action would promote efficiency, competition, and capital
formation.\1113\ In addition, Section 23(a)(2) of the Exchange Act
requires the Commission, when adopting rules under the Exchange Act, to
consider the impact such rules would have on competition.\1114\
Exchange Act Section 23(a)(2) prohibits the Commission from adopting
any rule that would impose a burden on competition not necessary or
appropriate in furtherance of the purposes of the Exchange Act.
---------------------------------------------------------------------------

    \1113\ 15 U.S.C. 78c(f).
    \1114\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    A number of commenters noted concerns about the impact of a short
sale price test restriction on efficiency, competition and capital
formation.\1115\ One commenter stated that ``the empirical evidence
from the many academic and Commission studies and experiences of [the
commenters] * * * raise a substantial question about whether the
proposed short sale restrictions can satisfy these standards.'' \1116\
Another commenter noted the beneficial impact of short selling on
efficiency and competition, quoting the Commission's statements that
short selling provides the market with liquidity and pricing
efficiency.\1117\ As discussed below, we considered these concerns, and
took them into account in formulating Rules 200(g) and 201, as adopted,
to address, to the extent possible, these concerns.
---------------------------------------------------------------------------

    \1115\ See, e.g., letter from Joseph A. Dear, Chief Investment
Officer, California Public Employees' Retirement System, dated June
19, 2009; letter from Citadel et al. (June 2009); letter from
Pershing Square; letter from Vanguard (June 2009); letter from Amer.
Bar Assoc. (July 2009); letter from Amer. Bar Assoc. (Sept. 2009);
letter from MFA (Oct. 2009).
    \1116\ Letter from Citadel et al. (June 2009).
    \1117\ See letter from Pershing Square (citing 2006 Price Test
Elimination Proposing Release, 71 FR at 75069-75070).
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A. Competition

    We begin our consideration of potential competitive impacts with
observations of the current structure of the markets with respect to
trading centers and broker-dealers, mindful of the statutory
requirements regarding competition. Based on our experience in
regulating the securities markets, including reviewing information
provided by trading centers and broker-dealers in their registrations
and filings with us, and approving such registration applications, we
discuss below the basic framework of the markets they comprise.
1. Market Structure for Trading Centers and Broker-Dealers
    Trading centers include national securities exchanges or national
securities associations that operate an SRO trading facility,
ATSs,\1118\ exchange market makers and OTC market makers, and any other
broker-dealer that executes orders internally, whether as agent or
principal.\1119\ All of these entities will be required to alter their
trading mechanisms to comply with Rule 200(g) and Rule 201.
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    \1118\ Under Regulation ATS, any entity that falls within the
definition of a securities exchange must apply to be a securities
exchange or must register as an ATS, subject to certain exceptions.
See 17 CFR 242.300, 301; see also 15 U.S.C. 78c(a)(1); 17 CFR
240.3b-16.
    \1119\ See 17 CFR 242.600(b)(78). Currently, no national
securities association is a trading center, as that term is defined
in Rule 600(b)(78) of Regulation NMS.
---------------------------------------------------------------------------

    The equity trading industry is a competitive one, with reasonably
low barriers to entry. The intensity of competition across trading
platforms in this industry has increased in the past decade as a result
of a number of factors, including market reforms and technological
advances. This increase in competition has resulted in decreases in
market concentration, more competition among trading centers, a
proliferation of trading platforms competing for order flow, and
decreases in trading fees.
    The reasonably low barriers to entry for trading centers are
evidenced, in part, by the fact that new entities, primarily ATSs,
continue to enter the market.\1120\ For example, currently there are
approximately 50 registered ATSs that trade covered securities. In
addition, the Commission within the past few years has approved
applications by two entities--BATS and Nasdaq--to become registered as
national securities exchanges for trading equities, and approved
proposed rule changes by two existing exchanges--ISE and CBOE--to add
equity trading facilities to their existing options business. We
believe that competition among trading centers has been facilitated by
Rule 611 of Regulation NMS,\1121\ which encourages quote-based
competition between trading centers; Rule 605 of Regulation NMS,\1122\
which empowers investors and broker-dealers to compare execution
quality statistics across trading centers; and Rule 606 of Regulation
NMS,\1123\ which enables customers to monitor order routing practices.
---------------------------------------------------------------------------

    \1120\ See Exchange Act Release No. 60997 (Nov. 13, 2009), 74 FR
61208, 61234 (Nov. 23, 2009) (discussing the reasonably low barriers
to entry for ATSs and that these reasonably low barriers to entry
have generally helped to promote competition and efficiency).
    \1121\ 17 CFR 242.611.
    \1122\ 17 CFR 242.605.
    \1123\ 17 CFR 242.606.
---------------------------------------------------------------------------

    Broker-dealers are required to register with the Commission and at
least one SRO. The broker-dealer industry, including market makers, is
a competitive industry, with most trading activity concentrated among
several dozen larger participants and with thousands of smaller
participants competing for niche or regional segments of the market.
    There are 5,178 registered broker-dealers, of which 890 are small
broker-dealers.\1124\ Larger broker-dealers often enjoy economies of
scale over smaller broker-dealers and compete with each other to
service the smaller broker-dealers, who are both their competitors and
customers. The reasonably low barriers to entry for broker-dealers are
evidenced, for example, by the fact that the average number of new
broker-dealers entering the market each year between 2001 and 2008 was
389.\1125\
---------------------------------------------------------------------------

    \1124\ These numbers are based on a review of 2007 and 2008
FOCUS Report filings reflecting registered broker-dealers, and
discussions with SRO staff. The number does not include broker-
dealers that are delinquent on FOCUS Report filings. We discuss the
impact of Rule 201 on small broker-dealers in Section XII.B., below.
    \1125\ This number is based on a review of FOCUS Report filings
reflecting registered broker-dealers from 2001 through 2008. The
number does not include broker-dealers that are delinquent on FOCUS
Report filings. New registered broker-dealers for each year during
the period from 2001 through 2008 were identified by comparing the
unique registration number of each broker-dealer filed for the
relevant year to the registration numbers filed for each year
between 1995 and the relevant year.

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

2. Discussion of Impacts of Rules 200(g) and 201 on Competition
    We believe that the estimated costs associated with implementing
and complying with Rules 200(g) and 201 are not so large as to raise
significant barriers to entry, or otherwise significantly alter the
competitive landscape of the industries involved. In industries
characterized by reasonably low barriers to entry and intense
competition, the viability of some of the less successful competitors
may be sensitive to regulatory costs. Nonetheless, given the reasonably
low barriers to entry into the market for execution services, we
believe that the trading center and broker-dealer industries will
remain competitive, despite the costs associated with implementing and
complying with Rules 200(g) and 201, even if those costs influence to
some degree the entry or exit decisions of individual trading centers
or broker-dealers at the margin.
    Several commenters expressed concerns about the impact of a short
sale price test restriction on competition among broker-dealers.\1126\
For example, one commenter noted concerns with respect to decreased
competition and increased broker-dealer ``internalization.'' \1127\
Specifically, this commenter stated that, as a result of short sale
price test restrictions, ``a widening of bid/offer spreads and decrease
in liquidity provided by professional market makers could reverse the
consolidation of liquidity in the public markets, permitting some
brokers once again to take advantage of decreased competition in price
discovery and offer substantially inferior (but still technically
legal) internalization prices to their customers.'' \1128\ Although we
considered this commenter's concerns, we note that, as discussed above,
due to the circuit breaker approach of Rule 201, as well as findings by
the Pilot Results regarding the market impact of former Rule 10a-1, we
believe that the short sale price test restrictions of Rule 201 will
have a limited, if any, negative market impact, such as widening of
bid/offer spreads or decreased liquidity.\1129\ Thus, we do not believe
that Rule 201 will result in decreased competition in price discovery
or increased internalization.
---------------------------------------------------------------------------

    \1126\ See, e.g., letter from Credit Suisse (June 2009); letter
from EWT (June 2009); letter from FIF (June 2009); letter from NSCP.
    \1127\ Letter from EWT (June 2009).
    \1128\ Id.
    \1129\ See supra Section X.B.1.a. (discussing the impact of Rule
201 on liquidity, market volume, bid-ask spreads, price discovery
and volatility).
---------------------------------------------------------------------------

    Another commenter stated that ``while it will not be mandated that
firms avail themselves of the [broker-dealer provision], competitive
pressure is likely to mean that broker dealers will need to invest
resources and time in building this functionality.'' \1130\ We
recognize that broker-dealers are faced with competitive concerns and
that such concerns may influence their decision whether or not to rely
on the broker-dealer provision of Rule 201(c). We also recognize that
if a broker-dealer chooses to rely on the broker-dealer provision it
will impose costs on such broker-dealers, and we considered these costs
in determining to adopt in Rule 201 the alternative uptick rule rather
than a rule that requires sequencing of the national best bid.\1131\
Although commenters expressed concerns with respect to the costs of the
broker-dealer provision of Rule 201(c) and the resulting impact on
competition, many of these comments were not specific to the
alternative uptick rule.\1132\ Without a sequencing requirement under
the alternative uptick rule, we believe that the policies and
procedures required to rely on the broker-dealer provision under Rule
201(c) will be easier and less costly to implement and monitor than the
cost concerns and estimates provided by some commenters.
---------------------------------------------------------------------------

    \1130\ Letter from FIF (June 2009). In addition, some commenters
raised concerns with respect to competitive pressure on smaller
broker-dealers, in particular, in connection with a short sale price
test restriction. As noted above, we discuss the impact of Rule 201
on small broker-dealers in Section XII.B., below.
    \1131\ See supra Section IX.E.2. (discussing the implementation
and on-going monitoring and compliance costs of the broker-dealer
provision).
    \1132\ See, e.g., letter from STANY (June 2009); letter from FIF
(June 2009); letter from Lime Brokerage (June 2009); letter from
T.D. Pro Ex; letter from Taurus Compliance; letter from Credit
Suisse (June 2009); letter from NSCP.
---------------------------------------------------------------------------

    Other commenters noted concerns regarding reduced competition among
market makers in the absence of a bona fide market making
exception.\1133\ We believe, however, that due to the approach of Rule
201, that is, the combination of a circuit breaker with the alternative
uptick rule, the lack of such a bona fide market maker exception will
have minimal, if any, impact on competition among market makers. This
is because, as noted by some commenters, equity market makers for the
most part sell at their offer quote.\1134\ Thus, the short sale price
test restriction of Rule 201, which requires short selling at a price
above the national best bid and only if the circuit breaker has been
triggered, is consistent with equity market making strategies because
these market makers generally sell at prices above the national best
bid.\1135\ This is particularly true where a security's price is
declining, as market makers often provide liquidity on the opposite
side of price moves to help reduce volatility. Thus, even during times
when a covered security is undergoing significant downward price
pressure, market makers are generally required to provide liquidity in
that security.\1136\
---------------------------------------------------------------------------

    \1133\ See, e.g., letter from EWT (June 2009); letter from EWT
(Sept. 2009); letter from GETCO (June 2009); letter from Goldman
Sachs (June 2009); but cf. letter from Dr. Jim DeCosta (noting that
there are currently few barriers to entry for market makers and
abuse can arise from small market makers, who are in need of
business, being willing to misuse a bona fide market making
exemption in exchange for order flow). See also supra Section
III.B.9. (discussing the decision not to include an exemption for
bona fide market making).
    \1134\ See, e.g., letter from CBOE (June 2009).
    \1135\ See letter from Direct Edge (Sept. 2009); see also supra
note 532 (discussing a 1997 study indicating 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).
    \1136\ See, e.g., NYSE Rule 104(f) (stating that ``it is
commonly desirable that a member acting as [a designated market
maker] engage to a reasonable degree under existing circumstances in
dealings for the [designated market maker's] own account when lack
of price continuity, lack of depth, or disparity between supply and
demand exists or is reasonably to be anticipated''); CBOE Rule
53.23(a)(1) (stating that ``[w]ith respect to each security for
which it holds an Appointment, a CBSX Remote Market Maker has a
continuous obligation to engage, to a reasonable degree under the
existing circumstances, in dealings for its own account when there
exists, or it is reasonably anticipated that there will exist, a
lack of price continuity, or a temporary disparity between the
supply of and demand for a particular security'').
---------------------------------------------------------------------------

    Weighing against the competitive concerns for the trading center
and broker-dealer industries, Rule 201 will advance the purposes of the
Exchange Act in a number of significant ways. It will help benefit the
market for a particular security by allowing market participants, when
a security is undergoing a significant intra-day price decline, an
opportunity to re-evaluate circumstances and respond to volatility in
that security. It will also help restore investor confidence during
times of substantial uncertainty because, once the circuit breaker has
been triggered for a particular security, long sellers will have
preferred access to bids for the security, and the security's continued
price decline will more likely be due to long selling and the
underlying fundamentals of the issuer, rather than to other factors. We
also believe that a circuit breaker will better target short selling
that may be related to potential

bear raids \1137\ and other forms of manipulation that may be used to
exacerbate a price decline in a covered security.
---------------------------------------------------------------------------

    \1137\ See supra note 36 and accompanying text.
---------------------------------------------------------------------------

    At the same time, however, we recognize the benefits to the market
of legitimate short selling, such as the provision of liquidity and
price efficiency, and considered these benefits in adopting the circuit
breaker approach of Rule 201. Under the circuit breaker approach, the
alternative uptick rule will only be imposed when a covered security
has experienced an intra-day price decline of 10% or more and will only
apply for the remainder of the day and the following day. We believe
that because of the limited scope and duration of Rule 201, it will not
interfere with the smooth functioning of the markets for the majority
of securities, including when prices in such securities are undergoing
minimal downward price pressure or are stable or rising. To the extent
that Rule 201 impacts the benefits of legitimate short selling, such as
the provision of liquidity and price efficiency, we believe that such
costs are justified by the benefits provided by the Rule in preventing
short selling, including potentially manipulative or abusive short
selling, from being used as a tool to exacerbate a declining market in
a security.
    After due consideration of all these factors and the comments we
have received, we have determined that any burden on competition that
Rules 200(g) and 201 may impose is necessary or appropriate in the
furtherance of the purposes of the Exchange Act noted above.

B. Capital Formation

    A purpose of Rule 201 is to strengthen investor confidence in the
markets we regulate which should help make investors more willing to
invest, resulting in the promotion of capital formation. Fair and
robust secondary markets, in which legitimate short selling can play a
positive role, supports the public offerings by which issuers raise
capital and, as a result, investors who provided private capital
realize profits and obtain liquidity. In addition, long holdings are
integral to capital formation. By placing long holders ahead of short
sellers in the execution queue under certain limited circumstances,
Rule 201 promotes capital formation, since investors should be more
willing to hold long positions if they know they may have a preferred
position over short sellers when they wish to sell in the market for
that security during a significant price decline in that security.
    In addition, paragraphs (c) and (d) of Rule 201 include provisions
that are designed to limit any adverse effects on the public offering
process, which is necessary to capital formation, while at the same
time not undermining the goals of Rule 201.\1138\ In particular, Rule
201(d)(5) is designed to facilitate price support during the offering
process by allowing broker-dealers to mark short sale orders ``short
exempt'' if the short sale is by an underwriter or syndicate member
participating in a distribution in connection with an over-allotment or
if the short sale order is by an underwriter or syndicate member for
purposes of a lay-off sale in connection with a distribution of
securities through a rights or standby underwriting commitment.\1139\
---------------------------------------------------------------------------

    \1138\ See supra Section III.B. (discussing ``short exempt''
provisions to Rule 201). Under these provisions, if a broker-dealer
chooses to rely on its own determination that it is submitting the
short sale order to the trading center at a price that is above the
current national best bid at the time of submission or to rely on an
exception specified in the Rule, it must mark the order as ``short
exempt.''
    \1139\ See Rule 201(d)(5).
---------------------------------------------------------------------------

    We note that short sales can facilitate convertible securities
offerings, and, as stated by some commenters,\1140\ we recognize that
hedges for this subset of offerings may become more expensive under
Rule 201 due to the absence of an exception from Rule 201 for short
selling in connection with convertible instruments. In this regard,
however, we note that as adopted, as opposed to some of our alternative
proposals, Rule 201 will not prohibit short selling to hedge a
position, although it could marginally increase the cost of adjusting a
hedge after a significant market decline. Even if these indirect costs
could, at the margin, reduce the attractiveness and, therefore, the
volume of certain types of offerings, we do not believe that any such
reduction will be significant because short sellers will be able to
sell at a price above the national best bid even during the limited
time the circuit breaker is in effect. Moreover, as described above,
Rule 201 includes an exception for short selling in connection with
certain types of capital-raising structures. Thus, while there may be a
change in the total mix of offering types, we have no reason to believe
that, in light of the anticipated positive effect of Rule 201 on
investor confidence, particularly confidence in long holdings, that
there will be any overall negative effect on capital formation as a
result of our adoption of this Rule.
---------------------------------------------------------------------------

    \1140\ See supra notes 425 to 426 and accompanying text (noting
requests by commenters for exceptions for short sales in connection
with the facilitation of capital raising transactions through
convertible instruments by issuers and selling shareholders, and to
allow investors purchasing a convertible instrument to hedge their
long exposure).
---------------------------------------------------------------------------

    We believe, and commenters agreed, that by helping to prevent short
selling, including manipulative or abusive short selling, from driving
down further the price of a security that has already experienced a
significant intra-day price decline, Rule 201 will help restore and
maintain investor confidence in the securities markets.\1141\
Bolstering investor confidence in the markets will help to encourage
investors to be more willing to invest in the markets, including during
times of substantial uncertainty, thereby adding depth and liquidity to
the markets and promoting capital formation.
---------------------------------------------------------------------------

    \1141\ See supra Section II.C. (discussing restoring investor
confidence); see also letter from Edward C. Springer, dated May 3,
2009; letter from Richard Anderson, dated May 5, 2009; letter from
Mike Pascale, dated May 11, 2009; letter from Sigmon Wealth
Management (June 2009); form letter type C, a petition drafted by
Jim Cramer, William Furber, Eric Oberg, and Scott Rothbort and
signed by 5,605 investors. Another commenter stated that adoption of
the alternative uptick rule would have a beneficial impact on
capital formation, stating that ``[t]he most important function of
the capital markets is to raise capital for American corporations,''
and that ``by adopting the alternative uptick rule, the Commission
will have chosen the best approach to deal with the loss of
confidence by Congress and most importantly the investing public.''
Letter from Glen Shipway (Sept. 2009). We note, however, that this
commenter did not support adoption of the alternative uptick rule in
conjunction with a circuit breaker.
---------------------------------------------------------------------------

C. Efficiency

    Rule 201 is designed to achieve the appropriate balance between our
goal of preventing short selling, including manipulative or abusive
short selling, from being used as a tool to exacerbate a declining
market in a security and the need to allow for the continued smooth
functioning of the markets, including the provision of liquidity and
price efficiency in the markets. By not allowing short sellers to sell
at or below the current national best bid while the circuit breaker is
in effect, the short sale price test restriction in Rule 201 will allow
long sellers in certain limited circumstances, by selling at the bid,
to sell first in a declining market for a particular security. As the
Commission has noted previously in connection with short sale price
test restrictions, a goal of such restrictions is to allow long sellers
to sell first in a declining market.\1142\
---------------------------------------------------------------------------

    \1142\ See supra note 17.
---------------------------------------------------------------------------

    The term ``price efficiency'' has a technical meaning in financial
economics, which is not the only way the term can be interpreted in the

Exchange Act.\1143\ We have, nonetheless, considered the effect of Rule
201 on price efficiency in terms of financial economic theory.\1144\
---------------------------------------------------------------------------

    \1143\ See supra note 18 (defining the term ``price
efficiency'').
    \1144\ See, e.g., Edward M. Miller, 1977, Risk, uncertainty, and
divergence of opinion, Journal of Finance 32, 1151-1168; Douglas W.
Diamond and Robert E. Verrecchia, 1987, Constraints on short-selling
and asset price adjustment to private information, Journal of
Financial Economics 18, 277-311.
---------------------------------------------------------------------------

    We have structured Rule 201 to mitigate its impact on price
efficiency. In response to the Proposal and Re-Opening Release, several
commenters cited empirical evidence showing that short selling
contributes to price efficiency and that restrictions on short selling,
particularly bans on short selling, may negatively impact price
efficiency.\1145\ We note, however, that empirical evidence on former
Rule 10a-1 suggests that the former rule, which applied to all short
selling all the time unless an exception or exemption applied, had
minimal effect on price efficiency.\1146\ Due to differences in the
operation of former Rule 10a-1 and Rule 201, when it applies, the
alternative uptick rule under Rule 201 will be more restrictive than
former Rule 10a-1 in some circumstances and less restrictive in
others.\1147\ As discussed above, however, due to the circuit breaker
approach in Rule 201, the alternative uptick rule of Rule 201 generally
will apply to a limited number of covered securities \1148\ and will
apply only to a particular security for a limited period of time when
the circuit breaker has been triggered for a covered security. As such,
it will not be triggered for the majority of covered securities at any
given time and, when triggered, will remain in effect for a short
duration--that day and the following day. Thus, consistent with the
empirical evidence on former Rule 10a-1, we expect that the alternative
uptick rule will have a minimal impact on price efficiency.
---------------------------------------------------------------------------

    \1145\ See, e.g., letter from Pershing Square (citing 2006 Price
Test Elimination Proposing Release, 71 FR at 75069-75070); letter
from CPIC (June 2009) (citing Pedro A. C. Saffi and Kari Sigurdson,
Price Efficiency and Short Selling, lESE Business School Working
Paper No. 748 (Apr. 2008); letter from Citadel et al. (June 2009).
    \1146\ See, e.g., supra Section II.B. (discussing the Pilot
Results).
    \1147\ See, e g., supra note 242 and accompanying text
(discussing automated trade matching systems).
    \1148\ See supra notes 305 to 311 and accompanying text
(discussing data reflecting that, on average, a limited number of
covered securities would hit a 10% trigger level each day).
---------------------------------------------------------------------------

    Moreover, paragraphs (c) and (d) of Rule 201 include provisions
designed to limit any adverse effects on price efficiency and
liquidity, while at the same time not undermining the goals of Rule
201.\1149\ In particular, paragraphs (d)(3) and (d)(4) of Rule 201 are
designed to facilitate pricing efficiency through certain domestic and
international arbitrage transactions. As stated above, allowing
arbitrage at a price that is less than or equal to the current national
best bid will potentially promote market efficiency. In addition,
paragraph (d)(6) of Rule 201, which relates to riskless principal
transactions, is designed to facilitate liquidity.
---------------------------------------------------------------------------

    \1149\ See supra Section III.B. (discussing ``short exempt''
provisions to Rule 201); see also supra note 1138.
---------------------------------------------------------------------------

XII. Final Regulatory Flexibility Analysis

    The Commission has prepared a Final Regulatory Flexibility Analysis
(``FRFA''), in accordance with the provisions of the Regulatory
Flexibility Act.\1150\ This FRFA relates to the amendments to Rules
200(g) and 201 of Regulation SHO under the Exchange Act. Rule 201 of
Regulation SHO implements a short sale-related circuit breaker that, if
triggered, will impose a short sale price test restriction.
Specifically, Rule 201 requires that a trading center 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 that 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, the Rule requires that the
trading center establish, maintain, and enforce written policies and
procedures reasonably designed to impose this short sale price test
restriction for the remainder of the day and 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.\1151\ In
addition, Rule 201 provides that the listing market for each covered
security must determine whether that covered security is subject to
Rule 201.\1152\ 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 \1153\ 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.\1154\ The amendments to Rule 200(g) of Regulation SHO add
a new marking requirement of ``short exempt.'' \1155\ In particular, if
the broker-dealer chooses to rely on its own determination that it is
submitting the short sale order to the trading center at a price that
is above the current national best bid at the time of submission or to
rely on an exception specified in the Rule, it must mark the order as
``short exempt.'' \1156\
---------------------------------------------------------------------------

    \1150\ 5 U.S.C. 604.
    \1151\ See Rule 201(b); see also supra Section III.A.7.
(discussing the policies and procedures approach).
    \1152\ See Rule 201(b)(3).
    \1153\ Rule 603(b) of Regulation NMS provides that ``[e]very
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).
    \1154\ See Rule 201(b)(3); 17 CFR 242.603(b).
    \1155\ See Rule 200(g); see also supra Section IV. (discussing
the amendments to Rule 200(g)).
    \1156\ See Rule 200(g)(2).
---------------------------------------------------------------------------

A. Need for and Objectives of the Rule

    We believe it is appropriate to adopt a circuit breaker in
combination with the alternative uptick rule because, when triggered,
it will prevent short selling, including potentially manipulative or
abusive short selling, from being used as a tool to exacerbate a
declining market in a security and will facilitate the ability of long
sellers to sell first upon such decline. This approach establishes a
narrowly-tailored Rule that will target only those securities that are
experiencing significant intra-day price declines. We believe that
addressing short selling in connection with such declines in individual
securities will help address erosion of investor confidence in our
markets generally. We are also adopting amendments to Rule 200(g) of
Regulation SHO in order to aid surveillance by SROs and the Commission
for compliance with the provisions of Rule 201.
    As discussed above, following changes in market conditions since
the elimination of former Rule 10a-1, including marked increases in
market volatility in the U.S. and in every major stock market around
the world, we proposed to re-examine and seek comment on whether to
impose short sale price test restrictions or circuit breaker
restrictions on short selling.\1157\

Although in recent months there has been an increase in stability in
the securities markets, we remain concerned that excessive downward
price pressure on individual securities accompanied by the fear of
unconstrained short selling can undermine investor confidence in our
markets generally. In addition, we are concerned about potential future
market turmoil, including significant increases in market volatility
and steep price declines. Thus, as discussed in more detail throughout
this adopting release, after considering the comments, we have
determined that it is appropriate to adopt in Rule 201 a targeted short
sale price test restriction that will apply the alternative uptick rule
for the remainder of the day and the following day if the price of an
individual security declines intra-day by 10% or more from the prior
day's closing price for that security as determined by the covered
security's listing market.
---------------------------------------------------------------------------

    \1157\ See Proposal, 74 FR at 18043, 18046; see also supra
Section II.C. (discussing the Proposal).
---------------------------------------------------------------------------

    By not allowing short sellers to sell at or below the current
national best bid while the circuit breaker is in effect, the short
sale price test restriction in Rule 201 will allow long sellers, by
selling at the bid, to sell first in a declining market for a
particular security. As the Commission has noted previously in
connection with short sale price test restrictions, a goal of such
restrictions is to allow long sellers to sell first in a declining
market.\1158\ A short seller that is seeking to profit quickly from
accelerated, downward market moves may find it advantageous to be able
to short sell at the current national best bid. In addition, by making
bids accessible only by long sellers when a security's price is
undergoing significant downward price pressure, Rule 201 will help to
facilitate and maintain stability in the markets and help ensure that
they function efficiently. It will also help restore investor
confidence during times of substantial uncertainty because, once the
circuit breaker has been triggered for a particular security, long
sellers will have preferred access to bids for the security, and the
security's continued price decline will more likely be due to long
selling and the underlying fundamentals of the issuer, rather than to
other factors.
---------------------------------------------------------------------------

    \1158\ See supra note 17.
---------------------------------------------------------------------------

    In addition, combining the alternative uptick rule with a circuit
breaker strikes the appropriate balance between our goal of preventing
short selling, including potentially manipulative or abusive short
selling, from being used as a tool to exacerbate a declining market in
a security and the need to allow for the continued smooth functioning
of the markets, including the provision of liquidity and price
efficiency in the markets. The circuit breaker approach of Rule 201
will help benefit the market for a particular security by allowing
participants, when a security is undergoing a significant intra-day
price decline, an opportunity to re-evaluate circumstances and respond
to volatility in that security. We also believe that a circuit breaker
will better target short selling that may be related to potential bear
raids\1159\ and other forms of manipulation that may be used as a tool
to exacerbate a price decline in a covered security.
---------------------------------------------------------------------------

    \1159\ See supra note 36 and accompanying text.
---------------------------------------------------------------------------

    At the same time, however, we recognize the benefits to the market
of legitimate short selling, such as the provision of liquidity and
price efficiency. Thus, by imposing a short sale price test restriction
only when an individual security is undergoing significant price
pressure, rather than on all securities all the time, the short sale
price test restrictions of Rule 201 will apply to a limited number of
securities and for a limited duration.\1160\ Rule 201 is structured so
that generally it will not be triggered for the majority of covered
securities at any given time and, thereby, will not interfere with the
smooth functioning of the markets for those securities, including when
prices in such securities are undergoing minimal downward price
pressure or are stable or rising. If the short sale price test
restrictions of Rule 201 apply to a covered security it will be because
and when that security is undergoing significant downward price
pressure. To the extent that Rule 201 negatively affects the benefits
of legitimate short selling, such as the provision of liquidity and
price efficiency, we believe that such costs are justified by the
benefits provided by the Rule in preventing short selling, including
potentially manipulative or abusive short selling, from being used as a
tool to exacerbate a declining market in a security.
---------------------------------------------------------------------------

    \1160\ See supra Section III.A.5. (discussing the circuit
breaker trigger level).
---------------------------------------------------------------------------

    In addition, to help ensure the Rule's workability, we are amending
Rule 200(g) of Regulation SHO, as proposed, to provide that, once the
circuit breaker has been triggered for a covered security, if a broker-
dealer chooses to rely on its own determination that it is submitting a
short sale order to a trading center at a price that is above the
current national best bid at the time of submission or to rely on an
exception specified in the Rule, it must mark the order ``short
exempt.'' The short sale price test restriction of Rule 201 generally
will apply to a small number of securities for a limited duration, and
will continue to permit short selling rather than, for example, halting
short selling when the restriction is in place. As such, we believe
that the circumstances under which a broker-dealer may need to mark a
short sale order ``short exempt'' under Rule 201 are limited.

B. Significant Issues Raised by Public Comment

    In the Initial Regulatory Flexibility Analysis included in the
Proposal, we requested comment on the number of small entities that
would be affected by the proposed amendments and on the impact the
proposed amendments would have on small entities and how to quantify
the impact.\1161\ The Commission did not receive any comment letters
addressing the number of small entities that would be affected by the
proposed amendments.
---------------------------------------------------------------------------

    \1161\ See Proposal, 74 FR at 18107.
---------------------------------------------------------------------------

    Several commenters stated that the costs of implementing and
complying with the broker-dealer provision of Rule 201(c) could be
particularly burdensome for smaller broker-dealers, but did not provide
a cost estimate of such burdens.\1162\ One commenter stated that this
burden would ``adversely affect the ability of smaller broker-dealers
to compete or the level of service that they can provide to their
customers,'' \1163\ while another stated that a short sale price test
would ``disproportionately burden smaller broker-dealers, who would
likely be forced to route their flow through a handful of larger
brokers, impeding competition and adding to systemic risk as flow is
consolidated among fewer players.'' \1164\
---------------------------------------------------------------------------

    \1162\ See, e.g., letter from Credit Suisse (June 2009); letter
from NSCP; letter from T.D. Pro Ex.
    \1163\ Letter from NSCP.
    \1164\ Letter from Credit Suisse (June 2009).
---------------------------------------------------------------------------

    Although we agree that implementation of the broker-dealer
provision of Rule 201(c) will impose costs on broker-dealers who choose
to rely on this provision, we note that Rule 201(c) is not a
requirement of the Rule, but rather provides that a broker-dealer may
mark a sell order for a security that has triggered the circuit breaker
as ``short exempt,'' provided that the broker-dealer identifies the
order as being at a price above the current national best bid at the
time of submission to the trading center and otherwise complies with
the requirements of the provision.
    In addition, as discussed throughout this adopting release, the
alternative

uptick rule references only the current national best bid, unlike the
proposed modified uptick rule and the proposed uptick rule, which would
have required sequencing of the national best bid or last sale price.
Although commenters expressed concerns with respect to the costs of the
broker-dealer provision of Rule 201(c), these comments were not
specific to the alternative uptick rule.\1165\ In order to rely on the
broker-dealer provision, a broker-dealer must establish, maintain, and
enforce written policies and procedures reasonably designed to prevent
the incorrect identification of orders as being at a price above the
current national best bid at the time of submission of the order to the
trading center. Without a sequencing requirement under the alternative
uptick rule, we believe that the policies and procedures required to
rely on the broker-dealer provision under Rule 201(c) will be easier
and less costly to implement and monitor than would be the case under
the proposed modified uptick rule or the proposed uptick rule,\1166\
and, therefore, lower than the cost concerns and estimates provided by
commenters. We note that one of the commenters that expressed concerns
about the implementation cost of the broker-dealer provision
acknowledged that a rule ``that would not require data centralization
and sequencing would be significantly less complex and faster to
implement.''\1167\
---------------------------------------------------------------------------

    \1165\ See, e.g., letter from Credit Suisse (June 2009); letter
from NSCP; letter from T.D. Pro Ex.
    \1166\ See supra notes 709 to 715 and accompanying text
(discussing comments on the impact of the alternative uptick rule on
implementation and on-going monitoring and compliance costs).
    \1167\ Letter from Credit Suisse (June 2009).
---------------------------------------------------------------------------

    We disagree with several commenters who stated that, although
implementation and on-going monitoring and surveillance of the
alternative uptick rule might be easier and/or less costly for trading
centers, this would not hold true for broker-dealers.\1168\ One of
these commenters stated that ``in order to avoid rejection of short
sale orders under an alternative uptick rule, programming would need to
be implemented to anticipate changes in the national best bid between
the time a short sale order is entered and the time it reaches the
relevant market center.'' \1169\ However, the broker-dealer provision
of Rule 201(c) is designed specifically to avoid this result. Under the
broker-dealer provision, a broker-dealer may, in accordance with the
policies and procedures required by the provision, identify the order
as being at a price above the current national best bid at the time the
order is submitted to the trading center and mark the order ``short
exempt.'' Trading centers are required to have written policies and
procedures in place 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.\1170\
---------------------------------------------------------------------------

    \1168\ See, e.g., letter from Citadel et al. (Sept. 2009);
letter from EWT (Sept. 2009); letter Lime Brokerage (Sept. 2009).
    \1169\ Letter from Citadel et al. (Sept. 2009).
    \1170\ See Rule 201(b)(1)(iii).
---------------------------------------------------------------------------

    Commenters also expressed concerns about the competitive pressure
of the broker-dealer provision, stating either that broker-dealers
would feel compelled to undertake implementation of the provision,
despite the high cost,\1171\ which would be particularly burdensome for
smaller firms,\1172\ or that smaller firms would find the costs
prohibitive, placing them at a competitive disadvantage.\1173\ We
recognize that broker-dealers are faced with competitive concerns and
that such concerns may influence their decision whether or not to rely
on the broker-dealer provision of Rule 201(c).
---------------------------------------------------------------------------

    \1171\ See, e.g., letter from STANY (June 2009); letter from FIF
(June 2009); letter from Lime Brokerage (June 2009).
    \1172\ See, e.g., letter from T.D. Pro Ex; letter from Taurus
Compliance; letter from Credit Suisse (June 2009).
    \1173\ See, e.g., letter from Credit Suisse (June 2009); letter
from NSCP.
---------------------------------------------------------------------------

    However, with respect to the cost, although we recognize that the
broker-dealer provision will impose implementation costs on broker-
dealers who choose to rely on this provision, we believe that this cost
will not be as great as stated by some commenters because the
alternative uptick rule does not require sequencing of the national
best bid, unlike the proposed modified uptick rule and the proposed
uptick rule, which would have required sequencing of the national best
bid or last sale price.\1174\ We believe that, without a sequencing
requirement, the policies and procedures required in order to rely on
the broker-dealer provision under the alternative uptick rule will be
easier and less costly to implement and monitor than would be the case
under the proposed modified uptick rule or the proposed uptick rule.
---------------------------------------------------------------------------

    \1174\ See supra note 1165 and accompanying text (discussing
impact of the alternative uptick rule on commenters' cost concerns
with respect to the broker-dealer provision of Rule 201(c)).
---------------------------------------------------------------------------

    In addition, we note that it is possible that some smaller broker-
dealers that determine to rely on the broker-dealer provision may
determine that it is cost-effective for them to outsource certain
functions necessary to comply with Rule 201(c) to larger broker-
dealers, rather than performing such functions in house, to remain
competitive in the market. This may help mitigate costs associated with
implementing and complying with Rule 201(c). Additionally, they may
decide to purchase order management software from technology firms.
Order management software providers may integrate changes imposed by
Rules 200(g) and 201 into their products, thereby providing another
cost-effective way for smaller broker-dealers to comply with the
requirements of Rule 201(c).
    Although we agree that the broker-dealer provision will impose
costs for implementation and on-going monitoring and surveillance, we
note that the policies and procedures that are required to be
implemented under the broker-dealer provision are similar to those that
are required under the Order Protection Rule of Regulation NMS.\1175\
In order to rely on the broker-dealer provision, a broker-dealer must
establish, maintain, and enforce written policies and procedures
reasonably designed to prevent the incorrect identification of orders
as being at a price above the current national best bid at the time of
submission of the order to the trading center. Because some broker-
dealers, including small broker-dealers, may have already developed or
modified their surveillance mechanisms in order to comply with the
policies and procedures requirement of the Order Protection Rule under
Regulation NMS, broker-dealers may already have retained and trained
the necessary personnel to ensure compliance with that Regulation's
policies and procedures requirements and, therefore, may already have
in place most of the infrastructure and potential policies and
procedures necessary to comply with the broker-dealer provision of Rule
201(c). In addition, one commenter supported using a policies and
procedures approach to any short sale price test restriction because it
would ease implementation for broker-dealers.\1176\ Thus, we believe
broker-dealers will already be familiar with establishing, maintaining,
and enforcing trading-related policies and procedures, including
programming their trading systems in accordance with such policies and
procedures.
---------------------------------------------------------------------------

    \1175\ See Regulation NMS Adopting Release, 70 FR 37496; see
also 17 CFR 242.611.
    \1176\ See, e.g., letter from GE.
---------------------------------------------------------------------------

    Although several commenters stated that previous implementation of
Regulation NMS would not mitigate the costs to broker-dealers of
implementing

a short sale price test restriction,\1177\ we considered these
comments, as well as comments stating that previous implementation of
Regulation NMS could ease implementation provided that broker-dealers
could leverage existing systems in implementing Rule 201,\1178\ and
continue to believe that familiarity with Regulation NMS policies and
procedures will reduce the implementation costs of the broker-dealer
provision under Rule 201(c) on broker-dealers.\1179\
---------------------------------------------------------------------------

    \1177\ See, e.g., letter from FIF (June 2009); letter from RBC
(June 2009).
    \1178\ See, e.g., letter from MFA (Oct. 2009).
    \1179\ See supra Section X.B.1.b.ii. (discussing implementation
and on-going monitoring and surveillance costs to broker-dealers
under Rule 201(c) and Rule 201(d)(6)).
---------------------------------------------------------------------------

    Further, we believe that the implementation and on-going monitoring
and compliance costs for broker-dealers who choose to rely on the
broker-dealer provision are justified by the benefits of providing
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.

C. Small Entities Affected by the Rule

    Rule 201 requires that a trading center 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 that 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, the Rule requires that the trading center
establish, maintain, and enforce written policies and procedures
reasonably designed to impose this short sale price test restriction
for the remainder of the day and 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.\1180\ Rule 201(a)(9) states that
the term ``trading center'' shall have the same meaning as in Rule
600(b)(78) of Regulation NMS, which defines a ``trading center'' as ``a
national securities exchange or national securities association that
operates an SRO trading facility, an alternative trading system, an
exchange market maker, an OTC market maker, or any other broker or
dealer that executes orders internally by trading as principal or
crossing orders as agent.'' \1181\
---------------------------------------------------------------------------

    \1180\ See Rule 201(b)(1).
    \1181\ See Rule 201(a)(9); see also 17 CFR 242.600(b)(78).
---------------------------------------------------------------------------

    Rule 0-10(e) under the Exchange Act provides that the term ``small
business'' or ``small organization,'' when referring to an exchange,
means any exchange that: (i) Has been exempted from the reporting
requirements of Rule 601 under the Exchange Act; \1182\ and (ii) is not
affiliated with any person (other than a natural person) that is not a
small business or small organization, as defined by Rule 0-10.\1183\ No
national securities exchanges are small entities because none meets
these criteria. Thus, the current national securities exchanges that
are subject to Rule 201 are not ``small entities'' for purposes of the
Regulatory Flexibility Act.
---------------------------------------------------------------------------

    \1182\ See 17 CFR 242.601.
    \1183\ See 17 CFR 240.0-10(e); 13 CFR 121.201 (setting size
standards to define small business concerns).
---------------------------------------------------------------------------

    The remaining non-SRO trading centers that are subject to Rule 201
are registered broker-dealers. The Commission has determined that there
are approximately 407 broker-dealers registered with the Commission
that may meet the definition of a trading center,\1184\ which includes
broker-dealers operating as equity ATSs, broker-dealers registered as
market makers or specialists in covered securities, and any broker-
dealer that is in the business of executing orders internally in
covered securities. Pursuant to Rule 0-10(c) under the Exchange Act, a
broker-dealer is defined as a small entity for purposes of the Exchange
Act and the Regulatory Flexibility Act if the broker-dealer had a total
capital (net worth plus subordinated liabilities) of less than $500,000
on the date in the prior fiscal year as of which its audited financial
statements were prepared, and it is not affiliated with any person
(other than a natural person) that is not a small entity.\1185\ Of
these 407 non-SRO trading centers, only five \1186\ are ``small
entities'' for purposes of the Regulatory Flexibility Act.
---------------------------------------------------------------------------

    \1184\ See supra note 651.
    \1185\ See 17 CFR 240.0-10(c)(1).
    \1186\ This number was derived from a review of 2008 FOCUS
Report filings and discussion with SRO staff.
---------------------------------------------------------------------------

    In addition, the broker-dealer provision of Rule 201(c) and the
riskless principal provision of Rule 201(d)(6) include policies and
procedures requirements to help prevent incorrect identification of
orders by broker-dealers for purposes of the provisions. The entities
covered by the broker-dealer provision of Rule 201(c), the riskless
principal provision of Rule 201(d)(6) and the marking requirements of
Rule 200(g) include small broker-dealers. Paragraph (c)(1) of Rule 0-10
under the Exchange Act, as mentioned above, states that the term
``small business'' or ``small organization,'' when referring to a
broker-dealer, means a broker-dealer that had total capital (net worth
plus subordinated liabilities) of less than $500,000 on the date in the
prior fiscal year as of which its audited financial statements were
prepared, and is not affiliated with any person (other than a natural
person) that is not a small entity.\1187\ We estimate that as of 2008
there were approximately 890 broker-dealers that are ``small entities''
for purposes of the Regulatory Flexibility Act.\1188\
---------------------------------------------------------------------------

    \1187\ 17 CFR 240.0-10(c)(1).
    \1188\ These numbers are based on a review of 2008 FOCUS Report
filings reflecting registered broker-dealers, including introducing
broker-dealers. This number does not include broker-dealers that are
delinquent on FOCUS Report filings.
---------------------------------------------------------------------------

    In addition, Rule 201(b)(3) provides that the listing market for
each covered security must determine whether that covered security is
subject to Rule 201 and must notify the single plan processor
responsible for that covered security that the covered security has
become subject to the short sale price test restriction of Rule 201.
The plan processor must then disseminate this information.\1189\ As
discussed below, the entities covered by the determination and
dissemination requirements of Rule 201(b)(3) do not include small
entities.
---------------------------------------------------------------------------

    \1189\ See Rule 201(b)(3).
---------------------------------------------------------------------------

    Rule 201(a)(3) defines the term ``listing market'' to have the same
meaning as defined in the effective transaction reporting plan for the
covered security.\1190\ Under the definitions of ``listing market'' of
the two effective transaction reporting plans, the CTA Plan and the
Nasdaq UTP Plan, ``listing markets'' are national securities
exchanges.\1191\ Rule 0-10(e) under the Exchange Act provides that the
term ``small business'' or ``small organization,'' when referring to an
exchange, means any exchange that: (i) Has been exempted from the
reporting requirements of Rule 601 under the Exchange Act; \1192\ and
(ii) is not affiliated with any person (other than a natural person)
that is not a small

business or small organization, as defined by Rule 0-10.\1193\ No
national securities exchanges are small entities because none meets
these criteria. Thus, the listing markets that are subject to Rule 201
are not ``small entities'' for purposes of the Regulatory Flexibility
Act.
---------------------------------------------------------------------------

    \1190\ See Rule 201(a)(3). Rule 201(a)(2) provides that ``[t]he
term effective transaction reporting plan for a covered security
shall have the same meaning as in Sec.  242.600(b)(22).'' Rule
201(a)(2); 17 CFR 600(b)(22).
    \1191\ See supra note 364 (discussing the definition of
``listing market'' in the CTA Plan and the Nasdaq UTP Plan).
    \1192\ See 17 CFR 242.601.
    \1193\ See 17 CFR 240.0-10(e); 13 CFR 121.201.
---------------------------------------------------------------------------

    There are two effective transaction reporting plans, the CTA Plan
and the Nasdaq UTP Plan. In accordance with Rule 603(b) of Regulation
NMS,\1194\ 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 plan processor for the CTA Plan is
SIAC and the plan processor for the Nasdaq UTP Plan is Nasdaq. Rule
201(a)(6) defines the term ``plan processor'' to have the same meaning
as in Rule 600(b)(55) of Regulation NMS.\1195\ Under Rule 600(b)(55),
the term ``plan processor'' means ``any self-regulatory organization or
securities information processor acting as an exclusive processor in
connection with the development, implementation and/or operation of any
facility contemplated by an effective national market system plan.''
\1196\ Paragraph (g) of Rule 0-10 defines the term ``small business''
or ``small organization,'' when referring to a securities information
processor, to mean a securities information processor that had gross
revenues of less than $10 million during the preceding fiscal year;
provided service to fewer than 100 interrogation devices or moving
tickers at all times during the preceding fiscal year; and is not
affiliated with any person (other than a natural person) that is not a
small business or small organization.\1197\ Neither SIAC nor Nasdaq
meet these criteria. Thus, the plan processors that are subject to Rule
201 are not ``small entities'' for purposes of the Regulatory
Flexibility Act.
---------------------------------------------------------------------------

    \1194\ See 17 CFR 242.603(b).
    \1195\ See Rule 201(a)(6); 17 CFR 242.600(b)(55).
    \1196\ 17 CFR 242.600(b)(55).
    \1197\ See 17 CFR 240.0-10(g).
---------------------------------------------------------------------------

D. Projected Reporting, Recordkeeping and Other Compliance Requirements

    Rule 201 imposes some new or additional reporting, recordkeeping,
or compliance costs on trading centers and other broker-dealers that
are small entities. Rule 201 focuses on a trading center's written
policies and procedures as the mechanism through which to help prevent
the execution or display of short sale orders at a price that is less
than or equal to the current national best bid, unless an exception
applies. In addition, the broker-dealer provision of Rule 201(c) and
the riskless principal provision of Rule 201(d)(6) include policies and
procedures requirements to help prevent incorrect identification of
orders by broker-dealers for purposes of those provisions.
    In regard to implementation and on-going monitoring and
surveillance costs of Rule 201 on trading centers that are small
entities,\1198\ we considered commenters' concerns that the cost and
time required for trading centers' implementation and on-going
monitoring and surveillance of a short sale price test restriction
could be high.\1199\ However, we note that the alternative uptick rule
references only the current national best bid, unlike the proposed
modified uptick rule and the proposed uptick rule, which would have
required sequencing of the national best bid or last sale price. Thus,
we believe that the alternative uptick rule will be easier and less
costly to implement and monitor for trading centers that are small
entities than the proposed modified uptick rule or the proposed uptick
rule.\1200\
---------------------------------------------------------------------------

    \1198\ As discussed above, there are no SRO trading centers that
are ``small entities'' for purposes of the Regulatory Flexibility
Act. Of the estimated 407 non-SRO trading centers (which include
broker-dealers operating as equity ATSs, broker-dealers registered
as market makers or specialists in covered securities, and any
broker-dealer that is in the business of executing orders internally
in covered securities) we estimate that there are only 5 non-SRO
trading centers that are ``small entities'' for purposes of the
Regulatory Flexibility Act. See supra Section XII.C.
    \1199\ See supra Section X.B.1.b.i. (discussing comments on the
implementation and on-going monitoring and compliance costs of the
policies and procedures requirement of Rule 201).
    \1200\ See supra notes 661 to 669 and accompanying text
(discussing comments on the effect of the alternative uptick rule on
implementation and on-going monitoring and surveillance costs).
---------------------------------------------------------------------------

    In addition, we note that the policies and procedures required to
be implemented for purposes of Rule 201 are similar to those that
trading centers are required to have in place under the Order
Protection Rule of Regulation NMS.\1201\ Thus, we believe trading
centers that are small entities may already be familiar with
establishing, maintaining, and enforcing trading-related policies and
procedures, including programming their trading systems in accordance
with such policies and procedures.
---------------------------------------------------------------------------

    \1201\ See Regulation NMS Adopting Release, 70 FR 37496; see
also Proposal, 74 FR at 18087; 17 CFR 242.611.
---------------------------------------------------------------------------

    Although, as discussed above, several commenters stated that
previous implementation of Regulation NMS would not mitigate the costs
of implementing a short sale price test restriction,\1202\ we
considered these comments, as well as comments stating that previous
implementation of Regulation NMS could ease implementation provided
that trading centers could use existing systems in implementing Rule
201,\1203\ and continue to believe that familiarity with Regulation NMS
policies and procedures will reduce the implementation costs for
trading centers of the policies and procedures requirement under Rule
201.
---------------------------------------------------------------------------

    \1202\ See supra notes 939 to 941 and accompanying text
(discussing comments that prior implementation of Regulation NMS
would not mitigate the costs of implementing a short sale price test
restriction).
    \1203\ See supra notes 942 to 945 and accompanying text
(discussing comments that prior implementation of Regulation NMS
could mitigate the costs of implementing a short sale price test
restriction).
---------------------------------------------------------------------------

    Further, we believe that the implementation and on-going monitoring
and compliance costs for trading centers are justified by the benefits
provided by the Rule in preventing short selling, including potentially
manipulative or abusive short selling, from being used as a tool to
exacerbate a declining market in a security.
    In regard to implementation and on-going monitoring and
surveillance costs of the broker-dealer provision of Rule 201(c) or the
riskless principal provision of Rule 201(d)(6) on small broker-
dealers,\1204\ as discussed in Section XII.B., above, several
commenters stated that the costs of implementing and complying with the
broker-dealer provision of Rule 201(c) could be particularly burdensome
for smaller broker-dealers.\1205\ Commenters also expressed concerns
about the competitive pressure of the broker-dealer provision, stating
either that broker-dealers would feel compelled to undertake
implementation of the provision, despite the high cost,\1206\ which
would be particularly burdensome for smaller firms,\1207\ or that
smaller firms would find the costs prohibitive, placing them at a
competitive disadvantage.\1208\
---------------------------------------------------------------------------

    \1204\ As discussed above, we estimate that as of 2008 there
were approximately 890 broker-dealers that are ``small entities''
for purposes of the Regulatory Flexibility Act. See supra Section
XII.C.
    \1205\ See supra notes 1162 to 1173 and accompanying text
(discussing comments on the costs of the broker-dealer provision of
Rule 201(c) for smaller broker-dealers).
    \1206\ See, e.g., letter from STANY (June 2009); letter from FIF
(June 2009); letter from Lime Brokerage (June 2009).
    \1207\ See, e.g., letter from T.D. Pro Ex; letter from Taurus
Compliance; letter from Credit Suisse (June 2009).
    \1208\ See, e.g., letter from Credit Suisse (June 2009); letter
from NSCP.

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

    We considered these comments in evaluating the costs of
implementation and on-going monitoring and surveillance of the broker-
dealer provision of Rule 201(c) on small broker-dealers. Although we
agree that implementation of the broker-dealer provision of Rule 201(c)
will impose costs on broker-dealers who choose to rely on this
provision, we note that Rule 201(c) is not a requirement of the Rule,
but rather provides that a broker-dealer may mark a sell order for a
security that has triggered the circuit breaker as ``short exempt,''
provided that the broker-dealer identifies the order as being at a
price above the current national best bid at the time of submission to
the trading center and otherwise complies with the requirements of the
provision. We recognize, however, that broker-dealers are faced with
competitive concerns and that such concerns may influence their
decision whether or not to rely on the broker-dealer provision of Rule
201(c).
    With respect to the cost, although we recognize that the broker-
dealer provision will impose implementation costs on broker-dealers who
choose to rely on this provision, we believe that this cost will not be
as great as stated by some commenters because the alternative uptick
rule does not require sequencing of the national best bid, unlike the
proposed modified uptick rule and the proposed uptick rule, which would
have required sequencing of the national best bid or last sale
price.\1209\ We believe that, without a sequencing requirement, the
policies and procedures required in order to rely on the broker-dealer
provision under the alternative uptick rule will be easier and less
costly to implement and monitor than would be the case under the
proposed modified uptick rule or the proposed uptick rule.\1210\
---------------------------------------------------------------------------

    \1209\ See supra notes 1165 to 1167 and accompanying text
(discussing impact of the alternative uptick rule on commenters'
cost concerns with respect to the broker-dealer provision of Rule
201(c)).
    \1210\ See supra notes 709 to 715 and accompanying text
(discussing comments on the effect of the alternative uptick rule on
implementation and on-going monitoring and surveillance costs).
---------------------------------------------------------------------------

    In addition, we note that it is possible that some smaller broker-
dealers that determine to rely on the broker-dealer provision may
determine that it is cost-effective for them to outsource certain
functions necessary to comply with Rule 201(c) to larger broker-
dealers, rather than performing such functions in house, to remain
competitive in the market. This may help mitigate costs associated with
implementing and complying with Rule 201(c). Additionally, they may
decide to purchase order management software from technology firms.
Order management software providers may integrate changes imposed by
Rules 200(g) and 201 into their products, thereby providing another
cost-effective way for smaller broker-dealers to comply with the
requirement of Rule 201(c).
    In addition, we note that the policies and procedures that are
required to be implemented under the broker-dealer provision are
similar to those that are required under the Order Protection Rule of
Regulation NMS.\1211\ Thus, we believe broker-dealers will already be
familiar with establishing, maintaining, and enforcing trading-related
policies and procedures, including programming their trading systems in
accordance with such policies and procedures.
---------------------------------------------------------------------------

    \1211\ See Regulation NMS Adopting Release, 70 FR 37496; see
also 17 CFR 242.611.
---------------------------------------------------------------------------

    Although several commenters stated that previous implementation of
Regulation NMS would not mitigate the costs to broker-dealers of
implementing a short sale price test restriction,\1212\ we considered
these comments, as well as comments stating that previous
implementation of Regulation NMS could ease implementation provided
that broker-dealers could leverage existing systems in implementing
Rule 201,\1213\ and continue to believe that familiarity with
Regulation NMS policies and procedures will reduce the implementation
costs of the broker-dealer provision under Rule 201(c) on broker-
dealers.
---------------------------------------------------------------------------

    \1212\ See, e.g., letter from FIF (June 2009); letter from RBC
(June 2009).
    \1213\ See, e.g., letter from MFA (Oct. 2009).
---------------------------------------------------------------------------

    Further, we believe that the implementation and on-going monitoring
and compliance costs for broker-dealers who choose to rely on the
broker-dealer provision are justified by the benefits of providing
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.
    The amendments to Rule 200(g), to add a new marking requirement of
``short exempt'' \1214\ and to provide that a broker-dealer may mark a
sell order ``short exempt'' only if the provisions in paragraph (c) or
(d) of Rule 201 are met,\1215\ may impose some new or additional
reporting, recordkeeping, or compliance costs on broker-dealers that
are small entities. We recognize commenters' concerns with respect to
the costs of the ``short exempt'' marking requirement and we considered
these comments in evaluating the costs of the ``short exempt'' marking
requirement.\1216\ However, we believe that such costs will be limited
because small broker-dealers already have established systems,
processes, and procedures in place to comply with the current marking
requirements of Rule 200(g) of Regulation SHO with respect to marking a
sell order either ``long'' or ``short'' and, therefore, will likely
leverage such systems, processes and procedures to comply with the
``short exempt'' marking requirements in Rules 200(g) and
200(g)(2).\1217\ Further, we believe that the implementation and
compliance costs of the ``short exempt'' marking requirements are
justified by the benefits provided by the requirements in aiding
surveillance by SROs and the Commission for compliance with the
provisions of Rule 201 and providing an indication to a trading center
regarding when it must execute or display a short sale order without
regard to whether the order is at a price that is less than or equal to
the current national best bid.
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    \1214\ See Rule 200(g); see also supra Section IV. (discussing
the amendments to Rule 200(g)).
    \1215\ See Rule 200(g)(2).
    \1216\ See supra notes 582 to 588 (discussing comments on the
costs of the ``short exempt'' marking requirement).
    \1217\ See supra notes 747 to 752 (discussing estimated costs of
the amendment to Rule 200(g)(2)).
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    In addition, to provide market participants with the time needed to
make the changes required to comply with Rule 200(g), we are adopting
an implementation period under which market participants will have to
comply with these requirements six months following the effective date
of the adoption of these amendments. We are sensitive to commenter's
concerns that implementation of the ``short exempt'' marking
requirement could be complex,\1218\ and believe that a six month
implementation period, which is longer than the 3 month implementation
period proposed in the Proposal, will afford market participants
sufficient time to make the necessary modifications to their systems
and procedures. In addition, we believe the six month implementation
period will help alleviate some of the potential disruptions that may
be associated with implementing the ``short exempt'' marking
requirements.
---------------------------------------------------------------------------

    \1218\ See supra notes 582 to 588 and accompanying text
(discussing comments on the implementation time for the ``short
exempt'' marking requirement).

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

E. Agency Action to Minimize Effect on Small Entities

    As required by the Regulatory Flexibility Act, we have considered
alternatives that would accomplish our stated objectives, while
minimizing any significant adverse impact on small entities. As noted
above, Rule 201 imposes some new or additional reporting,
recordkeeping, or compliance costs on trading centers and other broker-
dealers that are small entities. However, we expect the impact of the
new or additional reporting, recordkeeping, or compliance costs will be
limited by the similarity of the policies and procedures requirements
of Rule 201 to the policies and procedures requirement of the Order
Protection Rule under Regulation NMS. Although, as discussed above,
several commenters stated that previous implementation of Regulation
NMS would not mitigate the costs of implementing a short sale price
test restriction,\1219\ we considered these comments, as well as
comments stating that previous implementation of Regulation NMS could
ease implementation provided that firms could use existing systems in
implementing Rule 201,\1220\ and continue to believe that familiarity
with Regulation NMS policies and procedures will reduce the
implementation costs of the broker-dealer provision under Rule 201(c)
on broker-dealers.
---------------------------------------------------------------------------

    \1219\ See supra notes 939 to 941 and accompanying text
(discussing comments that prior implementation of Regulation NMS
would not mitigate the costs of implementing a short sale price test
restriction).
    \1220\ See supra notes 942 to 944 and accompanying text
(discussing comments that prior implementation of Regulation NMS
could mitigate the costs of implementing a short sale price test
restriction).
---------------------------------------------------------------------------

    Thus, the five non-SRO trading centers that qualify as small
entities and the approximately 890 broker-dealers that qualify as small
entities should already have in place most of the infrastructure
necessary to comply with Rule 201. The marking requirements of the
amendments to Rule 200(g) are not expected to adversely affect small
entities because they impose minimal reporting, recordkeeping, or
compliance requirements. Rule 200(g) currently requires that broker-
dealers mark all sell orders of any equity security as either ``long''
or ``short.'' \1221\ Broker-dealers that are small entities should
already be familiar with the current marking requirements and should
already have in place mechanisms that could be used to comply with the
new ``short exempt'' marking requirement of Rule 200(g). Moreover, it
is not appropriate to develop separate requirements for small entities
under either Rule 201 or Rule 200(g) because we believe that to
accomplish the Commission's goals, as well as to avoid the possibility
of regulatory arbitrage that would undermine the Commission's goals,
all trading centers and broker-dealers, regardless of size, should be
subject to the same circuit breaker short sale price test restrictions
and all broker-dealers, regardless of size, should be subject to the
same order marking requirements.
---------------------------------------------------------------------------

    \1221\ See 17 CFR 242.200(g).
---------------------------------------------------------------------------

F. Significant Alternatives

    The Regulatory Flexibility Act directs us to consider significant
alternatives that would accomplish our stated objective, while
minimizing any significant adverse impact on small entities.\1222\ In
connection with Rules 201 and 200(g), we considered the following
alternatives: (i) Establishing different compliance or reporting
requirements or timetables that take into account the resources
available to small entities; (ii) clarifying, consolidating, or
simplifying compliance and reporting requirements under the Rule for
small entities; (iii) using performance rather than design standards;
and (iv) exempting small entities from coverage of the Rule, or any
part of the Rule. First, we note that Rule 201 as adopted and the
amendments to Rule 200(g) use performance standards, which we believe
will help to minimize any significant adverse impact on small entities.
---------------------------------------------------------------------------

    \1222\ See 5 U.S.C. 603(a)(5).
---------------------------------------------------------------------------

    A primary goal of the short sale-related circuit breaker under Rule
201 is to help restore investor confidence by not allowing sellers to
sell short at or below the current national best bid if the price of
that 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, unless an exception applies. Rule 201 will allow long sellers, by
selling at the bid, to sell first in a declining market for a
particular security. As the Commission has noted previously in
connection with short sale price test restrictions, a goal of such
restrictions is to allow long sellers to sell first in a declining
market.\1223\ A short seller that is seeking to profit quickly from
accelerated, downward market moves may find it advantageous to be able
to short sell at the current national best bid. In addition, by making
bids accessible only by long sellers when a security's price is
undergoing significant downward price pressure, Rule 201 will help to
facilitate and maintain stability in the markets and help ensure that
they function efficiently. It will also help restore investor
confidence during times of substantial uncertainty because, once the
circuit breaker has been triggered for a particular security, long
sellers will have preferred access to bids for the security, and the
security's continued price decline will more likely be due to long
selling and the underlying fundamentals of the issuer, rather than to
other factors.
---------------------------------------------------------------------------

    \1223\ See supra note 17.
---------------------------------------------------------------------------

    In addition, combining the alternative uptick rule with a circuit
breaker strikes the appropriate balance between our goal of preventing
short selling, including potentially manipulative or abusive short
selling, from being used as a tool to exacerbate a declining market in
a security and the need to allow for the continued smooth functioning
of the markets, including the provision of liquidity and price
efficiency in the markets. The circuit breaker approach of Rule 201
will help benefit the market for a particular security by allowing
participants, when a security is undergoing a significant intra-day
price decline, an opportunity to re-evaluate circumstances and respond
to volatility in that security. We also believe that a circuit breaker
will better target short selling that may be related to potential bear
raids \1224\ and other forms of manipulation that may be used as a tool
to exacerbate a price decline in a covered security.
---------------------------------------------------------------------------

    \1224\ See supra note 36 and accompanying text.
---------------------------------------------------------------------------

    As discussed throughout this adopting release, we have designed
Rule 201 to accomplish its objectives with lower costs to trading
centers and broker-dealers than some of the alternatives we proposed
and considered. We believe the alternative uptick rule will require
less time and less costs for implementation because it does not require
sequencing of bids or last sale prices.\1225\ In addition, we believe
that the circuit breaker approach, which limits the short sale price
test restriction for an individual security to a two-day period
following a significant intra-day decline in share price in that
security, will also limit compliance costs for all participants.\1226\
---------------------------------------------------------------------------

    \1225\ See supra Section X.B.1. (discussing the costs of the
alternative uptick rule).
    \1226\ See supra Section III.A.4. (discussing the circuit
breaker approach).
---------------------------------------------------------------------------

    The costs of compliance with Rules 201 and 200(g) are likely to
vary among individual trading centers and broker-dealer firms. As
detailed in PRA Section IX.E.1., above, we realize that the

policies and procedures that a trading center is required to establish
will likewise vary depending upon the type, size, and nature of the
trading center. In addition, as detailed in PRA Section IX.E.2., above,
we note that the nature and extent of policies and procedures that a
broker-dealer must establish under Rule 201(c) or 201(d)(6), if it
determines to rely on either provision to mark an order ``short
exempt,'' likely will vary based upon the type, size, and nature of the
broker-dealer.\1227\ Our estimates take into account different types of
trading centers and broker-dealers (including large versus small), and
we realize that the applicable estimates may be on the low-end for some
trading centers and broker-dealers while they may be on the high-end
for others.
---------------------------------------------------------------------------

    \1227\ We note that one commenter stated that the ``Commission's
cost estimates 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'' but did not provide a
specific cost estimate. See letter from NSCP.
---------------------------------------------------------------------------

    Although we recognize that the costs of the Rules may vary based
upon the type, size, and nature of the trading center or broker-dealer,
we believe that uniform application of Rules 201 and 200(g) to all
trading centers and broker-dealers is necessary to prevent damaging
opportunities for regulatory arbitrage and to avoid confusion in the
markets. In addition, different application of the Rules' requirements
for small entities could undermine the goals of the short sale related
circuit breaker by potentially providing an avenue for short sellers to
evade the requirements of Rule 201. Further, in relation to the
already-mentioned concerns, we believe that our goal of restoring
investor confidence could be undermined by actual or perceived
regulatory arbitrage, market confusion, and/or evasion of Rule 201's
requirements as a result of different requirements for different market
participants in Rules 201 and 200(g).
    Due to these concerns, we have concluded that in order for Rules
201 and 200(g) to be effective in helping to restore investor
confidence by preventing short selling, including potentially
manipulative or abusive short selling, from being used as a tool to
exacerbate a declining market in a security, the Rules' requirements
must apply uniformly to all trading centers and broker-dealers. Thus,
we have determined not to adopt different compliance requirements or a
different timetable for compliance requirements for small entities. In
addition, and for the same reasons, we have determined not to clarify,
consolidate, simplify, or otherwise modify Rules 201 and 200(g) for
small entities. Finally, we believe that it is inconsistent with the
purposes of the Exchange Act and the goals of adopting Rules 201 and
200(g) to except small entities from having to comply with Rules 201
and 200(g).

XIII. Statutory Authority

    Pursuant to the Exchange Act and, particularly, Sections 2, 3(b),
6, 9(h), 10, 11A, 15, 15A, 17, 19, 23(a), and 36 thereof, 15 U.S.C.
78b, 78c(b), 78(f), 78i(h), 78j, 78k-1, 78o, 78o-3, 78q, 78s, 78w(a),
and 78mm, the Commission is amending Sec. Sec.  242.200 and 242.201 of
Regulation SHO.

XIV. Text of the Amendments to Regulation SHO

List of Subjects in 17 CFR Part 242

    Brokers, Fraud, Reporting and recordkeeping requirements,
Securities.

0
For the reasons set out in the preamble, Title 17, Chapter II, Part
242, of the Code of Federal Regulations is amended as follows.

PART 242--REGULATIONS M, SHO, ATS, AC, AND NMS AND CUSTOMER MARGIN
REQUIREMENTS FOR SECURITY FUTURES

0
1. The authority citation for part 242 continues to read as follows:

    Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78g(c)(2),
78i(a), 78j, 78k-l(c), 78l, 78m, 78n, 78o(b), 78o(c), 78o(g),
78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 78mm, 80a-23, 80a-29, and
80a-37.

0
2. Section 242.200 is amended by revising paragraph (g) introductory
text and adding paragraph (g)(2) to read as follows:

Sec.  242.200  Definition of ``short sale'' and marking requirements.

* * * * *
    (g) A broker or dealer must mark all sell orders of any equity
security as ``long,'' ``short,'' or ``short exempt.''
    (1) * * *
    (2) A sale order shall be marked ``short exempt'' only if the
provisions of Sec.  242.201(c) or (d) are met.
* * * * *

0
3. Section 242.201 is revised to read as follows:

Sec.  242.201  Circuit breaker.

    (a) Definitions. For the purposes of this section:
    (1) The term covered security shall mean any NMS stock as defined
in Sec.  242.600(b)(47).
    (2) The term effective transaction reporting plan for a covered
security shall have the same meaning as in Sec.  242.600(b)(22).
    (3) The term listing market shall have the same meaning as the term
``listing market'' as defined in the effective transaction reporting
plan for the covered security.
    (4) The term national best bid shall have the same meaning as in
Sec.  242.600(b)(42).
    (5) The term odd lot shall have the same meaning as in Sec.
242.600(b)(49).
    (6) The term plan processor shall have the same meaning as in Sec.
242.600(b)(55).
    (7) The term regular trading hours shall have the same meaning as
in Sec.  242.600(b)(64).
    (8) The term riskless principal shall 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.
    (9) The term trading center shall have the same meaning as in Sec.
242.600(b)(78).
    (b)(1) A trading center shall establish, maintain, and enforce
written policies and procedures reasonably designed to:
    (i) 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 that 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; and
    (ii) Impose the requirements of paragraph (b)(1)(i) of this section
for the remainder of the day and 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.
    (iii) Provided, however, that the policies and procedures must be
reasonably designed to permit:
    (A) The execution of a displayed short sale order of a covered
security by a trading center if, at the time of initial display of the
short sale order, the order was at a price above the current national
best bid; and
    (B) 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.
    (2) A trading center shall regularly surveil to ascertain the
effectiveness of the policies and procedures required by paragraph
(b)(1) of this section and shall take prompt action to remedy
deficiencies in such policies and procedures.
    (3) The determination regarding whether the price of a covered
security has decreased 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 shall
be made by the listing market for the covered security and, if such
decrease has occurred, the listing market shall immediately notify the
single plan processor responsible for consolidation of information for
the covered security pursuant to Sec.  242.603(b). The single plan
processor must then disseminate this information.
    (c) Following any determination and notification pursuant to
paragraph (b)(3) of this section with respect to a covered security, a
broker or dealer submitting a short sale order of the covered security
in question to a trading center may mark the order ``short exempt'' if
the broker or dealer identifies the order as being at a price above the
current national best bid at the time of submission; provided, however:
    (1) The broker or dealer that identifies a short sale order of a
covered security as ``short exempt'' in accordance with this paragraph
(c) must establish, maintain, and enforce written policies and
procedures reasonably designed to prevent incorrect identification of
orders for purposes of this paragraph; and
    (2) The broker or dealer shall regularly surveil to ascertain the
effectiveness of the policies and procedures required by paragraph
(c)(1) of this section and shall take prompt action to remedy
deficiencies in such policies and procedures.
    (d) Following any determination and notification pursuant to
paragraph (b)(3) of this section with respect to a covered security, a
broker or dealer may mark a short sale order of a covered security
``short exempt'' if the broker or dealer has a reasonable basis to
believe that:
    (1) The short sale order of a covered security is by a person that
is deemed to own the covered security pursuant to Sec.  242.200,
provided that the person intends to deliver the security as soon as all
restrictions on delivery have been removed.
    (2) The short sale order of a covered security is by a market maker
to offset customer odd-lot orders or to liquidate an odd-lot position
that changes such broker's or dealer's position by no more than a unit
of trading.
    (3) The short sale order of a covered security 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.
    (4) The short sale order of a covered security 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. For the purposes of this paragraph (d)(4), a depository
receipt of a security shall be deemed to be the same security as the
security represented by such receipt.
    (5)(i) The short sale order of a covered security is by an
underwriter or member of a syndicate or group participating in the
distribution of a security in connection with an over-allotment of
securities; or
    (ii) The short sale order of a covered security is for purposes of
a lay-off sale by an underwriter or member of a syndicate or group in
connection with a distribution of securities through a rights or
standby underwriting commitment.
    (6) The short sale order of a covered security is by a broker or
dealer effecting the execution of a customer purchase or the execution
of a customer ``long'' sale on a riskless principal basis. In addition,
for purposes of this paragraph (d)(6), a broker or dealer must 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) The broker or dealer has supervisory systems in place to
produce records that enable the broker or dealer to accurately and
readily reconstruct, in a time-sequenced manner, all orders on which a
broker or dealer relies pursuant to this exception.
    (7) The short sale order is for the sale of a covered security at
the volume weighted average price (VWAP) that meets the following
criteria:
    (i) The VWAP for the covered security is calculated by:
    (A) 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;
    (B) Compiling an aggregate sum of all values; and
    (C) Dividing the aggregate sum by the total number of reported
shares for that day in the security.
    (ii) The transactions are reported using a special VWAP trade
modifier.
    (iii) The VWAP matched security:
    (A) Qualifies as an ``actively-traded security'' pursuant to Sec.
242.101 and Sec.  242.102; or
    (B) The proposed short sale transaction is being 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.
    (iv) The transaction is not effected for the purpose of creating
actual, or apparent, active trading in or otherwise affecting the price
of any security.
    (v) A broker or dealer shall be permitted to act as principal on
the contra-side to fill customer short sale orders only if the broker's
or dealer's position in the covered security, as committed by the
broker or 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.
    (e) No self-regulatory organization shall have any rule that is not
in conformity with, or conflicts with, this section.
    (f) Upon written application or upon its own motion, the Commission
may grant an exemption from the provisions of this section, either
unconditionally or on specified terms and conditions, to any person or
class of persons, to any transaction or class of transactions, or to
any security or class of securities to the extent that such exemption
is necessary or appropriate, in the public interest, and is consistent
with the protection of investors.

    Dated: February 26, 2010.

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-4409 Filed 3-9-10; 8:45 am]
BILLING CODE 8011-01-P