uptick
rule we would provide an exception for sales related to odd-lot orders.
These provisions would allow market makers to facilitate customer
orders that are not of a size that could facilitate a downward price
movement in the market.
    Proposed Rule 201(d)(3) of the proposed modified uptick would
permit qualifying short sale orders associated with certain bona fide
domestic arbitrage transactions to be marked ``short exempt,'' and
thereby permit them to be executed or displayed at a down-bid price.
This provision would allow broker-dealers to engage in transactions
that tend to reduce pricing disparities between securities.

Moreover, to facilitate arbitrage transactions in which a short
position was taken in a security on the U.S. market, and which was to
be immediately covered on a foreign market, Rule 201(d)(4) of the
proposed modified uptick rule would permit short sale orders associated
with certain international arbitrage transactions to be marked ``short
exempt,'' and thereby permit such orders to be executed or displayed at
a down-bid price. Similarly, proposed Rules 201(c)(4) and 201(c)(5) of
the proposed uptick rule would provide exceptions related to domestic
and international arbitrage transactions.
    In addition, proposed Rule 201(d)(5) of the proposed modified
uptick rule is intended to facilitate distributions of securities by
providing an exception for any sales of covered securities by
underwriters or members of a syndicate or group participating in the
distribution of a security in connection with an over-allotment of
securities, and any lay-off sales by such persons in connection with a
distribution of securities through a rights or standby underwriting
commitment. By permitting short sales in connection with an over-
allotment or lay-off sales at or below the national best bid to be
marked ``short exempt,'' and thereby permit them to be executed or
displayed at a down-bid price, this provision would enable an
underwriter to reduce its risk by pricing an offering at or below the
current national best bid or last sale price, as applicable. Similarly,
proposed Rule 201(c)(6) of the proposed uptick rule would provide an
exception for sales in connection with over-allotments and lay-off
sales.
    As discussed above, proposed Rule 201(d)(6) of the proposed
modified uptick rule would allow a broker-dealer to mark short sale
orders of a covered security ``short exempt,'' and thereby allow for
their execution or display at a down-bid price where a broker-dealer is
facilitating customer buy orders or sell orders where the customer is
net long and the broker-dealer is net short but is effecting the sale
as riskless principal, provided certain conditions are met. Similarly,
proposed Rule 201(c)(9) of the proposed uptick rule would provide an
exception for certain transactions on a riskless principal basis. These
provisions would provide broker-dealers with additional flexibility to
facilitate customer orders.
    Proposed Rule 201(d)(7) of the proposed modified uptick rule would
permit certain short sale orders executed on a VWAP basis to be marked
``short exempt,'' and, as a result, to be executed or displayed at a
down-bid price.\403\ Similarly, proposed Rule 201(c)(7) of the proposed
uptick rule would provide an exception for certain transactions on a
VWAP basis. These provisions might help provide an additional source of
liquidity for investors' VWAP orders and might help enable investors to
achieve their objective of obtaining an execution at the VWAP.
---------------------------------------------------------------------------

    \403\ See supra note 181 (citing to VWAP relief letters under
former Rule 10a-1).
---------------------------------------------------------------------------

    In addition, the proposed uptick rule would include cost-mitigating
provisions that would be unique to the proposed uptick rule, designed
to allow its proper functioning in today's markets, while at the same
time being designed to further the purposes of our proposing short sale
price test restrictions at this time. For example, proposed Rule
201(c)(2) of the proposed uptick rule would provide an exception for
errors in marking a short sale order, such as when a broker-dealer
effected a sale marked ``long'' by another broker-dealer, but the sale
was mis-marked such that it should have been marked as a ``short''
sale.\404\ This exception might help promote liquidity by avoiding
implicating the broker-dealer effecting the sale where the broker-
dealer's participation in the violation was neither knowing nor
reckless.\405\
---------------------------------------------------------------------------

    \404\ See proposed Rule 201(d)(2).
    \405\ Id.
---------------------------------------------------------------------------

    Proposed Rule 201(c)(8) of the proposed uptick rule would provide
an exception from the proposed uptick rule for any sale of a covered
security in an electronic trading system that matches buying and
selling interest at various times throughout the day as long as such
sales meet certain criteria. This exception might help promote market
efficiency and liquidity by accommodating the increased use of
automated trading systems and alternative strategies used in today's
marketplace. It might also help provide an additional source of
liquidity for investors' passively priced orders and better enable
investors to engage in alternative trading strategies to achieve their
investment objectives.
    Proposed Rule 201(c)(10) and (c)(11) of the proposed uptick rule
might also help promote market efficiency and liquidity by providing
exceptions to the requirements of the proposed uptick rule to help
address conflicts between the proposed uptick rule and the Quote Rule
under Rule 602 of Regulation NMS.\406\
---------------------------------------------------------------------------

    \406\ See 17 CFR 242.602.
---------------------------------------------------------------------------

    Proposed Rule 201(c)(12) of the proposed uptick rule would provide
an exception from the proposed uptick rule for any sale of a security
at the offer by a registered market maker or specialist publishing two-
sided quotes to sell short to facilitate customer market and marketable
limit orders to buy regardless of the last sale price. This exception
is intended to help provide relief in a decimals environment to
registered market makers and specialists so that they could provide
liquidity in response to customer buy orders.
2. Proposed Circuit Breaker Halt Rule
    We recognize that the proposed circuit breaker halt rule, if
adopted, would impose costs on market participants to implement and
assure compliance with the proposed circuit breaker halt rule's
requirements. These costs could, in sum, increase the costs of
legitimate short selling. For example, the proposed circuit breaker
halt rule, when triggered, would impose a short selling halt that might
restrict otherwise legitimate short selling activity during periods of
extreme volatility. As such, we recognize that the proposed circuit
breaker halt rule might result in a reduction of the benefits of
legitimate short selling and, thereby, could result in a subsequent
reduction in short selling generally. Such a reduction might lead to a
decrease in market efficiency and price discovery, less protection
against upward stock price manipulations, a less efficient allocation
of capital, an increase in trading costs, and a decrease in
liquidity.\407\ Thus, we believe there might be potential costs
associated with the proposed circuit breaker halt rule in terms of
potential impact of such a halt on quote depths, spread widths, and
market liquidity.
---------------------------------------------------------------------------

    \407\ See Section IX.B. (discussing costs of the proposed
modified uptick rule and proposed uptick rule).
---------------------------------------------------------------------------

    In addition, we recognize that imposing a circuit breaker halt rule
when, currently, there is an absence of a short selling halt may result
in costs in terms of modifications to systems and surveillance
mechanisms, as well as changes to processes and procedures. We
anticipate that these changes would likely result in immediate
implementation costs for market participants associated with
reprogramming trading and surveillance systems to now account for the
requirements of the proposed circuit breaker halt, if adopted. We also
believe the proposed circuit breaker halt rule may impose costs to
market participants related to systems changes to computer hardware and
software, reprogramming costs, and surveillance and compliance costs,
as well as staff time and technology resources, associated with

monitoring compliance with the proposed circuit breaker halt rule.\408\
---------------------------------------------------------------------------

    \408\ See id.
---------------------------------------------------------------------------

    Moreover, imposing a circuit breaker halt rule when there are
currently no short sale halts in place also could mean that staff
(compliance personnel, associated persons, etc.) might need to be
trained or re-trained regarding rules related to the circuit breaker
requirements. Also, market participants could be required to hire
additional staff (and train or re-train them) to comply with the
proposed circuit breaker halt rule. As such, we believe the proposed
circuit breaker halt rule, if adopted, might impose training and
compliance costs for market participants.
    While we recognize that market participants would incur initial up-
front costs associated with having to update their systems, including
systems changes to computer hardware and software, as well as staff
time and technology resources to update their systems and surveillance
mechanisms in order to ensure compliance with the requirements of the
proposed circuit breaker halt rule,\409\ we believe that many of the
systems changes that would be required to be implemented are similar to
what was already required for implementation under Regulation NMS.\410\
Thus, we believe market participants may already have developed or
programmed their trading and surveillance systems in accordance with
the requirements of Regulation NMS which may help to reduce any
implementation costs associated with the proposed circuit breaker halt
rule and, therefore, may make the proposed circuit breaker halt rule
less burdensome to implement.
---------------------------------------------------------------------------

    \409\ See, e.g., 2007 Price Test Adopting Release, 72 FR at
36350 n. 113 (citing comment letter from SIFMA stating that cost
estimates for firms to program for the changes that were necessary
to meet the requirements of Regulation NMS varied, from as low as
approximately $200,000 for some firms to as high as $2 million for
others. See also letter from Credit Suisse.
    \410\ See Regulation NMS Adopting Release, 70 FR 37496. See also
17 CFR 242.611.
---------------------------------------------------------------------------

    Thus, while we believe there would be costs associated with systems
modifications and training staff that would be affected by these
systems modifications, because most market participants would already
have in place systems in order to comply with Regulation NMS, market
participants may already have in place most of the infrastructure and
processes necessary to comply with the proposed circuit breaker halt
rule. Moreover, because the proposed circuit breaker halt rule might
require less substantial modifications to existing systems, the
implementation and compliance costs may not be significant.\411\ As
discussed above, currently, all stock exchanges and FINRA have rules or
policies to implement coordinated circuit breaker halts.\412\ Moreover,
SROs have rules or policies in place to coordinate individual security
trading halts corresponding to significant news events.\413\
Information on the securities subject to SRO regulatory trading halts
is disseminated to market participants through the CMS and other
electronic media.\414\ We, however, seek comment as to whether the time
and implementation costs associated with the proposed circuit breaker
halt rule may be lower than other alternatives proposed.
---------------------------------------------------------------------------

    \411\ See letter from Credit Suisse (stating that
``[i]mplementation could be fast and costs would be modest'' and
that ``listing exchanges already disseminate real-time status
conditions as part of existing price feeds. By generalizing the
existing ``Regulatory Halt'' flag to include a ``Do Not Short''
condition, both away trading venues and broker-dealers could react
to the circuit breaker condition in real-time with very little
coding and testing'').
    \412\ See Securities Exchange Act Release No. 39846 (Apr. 9,
1998), 63 FR 18477 (Apr. 15, 1998) (order approving proposals by
Amex, BSE, CHX, NASD, NYSE, and Phlx) (``1998 Release''). See also
NYSE Rule 80B. The circuit breaker procedures call for cross-market
trading halts when the DJIA declines by 10 percent, 20 percent, and
30 percent from the previous day's closing value. See e.g., BATS
Exchange Rule 11.18.
    \413\ See, e.g., FINRA Rule 6120.
    \414\ For example, in addition to disseminating news of trading
halts through the CMS, Nasdaq publishes a daily list of securities
subject to trading halts indicating the name of the issuer, the time
the halt was initiated, and where applicable, the times at which
quoting and trading may resume.
---------------------------------------------------------------------------

    We, however, recognize that there may be concerns about a potential
``magnet effect'' that could arise as an unintended consequence of the
proposed circuit breaker halt rule that could halt short selling and
result in short sellers driving down the price of an equity security in
a rush to execute short sales before the circuit breaker would be
triggered. As discussed above, one commenter noted that a short sale
circuit breaker could exacerbate downward pressure on stocks as their
value reached the threshold level.\415\ Another commenter, however, in
discussing the issue of a ``magnet effect'' cited empirical studies
that question whether a circuit breaker would result in artificial
pressure on the price of individual securities.\416\
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    \415\ See letter to Mary Schapiro, Chairman, from Direct Edge,
dated March 30, 2009.
    \416\ See letter from Credit Suisse (discussing potential costs
associated with short sale price test restrictions and circuit
breaker rules).
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    In addition, we note that the proposed circuit breaker halt rule
would include exceptions substantially identical to exceptions in the
Short Sale Ban that would be designed to allow its proper functioning
in today's markets and allow broker-dealer to provide liquidity to the
market, while at the same time being designed to further the purposes
of our proposing the alternative circuit breaker halt rule at this
time.\417\
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    \417\ See Section III, above (discussing exceptions to proposed
circuit breaker halt rule). See also Securities Exchange Act Release
No. 58592 (Sept. 18, 2008), 73 FR 55169-02 (Sept. 24, 2008)
(regarding exceptions to the Short Sale Ban).
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    We believe the proposed circuit breaker halt rule should include
exceptions that mirror certain of the exceptions in the Short Sale Ban
because the proposed rule shares the same goal of prohibiting short
selling that might exacerbate a price decline during a period of sudden
and excessive price declines. For example, the proposed circuit breaker
halt would include a bona fide market maker exception, which would
allow market makers to effect a short sale as part of bona fide market
making and hedging activity related directly to bona fide market making
in derivatives on the publicly traded securities of a covered security.
This proposed exception would permit market makers to continue to
provide liquidity to the markets, facilitate orders, and otherwise
comply with their obligations as market makers. This proposed exception
would also apply to options market makers that sell short equity
securities to hedge options positions.
    The proposed exception for short sales that occur as a result of
automatic exercise or assignment of an equity option held before a
circuit breaker on a particular security is triggered and a short
selling halt is imposed in that security due to expiration of the
option would allow short sales that occur as a result of the expiration
of options contracts held before a circuit breaker is triggered in a
particular security. This would allow persons that purchased or sold
options prior to the effectiveness of a circuit breaker halt entered
into such transactions with the expectation that they would be able to
fulfill their contractual obligations and receive the benefits of their
bargain in return. Providing this proposed exception to the circuit
breaker halt rule would not raise the concerns that a circuit breaker
rule is intended to address.
    To allow for creation of long call options, the proposed exception
would permit short sales that occur as a result of assignment to call
writers upon exercise. When options are exercised, call writers may be
required to sell short in order to satisfy their obligations. Because
call writers do not have discretion, and because the short sales are
effected in order to fill buying

demand, we believe that including this exception in the proposed
circuit breaker halt rule would benefit the markets while not opening
the door to the abuses that the proposed rule is intended to address.
    The proposed exception for securities that a seller is deemed to
own under Rule 200(b) (because Rule 144 securities are owned securities
and do not raise the concerns that a short sale circuit breaker halt
would be designed to address) would, during a halt triggered by a
circuit breaker, allow sellers to sell securities that although owned,
are subject to the provisions of Regulation SHO governing short sales
due solely to the seller being unable to deliver the security to its
broker-dealer prior to settlement based on circumstances outside the
seller's control.
    We seek comment regarding any benefits or costs associated with the
above described exceptions to the proposed circuit breaker halt rule.
3. Proposed Circuit Breaker Price Test Rules
    We also recognize that the proposed circuit breaker price test
restrictions would result in costs on market participants responsible
for implementing and assuring compliance with such requirements. We
anticipate that there might be significant operational costs associated
with reprogramming systems to comply with the proposed circuit breaker
price test rules. We also anticipate that these costs might be greater
than those required to comply with the proposed circuit breaker halt
rule described above, which would, when triggered, impose a halt on
short selling in individual NMS stocks rather than impose specific
price test restrictions.\418\ In addition, we believe there might also
be costs incurred for additional staff and costs associated with
personnel hiring and training related to maintaining and ensuring
compliance with the proposed circuit breaker price test rules.\419\
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    \418\ See also Sections IX.B.1. (discussing costs of the
proposed modified uptick rule and proposed uptick rule).
    \419\ See, e.g., letter from Credit Suisse (discussing potential
costs associated with short sale price restrictions and circuit
breaker rules). See also Section IX.B. (discussing costs associated
with proposed modified uptick rule and proposed uptick rule).
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    Further, we recognize that short sale price test restrictions that
would be imposed as a result of the proposed circuit breaker price test
rules being triggered might result in many of the same costs discussed
in detail in Section IX.B.1 pertaining to the implementation of market-
wide short sale price test restrictions.\420\ Those costs might include
a reduction of the benefit of legitimate short selling and a subsequent
reduction in the quantity of short selling, which we recognize might
lead to a decrease in market efficiency and price discovery, less
protection against upward stock price manipulations, a less efficient
allocation of capital, an increase in trading costs, and a decrease in
liquidity.\421\
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    \420\ See Section IX.B.1. (discussing costs and benefits of the
proposed modified uptick rule and the proposed uptick rule). See
also Section IX.B.1.a. (discussing burden hour estimates, for
purposes of the PRA, in connection with the proposed policies and
procedure requirements under the modified uptick rule, the riskless
principal exception to the proposed uptick rule, and the proposed
marking requirements).
    \421\ See Section IX.B.1. (discussing costs of the proposed
modified uptick rule and proposed uptick rule).
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    Although under the proposed circuit breaker price test rules, a
price test would not be in place full-time or for all securities, if
the proposed circuit breaker modified uptick rule is adopted, trading
centers would need to establish reasonable policies and procedures in
advance to ensure compliance whenever a circuit breaker, and thus the
proposed circuit breaker modified uptick rule, is triggered. We note
that it would not be reasonable for a trading center to wait until the
circuit breaker is triggered to begin establishing reasonable policies
and procedures to prevent the execution or display of the particular
NMS stock on a down-bid. Thus, we recognize that both of the proposed
circuit breaker price tests would result in immediate upfront costs to
trading centers.\422\
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    \422\ See id.
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    However, while we recognize that either proposed circuit breaker
price test would create costs for trading centers that execute or
display short sale orders in covered securities, as well as other
market participants that engage in short selling, we note that the
proposed circuit breaker price tests would include the same cost-
mitigating provisions discussed in Section IX(B)(1)(c) pertaining to
the market-wide short sale price test restrictions that might help to
reduce costs associated with the proposed circuit breaker price tests,
while at the same time being designed to further the purposes of our
proposing the alternative circuit breaker price test restrictions at
this time.\423\ For example, we believe that the fact that either
proposed circuit breaker price test, if adopted, would apply a uniform
price test \424\ might help to reduce compliance costs for market
participants associated with systems and surveillance mechanisms that
would have to be programmed to consider only a single circuit breaker
price test instead of different tests for different markets.
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    \423\ See id.
    \424\ As discussed above, unlike the former Rule 10a-1, the
proposed short sale price test restrictions, if adopted, would apply
a uniform rule to trades in the same securities that occur in
multiple, dispersed, and diverse markets. Under the proposed short
sale price test restrictions, all covered securities, wherever
traded, would be subject to the same short sale price test.
---------------------------------------------------------------------------

    Second, the proposed three month implementation period would be
designed to provide trading centers and market participants with a
sufficient amount of time in which to modify their systems and
procedures in order to comply with the requirements of either proposed
circuit breaker price test, if adopted, and, thus, might help reduce
some of the costs and help to alleviate some of the potential
disruptions that might be associated with implementing either proposed
circuit breaker price test. We recognize, however, that a longer
implementation period may be more manageable or preferable,
particularly to smaller broker-dealers that might be disproportionately
burdened by any implementation and compliance costs associated with the
proposed circuit breaker price test restrictions, as well as
competitively disadvantaged in terms of reduced order flow as a
result.\425\ Thus, we seek comment as to what length of implementation
period would be necessary or appropriate, and why, such that trading
centers would be able to meet the proposed circuit breaker price test
restrictions, if adopted.
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    \425\ See letter from Credit Suisse supra note 122 (discussing
need for a much longer implementation period, particularly for
smaller broker-dealers). According to this commenter, compliance
costs associated with a bid or tick test would disproportionately
burden smaller broker-dealers, who would likely be forced to route
their flow through a handful of larger broker-dealers, impeding
competition and adding to systemic risk as flow is consolidated
among fewer players).
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    Third, as described below, we believe the ``broker-dealer''
provision in proposed Rule 201(c)(1) of the proposed circuit breaker
modified uptick rule and the provisions contained in paragraph (d) of
the proposed circuit breaker modified uptick rule, as well as the
exceptions contained in paragraph (c) of the proposed circuit breaker
uptick rule might also help to minimize any potential price distortions
or costs associated with the proposed circuit breaker price
restrictions. These provisions also would be designed to help promote
the workability of the proposed circuit breaker price tests, while at
the same time furthering the

Commission's stated goals of short sale price test regulation.\426\
---------------------------------------------------------------------------

    \426\ See Section IX.B.1.c. (discussing cost-mitigating features
of proposed modified uptick rule and proposed uptick rule in
detail).
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4. Proposed Marking Requirements
    We do not anticipate that the ``short exempt'' marking requirements
would impose significant costs on broker-dealers. For example, such
broker-dealers might incur a one-time cost associated with
implementation and reprogramming. In connection with the order marking
requirements of Rule 200(g) of Regulation SHO, which had originally
included the category of ``short exempt,'' industry sources at that
time estimated initial implementation costs for the former ``short
exempt'' marking requirement to be approximately $100,000 to
$125,000.\427\
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    \427\ See 2004 Regulation SHO Adopting Release, 69 FR at 48023.
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    In addition, we do not believe the proposed order marking
requirements would impose significant ongoing monitoring and
surveillance costs for broker-dealers. Broker-dealers already have
established systems, processes, and procedures in place to comply with
the current marking requirements of Rule 200(g) of Regulation SHO with
respect to marking a sell order either ``long'' or ``short'' and, thus,
would likely continue to use such systems, processes and procedures to
comply with the proposed ``short exempt'' marking requirements in
proposed Rules 200(g) and 200(g)(2).
    We recognize that there would be an ongoing paperwork burden cost
associated with adding the ``short exempt'' marking requirements. For
example, as discussed in detail in Section VIII, above, for purposes of
the PRA, we estimate that it would take each broker-dealer no more than
approximately .000139 hours (.5 seconds) to mark a sell order ``short
exempt.'' In addition, we estimate that the total annual hour burden
per year for each broker-dealer subject to the proposed ``short
exempt'' marking requirements would be 322 hours.
    If we were to adopt the proposed ``short exempt'' marking
requirements of proposed Rules 200(g) of the proposed modified uptick
rule (or the proposed circuit breaker modified uptick rule) or the
proposed uptick rule (or the proposed circuit breaker uptick rule), or
the proposed circuit breaker halt rule, we are proposing an
implementation period under which market participants would have to
comply with these requirements three months following the effective
date of the proposed marking requirements. We believe that this
proposed implementation period would provide market participants with
sufficient time in which to modify their systems and procedures in
order to comply with the proposed ``short exempt'' marking
requirements. We realize, however, that a shorter or longer
implementation period may be manageable or preferable. Thus, we seek
specific comment as to what length of implementation period would be
necessary or appropriate, and why, such that market participants would
be able to meet the proposed marking requirements, if adopted.

C. Request for Comment

    We are sensitive to the costs and benefits of the proposed
amendments, and encourage commenters to discuss any additional costs or
benefits beyond those discussed herein, as well as any reduction in
costs. Commenters should provide analysis and data to support their
views of the costs and benefits associated with the proposed
amendments.
Questions Regarding Proposed Short Sale Price Test Restrictions
    1. The Commission believes that the erosion of investor confidence
and questions concerning the volatility in the securities markets
necessitate review of various alternatives with respect to short
selling restrictions. Would the proposed market-wide short sale price
test restrictions be more appropriate than the proposed circuit breaker
rules in current market conditions? If so, why? If not, why not? Would
the proposed market-wide short sale price test restrictions provide
more potential benefit to the market than the proposed circuit breaker
rules? Please explain. For example, would the proposed market-wide
short sale price test restrictions be a more appropriate means for the
Commission to achieve the objective helping to prevent short selling
from being used as a tool to drive down the market? Please explain.
Would the proposed market-wide short sale price test restrictions help
to address the Commission's concerns regarding investor confidence? If
so, why and how? If not, why not?
    2. What would be the costs and benefits of the proposed modified
uptick rule versus the proposed uptick rule? Is a policies and
procedures approach preferable to a prohibition on executing a short
sale on a down-bid price? Why or why not? What would be the costs and
benefits of a policies and procedures approach as compared to such a
prohibition? Should we consider other forms of short sale price tests?
What would be the costs and benefits of any alternative forms of short
sale price tests?
    3. What would be the costs and benefits of short sales being
subject to the proposed modified uptick rule? What would be the costs
and benefits of short sales being subject to the proposed uptick rule?
What would be the costs and benefits of having a uniform short sale
price test in the covered securities across all markets? Please
explain.
    4. What, if any, additional benefits, beyond those discussed
herein, would result from the proposed modified uptick rule? What, if
any, additional benefits, beyond those discussed herein, would result