\364\ We note that although the definition of a ``listing
market'' in the CTA Plan and Nasdaq UTP Plan is similar, the Plans
differ with respect to how they treat dually listed securities. The
CTA Plan states that ``the `listing market' for any Eligible
Security shall be that exchange Participant on which the Eligible
Security is listed. If an Eligible Security is dually listed,
`listing market' shall be that exchange Participant on which the
Eligible Security was originally listed.'' The Nasdaq UTP Plan
states that `` `Listing Market' for an Eligible Security means the
Participant's Market on which the Eligible Security is listed. If an
Eligible Security is dually listed, Listing Market shall mean the
Participant's Market on which the Eligible Security is listed that
also has the highest number of the average of the reported
transactions and reported share volume for the preceding 12-month
period. The Listing Market for dually-listed Eligible Securities
shall be determined at the beginning of each calendar quarter.''
Although there are differences between how each of the Plans
determines the listing market for dually listed securities, we do
not believe this difference will impact the rule operationally
because participants are already familiar with determining the
applicable listing market for a covered security.
    \365\ See, e.g., Nasdaq Rule 4120 (relating to trading halts in
Nasdaq-listed securities); NYSE Rule 123D (relating to delayed
openings and trading halts in NYSE-listed securities).
---------------------------------------------------------------------------

    In addition, requiring the listing market for a covered security to
determine whether the security has become subject to the short sale
price test restrictions of Rule 201 will help ensure consistency for
each covered security with respect to such determinations as only the
listing market for that covered security will be making the
determination. In addition, we believe that listing markets will be in
the best position to respond to anomalous or unforeseeable events that
may impact a covered security's price, such as an erroneous trade,
because the listing markets generally have in place specific procedures
designed to address such events.
    As discussed above, in response to our request for comment,\366\
some commenters provided comments regarding how information that a
covered security has become subject to the short sale price test
restrictions of Rule 201 should be disseminated to the markets.\367\ In
order that all market participants receive information regarding when a
security has become subject to Rule 201 on a fair, impartial and timely
basis, after considering the comments we have determined to provide in
Rule 201(b)(3) that once the listing market has determined that a
security has become subject to the requirements of Rule 201, the
listing market shall immediately notify the single plan processor
responsible for consolidation of information for the covered security
in accordance with Rule 603(b) of Regulation NMS \368\ of the fact that
a covered security has become subject to the short sale price test
restriction of Rule 201. The plan processor must then disseminate this
information.\369\
---------------------------------------------------------------------------

    \366\ See supra note 353 and accompanying text.
    \367\ See, e.g., letter from Direct Edge (June 2009); letter
from FIF (June 2009); letter from Liquidnet; letter from RBC (June
2009); letter from SIFMA (June 2009); letter from FIF (Sept. 2009);
letter from NYSE Euronext (Sept. 2009); letter from Virtu Financial.
    \368\ Rule 603(b) of Regulation NMS provides that ``Every
national securities exchange on which an NMS stock is traded and
national securities association shall act jointly pursuant to one or
more effective national market system plans to disseminate
consolidated information, including a national best bid and national
best offer, on quotations for and transactions in NMS stocks. Such
plan or plans shall provide for the dissemination of all
consolidated information for an individual NMS stock through a
single plan processor.'' 17 CFR 242.603(b).
    \369\ See Rule 201(b)(3); 17 CFR 242.603(b).
---------------------------------------------------------------------------

    As discussed above, the CTA Plan disseminates transaction
information for securities primarily listed on an exchange other than
Nasdaq and the Nasdaq UTP Plan disseminates consolidated transaction
and quotation information for securities primarily listed on Nasdaq. In
accordance with Rule 603(b) of Regulation NMS, these plans, together
with the CQ Plan, provide for the dissemination of all consolidated
information for individual

NMS stocks through a single plan processor. The single plan processors
currently receive information from listing markets regarding trading
restrictions (i.e., Regulatory Halts as defined in those plans) on
individual securities and disseminate such information. Thus, the
requirements of Rule 201(b)(3) are similar to existing obligations on
plan processors pursuant to the requirements of Regulation NMS, the CTA
and CQ Plans and the Nasdaq UTP Plan.
    We recognize that the requirements of Rule 201(b)(3) may require
changes to systems currently supported by the single plan
processors.\370\ Thus, in considering the appropriate implementation
period for Rule 201, we have factored into our considerations time to
allow the single plan processors to determine any changes to their
systems requirements and to make any necessary changes.
---------------------------------------------------------------------------

    \370\ See letter from FIF (June 2009).
---------------------------------------------------------------------------

7. Policies and Procedures Approach
    In the Proposal, we stated that the proposed price test
restrictions could be applied in combination with a policies and
procedures approach, a prohibition approach, or a combination
thereof.\371\ We have determined to adopt a policies and procedures
approach in Rule 201(b). Rule 201(b) will require trading centers 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 price that is less than or equal to
the current national best bid if the price of the security decreases by
10% or more from the covered security's closing price as determined by
the listing market for the covered security as of the end of regular
trading hours on the prior day.\372\ In addition, such policies and
procedures must be reasonably designed to impose the short sale price
test restriction in Rule 201(b)(1) for the remainder of the day on
which it is triggered and on the following day when a national best bid
for the covered security is calculated and disseminated on a current
and continuing basis by a plan processor pursuant to an effective
national market system plan.\373\
---------------------------------------------------------------------------

    \371\ See Proposal, 74 FR at 18049.
    \372\ See Rule 201(b)(1)(i).
    \373\ See Rule 201(b)(1)(ii).
---------------------------------------------------------------------------

    Several commenters stated that any short sale price test
restriction should be implemented through a policies and procedures
approach.\374\ One such commenter stated that a policies and procedures
approach ``would help promote compliance by all affected parties,
distribute compliance and monitoring responsibility, allow flexibility
to address inadvertent violations (thus likely resulting in fewer
cancellations and trade breaks), and conserve the enforcement resources
of agencies and other self-regulatory organizations.'' \375\ Another
commenter noted the ``smooth implementation'' and ``successful
operation'' of Regulation NMS, which also uses a policies and
procedures approach, and stated that a policies and procedures approach
for Rule 201 will ``allow for a smoother transition into full
implementation as well as a more flexible rule where triggers based on
circuit breakers are being contemplated.'' \376\
---------------------------------------------------------------------------

    \374\ See, e.g., letter from SIFMA (June, 2009); letter from
Goldman Sachs (June 2009); letter from NYSE Euronext (June 2009);
letter from T. Rowe Price (June 2009); letter from RBC (June 2009);
letter from Schwab; letter from BATS (Sept. 2009); letter from SIFMA
(Sept. 2009); letter from Credit Suisse (Sept. 2009); letter from
Virtu Financial; letter from Goldman Sachs (Sept. 2009); letter from
NYSE Euronext (Sept. 2009); letter from Qtrade; letter from Citadel
et al. (Sept. 2009); letter from MFA (Oct. 2009).
    \375\ Letter from Citadel et al. (Sept. 2009); see also letter
from AIMA.
    \376\ Letter from Virtu Financial; see also letter from MFA
(Oct. 2009) (stating that it believes that ``implementation concerns
would be minimized if executing market centers (or any broker using
an intermarket sweep order) surveil for compliance as they could
leverage existing architecture developed to comply with the order
protection rule in Reg. NMS (Rule 611)'').
---------------------------------------------------------------------------

    Some commenters stated that any short sale price test restriction
should be implemented with a policies and procedures approach as well
as a straight prohibition approach.\377\ In supporting this combination
approach, one such commenter noted that a policies and procedures
approach would be consistent with Regulation NMS, permit trading
centers the flexibility to tailor such policies and procedures to their
particular markets, and permit broker-dealers to manage their order
flow. At the same time, this commenter stated that a prohibition
approach would be familiar to market participants and will give the
Commission direct enforcement authority over violations.\378\
---------------------------------------------------------------------------

    \377\ See, e.g., letter from GE; letter from Wachtell; letter
from Amer. Bankers Assoc.
    \378\ See letter from GE; see also letter from Wachtell.
---------------------------------------------------------------------------

    In contrast, some commenters stated that a short sale price test
restriction, if adopted, should be implemented with a straight
prohibition approach only. For example, one commenter stated that a
straight prohibition approach is preferable because ``[v]ariations in
policies and procedures would lead some to believe certain market
participants are less vigilant than others.'' \379\ Another said a
straight prohibition approach would be easier for market participants
to implement and understand.\380\ In addition, several commenters
expressed support for a rule that would ``prohibit'' short selling on a
down-bid (or down-tick) \381\ or expressed that they did not support a
policies and procedures approach.\382\
---------------------------------------------------------------------------

    \379\ Letter from Wells Fargo (Sept. 2009).
    \380\ See, e.g., letter from Amer. Bankers Assoc. We note that
this commenter also expressed support for a policies and procedures
requirement for trading centers.
    \381\ See, e.g., letter from Sigmon Wealth Management (June
2009); letter from James V. Kelly, President, Kelly Capital
Management, LLC, dated June 2, 2009 (``Kelly Capital''); letter from
Larry Chlebina, President, Ryan Stine, VP Portfolio Strategist,
Chlebina Capital Management, LLC, dated May 29, 2009.
    \382\ See, e.g., letter from Theresa Kinley, dated May 14, 2009;
see also letter from James Rothenberg.
---------------------------------------------------------------------------

    We recognize some commenters' preference that a short sale price
test restriction be adopted with a straight prohibition approach or in
combination with a straight prohibition approach because it is the
approach taken under former Rule 10a-1 and, therefore, is familiar to
market participants. Further, some commenters noted there can be
variations in policies and procedures. As discussed in more detail
below, however, we have determined to adopt in Rule 201(b)(1) a
policies and procedures approach rather than a straight prohibition
approach (or a combination thereof) because this alternative is similar
to the policies and procedures approach under Regulation NMS and,
therefore, market participants are familiar with a policies and
procedures approach and can build on such policies and procedures in
implementing Rule 201. In addition, a policies and procedures approach
provides flexibility to trading centers and their customers in managing
order flow because it allows trading centers, together with their
customers, to determine how to handle orders that are not immediately
executable or displayable by the trading center because the order is
impermissibly priced. This flexibility potentially allows for the more
efficient functioning of the securities markets than a rule that
applies a straight prohibition approach.
    In addition, we note that the Commission and SROs will carefully
monitor whether trading centers' policies and procedures are reasonably
designed to prevent short selling in violation of Rule 201. To the
extent that a trading center's policies and procedures permit any
execution or display of a short sale order not in accordance with the
requirements of the

Rule, such trading center's policies and procedures may not be
reasonable and could subject the trading center to enforcement action.
Further, any conduct by trading centers, or other market participants,
that facilitates short sales in violation of Rule 201 could also lead
to liability for aiding and abetting or causing a violation of
Regulation SHO, as well as potential liability under the anti-fraud and
anti-manipulation provisions of the Federal securities laws, including
sections 9(a), 10(b), and 15(c) of the Exchange Act, and Rule 10b-5
thereunder.
    Under Rule 201(b)(1), a trading center will be required to have
written policies and procedures reasonably designed to prevent the
execution or display of short sale orders at a price that is less than
or equal to the current national best bid when the price of a covered
security decreases by 10% or more from the covered security's closing
price as determined by the listing market for the covered security as
of the end of regular trading hours on the prior day. In addition, such
policies and procedures must be reasonably designed to impose the short
sale price test restriction of Rule 201(b)(1)(i) for the remainder of
the day and the following day. Thus, a trading center's policies and
procedures must require that a trading center be able to determine when
a covered security is subject to the short sale price test restriction
of Rule 201. As discussed above, due to the importance of ensuring that
the triggering of the requirements of Rule 201 is communicated to all
market participants on a fair, impartial and timely basis, we believe
it is appropriate for the listing market for the covered security to
determine whether that security is subject to the requirements of Rule
201 and, if it is, for such information to be disseminated to the
market by the single plan processor. Thus, a trading center's policies
and procedures must be reasonably designed so that the trading center
is able to obtain such information from the single plan processor if
the covered security becomes subject to the Rule's requirements.
    Upon receipt of a short sale order for a covered security that is
subject to the Rule's requirements, a trading center's policies and
procedures must ensure that the trading center is able to determine
whether or not the short sale order can be executed or displayed in
accordance with the provisions of Rule 201(b)(1). If the order is
marketable at a permissible price, the trading center may present the
order for immediate execution or, if not immediately marketable, hold
it for execution later at its specified price.
    Rule 201(b)(1) permits a trading center to display an order
provided it is permissibly priced at the time the trading center
displays the order. If an order is impermissibly priced, the trading
center could, in accordance with policies and procedures reasonably
designed to prevent the execution or display of a short sale order at a
price that is less than or equal to the current national best bid, re-
price the order upwards to the lowest permissible price and hold it for
later execution at its new price or better.\383\ As quoted prices
change, in accordance with Rule 201(b)(1), a trading center may
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).
---------------------------------------------------------------------------

    \383\ For example, if a trading center receives a short sale
order priced at $47.00 when the current national best bid in the
security is $47.00, 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.
---------------------------------------------------------------------------

    In addition, paragraph (b)(1)(iii)(A) of Rule 201 requires a
trading center's policies and procedures to be reasonably designed to
permit a trading center to execute a displayed short sale order at a
price that is less than or equal to the current national best bid
provided that, at the time the order was initially displayed by the
trading center it was permissibly priced, i.e., not at a price that was
less than or equal to the then-current national best bid.\384\ As
discussed in the Proposal, this exception for properly displayed short
sale orders will help avoid a conflict between Rule 201 and the ``Quote
Rule'' under Rule 602 of Regulation NMS.\385\ The Quote Rule requires
that, subject to certain exceptions, the broker-dealer responsible for
communicating a quotation shall be obligated to execute any order to
buy or sell presented to him, other than an odd lot order, at a price
at least as favorable to such buyer or seller as the responsible
broker-dealer's published bid or published offer in any amount up to
his published quotation size.\386\ Thus, pursuant to this exception, a
trading center will be able to comply with the ``firm quote''
requirement of Rule 602 of Regulation NMS by executing a presented
order to buy against its displayed offer to sell as long as the
displayed offer to sell was permissibly priced under Rule 201 at the
time it was first displayed, even if the execution of the transaction
will be at a price that is less than or equal to the current national
best bid at the time of execution.\387\
---------------------------------------------------------------------------

    \384\ See Rule 201(b)(1)(iii)(A).
    \385\ See Proposal, 74 FR at 18051.
    \386\ See 17 CFR 242.602(b)(2). We note that to the extent that
a short sale order is un-displayed, Rule 201 will prevent the
trading center from executing the order unless at the time of
execution, the execution price complies with the Rule.
    \387\ We note that such a conflict between the Quote Rule and
Rule 201 should be relatively infrequent. If a displayed order to
sell shares is at a price that is less than or equal to the national
best bid, this would result in a crossed or locked market. In
accordance with Rule 610(d) of Regulation NMS, each national
securities exchange and national securities association must
establish, maintain, and enforce written rules that require its
members reasonably to avoid: Displaying quotations that lock or
cross any protected quotation in an NMS stock, displaying manual
quotations that lock or cross any quotation in an NMS stock
disseminated pursuant to an effective national market system plan;
are reasonably designed to assure reconciliation of locked or
crossed quotations in an NMS stock; and prohibit its members from
engaging in a pattern or practice of displaying quotations that lock
or cross any protected quotation, or other quotation, in an NMS
stock, unless an exception in such rules applies. See 17 CFR
242.610(d).
---------------------------------------------------------------------------

    Because a trading center can re-price and display a previously
impermissibly priced short sale order, the policies and procedures
approach of Rule 201, as noted by one commenter,\388\ potentially
allows for the more efficient functioning of the markets than a rule
that applies a straight prohibition approach. Another commenter noted
that while a prohibition approach could provide ``bright lines'' as to
the acceptability of trades, such an approach would result in an
``inordinate number'' of trades being cancelled by trading
centers.\389\ Because trading centers will 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, we believe that the
policies and procedures approach of Rule 201 will provide more
flexibility to trading centers and their customers and result in more
efficient markets. We recognize, however, that some trading centers
might not want to re-price an impermissibly priced short sale order.
Thus, re-pricing is not a requirement under Rule 201.
---------------------------------------------------------------------------

    \388\ See, e.g., letter from Citadel et al. (Sept. 2009) (noting
that a policies and procedures approach is favorable to a strict
prohibition approach in that it ``would help promote compliance''
and ``address inadvertent violations'' of Rule 201).
    \389\ Letter from STA (June 2009).
---------------------------------------------------------------------------

    In addition, as noted by commenters, Rule 201 will 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. For example,
trading centers can offer their customers various order types regarding
the handling of impermissibly priced orders such that a trading center
can either reject an impermissibly priced order or re-price the order

upwards to the lowest permissible price until the order is filled.
    As proposed and as adopted, Rule 201(b)(2) requires trading centers
to regularly surveil to ascertain the effectiveness of the policies and
procedures required by Rule 201(b)(1) and to take prompt action to
remedy deficiencies in such policies and procedures.\390\ As one
commenter noted, this provision places trading centers in the position
of determining whether an execution complies with the requirements of
Rule 201(b)(1).\391\ Thus, short sale orders executed or displayed at
impermissible prices will require the trading center that executed or
displayed the short sales to take prompt action to remedy any
deficiencies.
---------------------------------------------------------------------------

    \390\ See Rule 201(b)(2).
    \391\ See letter from Wolverine.
---------------------------------------------------------------------------

    The policies and procedures requirements of Rule 201(b)(1) are
similar to those set forth under Regulation NMS.\392\ In accordance
with Regulation NMS, trading centers must have in place written
policies and procedures in connection with that Regulation's Order
Protection Rule.\393\ Thus, as we stated in the Proposal, trading
centers are already familiar with establishing, maintaining, and
enforcing trading-related policies and procedures, including
programming their trading systems in accordance with such policies and
procedures.\394\ Several commenters agreed with the Commission's view
that this familiarity should reduce the implementation time and costs
of the Rule on trading centers.\395\
---------------------------------------------------------------------------

    \392\ See Regulation NMS Adopting Release, 70 FR 37496; see also
17 CFR 242.611.
    \393\ See id.
    \394\ See Proposal, 74 FR at 18051-18052.
    \395\ See, e.g., letter from Amer. Bankers Assoc.; letter from
Schwab; letter from Credit Suisse (Sept. 2009); letter from GE;
letter from Goldman Sachs (June 2009); letter from NYSE Euronext
(June 2009); letter from SIFMA (June 2009); letter from T. Rowe
Price (June 2009); letter from Virtu Financial (noting familiarity
with the policies and procedures approach of Regulation NMS should
reduce the implementation costs of Rule 201).
---------------------------------------------------------------------------

    As discussed in the Proposal,\396\ similar to the requirements
under Regulation NMS in connection with the Order Protection Rule, at a
minimum, a trading center's policies and procedures must enable a
trading center to monitor, on a real-time basis, the national best bid,
so as to determine the price at which the trading center may execute or
display a short sale order. In addition, as proposed, a trading center
must 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 price that
is less than or equal to the current national best bid.\397\ A trading
center's policies and procedures will 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 Rule 201.\398\ We note that we did not receive comments that
specifically discussed a trading center's policies and procedures with
respect to the monitoring, on a real-time basis, of the national best
bid, or its policies and procedures related to orders marked ``short
exempt.''
---------------------------------------------------------------------------

    \396\ See Proposal, 74 FR at 18052.
    \397\ See Rule 201(b)(1)(iii)(B); see also infra Section III.B.
(discussing short sale orders marked ``short exempt'').
    \398\ See infra Section III.B.; see also Rules 201(c) and 201(d)
---------------------------------------------------------------------------

    As discussed in the Proposal,\399\ a trading center must also take
such steps as will be necessary to enable it to enforce its policies
and procedures effectively. For example, trading centers may establish
policies and procedures that include regular exception reports to
evaluate their trading practices. If a trading center's policies and
procedures include exception reports, any such reports will need to be
examined by the trading center to affirm that a trading center's
policies and procedures have been followed by its personnel and
properly coded into its automated systems and, if not, promptly
identify the reasons and take remedial action. In addition, we note
that one commenter stated, and we agree, that as a means for developing
an effective set of policies and procedures for compliance with the
provisions of Rule 201, trading centers should conduct ``regular post-
trade analysis.'' \400\ Another commenter stated that significant
oversight of policies and procedures is necessary to prevent trades
from being directed toward venues that become known for lax supervision
regarding compliance with Rule 201.\401\
---------------------------------------------------------------------------

    \399\ See Proposal, 74 FR at 18052.
    \400\ See letter from Jordan & Jordan.
    \401\ See letter from STA (June 2009). We note that to the
extent that a trading center is lax with respect to its supervision
regarding Rule 201, such trading center could be subject to
enforcement action. In addition, the Commission and SROs will
monitor whether trading centers adequately monitor their compliance
with Rule 201 as part of their examinations.
---------------------------------------------------------------------------

    To help ensure compliance with Rule 201, as discussed in the
Proposal,\402\ trading centers may also have policies and procedures
that will enable a trading center to have a record identifying the
current national best bid at the time of execution or display of a
short sale order. Such ``snapshots'' of the market will aid SROs in
evaluating a trading center's written policies and procedures and
compliance with Rule 201. In addition, such snapshots will aid trading
centers in verifying that a short sale order was priced in accordance
with the provisions of proposed Rule 201(b)(1) if bid ``flickering,''
i.e., rapid and repeated changes in the current national best bid
during the period between identification of the current national best
bid and the execution or display of the short sale order, creates
confusion regarding whether or not the short sale order was executed or
displayed at a permissible price. Snapshots of the market at the time
of execution or display of an order will also aid trading centers in
dealing with time lags in receiving data regarding the national best
bid from different data sources. A trading center's policies and
procedures will be required to address latencies in obtaining data
regarding the national best bid. In addition, to the extent such
latencies occur, a trading center's policies and procedures will need
to implement reasonable steps to monitor such latencies on a continuing
basis and take appropriate steps to address a problem should one
develop.
---------------------------------------------------------------------------

    \402\ See Proposal, 74 FR at 18052.
---------------------------------------------------------------------------

    Some commenters requested clarification regarding whether, in
determining the current national best bid, trading centers and/or
broker-dealers, as applicable, may rely on the current national best
bid as disseminated by proprietary feeds as well as the current
national best bid disseminated by SIPs.\403\ In addition, several
commenters indicated that trading centers and/or broker-dealers should
be required to rely on one source of the national best bid,\404\ such
as the current national best bid disseminated by SIPs.\405\ One
commenter stated that ``[s]uch centralization would ensure consistent
treatment of orders,'' \406\ and another commenter stated that it would
``eliminate redundant effort across broker-dealers and maintain
uniformity across exchanges.'' \407\ Other

commenters, however, questioned whether a unitary data feed would be
beneficial, stating that ``[e]ven utilizing a unitary data feed would
be problematic, however, given the `flickering' that occurs,'' \408\
and that latencies in the receipt of data by market participants is of
concern, ``even if they are working with the same SIP or exchange
feed.'' \409\ Another commenter noted concerns with respect to market
disruption as a result of a single mandated data feed, stating that
``the entire market could be disrupted significantly by a single point
of failure at the aggregator.'' \410\
---------------------------------------------------------------------------

    \403\ See, e.g., letter from Glen Shipway (Sept. 2009); see also
letter from Credit Suisse (June 2009); letter from FIF (June 2009);
letter from Goldman Sachs (June 2009); letter from Lime Brokerage
(June 2009); letter from RBC (June 2009); letter from SIFMA (June
2009); letter from Direct Edge (June 2009); letter from BATS (Sept.
2009); letter from Credit Suisse (Sept. 2009); letter from Lime
Brokerage (Sept. 2009); letter from Qtrade.
    \404\ See, e.g., letter from FIF (June 2009); letter from RBC
(June 2009); letter from NYSE Euronext (Sept. 2009).
    \405\ See, e.g., letter from FIF (June 2009); letter from NYSE
Euronext (Sept. 2009); see also letter from Direct Edge (June 2009).
    \406\ Letter from RBC (June 2009).
    \407\ Letter from FIF (June 2009).
    \408\ Letter from Direct Edge (June 2009).
    \409\ Letter from Lime Brokerage (June 2009); see also letter
from Lime Brokerage (Sept. 2009).
    \410\ Letter from Credit Suisse (June 2009).
---------------------------------------------------------------------------

    We recognize commenters' concerns regarding the potential impact
that receiving national best bid information from different data feeds
might have on the application of Rule 201, including latencies that may
occur in receiving such information from different data feeds.\411\ We
do not believe, however, that it is appropriate to mandate that the
receipt of the current national best bid must be from any one
particular data feed because a policies and procedures approach that
provides for a ``snapshot'' of the applicable current national best bid
will allow trading centers to deal with time lags in receiving data
regarding the national best bid from different data sources. Thus, Rule
201 does not require modifications to how data feeds are currently
received.
---------------------------------------------------------------------------

    \411\ See infra Section X.B.1.b.i. and Section X.B.1.b.ii.
(discussing the potential impact of not mandating receipt of the
current national best bid from one particular data feed on the
implementation costs of Rule 201).
---------------------------------------------------------------------------

    As discussed in the Proposal, trading centers will be required to
conduct regular surveillance of their policies and procedures under
Rule 201. Specifically, Rule 201(b)(2) provides that a trading center
must regularly surveil to ascertain the effectiveness of the policies
and procedures required under the Rule and must take prompt action to
remedy deficiencies in such policies and procedures.\412\ This
provision will reinforce the requirement of Rule 201(b)(1) to maintain
and enforce policies and procedures by explicitly assigning an
affirmative responsibility to trading centers to surveil to ascertain
the effectiveness of their policies and procedures.\413\ Thus, under
the Rule, trading centers may not merely establish policies and
procedures that may be reasonable when created and assume that such
policies and procedures will continue to satisfy the requirements of
Rule 201(b). Rather, trading centers will be required to regularly
assess the continuing effectiveness of their policies and procedures
and take prompt action when needed to remedy deficiencies. In
particular, trading centers will need to engage in regular and periodic
surveillance to determine whether executions or displays of short sale
orders on impermissible bids are occurring without an applicable
exception and whether the trading center has failed to implement and
maintain policies and procedures that would have reasonably prevented
such impermissible executions or displays of short sale orders. We note
that, although discussed in the Proposal, we did not receive comments
that specifically addressed the requirement that trading centers must
conduct regular surveillance of their policies and procedures under
Rule 201.
---------------------------------------------------------------------------

    \412\ See Rule 201(b)(2).
    \413\ We note that Rule 611(a)(2) of Regulation NMS contains a
similar provision for trading centers. See 17 CFR 242.611(a)(2).
---------------------------------------------------------------------------

B. ``Short Exempt'' Provisions of Rule 201

    In the Proposal, we proposed that a trading center's policies and
procedures must be 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 otherwise met the short
sale price test restrictions.\414\ In addition, we included provisions
in the Proposal that set out circumstances under which a broker-dealer
could mark a sale order as ``short exempt.'' \415\
---------------------------------------------------------------------------

    \414\ See, e.g., Proposal, 74 FR at 18107, 18111.
    \415\ See, e.g., Proposal, 74 FR at 18108, 18111-18112. We note
that we proposed provisions relating to when a broker-dealer may
mark a sale order as ``short exempt.'' In discussing the ``short
exempt'' marking provisions in paragraphs (c) and (d) of Rule 201,
we set forth below how and why the provisions, as adopted, differ
from the provisions as set forth in the proposed circuit breaker
with modified uptick rule because that rule most closely resembles
Rule 201, as adopted. To that end, we note that the circumstances
under which a sale order may be marked as ``short exempt'' are
contained in paragraphs (c) and (d) of Rule 201, as adopted, whereas
such circumstances were contained in paragraphs (d) and (e) of the
proposed circuit breaker with modified uptick rule.
---------------------------------------------------------------------------

    After considering the comments and consistent with the Proposal, we
have determined to include in Rule 201(b)(1)(iii)(B) a requirement that
a trading center's policies and procedures must be 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 price that is less than or equal to the current national best
bid.\416\ We have also determined to include in Rule 201(c) and (d)
provisions that specify the circumstances under which a broker-dealer
may mark certain sale orders as ``short exempt'' so that a trading
center may execute or display such orders without regard to whether
they are priced in accordance with the requirements of Rule
201(b).\417\ The provisions contained in paragraphs (c) and (d) of Rule
201 are designed to promote the workability of the Rule, while at the
same time furthering the Commission's goals.
---------------------------------------------------------------------------

    \416\ See Rule 201(b)(1)(iii)(B).
    \417\ See Rule 201(c); 201(d).
---------------------------------------------------------------------------

    The provisions contained in paragraph (d) of Rule 201 parallel
exceptions to former Rule 10a-1 and exemptive relief granted pursuant
to that rule.\418\ These exceptions and exemptions from former Rule
10a-1 had been in place for several years. As we noted in the Proposal,
we believe that the rationales underlying these exceptions and
exemptions from former Rule 10a-1 still hold true today.\419\ Moreover,
due to the limited scope of these exceptions and exemptions, we do not
believe that including them will undermine the Commission's goals for
adopting Rule 201. To the extent that commenters addressed our
inclusion of these exceptions and exemptions, we discuss such comments
below.
---------------------------------------------------------------------------

    \418\ See Proposal, 74 FR at 18054 (discussing how the ``short
exempt'' marking provisions of the proposed modified uptick rule
would parallel exceptions to former Rule 10a-1 and exemptive relief
granted pursuant to that rule).
    \419\ See Proposal, 74 FR at 18054-18059.
---------------------------------------------------------------------------

    A number of commenters stated that if we were to adopt a form of
short sale price test restriction, it should include exceptions beyond
those that we proposed in the Proposal and Re-Opening Release,
particularly if we were to adopt a short sale price test restriction
based on the alternative uptick rule.\420\ Some commenters stated that
the exceptions included in the Proposal and the Re-Opening Release were
insufficient, stating that broader and/or additional exceptions would
be necessary to, among other things, provide stability and liquidity to
the market \421\ and so as not to impair price discovery.\422\ For
example, commenters requested exceptions for activity excepted from, or
necessary to comply with, Regulation NMS.\423\ Commenters

also requested an exception for exchange traded funds (``ETFs'') and
similar broad-based indices and baskets of stocks.\424\ Some commenters
requested exceptions for short sales in connection with the
facilitation of capital raising transactions, through stock issuances
and convertible instruments, by issuers and selling shareholders.\425\
In connection with convertible instruments, commenters stated that
there needs to be an exception from any short sale price test
restriction to allow investors purchasing a convertible instrument to
hedge their long exposure.\426\ Other exceptions requested relate to
automated electronic buy-side trading,\427\ bona fide hedging
generally,\428\ ``exchange for physicals'' transactions,\429\ index
expirations,\430\ and market on open \431\ and market on close
orders.\432\
---------------------------------------------------------------------------

    \420\ See, e.g., letter from SIFMA (Sept. 2009); letter from
NYSE Euronext (Sept. 2009); letter from EWT (Sept. 2009); letter
from GETCO (Sept. 2009).
    \421\ See, e.g., letter from SIFMA (June 2009); letter from NYSE
Euronext (June 2009).
    \422\ See, e.g., letter from NYSE Euronext (June 2009).
    \423\ See, e.g., letter from SIFMA (June 2009); letter from RBC
(June 2009); letter from Goldman Sachs (June 2009). We note that
where a broker-dealer is routing an inter-market sweep order
(``ISO'') solely to facilitate its execution of a customer's long
sale in compliance with Rule 611, such ISOs may be marked as ``short
exempt.'' This will allow the destination trading centers to execute
the orders against better-priced protected quotations without regard
to the short sale price test restrictions of Rule 201. Such ISOs
must not be marked as ``long.''
    \424\ See, e.g., letter from SIFMA (June 2009); letter from NYSE
Euronext (June 2009); letter from MFA (June 2009); letter from RBC
(June 2009); letter from ICI (June 2009); letter from Citadel et al.
(June 2009); letter from Credit Suisse (June 2009); letter from
ISDA; letter from NYSE Euronext (Sept. 2009); letter from Direct
Edge (Sept. 2009); letter from Knight Capital (Sept. 2009); letter
from Virtu Financial; letter from EWT (Sept. 2009).
    \425\ See, e.g., letter from SIFMA (June 2009); see also letter
from ISDA.
    \426\ See, e.g., letter from SIFMA (June 2009).
    \427\ See, e.g., letter from MFA (June 2009).
    \428\ See, e.g., letter from MFA (June 2009); letter from Credit
Suisse (June 2009); letter from ISDA; letter from John K. Robinson,
General Counsel, P. Schoenfeld Asset Management LP, dated July 2,
2009 (``P. Schoenfeld Asset Management'').
    \429\ See, e.g., letter from SIFMA (June 2009); letter from RBC
(June 2009).
    \430\ See, e.g., letter from SIFMA (June 2009).
    \431\ See, e.g., letter from RBC (June 2009); letter from
Goldman Sachs (June 2009); letter from Goldman Sachs (Sept. 2009).
    \432\ See, e.g., letter from SIFMA (June 2009); letter from RBC
(June 2009); letter from Credit Suisse (June 2009); letter from EWT
(Sept. 2009); letter from Goldman Sachs (June 2009); letter from
Goldman Sachs (Sept. 2009). We also note that some commenters stated
that we should include a marking error exception in connection with
any short sale price test restriction we adopt. See, e.g., letter
from RBC (June 2009); letter from SIFMA (June 2009). In connection
with the proposed uptick rule, we proposed an exception for any sale
by a broker-dealer of a covered security for an account in which it
has no interest, pursuant to an order marked ``long.'' See Proposal,
74 FR at 18109. This exception would have applied where a broker-
dealer effects a sale of an order marked ``long'' by another broker-
dealer, but the order was mis-marked such that it should have been
marked as a short sale order. We do not believe that a similar
exception is necessary under Rule 201 because Rule 201, unlike the
proposed uptick rule, is based on a policies and procedures approach
rather than a straight prohibition approach. Thus, if a trading
center's written policies and procedures are reasonably designed to
prevent the execution or display of a short sale order of a covered
security at a price that is less than or equal to the current
national best bid, it is unlikely that such trading center's
participation in any violation of the Rule due to a mis-marking by a
broker-dealer could be knowing or reckless. See Proposal, 74 FR at
18063. As we stated in the Proposal, knowledge may be inferred where
a broker-dealer has previously accepted orders marked ``long'' from
the same counterparty that required borrowed shares for delivery or
that resulted in a ``fail to deliver.'' See Proposal, 74 FR at 18063
n.212; see also 2004 Regulation SHO Adopting Release, 69 FR at
48019, n.111 (stating that ``[i]t may be unreasonable for a broker-
dealer to treat a sale as long where orders marked `long' from the
same customer repeatedly require borrowed shares for delivery or
result in `fails to deliver.' A broker-dealer also may not treat a
sale as long if the broker-dealer knows or has reason to know that
the customer borrowed shares being sold.'').
---------------------------------------------------------------------------

    In addition, as discussed in more detail in Section III.B.9. below,
commenters requested an exception for short sales by market makers
engaged in bona fide market making activities, including market makers
in OTC and listed derivatives, options, convertibles and ETFs, and
block positioners.\433\
---------------------------------------------------------------------------

    \433\ See, e.g., letter from SIFMA (June 2009); letter from NYSE
Euronext (June 2009); letter from Knight Capital (June 2009); letter
from EWT (June 2009); letter from STANY (June 2009); letter from
Credit Suisse (June 2009); letter from CBOE (June 2009); letter from
RBC (June 2009); letter from Citadel et al. (June 2009); letter from
NYSE Euronext (Sept. 2009); letter from Direct Edge (Sept. 2009);
letter from Virtu Financial; letter from EWT (Sept. 2009); letter
from Credit Suisse (Sept. 2009). Some commenters also asked for an
exception for, or clarification that, a short sale price test
restriction would not apply to short sales pursuant to all options
assignments and exercises. See, e.g., letter from SIFMA (June 2009);
letter from CBOE (June 2009); letter from Boston Options Exchange,
Chicago Board Options Exchange, International Securities Exchange,
Nasdaq Options Market, Nasdaq OMX PHLX, NYSE Amex, NYSE Arca and The
Options Clearing Corporation, dated June 22, 2009 (``Boston Options
Exchange et al. (June 2009)''); letter from RBC (June 2009). We note
that because short sales pursuant to options exercises and
assignments (whether or not automatic) are unrelated to the current
national best bid, Rule 201 does not apply to such sales.
---------------------------------------------------------------------------

    Several commenters, however, stated that the Commission should be
cautious of adopting numerous exceptions and discussed problems that
may arise from adopting a short sale price test restriction with many
or complex exceptions, such as additional implementation difficulties,
greater compliance costs, lack of uniformity that may cause unfair
application of the rule, increased opportunities for gaming and abuse,
and, overall, a less effective rule that only applies to a limited
numbers of short sales.\434\ Commenters stated that a short sale price
test restriction with numerous exceptions will create loopholes and a
rule that is easy to circumvent, thus resulting in a rule that applies
to little trading activity and fails to serve the purpose for which it
was adopted.\435\ One commenter stated that emphasis should first be
placed on ``a sales price restriction on short sales, its possible
effects on helping restore a measure of price continuity, and its
possible deleterious effects on informational efficiency * * * with
exceptions to be evolved as time goes by and as the industry petitions
for them.'' \436\ Another commenter noted that a short sale price test
restriction with many exceptions will impose additional burdens on the
Commission's inspection staff, which will be tasked with ``retracing
transactions to discern which were eligible for exceptions, which were
not, and if any were disguised.'' \437\
---------------------------------------------------------------------------

    \434\ See, e.g., letter from Paladin Investment; letter from
Douglas M. Branson, W. Edward Sell Professor of Business Law,
University of Pittsburgh School of Law, dated June 10, 2009 (``Prof.
Branson''); letter from Wells Fargo (June 2009); letter from CPIC
(June 2009); letter from IAG; letter from IBC; letter from Jordan &
Jordan; letter from Kelly Capital; letter from Lime Brokerage (June
2009); letter from Millennium; letter from Hudson River Trading;
letter from Lime Brokerage (Sept. 2009); letter from Glen Shipway
(Sept. 2009); letter from Qtrade.
    \435\ See, e.g., letter from Paladin Investment; letter from
Prof. Branson; letter from CPIC (June 2009); letter from Wells Fargo
(June 2009); letter from IBC (June 2009); letter from Jordan &
Jordan; letter from Lime Brokerage (June 2009); letter from
Millennium.
    \436\ Letter from Prof. Branson.
    \437\ Letter from CPIC (June 2009).
---------------------------------------------------------------------------

    In addition, one commenter noted that the exceptions that accompany
any price test restriction will be driven by the approach adopted.\438\
This commenter noted that a permanent, market-wide approach may
necessitate more exceptions than one triggered by a temporary circuit
breaker.\439\ This commenter further noted that ``a circuit breaker
short sale ban may necessitate more or different exceptions than a
circuit breaker that still permits short selling to occur.'' \440\
---------------------------------------------------------------------------

    \438\ See, e.g., letter from ICI (June 2009).
    \439\ See letter from ICI (June 2009).
    \440\ Letter from ICI (June 2009).
---------------------------------------------------------------------------

    Although, as noted above, commenters requested a variety of
exceptions in addition to those set forth in the Proposal, at this
time, we have determined to include in Rule 201(c) and (d) only the
``short exempt'' marking provisions that we proposed. We believe that
these limited provisions will help ensure the smooth functioning of the
markets while at the same time not undermining our goals for adopting
Rule 201.
    In addition, we note that a number of commenters that discussed the
need for additional and/or broader exceptions referenced the absence of
some of the requested exceptions during the Short

Sale Ban Emergency Order \441\ and the effect on market quality of the
Short Sale Ban Emergency Order in the absence of such exceptions.\442\
These commenters noted the absence from the Short Sale Ban Emergency
Order of exceptions for certain convertible arbitrage or hedging
activities \443\ and for automated electronic buy-side trading.\444\ We
note, however, that unlike the Short Sale Ban Emergency Order, which
halted all short selling in the securities subject to the emergency
order for its three-week duration, the short sale restrictions of Rule
201 will apply for a limited duration and will only apply to a covered
security if such security has experienced a significant intra-day price
decline (of 10% or more). Thus, Rule 201 will not impact trading in the
vast majority of covered securities on an average day.\445\ If a
covered security becomes subject to the short sale price test
restrictions of Rule 201 it will occur because that security's price is
experiencing extreme downward price pressure and it is these securities
that Rule 201 is designed to address by helping to prevent short
selling from being used as a tool to exacerbate its price decline. If,
as requested by commenters, we were to expand the scope of short
selling activities that would not be subject to Rule 201, we are
concerned such exceptions could undermine this goal of Rule 201.
---------------------------------------------------------------------------

    \441\ See supra Section II.C. (discussing the Short Sale Ban
Emergency Order).
    \442\ See, e.g., letter from SIFMA (June 2009); letter from RBC
(June 2009); letter from CPIC (June 2009); letter from Goldman Sachs
(June 2009); letter from MFA (June 2009).
    \443\ See, e.g., letter from RBC (June 2009) (attaching and
discussing letter from Philip Taylor and Scott DeCanio, Directors,
RBC Capital Markets Corp., dated Sept. 25, 2008); letter from CPIC
(June 2009); letter from Goldman Sachs (June 2009); letter from
SIFMA (June 2009); letter from MFA (June 2009).
    \444\ See, e.g., letter from MFA (June 2009).
    \445\ See supra Section III.A.5. (discussing analyses regarding
the number of securities that will trigger the circuit breaker on an
average day).
---------------------------------------------------------------------------

    In addition, although short selling will be restricted if the price
of a covered security decreases by 10% or more, in contrast to
securities subject to the Short Sale Ban Emergency Order, Rule 201 will
still permit short selling in the covered security even when the
restriction is in place, although at a price above the current national
best bid. Thus, short sellers engaged in the various activities for
which commenters are requesting additional or expanded exceptions will
continue to be able to sell short even when the price test restriction
is in effect. In addition, the restriction on short selling will be in
place for a limited duration, that is, the remainder of the day on
which the circuit beaker level is triggered and the following day,
further reducing the need for additional exceptions.
    We also note that with respect to ETFs, although under former Rule
10a-1 the Commission issued limited exemptive relief for certain ETFs
via authority delegated to the Staff, that relief was issued on a case-
by-case basis for a permanent, market-wide short sale price test
rule.\446\ Since the elimination of former Rule 10a-1, there has been a
significant growth in ETF trading volume and an expansion in different
structures of ETF products.\447\ Commenters who opposed an exception
for these products noted the growth in ETF trading volume and new ETF
products among the reasons not to provide an exception for ETFs from
any short sale price test restriction.\448\ We do not believe that a
general ETF exception is necessary because the circuit breaker approach
of Rule 201 will generally result in the majority of ETFs not being
subject to its short sale price test restrictions because ETFs are
generally diversified, whereas single stocks are not. If such
securities do become subject to its restrictions, the restrictions will
be in place for a limited duration and will continue to permit short
selling even when in place.
---------------------------------------------------------------------------

    \446\ See, e.g., letter from Racquel L. Russell, Esq., Branch
Chief, Office of Trading Practices and Processing, Division of
Market Regulation, to George T. Simon, Esq., Foley & Lardner LLP,
dated June 21, 2006; letter from James A. Brigagliano, Assistant
Director, Division of Market Regulation, to Claire P. McGrath, Vice
President and Special Counsel, Amex, dated Aug. 17, 2001. We note
that each of the approvals for relief under former Rule 10a-1 was
conditioned on the ETF meeting certain enumerated conditions, either
specific to certain products or included as part of a broader
``class exemption.''
    \447\ See, e.g., Investment Company Institute, 2009 Investment
Company Fact Book, (49 ed.); National Stock Exchange, NSX Annouces
Record January ETF Trading Volume Surpasses $2.2 Trillion, News &
Views, Feb. 14, 2008 available at http://www.nsx.com/content/news/
story/90.
    \448\ See, e.g., letter from Robert E. Koza, dated May 4, 2009;
letter from Robert W. Angove, President, Santiam Mountain
Investment, dated May 5, 2009; letter from David Tarrell, dated May
6, 2009; letter from Mitchel Schlesinger, Principal, FBB Capital
Partners, dated May 8, 2009; letter from Paladin Investment; letter
from Shelby Frisch, dated May 15, 2009; letter from Robert
Cannataro, dated June 5, 2009; letter from High Street Advisors;
letter from European Investors (June 2009); letter from Ascendant
Capital; letter from Kelly Capital; letter from European Investors
(Sept. 2009); letter from NAREIT.
---------------------------------------------------------------------------

    For the reasons discussed above, at this time we believe it is
appropriate to limit the scope and number of circumstances under which
a broker-dealer may mark a sell order as ``short exempt.'' We
recognize, however, the concerns raised by commenters and note that to
help ensure the future workability of Rule 201, or for other reasons,
we may reconsider whether certain exceptions or exemptions are
warranted.
1. Broker-Dealer Provision
    After the 10% circuit breaker is triggered for a covered security,
Rule 201(c) will permit a broker-dealer submitting a short sale order
for the covered security to a trading center to mark the order ``short
exempt'' if the broker-dealer identifies the order as being at a price
above the current national best bid at the time of submission.\449\ We
have modified this provision from the Proposal to clarify that a
broker-dealer may only mark an order as ``short exempt'' after the
circuit breaker has been triggered for a covered security.\450\ In
addition, consistent with the Proposal, Rule 201(c) requires any
broker-dealer relying on this provision to establish, maintain, and
enforce written policies and procedures that are reasonably designed to
prevent the incorrect identification of orders as being priced in
accordance with the requirements of Rule 201(c) and requires the
broker-dealer regularly to surveil to ascertain the effectiveness of
these policies and procedures, and to take prompt action to remedy
deficiencies.\451\
---------------------------------------------------------------------------

    \449\ See Rule 201(c).
    \450\ We have also made technical modifications to Rule 201(c)
to reflect that it is the broker-dealer submitting the order that
must also mark the order as ``short exempt'' and to reflect the
difference in operation of the alternative uptick rule from the
proposed circuit breaker with modified uptick rule.
    \451\ See Rule 201(c).
---------------------------------------------------------------------------

    As discussed above, in response to our request for comment,\452\
several commenters stated that if we were to adopt a short sale price
test restriction, it should include a broker-dealer provision.\453\ One
commenter stated that the broker-dealer provision is necessary to
prevent contradictory requirements for broker-dealers under Regulation
NMS and Regulation SHO.\454\
---------------------------------------------------------------------------

    \452\ See Proposal, 74 FR at 18073-18074.
    \453\ See, e.g., letter from SIFMA (June 2009); letter from BATS
(May 2009); letter from EWT (Sept. 2009); letter from Qtrade.
    \454\ See letter from EWT (Sept. 2009).
---------------------------------------------------------------------------

    Other commenters disagreed, stating that they do not think that the
broker-dealer provision is necessary. One commenter pointed to problems
that may arise from the provision, such as increasing the potential for
confusion in the marketplace, creating an unlevel playing field, and
penalizing participants who have the most efficient market data
infrastructures.\455\ Commenters also noted that the broker-dealer
provision has the potential to

greatly increase costs to the industry and to adversely impact the
ability of smaller broker-dealers to compete.\456\ One commenter stated
that, what it termed a ``requirement,'' that broker-dealers maintain
``snapshots,'' may impose significant costs, including costs associated
with technology, data storage, and surveillance and review and that the
Commission's cost estimates of over $100,000 per broker-dealer ``seem
to underestimate the cost to large, full service broker-dealers, since
the volume of orders handled by these firms are likely to lead to
significantly greater technology and storage costs alone as well as
more frequent reviews.'' \457\ We note that, as discussed in the
Proposal and in more detail below, we believe that ``snapshots'' of the
market could aid broker-dealers in complying with Rule 201(c), but Rule
201 does not ``require'' such snapshots.\458\
---------------------------------------------------------------------------

    \455\ See letter from Lime Brokerage (June 2009).
    \456\ See letter from STANY (June 2009); letter from Lime
Brokerage (June 2009); letter from NSCP.
    \457\ Letter from NSCP.
    \458\ See Proposal, 74 FR at 18054-18055.
---------------------------------------------------------------------------

    Another commenter expressed the belief that a majority of broker-
dealer participants that service customer orders will want to take
advantage of the provision to remain competitive and to ensure that
client orders receive the best possible execution, which will result in
many non-trading center participants becoming subject to market data
``snapshotting'' and other compliance-related changes.\459\
---------------------------------------------------------------------------

    \459\ See letter from Lime Brokerage (June 2009).
---------------------------------------------------------------------------

    After considering the comments, as discussed above, we have
determined to include in Rule 201(c) a provision to permit a broker-
dealer submitting a short sale order for a covered security to a
trading center after the circuit breaker is triggered for a covered
security, to mark the order ``short exempt'' if the broker-dealer
identifies the order as being at a price above the current national
best bid at the time of submission.\460\ Rule 201(c) will 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.
---------------------------------------------------------------------------

    \460\ See Rule 201(c).
---------------------------------------------------------------------------

    Although we recognize commenters' concerns, including regarding
potential increased costs to the industry with respect to technology,
data storage and surveillance, we note that most broker-dealers may
already have developed ``snapshot'' capability in connection with
Regulation NMS's Order Protection Rule. We also agree that ``snapshot''
capability will require data storage by broker-dealers; however, as
noted by one commenter,\461\ because the alternative uptick rule does
not require sequencing of the national best bid, the data storage
requirements under the alternative uptick rule are lower than they
would be under the proposed modified uptick rule or the proposed uptick
rule. In addition, we believe that the costs of a policies and
procedures approach that provides for a snapshot of the applicable
current national best bid of the security are justified because
snapshot capability will aid broker-dealers in dealing with time lags
in receiving data regarding the national best bid from different data
sources and facilitate verification of whether a short sale order was
executed or displayed at a permissible price.
---------------------------------------------------------------------------

    \461\ See letter from STA (Sept. 2009).
---------------------------------------------------------------------------

    In addition, we note that this provision will not undermine our
goals for short sale regulation because any broker-dealer marking an
order ``short exempt'' in accordance with this provision must have
mechanisms in place to enable the broker-dealer to identify the short
sale order as priced in accordance with the provisions of Rule 201(c).
In accordance with Rule 201(c)(1), these mechanisms must include
written policies and procedures reasonably designed to prevent the
incorrect identification of orders as being permissibly priced in
accordance with the provisions of 201(c).\462\ Thus, although a broker-
dealer relying on this provision in marking an order ``short exempt''
will not need to identify the order as permissibly priced to the
trading center, it will need to have written policies and procedures in
place reasonably designed to enable it to identify that an order was
permissibly priced at the time of submission of the order to a trading
center.\463\ We believe these policies and procedures will further our
goals by helping to ensure that short sale orders are not incorrectly
marked as ``short exempt,'' and, thereby, helping to preclude
impermissible short sales from being executed when the price test
restriction has been triggered.\464\
---------------------------------------------------------------------------

    \462\ See Rule 201(c)(1).
    \463\ Such policies and procedures should be similar to those
required for trading centers complying with paragraph (b) of Rule
201.
    \464\ We also note that it would be a violation of Rule 200(g)
to mark a short sale order as ``short exempt'' when a security is
not subject to the alternative uptick rule.
---------------------------------------------------------------------------

    At a minimum, a broker-dealer's policies and procedures must be
reasonably designed to enable a broker-dealer to monitor, on a real-
time basis, the 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 provisions of Rule 201(c). To ensure
compliance with Rule 201(c), a broker-dealer may also have policies and
procedures that will enable it to have a record identifying the current
national best bid at the time of submission of a short sale order. Such
``snapshots'' of the market will also aid SROs in evaluating a broker-
dealer's written policies and procedures and compliance with Rule
201(c). In addition, such snapshots will aid broker-dealers in
verifying that a short sale order was priced in accordance with the
provisions of Rule 201(c) if bid flickering during the period between
identification of the current national best bid and the submission of
the short sale order to a trading center creates confusion regarding
whether or not the short sale order was submitted at a permissible
price. Snapshots of the market at the time of submission of an order
will also aid broker-dealers in dealing with time lags in receiving
data regarding the national best bid from different data sources. Under
Rule 201(c)(2), latencies in obtaining data regarding the national best
bid will need to be addressed.\465\ In addition, to the extent such
latencies occur, a broker-dealer's policies and procedures will need to
implement reasonable steps to monitor such latencies on a continuing
basis and take appropriate steps to address a problem should one
develop.
---------------------------------------------------------------------------

    \465\ See Rule 201(c)(2).
---------------------------------------------------------------------------

    Surveillance will be a required part of a broker-dealer's
satisfaction of its legal obligations. Rule 201(c)(2) provides that a
broker-dealer must regularly surveil to ascertain the effectiveness of
the policies and procedures required under Rule 201(c)(1) and must take
prompt action to remedy deficiencies in such policies and
procedures.\466\ This provision will reinforce the on-going maintenance
and enforcement requirements of Rule 201(c) by explicitly assigning an
affirmative responsibility to broker-dealers to surveil to ascertain
the effectiveness of their policies and procedures.\467\ Thus, under
paragraphs (c)(1) and (c)(2) of Rule 201, broker-dealers may not merely
establish policies and procedures that may be reasonable when created
and assume that such policies and procedures will continue to satisfy
the requirements of the Rule. Rather, broker-dealers will be required
to regularly assess the continuing effectiveness of their procedures
and

take prompt action when needed to remedy deficiencies. In particular,
each broker-dealer will need to engage in regular and periodic
surveillance to determine whether it is submitting short sale orders
marked ``short exempt'' without complying with the requirements of Rule
201(c) and whether the broker-dealer has failed to implement and
maintain policies and procedures that would have reasonably prevented
such impermissible submissions.
---------------------------------------------------------------------------

    \466\ See id.
    \467\ We note that Rule 611(a)(2) of Regulation NMS contains a
similar surveillance provision. See 17 CFR 242.611(a)(2).
---------------------------------------------------------------------------

    A broker-dealer will also need to take such steps as will be
necessary to enable it to enforce its policies and procedures
effectively.\468\ For example, broker-dealers may establish policies
and procedures that include regular exception reports to evaluate their
trading practices. If a broker-dealer's policies and procedures include
exception reports, any such reports will need to be examined to affirm
that a broker-dealer's policies and procedures have been followed by
its personnel and properly coded into its automated systems and, if
not, promptly identify the reasons and take remedial action.
---------------------------------------------------------------------------

    \468\ See Rule 201(c)(2).
---------------------------------------------------------------------------

2. Seller's Delay in Delivery \469\
---------------------------------------------------------------------------

    \469\ We note that we have modified paragraph (d) of Rule 201
from that provision as proposed to reflect that a broker-dealer may
only mark an order as ``short exempt'' pursuant to the provisions in
paragraph (d) after the circuit breaker has been triggered for a
covered security.
---------------------------------------------------------------------------

    We are adopting Rule 201(d)(1) without modification to provide that
a broker-dealer may mark an order ``short exempt'' if the broker-dealer
has a reasonable basis to believe that the seller owns the security
being sold and that the seller intends to deliver the security as soon
as all restrictions on delivery have been removed.\470\ Specifically,
Rule 201(d)(1) provides that a broker-dealer may mark a short sale
order ``short exempt'' if the broker-dealer has a reasonable basis to
believe the short sale order of a covered security is by a person that
is ``deemed to own'' the covered security pursuant to Rule 200 of
Regulation SHO,\471\ provided that the person intends to deliver the
security as soon as all restrictions on delivery have been
removed.\472\
---------------------------------------------------------------------------

    \470\ Subsection (e)(1) of former Rule 10a-1 contained an
exception relating to a seller's delay in the delivery of
securities. The provision in Rule 201(d)(1) parallels the exception
in former Rule 10a-1(e)(1).
    \471\ See 17 CFR 242.200(a)-(f) (defining the term ``deemed to
own'').
    \472\ See Rule 201(d)(1). This provision is also consistent with
Rule 203(b)(2)(ii) and Rule 204(a)(2) of Regulation SHO. Rule
203(b)(2)(ii) provides an exception from the ``locate'' requirement
of Rule 203(b)(1) of Regulation SHO for ``[a]ny sale of a security
that a person is deemed to own pursuant to Sec.  242.200, provided
that the broker or dealer has been reasonably informed that the
person intends to deliver such security as soon as all restrictions
on delivery have been removed * * *''. Rule 204(a)(2) provides
additional time to close out fails to deliver ``[i]f a participant
of a registered clearing agency has a fail to deliver position at a
registered clearing agency in any equity security resulting from a
sale of a security that person is deemed to own pursuant to Sec.
242.200 and that such person intends to deliver as soon as all
restrictions on delivery have been removed, the participant shall,
by no later than the beginning of regular trading hours on the
thirty-fifth consecutive calendar day following the trade date for
the transaction, immediately close out the fail to deliver position
by purchasing securities of like kind and quantity.'' We note that
to the extent that an exception to Regulation SHO's locate
requirement applies to a short sale order, such order must be marked
``short'' in accordance with Rule 200(g) of Regulation SHO unless
the order can be marked ``short exempt'' pursuant to Rule 200(g)(2)
of Regulation SHO.
---------------------------------------------------------------------------

    Rule 200(g)(1) of Regulation SHO provides that a sale can be marked
``long'' only if the seller is deemed to own the security being sold
and either (i) the security is in the broker-dealer's physical
possession or control; or (ii) it is reasonably expected that the
security will be in the broker-dealer's possession or control by
settlement of the transaction.\473\ Thus, even where a seller owns a
security, if delivery will be delayed, such as in the sale of formerly
restricted securities pursuant to Rule 144 of the Securities Act of
1933,\474\ or where a convertible security, option, or warrant has been
tendered for conversion or exchange, but the underlying security is not
reasonably expected to be received by settlement date, such sales must
be marked ``short.'' As a result, Rule 201(d)(1) is necessary to allow
for sales of 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 covered security to its broker-
dealer prior to settlement based on circumstances outside the seller's
control. In response to our request for comment, commenters that
specifically addressed this provision were supportive of it.\475\
---------------------------------------------------------------------------

    \473\ See 17 CFR 242.200(g)(1).
    \474\ 17 CFR 230.144.
    \475\ See, e.g., letter from BATS (May 2009); letter from SIFMA
(June 2009); letter from Jesse D. Hill, Director of Regulatory
Relations, Office of Regulatory Counsel, Edward Jones, dated Sept.
21, 2009 (``Edward Jones''); letter from NYSE Euronext (Sept. 2009).
---------------------------------------------------------------------------

    After considering the comments, we believe it is appropriate to
adopt Rule 201(d)(1) as proposed. This provision is consistent with the
goals of Rule 201 and with other provisions of Regulation SHO related
to sales of securities that although owned are subject to the
provisions of Regulation SHO governing short sales. Thus, we are
adopting Rule 201(d)(1) such that the provision will apply to the sale
of any covered securities that a seller is deemed to own pursuant to
Rule 200 of Regulation SHO and cannot deliver by settlement date based
on circumstances outside the seller's control, provided the seller
intends to deliver the securities as soon as all restrictions on
delivery have been removed.\476\
---------------------------------------------------------------------------

    \476\ Such circumstances could include the situation where a
convertible security, option or warrant has been tendered for
conversion or exchange, but the underlying security is not
reasonably expected to be received by settlement date. See
Regulation SHO Adopting Release, 69 FR at 48015; see also 17 CFR
242.200(b) (defining when a person shall be ``deemed to own'' a
security). In addition, we understand that sellers that own
restricted equity securities that wish to sell such securities
pursuant to an effective registration statement pursuant to Rule 415
under the Securities Act of 1933 experience similar types of
potential settlement delays as those persons selling Rule 144
securities. Thus sales of such securities pursuant to Rule 415 may
be marked ``short exempt'' in accordance with Rule 201(d)(1) if the
securities subject to the sale are outstanding at the time they are
sold, and the sale occurs after the registration statement has
become effective. In addition, and as noted by one commenter, we
understand that sales made pursuant to broker-dealer assisted
cashless exercises of compensatory options to purchase a company's
securities may result in potential settlement delays that would
otherwise require the seller to mark such sales ``short'' pursuant
to the definition under Rule 200(g) of Regulation SHO. Such sales
may be marked ``short exempt'' pursuant to Rule 201(d)(1). See Rule
204 Adopting Release, 74 FR at 38277, n.141; see also 17 CFR
230.415.
---------------------------------------------------------------------------

3. Odd Lot Transactions
    We are adopting in Rule 201(d)(2), without modification, the
ability for a broker-dealer to mark a short sale order as ``short
exempt'' if the broker-dealer has a reasonable basis to believe that
the short sale order is by a market maker to offset a customer odd-lot
\477\ order or to liquidate an odd-lot position that changes such
broker-dealer's position by no more than a unit of trading.\478\ In
response to our request for comment, commenters that specifically
addressed this provision were supportive of

inclusion of this provision in any short sale price test
restriction.\479\
---------------------------------------------------------------------------

    \477\ Rule 201(a)(5) provides that the term ``odd lot'' shall
have the same meaning as in 17 CFR 242.600(b)(49). Rule 600(b)(49)
defines an ``odd lot'' as ``an order for the purchase or sale of an
NMS stock in an amount less than a round lot.'' 17 CFR
242.600(b)(49).
    \478\ See Rule 201(d)(2). SRO rules define a ``unit of trading''
or ``normal unit of trading,'' and the term generally means 100
shares, i.e., a round lot. For example, FINRA Rule 6320A(a)(7)
defines a ``normal unit of trading'' to mean ``100 shares of a
security unless, with respect to a particular security, FINRA
determines that a normal unit of trading shall constitute other than
100 shares.'' NYSE Rule 55 states that ``[t]he unit of trading in
stocks shall be 100 shares, except that in the case of certain
stocks designated by the Exchange the unit of trading shall be such
lesser number of shares as may be determined by the Exchange, with
respect to each stock so designated. * * *''
    \479\ See, e.g., letter from BATS (May 2009); letter from SIFMA
(June 2009); letter from NYSE Euronext (Sept. 2009).
---------------------------------------------------------------------------

    Under former Rule 10a-1, an exception for certain odd-lot
transactions was created in an effort to reduce the burden and
inconvenience that short sale restrictions would place on odd-lot
transactions. In 1938, the Commission found that odd-lot transactions
played a very minor role in potential manipulation by short
selling.\480\ Initially, sales of odd-lots were not subject to the
restrictions of former Rule 10a-1.\481\ However, the Commission became
concerned over the volume of odd-lot transactions, which possibly
indicated that the exception was being used to circumvent the rule. As
a result, the exception was changed to include the two odd lot
exceptions described below.\482\
---------------------------------------------------------------------------

    \480\ See Former Rule 10a-1 Adopting Release, 3 FR 213.
    \481\ The Commission initially adopted three exceptions for odd-
lot transactions. While the first one, excepting all odd-lot
transactions, seemed to make other odd-lot exceptions unnecessary,
the 1938 adopting release included all three exceptions without
discussion. See Former Rule 10a-1 Adopting Release, 3 FR 213.
    \482\ See Exchange Act Release No. 11030 (Sept. 27, 1974), 39 FR
35570 (Oct. 2, 1974) (``1974 Release'').
---------------------------------------------------------------------------

    Former Rule 10a-1(e)(3) contained a limited exception that allowed
short sales by odd-lot dealers registered in the security and by third
market makers of covered securities to fill customer odd lot orders.
Former Rule 10a-1(e)(4) provided an exception under the rule for any
sale to liquidate an odd-lot position by a single round lot sell order
that changed the broker-dealer's position by no more than a unit of
trading.
    Rule 201(d)(2), as proposed and adopted, generally parallels the
exceptions in subsections (e)(3) and (e)(4) of former Rule 10a-1. In
addition, however, as proposed, we are extending the provision to cover
all market makers acting in the capacity of an odd-lot dealer. When
former Rule 10a-1 was adopted, odd-lot dealers dealt exclusively with
odd-lot transactions, and were so registered. Today, market makers
registered in a security typically also act as odd-lot dealers of the
security. Thus, as proposed, we are broadening the provision in Rule
201(d)(2) to all broker-dealers acting as ``market makers'' in odd
lots.\483\
---------------------------------------------------------------------------

    \483\ Section 3(a)(38) of the Exchange Act defines the term
``market maker,'' and includes specialists. See 15 U.S.C.
78c(a)(38).
---------------------------------------------------------------------------

    We believe that a provision that will allow a broker-dealer to mark
a short sale order ``short exempt'' if it has a reasonable basis to
believe that the short sale order is by a market maker to offset a
customer odd-lot order or liquidate an odd-lot position that changes
such broker-dealer's position by no more than a unit of trading, will
continue to be of utility under Rule 201 and will not be in conflict
with the goals of the Rule.
    Because odd-lot transactions by market makers to facilitate
customer orders are not of a size that could facilitate a downward
movement in the particular security, we do not believe that Rule
201(d)(2) will adversely affect the goals of short sale regulation that
Rule 201 seeks to advance. Thus, we believe that a broker-dealer should
be able to mark such orders ``short exempt'' so that those acting in
the capacity of a ``market maker,'' with the commensurate negative and
positive obligations, will be able to offset a customer odd-lot order
and liquidate an odd-lot position without a trading center's policies
and procedures preventing the execution or display of such orders at a
price that is less than or equal to the current national best bid.
4. Domestic Arbitrage
    We are adopting in Rule 201(d)(3) without modification the ability
for a broker-dealer to mark as ``short exempt'' short sale orders
associated with certain bona fide domestic arbitrage transactions.
Although commenters generally stated that a domestic arbitrage
provision should be included in any short sale price test restriction,
some commenters also stated that the provision, as proposed, should be
expanded to cover more trading scenarios.\484\ However, one commenter
stated that arbitrage activities are not unique in contributing to
market efficiency and any short sale price test restriction that the
Commission adopts should require few, if any, exceptions to maintain
market quality.\485\
---------------------------------------------------------------------------

    \484\ See, e.g., letter from SIFMA (June 2009) (stating that the
exception should cover convertible arbitrage strategies); letter
from AIMA (stating that the provisions relating to domestic and
international arbitrage are too narrow in scope, and that they
should be broadened to include: (1) Bona fide strategies and risk
management tools that provide necessary market liquidity and
efficiency, and (2) other forms of convertible securities that
differ from standard American-style convertibles); letter from
Credit Suisse (June 2009); letter from Citadel et al. (June 2009)
(stating that the exception should be broadened to cover any
transaction in connection with domestic arbitrage, even if not
contemporaneous in time); letter from RBC (June 2009) (stating that
the exception should accommodate convertible arbitrage strategies as
well as arbitrage strategies that do not meet the contemporaneous
requirement of this provision); letter from MFA (June 2009) (stating
that we should broaden the domestic arbitrage provision to include
``bona fide hedging transactions,'' such as risk arbitrage and
statistical arbitrage transactions).
    \485\ See letter from Hudson River Trading; see also letter from
Liquidnet (expressing concern regarding the complexity of the
arbitrage and other exceptions to a short sale price test
restriction and concern that the exceptions could result in
different rules applying to different industry participants).
---------------------------------------------------------------------------

    As discussed above, the short sale price test restriction adopted
in Rule 201(b) will apply to a covered security only after the security
has experienced a significant intra-day price decline, will remain in
place for a limited period of time, and will continue to permit short
selling at a price above the national best bid (rather than, for
example, halting all short selling in that security). As such, we do
not believe it is appropriate at this time to broaden the scope of the
domestic arbitrage provision. Due to the already limited scope and
applicability of Rule 201, we believe that expanding the domestic
arbitrage provision to cover more trading scenarios would undermine our
goals in adopting Rule 201. Thus, we are adopting the provision as
proposed.
    Subsection (e)(7) of former Rule 10a-1 contained an exception
related to domestic arbitrage.\486\ That exception applied to bona fide
arbitrage undertaken to profit from a current difference in price
between a convertible security and the underlying common stock.\487\
The term ``bona fide arbitrage'' describes an activity undertaken by
market professionals in which essentially contemporaneous purchases and
sales are effected in order to lock in a gross profit or spread
resulting from a current differential in pricing of two related
securities.\488\ For example, a person may sell short securities to
profit from a current price differential based upon a convertible
security that entitles him to acquire a number of securities equivalent
to the securities sold short. We continue to believe that bona fide
arbitrage activities are beneficial to the markets because

they tend to reduce pricing disparities between related securities and,
thereby, promote market efficiency.\489\
---------------------------------------------------------------------------

    \486\ See Exchange Act Release No. 1645 (Apr. 8, 1938).
    \487\ See 1999 Concept Release, 64 FR 57996.
    \488\ 1999 Concept Release, 64 FR at 58001, n.54 and
accompanying text (discussing the domestic arbitrage exception under
former Rule 10a-1). See also Section 220.6(b) of Regulation T, which
states that the term ``bona fide arbitrage'' means: ``(1) A purchase
or sale of a security in one market together with an offsetting sale
or purchase of the same security in a different market at as nearly
the same time as practicable for the purpose of taking advantage of
a difference in prices in the two markets; or (2) A purchase of a
security which is, without restriction other than the payment of
money, exchangeable or convertible within 90 calendar days of the
purchase into a second security together with an offsetting sale of
the second security at or about the same time, for the purpose of
taking advantage of a concurrent disparity in the prices of the two
securities.'' 12 CFR 220.6(b). See also Exchange Act Release No.
15533 (Jan. 29, 1979), 44 FR 6084 (Jan. 31, 1979) (``1979 Release'')
(interpretation concerning the application of Exchange Act Section
11(a)(1) to bona fide arbitrage).
    \489\ See 1979 Release, 44 FR 6084.
---------------------------------------------------------------------------

    Rule 201(d)(3) parallels the exception in former Rule 10a-1(e)(7).
Specifically, Rule 201(d)(3) provides that a broker-dealer may mark a
short sale order of a covered security ``short exempt'' if the broker-
dealer has a reasonable basis to believe that the short sale order is
``for a good faith account of a person who then owns another security
by virtue of which he is, or presently will be, entitled to acquire an
equivalent number of securities of the same class as the securities
sold; provided such sale, or the purchase which such sale offsets, is
effected for the bona fide purpose of profiting from a current
difference between the price of the security sold and the security
owned and that such right of acquisition was originally attached to or
represented by another security or was issued to all the holders of any
such securities of the issuer.'' \490\
---------------------------------------------------------------------------

    \490\ Rule 201(d)(3).
---------------------------------------------------------------------------

    The domestic arbitrage exception in former Rule 10a-1 was intended
to be consistent with the arbitrage provision of Regulation T.\491\
Thus, consistent with that provision, former Rule 10a-1(e)(7) referred
to a ``special arbitrage account'' and not a ``good faith account.''
\492\ The Federal Reserve Board amended Regulation T in 1998 to
eliminate the ``special arbitrage account'' and to allow the functions
formerly effected in that account to be effected in a ``good faith
account.'' Consistent with that language, Rule 201(d)(3) refers to a
``good faith account.''
---------------------------------------------------------------------------

    \491\ See 12 CFR 220.6.
    \492\ See Proposal, 74 FR at 18056.
---------------------------------------------------------------------------

    Because allowing domestic arbitrage at a price that is less than or
equal to the current national best bid will potentially promote market
efficiency, we have included in Rule 201 a limited provision to allow
broker-dealers to mark short sale orders ``short exempt'' where the
broker-dealer has a reasonable basis to believe that the conditions in
proposed Rule 201(d)(3) have been met. Thus, Rule 201 is designed to
permit the execution or display of such orders in connection with bona
fide arbitrage transactions involving convertible, exchangeable, and
other rights to acquire the securities sold short, where such rights of
acquisition were originally attached to, or represented by, another
security, or were issued to all the holders of any such class of
securities of the issuer.
5. International Arbitrage
    We are adopting Rule 201(d)(4) without modification to allow a
broker-dealer to mark as ``short exempt'' short sale orders associated
with certain international arbitrage transactions. In response to our
request for comment, commenters were generally supportive of this
provision relating to international arbitrage.\493\ Some commenters,
however, stated that they believe that the provision should be expanded
to cover more trading scenarios.\494\
---------------------------------------------------------------------------

    \493\ See, e.g., letter from SIFMA (June 2009); letter from RBC
(June 2009); letter from NYSE Euronext (Sept. 2009); letter from
STANY (Sept. 2009).
    \494\ See, e.g., letter from RBC (June 2009) (stating that the
exception should accommodate convertible arbitrage strategies as
well as arbitrage strategies that do not meet the contemporaneous
requirement of this provision); letter from Credit Suisse (June
2009); see also supra note 484 (discussing comments regarding the
domestic arbitrage provision).
---------------------------------------------------------------------------

    As discussed above, the short sale price test restriction of Rule
201(b) will apply to a covered security only after the security has
experienced a significant intra-day price decline, will remain in place
for a limited period of time, and will continue to permit short selling
at a price above the current national best bid (rather than, for
example, halting all short selling in that security). As such, we do
not believe it is appropriate at this time to broaden the scope of the
international arbitrage provision. Due to the already limited scope and
applicability of Rule 201, we believe that expanding the scope of the
international arbitrage provision to cover more trading scenarios would
undermine our goals in adopting Rule 201 because its scope would be
even further limited, thereby risking not achieving our goals in
adopting Rule 201. Thus, we are adopting the provision as proposed.
    Former Rule 10a-1(e)(8) included an international arbitrage
exception that was adopted in 1939.\495\ In adopting the exception, the
Commission stated that it was necessary to facilitate ``transactions
which are of a true arbitrage nature, namely, transactions in which a
position is taken on one exchange which is to be immediately covered on
a foreign market.'' \496\ We believe likewise that such transactions
will have utility under Rule 201. As discussed above in connection with
domestic arbitrage, bona fide arbitrage transactions promote market
efficiency because they equalize prices at an instant in time in
different markets or between relatively equivalent securities.
---------------------------------------------------------------------------

    \495\ See Exchange Act Release No. 2039 (Mar. 10, 1939), 4 FR
1209 (Mar. 14, 1939).
    \496\ See id.
---------------------------------------------------------------------------

    Rule 201(d)(4) parallels the exception contained in former Rule
10a-1(e)(8). Specifically, Rule 201(d)(4) provides that a broker-dealer
may mark a short sale order of a covered security ``short exempt'' if
the broker-dealer has a reasonable basis to believe that the short sale
order is ``for a good faith account and submitted to profit from a
current price difference between a security on a foreign securities
market and a security on a securities market subject to the
jurisdiction of the United States, provided that the short seller has
an offer to buy on a foreign market that allows the seller to
immediately cover the short sale at the time it was made.'' \497\
---------------------------------------------------------------------------

    \497\ Rule 201(d)(4).
---------------------------------------------------------------------------

    In Rule 201(d)(4), we have simplified the language of former Rule
10a-1(e)(8) to make it more understandable.\498\ In addition, we have
changed the reference in former Rule 10a-1(e)(8) from a ``special
international arbitrage account'' to a ``good faith account.'' As
discussed above in connection with the domestic arbitrage provision of
Rule 201(d)(3), this revision will make the provision consistent with
the arbitrage provision in Regulation T.
---------------------------------------------------------------------------

    \498\ Former Rule 10a-1(e)(8) provided that the short sale price
test restrictions of that rule shall not apply to: ``Any sale of a
security registered on, or admitted to unlisted trading privileges
on, a national securities exchange effected for a special
international arbitrage account for the bona fide purpose of
profiting [sic] from a current difference between the price of such
security on a securities market not within or subject to the
jurisdiction of the United States and on a securities market subject
to the jurisdiction of the United States; provided the seller at the
time of such sale knows or, by virtue of information currently
received, has reasonable grounds to believe that an offer enabling
him to cover such sale is then available to him in such foreign
securities market and intends to accept such offer immediately.''
---------------------------------------------------------------------------

    In addition, as proposed, we have incorporated language from the
exception in former Rule 10a-1(e)(12) that provided that, for purposes
of the international arbitrage exception, a depository receipt for a
security shall be deemed to be the same security represented by the
receipt. This language was originally included in the Commission's 1939
release adopting the international arbitrage exception, but was
incorporated separately in former Rule 10a-1(e)(12).\499\ Although we
requested comment in the Proposal regarding whether a depository
receipt for a security should be deemed to be the same security
represented by the receipt, we did not receive comments specific to
this request.\500\ As proposed,

we are incorporating in Rule 201(d)(4) the language from the exception
in former Rule 10a-1(e)(12).\501\
---------------------------------------------------------------------------

    \499\ See supra note 495.
    \500\ See Proposal, 74 FR at 18057.
    \501\ To the extent that the short sale is of a depository
receipt and the seller intends to purchase the same security
represented by the depository receipt to immediately cover the short
sale of the depository receipt, the sale may be marked ``short
exempt'' provided that the seller reasonably believes at the time of
the sale that it will be able to convert the security to be
purchased into the depository receipt and deliver the depository
receipt by settlement date for the sale.
---------------------------------------------------------------------------

    As with the exception in former Rule 10a-1(e)(8), Rule 201(d)(4)
will apply only to bona fide arbitrage transactions. Thus, this
provision will only be applicable if at the time of the short sale
there is a corresponding offer in a foreign securities market, so that
the immediate covering purchase will have the effect of neutralizing
the short sale. We believe Rule 201(d)(4) is necessary to facilitate
arbitrage transactions in which a position is taken in a security in
the U.S. market, and which is to be immediately covered in a foreign
market.\502\ Thus, we do not believe that permitting broker-dealers to
mark these orders ``short exempt'' will undermine our goals for
adopting Rule 201, and, as described above, we believe facilitating or
permitting these transactions has utility in terms of promoting market
and pricing efficiency.
---------------------------------------------------------------------------

    \502\ We note that the requirement that the transaction be
``immediately'' covered on a foreign market requires the foreign
market to be open for trading at the time of the transaction. See
Proposal, 74 FR at 18057, n.166; see also 2003 Regulation SHO
Proposing Release, 68 FR at 62986, n.119.
---------------------------------------------------------------------------

6. Over-Allotments and Lay-Off Sales
    We have determined to adopt without modification in Rule 201(d)(5)
a provision that will permit a broker-dealer to mark as ``short
exempt'' short sale orders by underwriters or syndicate members
participating in a distribution in connection with an over-allotment,
and any short sale orders for purposes of lay-off sales by such persons
in connection with a distribution of securities through a rights or
standby underwriting commitment.\503\ In response to our request for
comment, commenters were generally supportive of inclusion of this
provision relating to certain syndicate activity.\504\ Some commenters,
however, asked that we expand this provision beyond over-allotment and
lay-off sales.\505\
---------------------------------------------------------------------------

    \503\ See Rule 201(d)(5).
    \504\ See, e.g., letter from BATS (May 2009); letter from SIFMA
(June 2009); letter from NYSE Euronext (Sept. 2009).
    \505\ See, e.g., letter from SIFMA (June 2009).
---------------------------------------------------------------------------

    As discussed above, the short sale price test restriction of Rule
201(b) will apply to a covered security only after the security has
experienced a significant intra-day price decline, will remain in place
for a limited period of time, and will continue to permit short selling
at a price above the national best bid (rather than, for example,
halting all short selling in that security). As such, we do not believe
it is appropriate at this time to broaden the scope of the provision
relating to over-allotment and lay-off sales. Due to the already
limited scope and applicability of Rule 201, we believe that expanding
the scope of this provision to cover other sales effected in connection
with a distribution would undermine our goals in adopting Rule 201
because it would further limit the scope of the Rule, thereby risking
not achieving our goals in adopting Rule 201. Thus, we are adopting the
provision as proposed. In addition, we note that we are including a
``short exempt'' marking provision for syndicate and lay-off sales in
part because, as discussed further below, we have historically excepted
such activity from short sale rules.
    Former Rule 10a-1(e)(10) contained an exception for over-allotment
and lay-off sales.\506\ Although the exception was not adopted until
1974, the Commission's approval of the concept of excepting over-
allotments and lay-off sales from short sale rules is long-
standing.\507\ In addition, we note that recently we excepted these
sales from the July Emergency Order, which among other things required
that short sellers borrow or arrange to borrow securities prior to
effecting a short sale, stating that it was not necessary for the Order
to cover such sales because such activity is covered by Regulation M
under the Exchange Act,\508\ an anti-manipulation rule.\509\ In
accordance with the long-standing Commission position regarding these
sales, we are including in Rule 201(d)(5) a provision to permit broker-
dealers to mark as ``short exempt'' short sale orders in connection
with over-allotment and lay-off sales, which provision also parallels
the exception in former Rule 10a-1(e)(10).
---------------------------------------------------------------------------

    \506\ See 1974 Release, 39 FR 35570.
    \507\ See, e.g., Exchange Act Release No. 3454 (July 6, 1946),
in which the Commission approved the NYSE's special offering plan,
which permitted short sales in the form of over-allotments to
facilitate market stabilization.
    \508\ 17 CFR 242.100 et seq.
    \509\ See Exchange Act Release No. 58190 (July 18, 2008), 73 FR
42837 (July 23, 2008) (amending the July Emergency Order to include
exceptions for certain short sales).
---------------------------------------------------------------------------

7. Riskless Principal Transactions
    We have determined to adopt without modification in Rule 201(d)(6)
a provision that will permit a broker-dealer to mark as ``short
exempt'' short sale orders where broker-dealers are 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.\510\ In response to our request for comment, commenters that
specifically addressed this provision supported its inclusion.\511\
---------------------------------------------------------------------------

    \510\ See Rule 201(d)(6).
    \511\ See, e.g., letter from BATS (May 2009); letter from SIFMA
(June 2009); letter from Credit Suisse (June 2009); letter from NYSE
Euronext (Sept. 2009).
---------------------------------------------------------------------------

    As discussed in the Proposal,\512\ in 2005, the Commission, via
authority delegated to the Staff, granted exemptive relief under former
Rule 10a-1 for any broker-dealer that facilitates a customer buy or
long sell order on a riskless principal basis.\513\ In granting the
relief, the Commission noted representations made in the letter
requesting relief that, in the situation where the amount of securities
that the broker-dealer purchases for the customer may not be sufficient
to give the broker-dealer an overall net ``long'' position, former Rule
10a-1 would constrain the ability of the broker-dealer to fill the
customer buy order. Further, the Commission noted representations in
the letter requesting relief that, because such short sales would be
effected only in response to a customer buy order, this should vitiate
any concerns about such sales having a depressing impact on the
security's price.\514\
---------------------------------------------------------------------------

    \512\ See Proposal, 74 FR at 18057-18058.
    \513\ See letter from James A. Brigagliano, Assistant Director,
Division of Market Regulation, SEC, to Ira Hammerman, Senior Vice
President and General Counsel, Securities Industry Association,
dated July 18, 2005 (``Riskless Principal Letter'').
    \514\ See id.
---------------------------------------------------------------------------

    In addition, the Commission noted representations made in the
letter requesting relief that where a broker-dealer is facilitating a
customer long sale order in a riskless principal transaction, because
the ultimate seller is long the shares being sold, these transactions
present none of the potential abuses that former Rule 10a-1 was
designed to address.\515\ The Commission also noted representations
that the application of former Rule 10a-1 to riskless principal
transactions involving a customer long sale can inhibit the broker-
dealer's ability to provide timely (or any) execution to such customer
long sale. Specifically, if the broker-dealer has a net short position,
the broker-dealer will be restricted from executing its own principal
trade to complete the first leg of the riskless principal
transaction.\516\

Thus, compliance with former Rule 10a-1 would adversely affect a
broker-dealer's ability to provide best execution to a customer
order.\517\
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    \515\ See id.
    \516\ See id.
    \517\ See id.
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    Taken together, Rules 201(a)(8) and (d)(6) parallel the conditions
for relief in the Riskless Principal Letter.\518\ Consistent with the
relief granted in the Riskless Principal Letter, we believe that
including a provision to permit a broker-dealer to mark ``short
exempt'' short sale orders in connection with riskless principal
transactions is appropriate and will not undermine our goals in
adopting short sale price test regulation. In particular, we note that
such a provision will facilitate a broker-dealer's ability to provide
best execution to customer orders. In addition, such provision will
apply only where the customer is selling long.
---------------------------------------------------------------------------

    \518\ These conditions are also consistent with the definition
of ``riskless principal transactions'' under Rule 10b-18 of the
Exchange Act. See 17 CFR 240.10b-18(a)(12).
---------------------------------------------------------------------------

    Rule 201(a)(8) defines the term ``riskless principal'' to mean ``a
transaction in which a broker or dealer, after having received an order
to buy a security, purchases the security as principal at the same
price to satisfy the order to buy, exclusive of any explicitly
disclosed markup or markdown, commission equivalent, or other fee, or,
after having received an order to sell, sells the security as principal
at the same price to satisfy the order to sell, exclusive of any
explicitly disclosed markup or markdown, commission equivalent, or
other fee.'' \519\
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    \519\ Rule 201(a)(8). In addition to being consistent with the
conditions in the Riskless Principal Letter and Rule 10b-18(a)(12)
of the Exchange Act, this definition is consistent with the
definition of ``riskless principal'' in FINRA Rule 6642. See FINRA
Rule 6642(d). We note that Rule 201(a)(8), as adopted, is slightly
modified from the definition in the Proposal in that we have added
language to clarify that the term ``same price'' shall be exclusive
of any explicitly disclosed markup or markdown, commission
equivalent, or other fee. This language is consistent with the
conditions in the Riskless Principal Letter and Rule 10b-18(a)(12).
It is also consistent with FINRA's trade reporting rules which
require a riskless principal transaction in which both legs are
executed at the same price to be reported once, in the same manner
as an agency transaction, exclusive of any markup, markdown,
commission equivalent, or other fee. See FINRA Rule 6380A(d)(3)(B).
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    Rule 201(d)(6) provides that a broker-dealer may mark a short sale
order ``short exempt'' if the broker-dealer has a reasonable basis to
believe that the short sale order is to effect the execution of a
customer purchase or the execution of a customer ``long'' sale on a
riskless principal basis.\520\ In addition, Rule 201(d)(6) requires the
broker-dealer, if it marks an order ``short exempt'' under this
provision, to have written policies and procedures in place to assure
that, at a minimum: (i) The customer order was received prior to the
offsetting transaction; (ii) the offsetting transaction is allocated to
a riskless principal or customer account within 60 seconds of
execution; and (iii) 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 the
broker-dealer relies pursuant to this provision.\521\
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    \520\ See Rule 201(d)(6). Due to the modification to the
definition of ``riskless principal'' in Rule 201(a)(8), we have not
included in Rule 201(d)(6) the proposed language that stated that
the purchase or sell order must be given the same per-share price at
which the broker-dealer sold or bought shares to satisfy the
facilitated order, exclusive of any explicitly disclosed markup or
markdown, commission equivalent or other fee. See also supra note
519.
    \521\ See Rule 201(d)(6). We note that we determined to adopt,
as proposed, in Rule 201(d)(6) an explicit requirement that broker-
dealers must establish policies and procedures for handling such
transactions to be consistent with the conditions in the Riskless
Principal Letter and Rule 10b-18(a)(12), which also contain such a
requirement.
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    We believe that Rule 201(d)(6) will provide broker-dealers with
additional flexibility to facilitate customer orders and provide best
execution. In addition, we believe that the conditions set forth in
Rule 201(d)(6) will provide a mechanism for the surveillance of the
provision's use by linking it to specific incoming orders and
executions, and by requiring broker-dealers to establish procedures for
handling such transactions. These requirements will help ensure that
broker-dealers are complying with Rule 201(d)(6).
8. Transactions on a Volume-Weighted Average Price Basis
    We have determined to adopt in Rule 201(d)(7) without modification
the ability for a broker-dealer to mark as ``short exempt'' certain
short sale orders executed on a volume-weighted average price
(``VWAP'') basis. In response to the Proposal, commenters to this
provision were supportive of the provision. Some commenters, however,
requested that we expand this provision to, for example, cover all
benchmark orders, similar to the exception in Rule 611 of Regulation
NMS.\522\ As discussed above, the short sale price test restriction of
Rule 201(b) will apply to a covered security only after the security
has experienced a significant intra-day price decline, will remain in
place for a limited period of time, and will continue to permit short
selling at a price above the current national best bid (rather than,
for example, halting all short selling in that security). As such, we
do not believe it is appropriate at this time to broaden the scope of
the provision relating to transactions on a VWAP basis. Due to the
already limited scope and applicability of Rule 201, we believe that
expanding the scope of this provision to cover other transactions would
undermine our goals in adopting Rule 201 because it would further limit
the scope of the Rule, thereby risking not achieving our goals in
adopting Rule 201. Thus, we are adopting the provision as proposed.
---------------------------------------------------------------------------

    \522\ See, e.g., letter from SIFMA (June 2009); letter from RBC
(June 2009); see also letter from Goldman Sachs (June 2009); letter
from ICI (June 2009) (stating that a broadened exception would be
necessary to facilitate execution of the types of large orders
executed by institutional investors and that such benchmark orders
do not raise concerns of manipulation or negative market effects
that a short sale price test restriction would be designed to
prevent); letter from Credit Suisse (Sept. 2009) (positing that the
exception should be extended to cover any orders executed on a
similar formulaic basis as VWAP orders).
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    Under former Rule 10a-1, the Commission, via authority delegated to
the Staff, granted limited relief from that rule in connection with
short sales executed on a VWAP basis.\523\ The relief was limited to
VWAP transactions that are arranged or ``matched'' before the market
opens at 9:30 a.m., but are not assigned a price until after the close
of trading when the VWAP value is calculated. The Commission granted
the exemptions based, in part, on the fact that these VWAP short sale
transactions appeared to pose little risk of facilitating the type of
market effects that former Rule 10a-1 was designed to prevent.\524\ In
particular, the Commission noted that the pre-opening VWAP short sale
transactions do not participate in or affect the determination of the
VWAP for a particular security.\525\ Moreover, the Commission stated
that all trades used to calculate the day's VWAP would continue to be
subject to former Rule 10a-1.\526\
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    \523\ See e.g. letter from Larry E. Bergmann, Senior Associate
Director, Division of Market Regulation, SEC, to Edith Hallahan,
Associate General Counsel, Phlx, dated Mar. 24, 1999; letter from
Larry E. Bergmann, Senior Associate Director, Division of Market
Regulation, SEC, to Soo J. Yim, Wilmer, Cutler & Pickering, dated
Dec. 7, 2000; letter from James Brigagliano, Assistant Director,
Division of Market Regulation, SEC, to Andre E. Owens, Schiff Hardin
& Waite, dated Mar. 30, 2001; letter from James Brigagliano,
Assistant Director, Division of Market Regulation, SEC, to Sam Scott
Miller, Esq., Orrick, Herrington & Sutcliffe LLP, dated May 12,
2001; letter from James Brigagliano, Assistant Director, Division of
Market Regulation, SEC, to William W. Uchimoto, Esq., Vie
Institutional Services, dated Feb. 12, 2003.
    \524\ See id.
    \525\ See id.
    \526\ See id.
---------------------------------------------------------------------------

    Consistent with the relief granted under former Rule 10a-1 and with
the Proposal, we are providing that a broker-dealer may mark as ``short

exempt'' certain short sale orders executed at the VWAP. Rule 201(d)(7)
differs from the relief granted under former Rule 10a-1, however, in
that it is not limited to VWAP transactions that are arranged or
``matched'' before the market opens at 9:30 a.m., or that are not
assigned a price until after the close of trading when the VWAP value
is calculated. As noted in the Proposal, we believe this restriction is
not necessary because VWAP short sale transactions appear to pose
little risk of facilitating the type of market effects that a short
sale price test restriction is designed to prevent. In addition, in
contrast to the Proposal, we have not included in Rule 201 the
requirement that no short sale orders marked ``short exempt'' may be
used to calculate the VWAP. We have not incorporated this condition
into Rule 201(d)(7) because the information used to calculate the VWAP
will not contain information regarding whether an order was marked
``short exempt.''
    Thus, pursuant to Rule 201(d)(7), a broker-dealer may mark a short
sale order of a covered security ``short exempt'' if the broker-dealer
has a reasonable basis to believe that the short sale order is for the
sale of a covered security at the VWAP that meets the following
conditions: \527\ (1) The VWAP for the covered security is calculated
by: Calculating the values for every regular way trade reported in the
consolidated system for the security during the regular trading
session, by multiplying each such price by the total number of shares
traded at that price; compiling an aggregate sum of all values; and
dividing the aggregate sum by the total number of reported shares for
that day in the security; (2) the transactions are reported using a
special VWAP trade modifier; (3) the VWAP matched security qualifies as
an ``actively-traded security'' (as defined under Rules 101(c)(1) and
102(d)(1) of Regulation M), or where the subject listed security is not
an ``actively-traded security,'' the proposed short sale transaction
will be permitted only if it is conducted as part of a basket
transaction of twenty or more securities in which the subject security
does not comprise more than 5% of the value of the basket traded; (4)
the transaction is not effected for the purpose of creating actual, or
apparent, active trading in or otherwise affecting the price of any
security; and (5) a broker or dealer will act as principal on the
contra-side to fill customer short sale orders only if the broker-
dealer's position in the covered security, as committed by the broker-
dealer during the pre-opening period of a trading day and aggregated
across all of its customers who propose to sell short the same security
on a VWAP basis, does not exceed 10% of the covered security's relevant
average daily trading volume, as defined in Regulation M.\528\
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    \527\ See Rule 201(d)(7).
    \528\ See Rule 201(d)(7); 17 CFR 242.100(b) (defining average
daily trading volume), 242.101(c)(1), 242.102(d)(1).
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    Except as discussed above, the conditions set forth in Rule
201(d)(7) parallel the conditions contained in the exemptive relief
from former Rule 10a-1 granted for VWAP short sale transactions. We
believe that these conditions worked well in restricting the exemptive
relief to situations that generally would not raise the harms that
short sale price tests are designed to prevent. We believe they will be
similarly effective in serving that function today and, therefore, we
have incorporated them into Rule 201(d)(7).
9. Decision Not To Adopt a Provision That a Broker-Dealer May Mark an
Order ``Short Exempt'' in Connection With Bona Fide Market Making
Activity
    As discussed in the Proposal, former Rule 10a-1(e)(5) provided a
limited exception from the restrictions of that rule for ``[a]ny sale *
* * by a registered specialist or registered exchange market maker for
its own account on any exchange with which it is registered for such
security, or by a third market maker for its own account over-the-
counter, (i) Effected at a price equal to or above the last sale,
regular way, reported for such security pursuant to an effective
transaction reporting plan * * *. Provided, however, That any exchange,
by rule, may prohibit its registered specialist and registered exchange
market makers from availing themselves of the exemption afforded by
this paragraph (e)(5) if that exchange determines that such action is
necessary or appropriate in its market in the public interest or for
the protection of investors.'' \529\ Unless prohibited by exchange
rule, this exception was intended to permit registered specialists or
market makers to protect customer orders against transactions in other
markets in the consolidated system by allowing them to sell short at a
price equal to the last trade price reported to the consolidated
system, even if that sale was on a minus or zero-minus tick.\530\
Although former Rule 10a-1 included this exception for market makers,
exchanges adopted rules that prohibited their registered specialists
and market makers from availing themselves of this exception.\531\ In
addition, former Rule 10a-1 did not contain a general exception for
short selling in connection with bona fide market making
activities.\532\
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    \529\ See Proposal, 74 FR at 18059.
    \530\ See 1974 Release, 39 FR 35570. Former Rule 10a-1(a)(1)(i)
referenced the last sale price reported to an effective transaction
reporting plan, but former Rule 10a-1(a)(2) also permitted an
exchange to make an election to use the last sale price reported in
that exchange market. Certain exchanges, such as the NYSE,
implemented short sale price test rules consistent with former Rule
10a-1(a)(2). See, e.g., former NYSE Rule 440B.
    \531\ See 1974 Release, 39 FR 35570.
    \532\ We note, however, that NASD's former bid test contained an
exception for short sales executed by qualified market makers in
connection with bona fide market making. Although the NASD's former
bid test contained an exception for short sales executed by
qualified market makers in connection with bona fide market making
activity, we understand that market makers relied on the exception a
small percentage of the time. For example, a 1997 study indicates
that during a sample month in 1997, market maker short sales at or
below the inside bid accounted for only 2.41% of their total share
volume. See D. Timothy McCormick and Bram Zeigler, The Nasdaq Short
Sale Rule: Analysis of Market Quality Effects and The Market Maker
Exemption, NASD Economic Research, (August 7, 1997) at 27; see also
2003 Regulation SHO Proposing Release, 68 FR at 62989. In addition,
we note that when the Commission approved NASD's former bid test and
the market maker exception to the bid test, it noted concerns that
the market maker exception could create opportunities for abusive
short selling. See Exchange Act Release No. 34277 (June 29, 1994),
59 FR 34885 (July 7, 1994). See also supra note 43 (discussing NASD
Rule 3350).
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    In the Proposal, in connection with one proposed rule, the proposed
circuit breaker halt rule, we included a provision that would permit a
broker-dealer to mark a short sale order ``short exempt'' in connection
with certain bona fide market making activities. None of the other
proposed rules contained a ``short exempt'' marking provision with
respect to bona fide market making activities. In connection with the
proposed circuit breaker halt rule, we included an exception for equity
and options market makers engaged in bona fide market making
activities.\533\ We also included in the proposed circuit breaker halt
rule an exception related to bona fide market making in
derivatives.\534\
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    \533\ See Proposal, 74 FR at 18110. Proposed Rule 201(d)(1) of
the proposed circuit breaker halt rule provided that the short
selling halt would not apply to ``[a]ny sale of a covered security
by a registered market maker, block positioner, or other market
maker obligated to quote in the over-the-counter market, in each
case that are selling short a covered security as part of bona fide
market making in such covered security.'' Id.
    \534\ See id. Proposed Rule 201(d)(4) of the proposed circuit
breaker halt rule provided that the short selling halt would not
apply to ``[a]ny sale of a covered security by any person that is a
market maker, including an over-the-counter market maker, if the
sale is part of a bona fide market making and hedging activity
related directly to bona fide market making in: (i) Derivative
securities based on that covered security; or (ii) exchange traded
funds and exchange traded notes of which that covered security is a
component.'' Id.

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    In response to our decision not to provide in the Proposal for most
of the proposed alternatives that a broker-dealer may mark an order
``short exempt'' in connection with bona fide market making activity,
we received a wide variety of comments both supporting and opposing
such a provision. Many commenters stated that any short sale price test
restriction adopted by the Commission must include an exception for
market makers due to the large amount of liquidity that they provide to
the markets; although comments varied with respect to the necessity of
such an exception to the various proposed price test restrictions and
circuit breaker rules and to whom such an exception should apply.\535\
Commenters stated that the lack of a market maker exception to any
short sale price test restriction could result in, among other things,
reduced liquidity, increased bid-ask spreads, increased volatility,
increased barriers to entry for new market makers, reduced competition
among market makers, and increased costs to market makers and
investors.\536\ Some commenters stated that the Commission should