[Federal Register Volume 87, Number 93 (Friday, May 13, 2022)]
[Notices]
[Page 29415]
[FR Doc No: 2022-10301]

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

SECURITIES AND EXCHANGE COMMISSION

[SEC File No. 270-057, OMB Control No. 3235-0057]

Submission for OMB Review; Comment Request

Upon Written Request Copies Available From: Securities and Exchange
Commission, Office of FOIA Services, 100 F Street NE, Washington, DC
20549-2736

Extension:
    Regulation 14C (Commission Rules 14c-1 through 14c-7 and
Schedule 14C)

    Notice is hereby given that, pursuant to the Paperwork Reduction
Act of 1995 (44 U.S.C. 3501 et seq.), the Securities and Exchange
Commission (``Commission'') has submitted to the Office of Management
and Budget this request for extension of the previously approved
collection of information discussed below.
    Section 14(c) of the Securities Exchange Act of 1934 (the
``Exchange Act'') operates to require issuers that do not solicit
proxies or consents from any or all of the holders of record of a class
of securities registered under Section 12 of the Exchange Act and in
accordance with the rules and regulations prescribed under Section
14(a) in connection with a meeting of security holders (including
action by consent) to distribute to any holders that were not solicited
an information statement substantially equivalent to the information
that would be required to be transmitted if a proxy or consent
solicitation were made. Regulation 14C (Exchange Act Rules 14c-1
through 14c-7 and Schedule 14C) (17 CFR 240.14c-1 through 240.14c-7 and
240.14c-101) sets forth the requirements for the dissemination, content
and filing of the information statement. We estimate that Schedule 14C
takes approximately 132.058 hours per response and will be filed by
approximately 569 issuers annually. In addition, we estimate that 75%
of the 132.058 hours per response (99.044 hours) is prepared by the
issuer for an annual reporting burden of 56,356 hours (99.044 hours per
response x 569 responses).
    An agency may conduct or sponsor, and a person is not required to
respond to, a collection of information unless it displays a currently
valid control number.
    The public may view background documentation for this information
collection at the following website: www.reginfo.gov. Find this
particular information collection by selecting ``Currently under 30-day
Review--Open for Public Comments'' or by using the search function.
Written comments and recommendations for the proposed information
collection should be sent within 30 days of publication of this notice
by June 13, 2022 to (i) www.reginfo.gov/public/do/PRAMain and (ii)
David Bottom, Director/Chief Information Officer, Securities and
Exchange Commission, c/o John Pezzullo, 100 F Street NE, Washington, DC
20549, or by sending an email to: [email protected].

    Dated: May 9, 2022.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-10301 Filed 5-12-22; 8:45 am]
BILLING CODE 8011-01-P


do occur, they are small in number and are usually closed out within
a day. Thus, such fails to deliver will not trigger the close-out
requirement of the temporary rule.
---------------------------------------------------------------------------

4. Certification Requirement
    The temporary rule includes an exception from the borrowing
requirements for any broker-dealer that can demonstrate that it was not
responsible for any part of the fail to deliver position of the
participant. Specifically, temporary Rule 204T(b)(1) provides that a
broker or dealer shall not be subject to the requirements of temporary
Rule 204T(b) if the broker or dealer timely certifies to the
participant that it has not incurred a fail to deliver position on
settlement date for a long or short sale in an equity security for
which the participant has a fail to deliver position at a registered
clearing agency or that the broker or dealer is in compliance with the
requirements of temporary Rule 204T(e) (the ``certification
requirement'').\119\
---------------------------------------------------------------------------

    \119\ See temporary Rule 204T(b)(1).
---------------------------------------------------------------------------

    This certification requirement will allow a broker-dealer to avoid
being subject to the temporary rule's borrowing requirements if it can
demonstrate that it did not incur a fail to deliver position in the
security on settlement date. Also, by requiring the broker-dealer to
demonstrate that it was not responsible for any part of the fail to
deliver position of the participant, the information collected will
help ensure that broker-dealers are complying with the requirements of
the temporary rule.
    This certification requirement will require a broker-dealer to
determine that it has not incurred a fail to deliver position on
settlement date in an equity security for which the participant has a
fail to deliver position at a registered clearing agency or that the
broker-dealer is in compliance with the requirements set forth in the
Pre-Fail Credit provision of temporary Rule 204T(e). After making such
determinations, the broker-dealer will have to certify this information
to the participant. We estimate that such procedures will take a
broker-dealer no more than approximately 0.16 hours (10 minutes) to
complete.
    We base this estimate, in part, on the fact that, to comply with
the close-out requirements of Rule 203(b) of Regulation SHO, current
industry practice for some participants that are registered broker-
dealers is to document purchases made on settlement days 11, 12, and 13
to demonstrate that such participants do not have a close-out
obligation under Regulation SHO. On average, participants informed us
that such documentation takes approximately 0.16 hours (10
minutes).\120\
---------------------------------------------------------------------------

    \120\ We base this estimate on information provided to our staff
by three small, three medium, and three large registered clearing
agency participants.
---------------------------------------------------------------------------

    If the broker-dealer determines that it has not incurred a fail to
deliver position on settlement date in an equity security for which the
participant has a fail to deliver position at a registered clearing
agency or has purchased securities in accordance with the conditions
specified in temporary Rule 204T(e), we estimate that a broker-dealer
will have to make such determinations with respect to approximately
1.76 securities per day. As of December 31, 2007, there were 5,561
registered broker-dealers. Each of these broker-dealers may clear
trades through a participant of a registered clearing agency. We
estimate that on average, a broker-dealer will have to certify to the
participant that it has not incurred a fail to deliver position on
settlement date in an equity security for which the participant has a
fail to deliver position at a registered clearing agency or,
alternatively, that it is in compliance with the requirements set forth
in the Pre-Fail Credit provision of the temporary Rule 204T(e),
2,466,415 times per year (5,561 broker-dealers certifying once per day
on 1.76 securities, multiplied by 252 trading days in a year). The
total approximate estimated annual burden hour per year will be
approximately 394,626 burden hours (2,466,415 multiplied by 0.16 hours/
certification). We estimate that the paperwork burden for the
certification provision for each broker-

dealer will be approximately 71.0 burden hours per year.
5. Pre-Fail Credit Demonstration Requirement
    To encourage close outs of fail to deliver positions prior to the
Close-Out Date, temporary Rule 204T(e) provides that a broker-dealer
can satisfy the temporary rule's close-out requirement by purchasing
securities in accordance with the conditions of that provision (i.e.,
broker-dealers will receive ``pre-fail credit'' for the purchase),
including a condition that the broker-dealer demonstrate that it has a
net long position or net flat position on its books and records on the
settlement day for which the broker or dealer is claiming credit (the
``Pre-Fail Credit demonstration requirement'').
    Temporary Rule 204T(e) provides that even if a participant of a
registered clearing agency has not closed out a fail to deliver
position at a registered clearing agency in accordance with temporary
Rule 204T(a), or has not allocated a fail to deliver position to a
broker-dealer in accordance with temporary Rule 204T(d), a broker or
dealer may receive credit for purchasing securities prior to the
beginning of regular trading hours on the Close-Out Date if, among
other things, the purchase is executed on, or after, trade date but by
no later than the end of regular trading hours on settlement date and
the broker or dealer can demonstrate that it has a net long position or
net flat position on its books and records on the settlement day for
which the broker or dealer is claiming credit.\121\
---------------------------------------------------------------------------

    \121\ See temporary Rule 204T(e).
---------------------------------------------------------------------------

    The Pre-Fail Credit provision is intended to encourage broker-
dealers to close out fail to deliver positions prior to the beginning
of regular trading hours on the Close-Out Date. By requiring, among
other things, that the broker-dealer demonstrate that it has a net long
position or net flat position on its books and records on the
settlement day for which the broker-dealer is claiming credit, the
information collected will help ensure that broker-dealers purchase
sufficient shares to close out their fail to deliver position prior to
the beginning of regular trading hours on the Close-Out Date.
    Such demonstration requirement will require a broker-dealer that
purchased securities in accordance with the conditions specified in
temporary Rule 204T(e) to determine that it has a net long position or
net flat position on the settlement day for which the broker-dealer is
claiming credit. After making such determination, the temporary rule
requires that the broker-dealer demonstrate such information on its
books and records. We estimate that such procedures will take a broker-
dealer no more than approximately 0.16 hours (10 minutes) to complete.
    We base this estimate on the fact that, to comply with the close-
out requirement of Rule 203(b)(3) of Regulation SHO, current industry
practice for some participants that are registered broker-dealers is to
document purchases made on settlement days 11, 12, and 13 to
demonstrate that such participants do not have a close-out obligation
under Regulation SHO. On average, participants informed us that such
documentation takes approximately 0.16 hours (10 minutes).\122\
---------------------------------------------------------------------------

    \122\ We base this estimate on information provided to our staff
by three small, three medium, and three large registered clearing
agency participants.
---------------------------------------------------------------------------

    If a broker-dealer purchased securities in accordance with the
conditions specified in temporary Rule 204T(e) and determined that it
has a net long position or net flat position on the settlement day for
which the broker-dealer is claiming credit, we estimate that a broker-
dealer will have to make such determination with respect to
approximately 1.76 securities per day.\123\
---------------------------------------------------------------------------

    \123\ See supra, note 107.
---------------------------------------------------------------------------

    As of December 31, 2007, there were 5,561 registered broker-
dealers. We estimate that on average, a broker-dealer will have to
demonstrate in its books and records that it has a net long position or
net flat position on the settlement day for which the broker-dealer is
claiming credit, 2,466,415 times per year (5,561 broker-dealers
checking for compliance once per day on 1.76 securities, multiplied by
252 trading days in a year). The total approximate estimated annual
burden hour per year will be approximately 394,626 burden hours
(2,466,415 multiplied by 0.16 hours/demonstration). We estimate that
the paperwork burden for the temporary Pre-Fail Credit provision for
each broker-dealer will be approximately 71.0 burden hours per year.
6. Market Maker Demonstration Requirement
    To allow market makers to facilitate customer orders in a fast
moving market, the temporary rule includes a limited exception from the
rule's close-out requirement for fails to deliver attributable to bona
fide market making activities by registered market makers, options
market makers, or other market makers obligated to quote in the over-
the-counter market (collectively, ``Market Makers''). Under this
exception, a participant must close out the fail to deliver position
attributable to a Market Maker by no later than the beginning of
regular trading hours on the morning of the third settlement day after
the settlement date for the transaction that resulted in the fail to
deliver position. The borrowing requirements of the temporary rule do
not apply to Market Makers provided the Market Maker can demonstrate
that it does not have an open fail to deliver position at the time of
any additional short sales (the ``Market Maker demonstration
requirement'').
    By requiring a Market Maker to demonstrate that it does not have an
open fail to deliver position at the time of any additional short sales
and, thus, avoid being subject to the temporary rule's pre-borrow
requirements, the information collected will help ensure that Market
Makers are complying with the requirements of temporary Rule
204T(b)(2).
    This requirement will require a Market Maker to determine whether
it has an open fail to deliver position at the time of any additional
short sales in the particular equity security in which there is a fail
to deliver position at a registered clearing agency. After making such
a determination, the temporary rule requires that the Market Maker
demonstrate that it does not have an open fail to deliver position in
that equity security. We estimate that such procedures will take a
Market Maker no more than approximately 0.16 hours (10 minutes) to
complete.\124\
---------------------------------------------------------------------------

    \124\ We base this estimate on information provided to our staff
by three large, three medium, and three small firms that engage in
market making activities currently complying with temporary Rule
204T, pursuant to the September Emergency Order, which has similar
requirements to temporary Rule 204(T)(b)(2) of this release.
---------------------------------------------------------------------------

    If a participant of a registered clearing agency has a fail to
deliver position in an equity security at a registered clearing agency
that is attributable to a Market Maker and the Market Maker, in seeking
to avoid the borrowing requirements of temporary Rule 204T(b), has
determined that it does not have an open fail to deliver position, we
estimate that such Market Maker will have to make such determination
with respect to approximately 15 securities per day.\125\
---------------------------------------------------------------------------

    \125\ OEA estimates that there are approximately 9,809 fail to
deliver positions per day. An upper bound on the number of fail to
deliver positions per day due to market makers is 9,809. Across 656
market makers, the number of securities per market maker per day is
approximately 15 equity securities. During the period from January
to July 2008, approximately 4,321 new fail to deliver positions
occurred per day. The NSCC data for this period includes only
securities with at least 10,000 shares in fails to deliver. To
account for securities with fails to deliver below 10,000 shares,
the figure is grossed-up by a factor of 2.27. The factor is
estimated from a more complete data set obtained from NSCC during
the period from September 16, 2008 to September 22, 2008. It should
be noted that these numbers include securities that were not subject
to the close-out requirement of Rule 203(b)(3) of Regulation SHO.

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

    As of December 31, 2007, there were 656 Market Makers.\126\ We
estimate a total of 2,479,680 written demonstrations in accordance with
temporary Rule 204T(b)(1) across all Market Makers per year (656 Market
Makers demonstrating once per day on 15 securities, multiplied by 252
trading days in a year). The total estimated annual burden hour per
year will be approximately 396,749 burden hours (2,479,680 multiplied
by 0.16 hours/demonstration). We estimate that the paperwork burden for
the Market Maker demonstration requirements for each Market Maker will
be approximately 604.8 burden hours per year.
---------------------------------------------------------------------------

    \126\ These numbers are based on OEA's review of 2007 FOCUS
Report filings reflecting registered broker-dealers. This number
does not include broker-dealers that are delinquent on FOCUS Report
filings.
---------------------------------------------------------------------------

B. Request for Comment

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

VIII. Cost-Benefit Analysis

 A. Summary

    The Commission is sensitive to the costs and benefits of its rules.
Commenters should provide analysis and data to support their views on
the costs and benefits associated with the temporary rule.
    We are adopting, as an interim final temporary rule, Rule 204T,
under the Exchange Act. The temporary rule is intended to address
abusive ``naked'' short selling in all equity securities by requiring
that participants of a registered clearing agency deliver securities by
settlement date, or if the participants have not delivered shares by
settlement date, the participants must, by no later than the beginning
of regular trading hours on the Close-Out Date, immediately close out
the fail to deliver position by borrowing or purchasing securities of
like kind and quantity.
    If a participant does not purchase or borrow shares, as applicable,
to close out a fail to deliver position in accordance with temporary
Rule 204T(a), the participant will have violated the temporary rule. In
addition, the temporary rule imposes on the participant for its own
trades and on all broker-dealers from which that participant receives
trades for clearance and settlement (including introducing and
executing brokers), a requirement to borrow or arrange to borrow
securities prior to accepting or effecting further short sales in that
security.\127\
---------------------------------------------------------------------------

    \127\ See temporary Rule 204T(b).
---------------------------------------------------------------------------

    To the extent that a participant becomes subject to the borrowing
requirements of temporary Rule 204T(b), a broker-dealer that clears
through the participant can avoid being subject to the borrowing
requirements of temporary Rule 204T(b) if the broker-dealer can
demonstrate that it was not responsible for any part of the fail to
deliver position of the participant. Moreover, to allow Market Makers
to facilitate customer orders in a fast moving market without possible
delays associated with complying with the pre-borrow penalty provision
of temporary Rule 204T(b), the borrowing requirements of the temporary
rule do not apply to Market Makers provided the Market Maker can show
that it does not have an open fail to deliver position at the time of
any additional short sales.\128\
---------------------------------------------------------------------------

    \128\ See temporary Rule 204T(b)(2).
---------------------------------------------------------------------------

    Similar to Rule 203(b)(3)(vi) of Regulation SHO, temporary Rule
204(d) provides that a participant may reasonably allocate its
responsibility to close out a fail to deliver position to another
broker-dealer for which the participant clears trades, or from which it
receives trades for settlement.\129\ Unlike Rule 203(b)(3)(vi) of
Regulation SHO, however, temporary Rule 204T(d) imposes a notification
requirement on a broker-dealer that has been allocated responsibility
for complying with the rule's requirements.\130\
---------------------------------------------------------------------------

    \129\ See 17 CFR 242.203(b)(3)(vi). Rule 203(b)(3)(vi) provides
that ``[i]f a participant of a registered clearing agency reasonably
allocates a portion of a fail to deliver position to another
registered broker or dealer for which it clears trades or for which
it is responsible for settlement, based on such broker or dealer's
short position, then the provisions of this paragraph (b)(3)
relating to such fail to deliver position shall apply to the portion
of such registered broker or dealer that was allocated the fail to
deliver position, and not to the participant.''
    \130\ See temporary Rule 204T(d).
---------------------------------------------------------------------------

    In addition, the temporary rule provides that if a participant has
a fail to deliver position at registered clearing agency in an equity
security and can demonstrate on its books and records that such fail to
deliver position resulted from a long sale, such participant has until
no later than the beginning of regular trading hours on the third
consecutive settlement day following the settlement date to immediately
close out the fail to deliver position by purchasing securities of like
kind and quantity.
    The temporary rule also extends the close-out requirement for fails
to deliver attributable to bona fide market making activities by Market
Makers by requiring a participant to close out the fail to deliver
position attributable to a Market Maker by no later than the beginning
of regular trading hours on the third settlement day after the
settlement date for the transaction that resulted in the fail to
deliver position.
    In addition, consistent with Rule 203(b)(3)(ii) of Regulation SHO,
the temporary rule includes an exception for sales of securities
pursuant to Rule 144 of the Securities Act.\131\

Specifically, temporary Rule 204T(a)(2) provides that if a participant
of a registered clearing agency has a fail to deliver position at a
registered clearing agency in any equity security sold pursuant to Rule
144 for thirty-five consecutive settlement days after the settlement
date for a sale in that equity security, the participant shall, by no
later than the beginning of regular trading hours on the thirty-sixth
consecutive settlement day following the settlement date for the
transaction, immediately close out the fail to deliver position by
purchasing securities of like kind and quantity.\132\
---------------------------------------------------------------------------

    \131\ See 17 CFR 242.203(b)(3)(ii).
    \132\ See temporary Rule 204T(a)(2).
---------------------------------------------------------------------------

    If, however, a fail to deliver position resulting from the sale of
an equity security pursuant to Rule 144 is not closed out in accordance
with temporary Rule 204T(a)(2), the participant is subject to the
borrow requirements in temporary Rule 204T(b). Thus, if the fail to
deliver position persists beyond thirty-five consecutive settlement
days, the temporary rule prohibits a participant of a registered
clearing agency, and any broker-dealer from which it receives trades
for clearance and settlement, from accepting any short sale orders or
effecting further short sales in the particular security without
borrowing, or entering into a bona-fide arrangement to borrow, the
security until the participant closes out the entire fail to deliver
position by purchasing securities of like kind and quantity and that
purchase has cleared and settled at a registered clearing agency.\133\
---------------------------------------------------------------------------

    \133\ See temporary Rule 204T(b).
---------------------------------------------------------------------------

    Although we recognize the temporary rule may impose increased
borrowing costs to assure settlement in accordance with the
requirements of the temporary rule, which may increase the costs of
legitimate short selling, we believe that the requirements of the
temporary rule are necessary to achieve our goal of further reducing
fails to deliver and addressing abusive ``naked'' short selling.

B. Benefits

    The temporary rule will substantially restrict the practice of
``naked'' short selling in all equity securities by strengthening the
delivery requirements for such securities. By requiring that
participants of a registered clearing agency deliver securities by
settlement date, or if the participants have not delivered shares by
settlement date, immediately close out the fail to deliver position by
borrowing or purchasing securities of like kind and quantity, the
temporary rule also furthers our goals of limiting fails to deliver and
helping to reduce the possibility that abusive ``naked'' short selling
may contribute to disruption in the securities markets. This, in turn,
will help to ensure that investors remain confident that trading can be
conducted without the influence of illegal manipulation. The temporary
rule also furthers the goals of helping to maintain fair and orderly
markets against the threat of sudden and excessive fluctuations of
securities prices and substantial disruption in the functioning of the
securities markets. The temporary rule also promotes the prompt and
accurate clearance and settlement of transactions in equity securities.
    In addition, the temporary rule will help to further reduce the
number of fails to deliver. These fails may create a misleading
impression of the market for these securities. Large and persistent
fails to deliver may have a negative effect on shareholders,
potentially depriving them of the benefits of ownership, such as voting
and lending. Thus, by facilitating the prompt receipt of shares, the
temporary rule will help enable investors to receive the benefits
associated with share ownership.
    Persistent fails to deliver in a security may also be perceived by
potential investors negatively and may affect their decision about
making a capital commitment. Thus, by providing greater assurance that
securities will be delivered and, thereby, alleviating investor
apprehension as they make investment decisions, the temporary rule will
benefit issuers in that an increase in investor confidence in the
market for their securities will facilitate investment in their
securities.
1. Close-Out Requirements
    By requiring that participants of a registered clearing agency
deliver securities by settlement date, or if the participants have not
delivered shares by settlement date, immediately close out the fail to
deliver position by borrowing or purchasing securities of like kind and
quantity, the temporary rule will help restore, maintain, and enhance
investor confidence in the securities markets. It will also help reduce
manipulative schemes involving ``naked'' short selling in equity
securities. Sellers that fail to deliver securities on settlement date
may enjoy fewer restrictions than if they were required to deliver the
securities within a reasonable period of time, and such sellers may
attempt to use this additional freedom to engage in trading activities
that deliberately depress the price of a security. Thus, the temporary
rule's close-out requirements are expected to remove a potential means
of manipulation, thereby decreasing the possibility of artificial
market influences and contributing to price efficiency.
    Under temporary Rule 204T(a)(1), a participant that has a fail to
deliver position at a registered clearing agency in an equity security
and can demonstrate on its books and records that such fail to deliver
position resulted from a long sale, will have until no later than the
beginning of regular trading hours on the third consecutive settlement
day following the settlement date to immediately close out the fail to
deliver position by purchasing securities of like kind and quantity.
This provision allows participants an additional two settlement days to
close out fail to deliver positions that result from long sales,
provided that the participant's books and records reflect the fact that
the fail to deliver resulted from a long sale.\134\ We believe this
exception to temporary Rule 204T(a)'s close-out requirement benefits
participants because the two additional days to close-out these fail to
deliver positions may reduce close-out costs for such participants.
---------------------------------------------------------------------------

    \134\ See temporary Rule 204T(a)(1).
---------------------------------------------------------------------------

    The temporary rule also extends temporary Rule 204T(a)'s close-out
requirement for fails to deliver attributable to bona fide market
making activities by Market Makers by requiring a participant to close
out the fail to deliver position attributable to a Market Maker by no
later than the beginning of regular trading hours on the third
settlement day after the settlement date. We believe this exception to
temporary Rule 204T(a)'s close-out requirement benefits participants
because the two additional days to close-out these fail to deliver
positions may reduce close-out costs for such participants.
    Similar to Rule 203(b)(3)(vi) of Regulation SHO, temporary Rule
204(d) allows a participant to reasonably allocate its responsibility
to close out a fail to deliver position to another broker-dealer for
which the participant clears trades, or from which it receives trades
for settlement. This allocation provision benefits participants because
if a participant can identify the accounts of broker-dealers for which
they clear or from which they receive trades for settlement, the
participant can allocate the responsibility to close out the fail to
deliver position to the particular broker-dealer account(s) whose
trading activities caused the fail to deliver position provided the
allocation is reasonable and, therefore, the allocated broker-dealer
rather than the participant

will incur any costs associated with the temporary rule's close-out
requirement.
    In addition, temporary Rule 204T(d) imposes a notification
requirement on a broker-dealer that has been allocated responsibility
for complying with the rule's requirements. Thus, under the temporary
rule's allocation provision, if the broker-dealer does not comply with
the provisions of temporary Rule 204T(a), it must immediately notify
the participant that it has become subject to the borrowing
requirements of temporary Rule 204T(b).\135\ This allocation
notification requirement is intended to let participants know when a
broker-dealer from which the participant receives trades for clearance
and settlement has become subject to the temporary rule's borrowing
requirements. The notification requirement furthers the Commission's
goals of limiting fails to deliver and addressing abusive ``naked''
short selling by promoting the prompt and accurate clearance and
settlement of transactions involving equity securities. The
notification requirement will also help ensure that participants that
receive trades for clearance and settlement from broker-dealers will be
on notice that the broker-dealer is subject to the borrow requirements
of temporary Rule 204T(b) until the fail to deliver position has been
closed out.
---------------------------------------------------------------------------

    \135\ See temporary Rule 204T(d).
---------------------------------------------------------------------------

    Moreover, under the temporary rule's Pre-Fail Credit provision, a
broker or dealer may receive credit for purchasing securities prior to
the beginning of regular trading hours on the Close-Out Date if, among
other things, the purchase is executed on, or after, trade date but by
no later than the end of regular trading hours on settlement date and
the broker or dealer can demonstrate that it has a net long position or
net flat position on its books and records on the settlement day for
which the broker or dealer is claiming credit. The Pre-Fail Credit
provision is intended to encourage earlier close out of fails to
deliver in all equity securities and, therefore, to the extent used
could result in a reduction of persistent fails to deliver.
2. Borrowing Requirements
    The borrowing requirements of temporary Rule 204T(b) are similar to
the requirements of Rule 203(b)(3)(iv) of Regulation SHO for a
participant that has not closed out a fail to deliver position in a
threshold security that has persisted for thirteen consecutive
settlement days.\136\ Similar to Regulation SHO, the temporary rule is
aimed in part at addressing potentially abusive ``naked'' short selling
in equity securities. To that end, we believe it is appropriate to
include in the temporary rule borrowing requirements for broker-
dealers, including participants, that sell short a security that has a
fail to deliver position that has not been closed out in accordance
with the requirements of the temporary rule. We believe that the
borrowing requirements of temporary Rule 204T(b) will further our goal
of limiting fails to deliver and addressing abusive ``naked'' short
selling by promoting the prompt and accurate clearance and settlement
of transactions in equity securities. By requiring that participants
and broker-dealers from which they receive trades for clearance and
settlement borrow or arrange to borrow securities prior to accepting or
effecting short sales in the security that has a fail to deliver
position that has not been closed out, the temporary rule will help to
ensure that shares will be available for delivery on the short sale by
settlement date and, thereby, help to avoid additional fails to deliver
occurring in the security.
---------------------------------------------------------------------------

    \136\ See 17 CFR 242.203(b)(3)(iv).
---------------------------------------------------------------------------

    Unlike the current borrow requirements of Rule 203(b)(3)(iv) of
Regulation SHO, however, the borrow requirements of the temporary rule
specify that participants must notify all broker-dealers from which
they receive trades for clearance and settlement that a fail to deliver
position in an equity security has not been closed out in accordance
with temporary Rule 204T(a).\137\ This notification requirement in
temporary Rule 204T(c) is intended to ensure that all broker-dealers
that submit trades for clearance and settlement to a participant that
has a fail to deliver position in an equity security that has not been
closed out in accordance with temporary Rule 204T(a) are on notice that
all short sales in that security will be subject to the borrowing
requirements of temporary Rule 204T(b) until the fail to deliver
position has been closed out.
---------------------------------------------------------------------------

    \137\ See temporary Rule 204T(c).
---------------------------------------------------------------------------

    However, if a participant becomes subject to the borrowing
requirements of temporary Rule 204T(b) because it did not close out a
fail to deliver position by no later than the beginning of regular
trading hours on the settlement date for the transaction, a broker-
dealer that clears through the participant will not also be subject to
the borrowing requirements of temporary Rule 204T(b) if the broker-
dealer can demonstrate that it was not responsible for any part of the
fail to deliver position of the participant.\138\ This exception allows
a broker-dealer to avoid being subject to the borrowing requirements of
the temporary rule if the broker-dealer can demonstrate that it did not
incur a fail to deliver position in the security on settlement date.
---------------------------------------------------------------------------

    \138\ See temporary Rule 204T(b)(1).
---------------------------------------------------------------------------

    Moreover, the borrowing requirements of the temporary rule will not
apply to Market Makers, provided that the Market Maker can show that it
does not have an open fail to deliver position at the time of any
additional short sales.\139\ This provision is intended to allow Market
Makers to facilitate customer orders in a fast moving market without
possible delays associated with complying with the pre-borrow penalty
provision of temporary Rule 204T(b).
---------------------------------------------------------------------------

    \139\ See temporary Rule 204T(b)(2).
---------------------------------------------------------------------------

3. Sales of Securities Pursuant to Rule 144
    Securities sold pursuant to Rule 144 of the Securities Act are
formerly restricted securities that a seller is ``deemed to own,'' as
defined by Rule 200(a) of Regulation SHO.\140\ The securities, however,
may not be capable of being delivered on the settlement date due to
processing delays related to removal of the restricted legend and,
therefore, sales of these securities frequently result in fails to
deliver. Consistent with our statements in connection with our recent
amendments to Regulation SHO in connection with closing out fails to
deliver in threshold securities sold pursuant to Rule 144,\141\ we
believe that a close-out requirement of thirty-five consecutive
settlement days from settlement date for fails to deliver resulting
from sales of equity securities sold pursuant to Rule 144, will permit
the orderly settlement of such sales without the risk of causing market
disruption due to unnecessary purchasing activity (particularly if the
purchases are for sizable quantities of stock). Because the Rule 144
security sold will be received as soon as all processing delays have
been removed, this additional time will allow participants to close out
fails to deliver resulting from the sale of the security with the
security sold, rather than having to close out such fail to deliver
position by purchasing securities in the market. Thus, the amendments
will

reduce costs to participants and, in turn, investors.
---------------------------------------------------------------------------

    \140\ See 17 CFR 242.200(a).
    \141\ As mentioned above, we recently adopted amendments to the
close-out requirement of Regulation SHO to allow fails to deliver
resulting from sales of threshold securities pursuant to Rule 144 to
be closed out within 35 rather 13 consecutive settlement days. See
2007 Regulation SHO Final Amendments, 72 FR at 45550-45551.
---------------------------------------------------------------------------

    Although the temporary rule allows fails to deliver resulting from
sales of equity securities sold pursuant to Rule 144 of the Securities
Act thirty-five consecutive settlement days after the settlement date
before a participant must take action to close out the fail to deliver
position, these fails to deliver must be closed out by no later than
the beginning of regular trading hours on the thirty-sixth settlement
day and, therefore, these fails to deliver cannot continue
indefinitely. Thus, we believe that the temporary rule is consistent
with our goal of further reducing fails to deliver in equity
securities, while balancing the concerns associated with closing out
fails to deliver resulting from sales of securities pursuant to Rule
144 of the Securities Act.

C. Costs

    We recognize that the temporary rule may result in increased short
selling costs for participants that may impact legitimate short selling
activities; however, we believe such costs will be limited. For
example, it might result in participants incurring borrowing costs
where they borrow securities to close out a fail to deliver position
that might have been closed out soon thereafter with shares received
from the customer. Such actions might result in added demand in the
lending market which in turn might exert upward pressure on securities
lending rates, potentially making short selling more expensive for all
market participants. For example, it is estimated that about $700
billion in U.S. equity securities are lent out per year. Preliminary
input from industry participants suggests that lending rates increased
significantly after the September Emergency Order for stocks not
covered by the ban on short selling. While results from the period
after the September Emergency Order may be confounded by the unusual
circumstances of the continued credit crisis, an increase of 10 basis
points in lending rates would result in an annual cost increase to
securities borrowers of $700 million and the new revenue for securities
lenders increasing by the corresponding amount of $700 million.
Therefore, if lending increased by 10 basis points, the annual impact
on the securities lending market would be about $1,400 million (or
$1,050 million for nine months).
    To the extent that the requirements of the temporary rule will
result in increased costs to short selling in equity securities, it may
lessen some of the benefits of legitimate short selling and, thereby,
result in a reduction in short selling generally. Such a reduction may
lead to a decrease in market efficiency and price discovery, less
protection against upward stock price manipulations, a less efficient
allocation of capital, an increase in trading costs, and a decrease in
liquidity. We also recognize that requiring that participants purchase
securities to close out fails to deliver in equity securities in
accordance with the temporary rule, may potentially impact the
willingness of participants to provide liquidity.
    As a likely result of the temporary rule as contained in the
September Emergency Order, bid-ask spreads on equity securities have
increased. Preliminary input from industry participants suggests that
bid-ask spreads have increased after the September Emergency Order for
stocks not covered by the ban on short selling. While results from the
period after the September Emergency Order may be confounded by the
unusual circumstances of the continued credit crisis, an increase of 1
basis point in bid-ask spreads would result in an annual cost to
investors of about $6,048 million. To calculate the annual cost, we
assume that 12 billion shares trade on a daily basis. At an average
share price of approximately $20, this constitutes $240 billion in
dollar volume per day. Based on this total, an increase in transaction
costs of one basis point would result in a daily increase in realized
transaction costs of approximately $24 million a day. At this rate,
investors would experience increased total transaction costs of over
$100 million within the first five trading days of the rule or about
$6,048 million annually ($24 million times 252 trading days) (or $4,536
million for nine months).
    We believe, however, that strengthening rules against potentially
abusive ``naked'' short selling will provide increased confidence in
the securities markets. Thus, although we recognize that the temporary
rule may result in increased short selling costs, we believe such costs
are justified by the fact that the temporary rule may help restore,
maintain, and enhance investor confidence in the markets by preventing
potentially abusive ``naked'' short selling.
1. Close-Out Requirements
    We also recognize that requiring that participants purchase
securities to close-out fails to deliver in any equity security in
accordance with the temporary rule, may potentially impact the
willingness of participants to provide liquidity. However, we believe
that any such potential effect will be minimal because participants
will still have some flexibility by having two additional settlement
days in which to purchase securities to close-out their fail to deliver
positions that either result from long sales or are attributable to
bona fide market making activities by Market Makers.
    In addition, we recognize that the temporary rule's close-out
requirement may result in some additional costs for participants of a
registered clearing agency in terms of systems and surveillance
modifications, as well as changes to processes and procedures. However,
we believe any additional costs incurred in implementing temporary Rule
204T's close-out requirement in terms of these modifications will be
minimal. The close-out requirement of the temporary rule is consistent
with the current settlement practices and procedures and with the
close-out requirement of Regulation SHO. For example, because most
transactions settle by T+3, participants should already have in place
policies and procedures to help ensure that delivery is being made by
settlement date. Nevertheless, participants will incur costs for each
close-out and these costs could accumulate to significant amounts over
time and across participants.
    Moreover, similar to the existing close-out requirement of Rule
203(b)(3) of Regulation SHO, the temporary rule is based on a
participant's fail to deliver position at a registered clearing agency.
As noted above, the NSCC clears and settles the majority of equity
securities trades conducted on the exchanges and in the over-the-
counter markets. The NSCC clears and settles trades through the CNS
system, which nets the securities delivery and payment obligations of
all of its members. The NSCC notifies its members of their securities
delivery and payment obligations daily. Thus, because the temporary
rule is based on a participant's fail to deliver position at a
registered clearing agency, it is consistent with current settlement
practices and procedures and with the Regulation SHO framework
regarding delivery of securities.\142\ As such, we anticipate that most
participants will already have systems, processes and procedures in
place in order to comply with the temporary rule's close-out
requirements and, therefore, that any additional implementation costs
associated with the temporary rule will be minimal.
---------------------------------------------------------------------------

    \142\ See 17 CFR 242.203(b)(3).
---------------------------------------------------------------------------

    In addition, to comply with Regulation SHO's close-out requirement

when it became effective in January 2005, participants needed to modify
their recordkeeping systems and surveillance mechanisms. Participants
also should have retained and trained the necessary personnel to ensure
compliance with the rule's close-out requirements. Thus, most of the
infrastructure necessary to comply with the temporary rule's close-out
requirement should already be in place. Thus, we believe that any
changes to personnel, computer hardware and software, recordkeeping or
surveillance costs will be minimal.
    We recognize that the requirements of temporary Rule 204T(a)(1) may
also impose additional costs on participants of a registered clearing
agency. As discussed above, under temporary Rule 204T(a)(1), a
participant of a registered clearing agency that has a fail to deliver
position at a registered clearing agency in an equity security and can
demonstrate on its books and records that the fail to deliver position
resulted from a long sale, will have until no later than the beginning
of regular trading hours on the third consecutive settlement day
following the settlement date to immediately close out the fail to
deliver position by purchasing securities of like kind and quantity.
Thus, to qualify for this additional time to close out a fail to
deliver position, the temporary rule requires the participant to
demonstrate on their books and records that the fail to deliver
position resulted from a long sale.
    This demonstration requirement may result in participants incurring
costs related to personnel, recordkeeping, systems, and surveillance
mechanisms. For example, as discussed in detail in section VII above,
for purposes of the Paperwork Reduction Act, we estimate that it will
take each participant of a registered clearing agency no more than
approximately 0.16 hours (10 minutes) to comply with the demonstration
requirement of the temporary Rule 204T(a)(1). In addition, we estimate
that the total annual hour burden per year for each participant subject
to the documentation requirement will be 1,371 hours.
    The allocation notification requirement of temporary Rule 204T(d)
will impose costs on broker-dealers that have been allocated
responsibility for the close-out requirement under the temporary rule.
As discussed above, temporary Rule 204T(d) requires a broker or dealer
that has been allocated a portion of a fail to deliver position that
has not complied with the close-out provisions under the temporary rule
to notify the participant that it has become subject to the borrowing
requirements of temporary Rule 204T(b). This notification requirement
may result in broker-dealers incurring costs related to personnel,
recordkeeping, systems, and surveillance mechanisms. For example, as
discussed in detail in section VII, above, for purposes of the
Paperwork Reduction Act, we estimate that it will take each broker-
dealer no more than approximately 0.16 hours (10 minutes) to comply
with the notification requirements of temporary Rule 204T(d). In
addition, we estimate that the total annual hour burden per year for
each broker-dealer subject to the notification requirement will be 71.0
hours.
    We also recognize that the requirements of temporary Rule 204T(e)
may impose additional costs on broker-dealers. As discussed above,
temporary Rule 204T(e) allows a broker-dealer to obtain pre-fail credit
if it purchases securities in accordance with the conditions specified
in the temporary rule. To receive pre-fail credit, the temporary rule
requires, among other things, that a broker-dealer demonstrate that it
has a net long position or net flat position on its books and records
on the settlement day for which the broker or dealer is claiming
credit.
    This demonstration requirement may result in participants incurring
costs related to personnel, recordkeeping, systems, and surveillance
mechanisms. For example, as discussed in detail in section VII above,
for purposes of the Paperwork Reduction Act, we estimate that it will
take each broker-dealer no more than approximately 0.16 hours (10
minutes) to comply with the demonstration requirements of the temporary
rule. In addition, we estimate that the total annual hour burden per
year for each broker-dealer subject to the demonstration requirement
will be 71.0 hours.
2. Borrowing Requirements
    We believe that temporary Rule 204T's borrow requirements for fail
to deliver positions that are not closed out in accordance with the
temporary rule will result in limited, if any, implementation costs to
participants of a registered clearing agency, and broker-dealers from
which they receive trades for clearance and settlement. These entities
must already comply with the borrow requirements of Rule 203(b)(3)(iv)
of Regulation SHO if a fail to deliver position has not been closed out
in accordance with Regulation SHO's mandatory close-out requirement.
Accordingly, these entities should already have in place the personnel,
recordkeeping, systems, and surveillance mechanisms necessary to comply
with the temporary rule's borrow requirements. Nevertheless, we
recognize that each pre-borrow will impose costs on participants,
broker-dealers, and investors and these costs can accumulate to
significant amounts if the borrow requirement is imposed often.
    The pre-borrow notification requirement of temporary Rule 204T(c)
will impose costs on participants of a registered clearing agency.
Temporary Rule 204T(c) requires a participant to notify any broker or
dealer from which it receives trades for clearance and settlement,
including any market maker that would otherwise be entitled to rely on
the exception provided in Rule 203(b)(2)(iii) of Regulation SHO,\143\
(1) that the participant has a fail to deliver position in an equity
security at a registered clearing agency that has not been closed out
in accordance with the requirements of temporary Rule 204T(a), and (2)
when the purchase that the participant has made to close out the fail
to deliver position has cleared and settled at a registered clearing
agency.\144\ This notification requirement may result in participants
incurring costs related to personnel, recordkeeping, systems, and
surveillance mechanisms. For example, as discussed in detail in section
VII, above, for purposes of the Paperwork Reduction Act, we estimate
that it will take each participant of a registered clearing agency no
more than approximately 0.16 hours (10 minutes) to comply with the pre-
borrow notification requirements of temporary Rule 204T(b). In
addition, we estimate that the total annual hour burden per year for
each participant subject to the notification requirement will be 2,016
hours.
---------------------------------------------------------------------------

    \143\ See 17 CFR 203(b)(2)(iii) (providing for an exception from
the ``locate'' requirement for market makers engaged in bona fide
market making in that security at the time of the short sale).
    \144\ See temporary Rule 204T(c).
---------------------------------------------------------------------------

    Moreover, we believe any additional costs incurred in connection
with the borrowing requirements of temporary Rule 204T(b) will be
limited by the fact that if a participant becomes subject to the
borrowing requirements of temporary Rule 204T(b), a broker-dealer that
clears through the participant will not also be subject to the
borrowing requirements of temporary Rule 204T(b) if the broker-dealer
can demonstrate that it was not responsible for any part of the fail to
deliver position of the participant. This provision allows a broker-
dealer to avoid the costs of being subject to the temporary rule's
borrowing requirements, provided that the broker-dealer can demonstrate
that it

did not incur a fail to deliver position in the security on settlement
date.
    The certification requirement of temporary Rule 204T(b)(1) may
impose some costs on broker-dealers having to demonstrate that it was
not responsible for any part of the fail to deliver position of the
participant. As discussed above, temporary Rule 204T(b)(1) requires the
broker-dealer to timely certify to the participant that it has not
incurred a fail to deliver position on settlement date in an equity
security for which the participant has a fail to deliver position at a
registered clearing agency or the broker-dealer is in compliance with
the requirements set forth in the temporary rule's Pre-Fail Credit
provision. This certification requirement may result in broker-dealers
incurring costs related to personnel, recordkeeping, systems, and
surveillance mechanisms. For example, as discussed in detail in section
VII, above, for purposes of the Paperwork Reduction Act, we estimate
that it will take each broker-dealer no more than approximately 0.16
hours (10 minutes) to comply with the certification requirement of
temporary Rule 204T(b)(1). In addition, we estimate that the total
annual hour burden per year for each broker-dealer subject to the
certification requirement will be 71.0 hours.
    Any potential additional costs associated with the temporary
borrowing requirements will be limited by the fact that the temporary
rule's borrowing requirements will not apply to Market Makers, provided
that the Market Maker can demonstrate that it does not have an open
fail to deliver position at the time of any additional short sales.
This allows Market Makers to facilitate customer orders in a fast
moving market without possible delays and added costs associated with
complying with the pre-borrow penalty provision of temporary Rule
204T(b).
    The demonstration requirement of temporary Rule 204T(b)(2) may
impose costs on Market Makers. This demonstration requirement may
result in Market Makers incurring costs related to personnel,
recordkeeping, systems, and surveillance mechanisms. For example, as
discussed in detail in section VII, above, for purposes of the
Paperwork Reduction Act, we estimate that it will take each Market
Maker no more than approximately 0.16 hours (10 minutes) to comply with
the demonstration requirement of temporary Rule 204T(b)(2). In
addition, we estimate that the total annual hour burden per year for
each Market Maker subject to this demonstration requirement will be
604.8 hours.
3. Sales of Securities Pursuant to Rule 144
    Consistent with our statements in connection with our recent
amendments to Regulation SHO in connection with closing out fails to
deliver in threshold securities sold pursuant to Rule 144,\145\ we do
not believe the temporary rule's close-out requirement will impose any
significant burden or cost on market participants. We believe that a
close-out requirement of thirty-five consecutive settlement days from
settlement date for fails to deliver resulting from sales of equity
securities sold pursuant to Rule 144 will reduce costs by allowing
participants of a registered clearing agency with a fail to deliver
position additional time for delivery of these securities.
---------------------------------------------------------------------------

    \145\ See 2007 Regulation SHO Final Amendments, 72 FR at 45550-
45551.
---------------------------------------------------------------------------

    Participants may incur, however, some added costs for minor changes
to their current systems to reflect the application of the temporary
rule's close-out requirement to fails to deliver resulting from sales
of all equity securities, rather than just threshold securities, sold
pursuant to Rule 144 of the Securities Act.

D. Request for Comment

    The Commission is sensitive to the costs and benefits of the
temporary rule, and encourages commenters to discuss any additional
costs or benefits beyond those discussed herein, as well as any
reduction in costs. Commenters should provide analysis and data to
support their views of the costs and benefits associated with the
temporary rule.
     What, if any, additional benefits are involved in
complying with the temporary rule? Should the temporary rule be
modified in any way to increase the benefits of the temporary rule? If
so, how?
     What, if any, additional costs are involved in complying
with the temporary rule? What are the types of costs, and what are the
amounts? Should the temporary rule be modified in any way to mitigate
costs? If so, how?
     The temporary rule requires that participants of a
registered clearing agency deliver securities by settlement date, or if
the participants have not delivered shares by settlement date, borrow
or purchase securities to close out the fail to deliver position by no
later than the beginning of regular trading hours on the settlement day
following the day the participant incurred the fail to deliver
position. What are the costs and benefits associated with purchasing
versus borrowing securities to close out a fail to deliver position?
     What impact will the temporary rule have on borrowing
costs? Please explain. What effect will the temporary rule have on the
availability of equity securities for lending and borrowing?
     The temporary rule will allow a participant that has a
fail to deliver position at a registered clearing agency in an equity
security and can demonstrate that such fail to deliver position
resulted from a long sale, two additional settlement days in which to
close out that fail to deliver position by purchasing securities of
like kind and quantity. What costs and benefits are associated with the
long sale documentation requirement? Are there any operational or
compliance concerns associated with this provision of the temporary
rule?
     The temporary rule will allow a participant of a
registered clearing agency two additional settlement days to close out
any fail to deliver positions attributable to a Market Maker. What are
the costs and benefits of allowing this additional time to close-out
fails to deliver attributable to Market Makers? Are there any
operational or compliance concerns associated with this provision of
the temporary rule?
     Will the temporary rule create any additional
implementation or operational costs associated with systems (including
computer hardware and software), surveillance, procedural,
recordkeeping, or personnel modifications?
     To comply with the temporary rule, will broker-dealers be
required to purchase new systems or implement changes to existing
systems? Will changes to existing systems be significant? What are the
costs and benefits associated with acquiring new systems or making
changes to existing systems? What, if any, changes will need to be made
to existing records? What are the costs and benefits associated with
any changes?
     Will there be any increases in staffing and associated
overhead costs? What are the costs and benefits associated with hiring
new staff or retraining existing staff? Will other resources need to be
re-dedicated to comply with the temporary rule?
     How much, if any, will the temporary rule affect
compliance costs for small, medium, and large broker-dealers (e.g.,
personnel or system changes)? We seek comment on the costs of
compliance that may arise.
     We solicit comment on whether the costs will be incurred
on a one-time or ongoing basis, as well as cost estimates. In addition,
we seek comment as to

whether the temporary rule will decrease any costs for any market
participants. We seek comment about any other costs and cost reductions
associated with the temporary rule.
     We recognize that the temporary rule may increase the
costs of legitimate short selling and lessen some of the benefits of
legitimate short selling, which, in turn, could result in a reduction
of short selling. To what extent, if any, will the temporary rule
impact legitimate short selling and market efficiency?
     The temporary rule does not allow any exceptions for fails
to deliver due to mechanical aspects of corporate events, such as
equity offers, including initial public offerings, and tender offers.
Will the temporary rule cause any disruption to these corporate events?
Can the costs of any disruption be quantified?
     What, if any, additional costs are involved in complying
with the borrowing requirements under temporary Rule 204T(b)? What are
the types of costs, and what are the amounts? Should the temporary rule
be modified in any way to mitigate costs? If so, how? Are there any
operational or compliance concerns associated with the borrowing
requirements under temporary Rule 204T(b)?
     The temporary rule will allow a broker-dealer that clears
through a participant that becomes subject to the borrowing
requirements of temporary Rule 204T(b) to avoid being subject to the
temporary rule's borrowing requirements if the broker-dealer can
demonstrate that it was not responsible for any part of the fail to
deliver position of the participant. What costs and benefits are
associated with the certification requirement? Are there any
operational or compliance concerns associated with this provision of
the temporary rule?
     Temporary Rule 204T(c) imposes a pre-borrow notification
requirement on participants. Will such a notification requirement
impose operational or systems costs on participants? What types of
communication mechanisms do participants use to comply with this
requirement of the temporary rule? What are the costs and benefits of
this notification requirement?
     What, if any, additional costs are associated with
extending the close-out requirement for Rule 144 securities? What are
the types of costs, and what are the amounts? Who bears these costs?
Should the exception be modified in any way to mitigate costs? If so,
how?
     Please identify any other costs, including reductions in
costs, associated with sales of Rule 144 restricted securities not
already discussed.

IX. Consideration of Burden on Competition and Promotion of Efficiency,
Competition, and Capital Formation

    Section 3(f) of the Exchange Act requires the Commission, whenever
it engages in rulemaking and whenever it is required to consider or
determine if an action is necessary or appropriate in the public
interest, to consider whether the action would promote efficiency,
competition, and capital formation.\146 \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.\147\ 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.
---------------------------------------------------------------------------

    \146\ 15 U.S.C. 78c(f).
    \147\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    We believe the temporary rule will have minimal impact on the
promotion of efficiency. The temporary rule is intended to further
reduce fails to deliver and address abusive ``naked'' short selling in
equity securities by requiring that participants of a registered
clearing agency deliver securities by settlement date, or if the
participants have not delivered shares by settlement date, the
participants must, by no later than the beginning of regular trading
hours on the Close-Out Date, immediately close out the fail to deliver
position by borrowing or purchasing securities of like kind and
quantity. A participant that does not comply with this close-out
requirement, and any broker-dealer from which it receives trades for
clearance and settlement, will not be able to short sell the security
either for itself or for the account of another, unless it has first
arranged to borrow the security, until the fail to deliver position is
closed out.
    The temporary rule is designed to ensure that buyers of equity
securities receive delivery of their shares, thereby helping to reduce
persistent fails to deliver, which may have a negative effect on the
securities markets and investors and also may be used to facilitate
some manipulative strategies. By requiring that participants of a
registered clearing agency deliver securities by settlement date and to
the extent that participants have not delivered shares by settlement
date, borrow or purchase securities to close out the fail to deliver
position by no later than the beginning of regular trading hours on the
Close-Out Date, the temporary rule will promote the prompt clearance
and settlement of securities transactions. By doing so, the temporary
rule will further our goals of helping to eliminate any possibility
that abusive ``naked'' short selling, as well as persistent fails to
deliver, will contribute to the disruption of markets in equity
securities and, thereby, will help ensure that investors remain
confident that trading can be conducted without the illegal influence
of manipulation. A loss of confidence in the market for these
securities can lead to panic selling, which may be further exacerbated
by potentially abusive ``naked'' short selling. As a result, prices of
these securities may artificially and unnecessarily decline below the
price level that would have resulted from the normal price discovery
process, threatening the disruption of the markets for these
securities. We seek comment regarding whether the temporary rule may
adversely impact liquidity, disrupt markets, or unnecessarily increase
risks or costs to participants of a registered clearing agency.
    In addition, we believe that the temporary rule will have minimal
impact on the promotion of capital formation. Issuers and investors
have repeatedly expressed concerns about fails to deliver in connection
with manipulative ``naked'' short selling.\148\ The perception that
abusive ``naked'' short selling is occurring in securities could
undermine the confidence of investors. These investors, in turn, may be
reluctant to commit capital to an issuer they believe to be subject to
such manipulative conduct.\149\ To the extent that ``naked'' short
selling and fails to deliver result in an unwarranted decline in
investor confidence about a security, the temporary rule will improve
investor confidence about the security. In addition, the temporary rule
may lead to a greater certainty in the settlement of these securities
which should

strengthen investor confidence in the settlement process.
---------------------------------------------------------------------------

    \148\ See, e.g., 2008 Regulation SHO Final Amendments, supra
note 19.
    \149\ In connection with prior proposed amendments to Regulation
SHO aimed at reducing fails to deliver and addressing potentially
abusive ``naked'' short selling, such as the 2007 Regulation SHO
Proposed Amendments, we sought comment on whether such proposed
amendments would promote capital formation, including whether the
proposed increased short sale restrictions would affect investors'
decisions to invest in certain equity securities. In response,
commenters expressed concern about the potential impact of ``naked''
short selling on capital formation claiming that ``naked'' short
selling causes a drop in an issuer's stock price that may limit the
issuer's ability to access the capital markets. See, e.g., letter
from Robert K. Lifton, Chairman and CEO, Medis Technologies, Inc.,
dated Sept. 12, 2007; letter from NCANS.
---------------------------------------------------------------------------

    We also believe that the temporary rule will not impose any burden
on competition not necessary or appropriate in furtherance of the
purposes of the Exchange Act. By requiring that participants of a
registered clearing agency deliver securities by settlement date, and
to the extent that participants have not delivered shares by settlement
date, borrow or purchase securities to close out the fail to deliver
position by no later than the beginning of regular trading hours on the
Close-Out Date, we believe the temporary rule will promote competition
by requiring similarly situated participants of a registered clearing
agency, including broker-dealers from which they receive trades for
clearance and settlement, to close out fail to deliver positions in any
equity securities within similar time-frames. Moreover, the
requirements of the temporary rule will help to eliminate any
possibility that abusive ``naked'' short selling may contribute to the
disruption of markets in equity securities and, therefore, will help
ensure that all investors remain confident that trading in these
securities can be conducted without the influence of illegal
manipulation. We also believe that the temporary rule will promote
competition by protecting and enhancing the operation, integrity, and
stability of the markets. At the same time, the temporary rule will
help to maintain fair and orderly markets without unduly restricting
legitimate short selling.
    In addition, by providing a close-out requirement of 35 consecutive
settlement days from settlement date for fails to deliver resulting
from sales of equity securities sold pursuant to Rule 144 of the
Securities Act, we believe the temporary rule will promote competition
by requiring similarly situated participants to close out fail to
deliver positions in any equity securities resulting from sales of Rule
144 securities within the same time-frame.
    Similarly, an extended close-out requirement for fails to deliver
resulting from long sales that are attributable to a Market Maker, will
promote competition by requiring similarly situated participants to
close out these fail to deliver positions within the same time-frame.
    We request comment on whether the temporary rule is likely to
promote efficiency, capital formation, and competition.

X. Final Regulatory Flexibility Analysis

    The Final Regulatory Flexibility Analysis (``FRFA'') has been
prepared in accordance with 5 U.S.C. 604. This FRFA relates to the
amendments that add temporary Rule 204T to Regulation SHO, which we are
adopting in this release.\150\
---------------------------------------------------------------------------

    \150\ Although the requirements of the Regulatory Flexibility
Act are not applicable to rules adopted under the Administrative
Procedure Act's ``good cause'' exception, see 5 U.S.C. 601(2)
(defining ``rule'' and notice requirements under the Administrative
Procedures Act), we nevertheless prepared a FRFA.
---------------------------------------------------------------------------

A. Need for and Objectives of the Rule

    Sections I through VI of this release describe the reasons for and
objectives of temporary Rule 204T. As we discuss in detail above, we
have become concerned that there is a substantial threat of sudden and
excessive fluctuations of securities prices and disruption in the
functioning of the securities markets that could threaten fair and
orderly markets.

B. Small Entities Affected by the Rule

    The entities covered by the temporary rule will include small
entities that are participants of a registered clearing agency and
small broker-dealers from which participants receive trades for
clearance and settlement. In addition, the entities covered by the
temporary rule will include small entities that are market participants
that effect sales subject to the requirements of Regulation SHO.
Although it is impossible to quantify every type of small entity
covered by the temporary rule, Paragraph (c)(1) of Rule 0-10 under the
Exchange Act \151\ states that the term ``small business'' or ``small
organization,'' when referring to a broker-dealer, means a broker or
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 pursuant to Sec.
240.17a-5(d); and is not affiliated with any person (other than a
natural person) that is not a small business or small organization. We
estimate that as of 2007 there were approximately 896 broker-dealers
that qualified as small entities as defined above.\152\
---------------------------------------------------------------------------

    \151\ 17 CFR 240.0-10(c)(1).
    \152\ These numbers are based on OEA's review of 2007 FOCUS
Report filings reflecting registered broker-dealers. This number
does not include broker-dealers that are delinquent on FOCUS Report
filings.
---------------------------------------------------------------------------

    As noted above, the entities covered by the temporary rule will
include small entities that are participants of a registered clearing
agency. As of July 31, 2008, approximately 91% of participants of the
NSCC, the primary registered clearing agency responsible for clearing
U.S. transactions, were registered as broker-dealers. Participants not
registered as broker-dealers include such entities as banks, U.S.-
registered exchanges, and clearing agencies. Although these entities
are participants of a registered clearing agency, generally these
entities do not engage in the types of activities that would implicate
the close-out requirements of Regulation SHO. Such activities of these
entities include creating and redeeming Exchange Traded Funds, trading
in municipal securities, and using NSCC's Envelope Settlement Service
or Inter-city Envelope Settlement Service. These activities rarely lead
to fails to deliver and, if fails to deliver do occur, they are small
in number and are usually cleaned up within a day. Thus, such fails to
deliver would not trigger the close-out provisions of Regulation SHO.
    The federal securities laws do not define what is a ``small
business'' or ``small organization'' when referring to a bank. The
Small Business Administration regulations define ``small entities'' to
include banks and savings associations with total assets of $165
million or less.\153\ As of July 31, 2008, no bank that was a
participant of the NSCC was a small entity because none met these
criteria.
---------------------------------------------------------------------------

    \153\ See 13 CFR 121.201.
---------------------------------------------------------------------------

    Paragraph (e) of Rule 0-10 under the Exchange Act \154\ states that
the term ``small business'' or ``small organization,'' when referring
to an exchange, means any exchange that: (1) Has been exempted from the
reporting requirements of Rule 11Aa3-1 under the Exchange Act; and (2)
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. No
U.S. registered exchange is a small entity because none meets these
criteria.
---------------------------------------------------------------------------

    \154\ 17 CFR 240.0-10(e).
---------------------------------------------------------------------------

    Paragraph (d) of Rule 0-10 under the Exchange Act \155\ states that
the term ``small business'' or ``small organization,'' when referring
to a clearing agency, means a clearing agency that: (1) Compared,
cleared and settled less than $500 million in securities transactions
during the preceding fiscal year (or in the time that it has been in
business, if shorter); (2) had less than $200 million in funds and
securities in its custody or control at all times during the preceding
fiscal year (or in the time that it has been in business, if shorter);
and (3) 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. No clearing agency that is subject to the
requirements of Regulation SHO is a small entity because none meets
these criteria.
---------------------------------------------------------------------------

    \155\ 17 CFR 240.0-10(d).
---------------------------------------------------------------------------

C. Projected Reporting, Recordkeeping and Other Compliance Requirements

    The temporary rule may impose some new or additional reporting,
recordkeeping, or compliance costs on small entities that are
participants of a clearing agency registered with the Commission and
small broker-dealers from which the participant receives trades for
clearance and settlement. We do not believe, at this time, that any
specialized professional skills will be necessary to comply with the
temporary rule.

D. 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. Temporary
Rule 204T should not adversely affect small entities because it imposes
minimal new reporting, recordkeeping, or compliance requirements.
Moreover, it is not appropriate to develop separate requirements for
small entities because we think all small entities that are broker-
dealers should be subject to the enhanced delivery requirements imposed
by the temporary rule.

E. Duplicative, Overlapping, or Conflicting Federal Rules

    The Commission believes that there are no rules that duplicate,
overlap, or conflict with temporary Rule 204T. The Commission has
designed the temporary rule so that it is consistent with the close-out
requirements of Rule 203(b)(3) of Regulation SHO.

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.\156\ In
connection with the temporary rule, we considered the following
alternatives: (1) Establishing different compliance or reporting
standards or timetable that take into account the resources available
to small entities; (2) clarifying, consolidating, or simplifying
compliance requirements under the rule for small entities; (3) using
performance rather than design standards; and (4) exempting small
entities from coverage of the rule, or any part of the rule.
---------------------------------------------------------------------------

    \156\ See 5 U.S.C. 603(c).
---------------------------------------------------------------------------

    The temporary rule furthers the Commission's stated goal of helping
to eliminate any possibility that abusive ``naked'' short selling may
contribute to the substantial disruption in the securities markets and,
therefore, to help ensure that investors remain confident that trading
in equity securities can be conducted without the illegal influence of
manipulation. The temporary rule also furthers the goals of helping to
maintain fair and orderly markets against the threat of sudden and
excessive fluctuations of securities prices generally and disruption in
the functioning of the securities markets.
    The temporary rule should not adversely affect small entities
because the rule may impose only minimal new compliance requirements.
Moreover, it is not appropriate to develop different compliance
requirements for small entities with respect to the temporary rule
because we think all entities, including small entities, should be
subject to the requirements of the temporary rule. We believe that
imposing different compliance requirements, and possibly a different
timetable for implementing compliance requirements, for small entities
would undermine the Commission's goal of addressing abusive ``naked''
short selling. We have concluded similarly that it is not consistent
with the goal of the temporary rule to further clarify, consolidate or
simplify the temporary rule for small entities. The Commission also
believes that it is inconsistent with the purposes of the Exchange Act
to use performance standards to specify different requirements for
small entities or to exempt small entities from having to comply with
the temporary rule.

G. General Request for Comments

    We solicit written comments regarding our analysis. We request
comment on whether the temporary rule will have any effects that we
have not discussed. We request that commenters describe the nature of
any impact on small entities and provide empirical data to support the
extent of the impact.

XI. Statutory Authority

    Pursuant to the Exchange Act and, particularly, Sections 2, 3(b),
6, 9(h), 10, 11A, 15, 15A, 17, 17A, 19 and 23(a) thereof, 15 U.S.C.
78b, 78c(b), 78f, 78i(h), 78j, 78k-1, 78o, 78o-3, 78q, 78q-1, 78s and
78w(a), the Commission is adopting, as an interim final temporary rule,
Rule 204T, amendments to Regulation SHO.

XII. 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-1(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 242.204T is added to read as follows:

Sec.  242.204T  Short sales.

    (a) A participant of a registered clearing agency must deliver
securities to a registered clearing agency for clearance and settlement
on a long or short sale in any equity security by settlement date, or
if a participant of a registered clearing agency has a fail to deliver
position at a registered clearing agency in any equity security for a
long or short sale transaction in that equity security, the participant
shall, by no later than the beginning of regular trading hours on the
settlement day following the settlement date, immediately close out its
fail to deliver position by borrowing or purchasing securities of like
kind and quantity; Provided, however:
    (1) If a participant of a registered clearing agency has a fail to
deliver position at a registered clearing agency in any equity security
and the participant can demonstrate on its books and records that such
fail to deliver position resulted from a long sale, the participant
shall by no later than the beginning of regular trading hours on the
third consecutive settlement day following the settlement date,
immediately close out the fail to deliver position by purchasing
securities of like kind and quantity;
    (2) If a participant of a registered clearing agency has a fail to
deliver position at a registered clearing agency in any equity security
sold pursuant to Sec.  230.144 of this chapter for thirty-five
consecutive settlement days after the settlement date for a sale in
that equity security, the participant shall, by no later than the
beginning of regular trading hours on the thirty-sixth

consecutive settlement day following the settlement date for the
transaction, immediately close out the fail to deliver position by
purchasing securities of like kind and quantity; or
    (3) If a participant of a registered clearing agency has a fail to
deliver position at a registered clearing agency in any equity security
that is attributable to bona fide market making activities by a
registered market maker, options market maker, or other market maker
obligated to quote in the over-the-counter market (individually a
``Market Maker,'' collectively ``Market Makers''), the participant
shall by no later than the beginning of regular trading hours on the
third consecutive settlement day following the settlement date,
immediately close out the fail to deliver position by purchasing
securities of like kind and quantity.
    (b) If a participant of a registered clearing agency has a fail to
deliver position in any equity security at a registered clearing agency
and does not close out such fail to deliver position in accordance with
the requirements of paragraph (a) of this section, the participant and
any broker or dealer from which it receives trades for clearance and
settlement, including any market maker that would otherwise be entitled
to rely on the exception provided in Sec.  242.203(b)(2)(iii), may not
accept a short sale order in the equity security from another person,
or effect a short sale in the equity security for its own account, to
the extent that the broker or dealer submits its short sales to that
participant for clearance and settlement, without first borrowing the
security, or entering into a bona fide arrangement to borrow the
security, until the participant closes out the fail to deliver position
by purchasing securities of like kind and quantity and that purchase
has cleared and settled at a registered clearing agency; Provided,
however:
    (1) A broker or dealer shall not be subject to the requirements of
paragraph (b) of this section if the broker or dealer timely certifies
to the participant of a registered clearing agency that it has not
incurred a fail to deliver position on settlement date for a long or
short sale in an equity security for which the participant has a fail
to deliver position at a registered clearing agency or that the broker
or dealer is in compliance with paragraph (e) of this section.
    (2) The requirements of paragraph (b) of this section shall not
apply to Market Makers provided the Market Maker can demonstrate that
it does not have an open short position in the equity security at the
time of any additional short sales.
    (c) The participant must notify any broker or dealer from which it
receives trades for clearance and settlement, including any market
maker that would otherwise be entitled to rely on the exception
provided in Sec.  242.203(b)(2)(iii):
    (1) That the participant has a fail to deliver position in an
equity security at a registered clearing agency that has not been
closed out in accordance with the requirements of paragraph (a) of this
section; and
    (2) When the purchase that the participant has made to close out
the fail to deliver position has cleared and settled at a registered
clearing agency.
    (d) If a participant of a registered clearing agency reasonably
allocates a portion of a fail to deliver position to another registered
broker or dealer for which it clears trades or from which it receives
trades for settlement, based on such broker's or dealer's short
position, the provisions of paragraphs (a) and (b) of this section
relating to such fail to deliver position shall apply to such
registered broker or dealer that was allocated the fail to deliver
position, and not to the participant. A broker or dealer that has been
allocated a portion of a fail to deliver position that does not comply
with the provisions of paragraph (a) of this section must immediately
notify the participant that it has become subject to the requirements
of paragraph (b) of this section.
    (e) Even if a participant of a registered clearing agency has not
closed out a fail to deliver position at a registered clearing agency
in accordance with paragraph (a) of this section, or has not allocated
a fail to deliver position to a broker or dealer in accordance with
paragraph (d) of this section, a broker or dealer shall not be subject
to the requirements of paragraph (a) or (b) of this section if the
broker or dealer purchases securities prior to the beginning of regular
trading hours on the settlement day after the settlement date for a
long or short sale to close out an open short position, and if:
    (1) The purchase is bona fide;
    (2) The purchase is executed on, or after, trade date but by no
later than the end of regular trading hours on settlement date for the
transaction;
    (3) The purchase is of a quantity of securities sufficient to cover
the entire amount of the open short position; and
    (4) The broker or dealer can demonstrate that it has a net long
position or net flat position on its books and records on the
settlement day for which the broker or dealer is seeking to demonstrate
that it has purchased shares to close out its open short position.
    (f) Definitions. (1) For purposes of this section, the term
settlement date shall mean the business day on which delivery of a
security and payment of money is to be made through the facilities of a
registered clearing agency in connection with the sale of a security.
    (2) For purposes of this section, the term regular trading hours
has the same meaning as in Rule 600(b)(64) of Regulation NMS (17 CFR
242.600(b)(64)).
    (g) This temporary section will expire and no longer be effective
on July 31, 2009.

    By the Commission.

    Dated: October 14, 2008.
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-24785 Filed 10-16-08; 8:45 am]

BILLING CODE 8011-01-P