[Federal Register: April 20, 2009 (Volume 74, Number 74)]
[Proposed Rules]
[Page 18041-18113]
[DOCID:fr20ap09-21]

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Part II

Securities and Exchange Commission

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17 CFR Part 242

Amendments to Regulation SHO; Proposed Rule

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 242

[Release No. 34-59748; File No. S7-08-09]
RIN 3235-AK35

Amendments to Regulation SHO

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is
proposing amendments to Regulation SHO under the Securities Exchange
Act of 1934 (``Exchange Act''). We are proposing two approaches to
restrictions on short selling--one is a price test that would apply on
a market wide and permanent basis (``short sale price test'' or ``short
sale price test restriction'') and one that would apply only to a
particular security during severe market declines in that security
(``circuit breaker''). With respect to the first approach, we propose
two alternative short sale price tests: One based on the national best
bid and the second based on the last sale price. With respect to the
second approach, we propose two basic alternatives: One alternative is
a circuit breaker rule that would temporarily prohibit short selling in
a particular security when there is a severe decline in the price of
that security (a ``halt''), which could operate in place of, or in
addition to, a short sale price test rule; and the second alternative
is a circuit breaker rule that would trigger a short sale price test
rule; we propose that such a short sale price test either be based on
the national best bid for any security for which there has been a
severe price decline or be based on the last sale price for any
security for which there has been a severe price decline.
    Due to the extreme market conditions that we are currently facing
and the resulting deterioration in investor confidence, we believe it
is appropriate at this time to re-evaluate and seek comment on some
form of short sale price test restriction, either in the form of a
short sale price test such as the proposed modified uptick rule or
proposed uptick rule, or a circuit breaker rule.
    For each of the proposed short sale price test restrictions and
proposed circuit breaker rules, we are also proposing to amend
Regulation SHO to require that a broker-dealer mark certain sell orders
``short exempt.'' If the Commission adopts a short sale price test
proposal or a circuit breaker proposal, and adopts a ``short exempt''
marking requirement, we are proposing that the implementation period
for these amendments would be three months from the effective date of
the amendments.

DATES: Comments should be received on or before June 19, 2009.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/proposed.shtml); or
     Send an e-mail to<EMAIL_ADDRESS>Please include
File Number S7-08-09 on the subject line; or
     Use the Federal eRulemaking Portal (http://
www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number S7-08-09. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/final.shtml). Comments are
also available for public inspection and copying in the Commission's
Public Reference Room, 100 F Street, NE., Washington, DC 20549, on
official business days between the hours of 10 am and 3 p.m. All
comments received will be posted without change; we do not edit
personal identifying information from submissions. You should submit
only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: James Brigagliano, Deputy Director; Jo
Anne Swindler, Acting Associate Director; Josephine Tao, Assistant
Director; Victoria Crane, Branch Chief; Joan Collopy, Special Counsel;
Christina Adams, Special Counsel; or Matthew Sparkes, Staff Attorney,
Division of Trading and Markets, at<PHONE_NUMBER>, at the Commission,
100 F Street, NE., Washington, DC 20549-6628.

SUPPLEMENTARY INFORMATION: The Commission is requesting public comment
on proposed amendments to Rules 200(g) and 201 of Regulation SHO, 17
CFR 242.200(g) and 17 CFR 242.201, under the Exchange Act. The
Commission is soliciting comments on all aspects of the proposed
amendments.

I. Executive Summary

    In July 2007, the Commission eliminated all short sale price test
restrictions. At that time, short sale price test restrictions included
Rule 10a-1 under the Exchange Act, also known as the ``uptick rule'' or
``tick test'' (``former Rule 10a-1''), that applied to exchange-listed
securities, and the National Association of Securities Dealers, Inc.'s
(``NASD'') \1\ bid test, that applied to certain Nasdaq securities. The
Commission's removal of short sale price test restrictions followed a
careful, deliberative rulemaking process, carried out in multiple
stages from 1999 through 2006, and was open to the public at every
stage.\2\
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    \1\ NASD is now known as the Financial Industry Regulatory
Authority, Inc. (``FINRA'').
    \2\ In 1999, the Commission published a concept release in which
it sought comment regarding short sale price test regulation,
including on whether to eliminate such regulation. See Securities
Exchange Act Release No. 42037 (Oct. 20, 1999), 64 FR 57996 (Oct.
28, 1999).
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    Prior to taking that action, the Commission took a number of steps,
including seeking extensive public comment and staff study to consider
removing short sale price test restrictions. For example, beginning in
1999, the Commission published a concept release in which it sought
comment regarding short sale price test regulation, including on
whether to eliminate such regulation.\3\ In 2004, the Commission
initiated a year-long pilot to study the removal of short sale price
tests for approximately one-third of the largest stocks.\4\ Short sale
data was made publicly available during this pilot to allow the public
and Commission staff to study the effects of eliminating short sale
price test restrictions. The findings of third party researchers were
presented and discussed in a public Roundtable in September 2006.\5\ In
addition, the results of the Commission staff study of the pilot data
were made publicly available in draft form in September 2006 and in
final form in February 2007.\6\
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    \3\ See Securities Exchange Act Release No. 42037 (Oct. 20,
1999), 64 FR 57996 (Oct. 28, 1999).
    \4\ See Securities Exchange Act Release No. 50104 (July 28,
2004), 69 FR 48032 (Aug. 6, 2004) (``Pilot Release'').
    \5\ See http://www.sec.gov/about/economic/
shopilottrans091506.pdf.
    \6\ See http://www.sec.gov/about/economic/shopilot091506/draft_
reg_sho_pilot_report.pdf and http://www.sec.gov/news/studies/
2007/regshopilot020607.pdf. See also discussion of findings of staff
study, supra notes 25 to 41 and accompanying text.

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    As discussed in detail below,\7\ concurrent with the development of
the subprime mortgage crisis and credit crisis in 2007, market
volatility, including steep price declines, particularly in the stocks
of certain financial services issuers, has increased markedly in the
U.S. and in every major stock market around the world (including
markets that continued to operate under short sale price test
restrictions). As market conditions have continued to worsen, investor
confidence has eroded, and the Commission has received requests from
many commenters to consider imposing restrictions with respect to short
selling, in part in the belief that such action would help restore
investor confidence.
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    \7\ See infra Section II(C).
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    Due to the extreme market conditions that we are currently facing
and the resulting deterioration in investor confidence, we believe it
is appropriate at this time to re-examine and seek comment on whether
to restore restrictions with respect to short selling. Thus, we are
proposing two approaches to restrictions on short selling. One approach
would apply a price test on a market wide and permanent basis. With
respect to this approach, we propose two alternative price tests. The
first alternative price test, in many ways similar to NASD's former bid
test, would be based on the national best bid (the ``proposed modified
uptick rule''). The second alternative price test, similar to former
Rule 10a-1, would be based on the last sale price (the ``proposed
uptick rule'').\8\
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    \8\ In 2003, the Commission proposed a short sale price test
based on the national best bid (``uniform bid test''). See
Securities Exchange Act Release No. 48709 (Oct. 28, 2003), 68 FR
62972 (Nov. 6, 2003) (``2003 Regulation SHO Proposing Release'').
The Commission determined not to proceed with the uniform bid test,
but instead established a pilot program pursuant to which it could
evaluate the overall effectiveness of short sale price test
restrictions on short sales. See Securities Exchange Act Release No.
50103 (July 28, 2004), 69 FR 48008, 48009 (Aug. 6, 2004) (``2004
Regulation SHO Adopting Release''). See also infra Section II(B)
(discussing the pilot program).
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    The other approach would apply only to a particular security during
a severe market decline in that security (collectively, the ``proposed
circuit breaker rules''). With respect to this second approach, we are
proposing two basic alternatives. First, we propose a circuit breaker
rule that, when triggered by a severe price decline in a particular
security, would temporarily prohibit any person from selling short that
security, subject to certain exceptions (``proposed circuit breaker
halt rule''). The proposed circuit breaker halt rule could operate in
place of, or in addition to, a short sale price test restriction.
Second, we propose a circuit breaker rule that, when triggered by a
severe price decline in a particular security, would trigger a
temporary short sale price test for that security. In connection with
this approach, we are proposing two price tests. One is the modified
uptick rule--that is, we propose a circuit breaker rule that would,
when triggered by a severe decline in a particular security,
temporarily impose the proposed modified uptick rule for that security
(``proposed circuit breaker modified uptick rule''). The other is the
uptick rule--that is, we propose a circuit breaker rule that would,
when triggered by a severe market decline in a particular security,
temporarily impose the proposed uptick rule for that security
(``proposed circuit breaker uptick rule''). A circuit breaker that
triggers a short sale price test rule such as the proposed modified
uptick rule or the proposed uptick rule would operate in place of a
short sale price test rule (collectively, the ``circuit breaker price
test rules'').
    As discussed in detail below, we preliminarily believe that of the
short sale price test proposals, a price test based on the national
best bid would have advantages over a test based on the last sale price
in today's markets. Among other reasons, we believe that bids generally
are a more accurate reflection of current prices for a security than
last sale prices due to delays that can occur in the reporting of last
sale price information and the manner in which last sale price
information is published to the markets. For example, sale transactions
may be reported manually up to 90 seconds after they occur. Even sale
transactions that are reported automatically can be reported out-of-
sequence if trades are occurring in multiple trading venues. This may
make the proposed uptick rule more difficult to implement. In addition,
last sale price information is published to the markets in reporting
sequence rather than in transaction sequence. Thus, we preliminarily
believe that if we were to adopt a short sale price test restriction,
whether as a full-time rule or as part of a circuit breaker rule, that
it would be more appropriate for such short sale price test
restrictions to be based on the national best bid rather than on the
last sale price.
    A short sale price test similar to former Rule 10a-1 that is based
on the last sale price, a short sale price test based on a national
best bid, and a circuit breaker rule resulting in a short sale halt,
should generally be familiar to investors and market participants.
Former Rule 10a-1 was in place for almost 70 years. NASD adopted its
bid test in 1994 and that rule was in place for over a decade. Various
circuit breaker rules have been in place throughout the markets for
many years.\9\ A circuit breaker rule resulting in a short sale price
test for particular stocks that have suffered a severe price decline
would be an amalgamation of these familiar rules.
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    \9\ See, e.g., infra note 239 and accompanying text.
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    To offer straight-forward alternatives, this release proposes a
modified uptick rule based on the national best bid that would apply to
trading centers \10\ and applies a policies and procedures approach
that would require that trading centers have policies and procedures
reasonably designed to prevent the execution or display of short sales
at impermissible prices. As an alternative short sale price test, this
release proposes an uptick rule based on the last sale price that,
similar to former Rule 10a-1, applies a straight prohibition approach
that would prohibit any person from effecting short sales at
impermissible prices. However, either alternative could ultimately be
implemented through a policies and procedures approach or through a
prohibition approach or some combination thereof.\11\
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    \10\ A ``trading center'' means a national securities exchange
or national securities association that operates an SRO trading
facility, an alternative trading system, an exchange market maker,
an OTC market maker, or any other broker or dealer that executes
orders internally by trading as principal or crossing orders as
agent. See infra note 111 and supporting text.
    \11\ For instance, the approaches could be combined so that
persons are prohibited from selling short on a downbid and trading
centers are also required to have reasonable policies and procedures
to prevent the execution or display of a short sale on a downbid.
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    We are also proposing circuit breaker rules.\12\ As noted above,
these are the proposed circuit breaker halt rule, the proposed circuit
breaker modified uptick rule, and the proposed circuit breaker uptick
rule. In addition, we are proposing that a broker-dealer be required to
mark a sell order ``short exempt'' if the seller is relying on an
exemption under the proposed short sale price test rules or proposed
circuit breaker rules.
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    \12\ See Section III.C below discussing the proposed circuit
breaker rules.
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II. Background on Short Sale Restrictions

    Short selling involves a sale of a security that the seller does
not own or a sale that is consummated by the delivery of a security
borrowed by, or for the account of, the seller.\13\ In order

to deliver the security to the purchaser, the short seller will borrow
the security, typically from a broker-dealer or an institutional
investor. Typically, the short seller later closes out the position by
purchasing equivalent securities on the open market and returning the
security to the lender. In general, short selling is used to profit
from an expected downward price movement, to provide liquidity in
response to unanticipated demand, or to hedge the risk of an economic
long position in the same security or in a related security.\14\
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    \13\ See 17 CFR 242.200(a).
    \14\ See, e.g., Securities Exchange Act Release No. 54891 (Dec.
7, 2006), 71 FR 75068, 75069 (Dec. 13, 2006) (``2006 Price Test
Elimination Proposing Release''); 2003 Regulation SHO Proposing
Release, 68 FR at 62974.
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A. Short Selling and Its Market Impact

    The Commission has long held the view that short selling provides
the market with important benefits, including market liquidity and
pricing efficiency.\15\ Market liquidity is often provided through
short selling by market professionals, such as market makers (including
specialists) and block positioners, who offset temporary imbalances in
the buying and selling interest for securities. Short sales effected in
the market add to the selling interest of stock available to purchasers
and reduce the risk that the price paid by investors is artificially
high because of a temporary imbalance between buying and selling
interest. Short sellers covering their sales also may add to the buying
interest of stock available to sellers.\16\
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    \15\ See id. See also Securities Exchange Act Release No. 29278
(June 7, 1991), 56 FR 27280 (June 13, 1991); 2004 Regulation SHO
Adopting Release, 69 FR 48008, n. 6; Boehmer, Ekkehart and Wu,
Julie, Short Selling and the Informational Efficiency of Prices
(Jan. 8, 2009).
    \16\ See, e.g., 2006 Price Test Elimination Proposing Release,
71 FR at 75069; 2003 Regulation SHO Proposing Release, 68 FR at
62974.
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    Short selling also can contribute to the pricing efficiency of the
equities markets.\17\ When a short seller speculates or hedges against
a downward movement in a security, his transaction is a mirror image of
the person who purchases the security in anticipation that the
security's price will rise or to hedge against such an increase. Both
the purchaser and the short seller hope to profit, or hedge against
loss, by buying the security at one price and selling at a higher
price. The strategies primarily differ in the sequence of transactions.
Market participants who believe a stock is overvalued may engage in
short sales in an attempt to profit from a perceived divergence of
prices from true economic values. Such short sellers add to stock
pricing efficiency because their transactions inform the market of
their evaluation of future stock price performance. This evaluation is
reflected in the resulting market price of the security.\18\
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    \17\ See id.
    \18\ See id. Arbitrageurs also contribute to pricing efficiency
by utilizing short sales to profit from price disparities between a
stock and a derivative security, such as a convertible security or
an option on that stock. For example, an arbitrageur may purchase a
convertible security and sell the underlying stock short to profit
from a current price differential between two economically similar
positions. See id.
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    We recognize that, to the extent that the proposed short sale price
test restrictions would result in increased costs to short selling in
equity securities, it may lessen some of the benefits of legitimate
short selling. 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. Thus, we
believe there may be potential costs associated with the proposed short
sale price tests in terms of potential impact of such price tests on
quote depths, spread widths, and market liquidity. We also believe
costs may be incurred in terms of execution and pricing inefficiencies.
For example, requiring all short sale orders to be executed or
displayed above the best bid, or last sale price, in a declining market
may slow the speed of executions and impose additional costs on market
participants, including buyers. Also, by not allowing short sellers to
sell at the bid, or last sale price, the proposed short sale price
tests may impede trading and distort market pricing.
    Although short selling serves useful market purposes, it also may
be used to illegally manipulate stock prices.\19\ One example is the
``bear raid'' where an equity security is sold short in an effort to
drive down the price of the security by creating an imbalance of sell-
side interest.\20\ This unrestricted short selling could exacerbate a
declining market in a security by increasing pressure from the sell-
side, eliminating bids, and causing a further reduction in the price of
a security by creating an appearance that the security price is falling
for fundamental reasons, when the decline, or the speed of the decline,
is being driven by other factors.\21\
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    \19\ See, e.g., U.S. v. Russo, 74 F.3d 1383, 1392 (2d Cir. 1996)
(short sales were sufficiently connected to the manipulation scheme
as to constitute a violation of Exchange Act Section 10(b) and Rule
10b-5); S.E.C. v. Gardiner, 48 S.E.C. Docket 811, No. 91 Civ. 2091
(S.D.N.Y. March 27, 1991) (alleged manipulation by sales
representative by directing or inducing customers to sell stock
short in order to depress its price).
    \20\ Many people blamed ``bear raids'' for the 1929 stock market
crash and the market's prolonged inability to recover from the
crash. See 8 Louis Loss and Joel Seligman, Securities Regulation,
section 8-B-3 (3d ed. 2006).
    \21\ See 2006 Price Test Elimination Proposing Release, 71 FR at
75069; 2003 Regulation SHO Proposing Release, 68 FR at 62074.
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B. History of Short Sale Price Test Restrictions in the U.S.

    Section 10(a) of the Exchange Act \22\ gives the Commission plenary
authority to regulate short sales of securities registered on a
national securities exchange, as necessary or appropriate in the public
interest or for the protection of investors.\23\ After conducting an
inquiry into the effects of concentrated short selling during the
market break of 1937,\24\ the Commission adopted former Rule 10a-1
(also known as the ``tick test'' or ``uptick rule'') in 1938 to
restrict short selling in a declining market.\25\
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    \22\ 15 U.S.C. 78j(a).
    \23\ See also 2006 Price Test Elimination Proposing Release, 71
FR at 75068; 2003 Regulation SHO Proposing Release, 68 FR at 62973.
    \24\ The study covered two weekly periods, that of September 7-
13, 1937, and that of October 18-23, 1937. See Securities Exchange
Act Release No. 1548 (Jan. 24, 1938), 3 FR 213 (Jan. 26, 1938)
(``Former Rule 10a-1 Adopting Release'').
    \25\ See id. Former Rule 10a-1 provided that, subject to certain
exceptions, a listed security could be sold short (i) at a price
above the price at which the immediately preceding sale was effected
(plus tick), or (ii) at the last sale price if it was higher than
the last different price (zero plus tick).
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    The core provisions of former Rule 10a-1 remained virtually
unchanged for almost 70 years. Over the years, however, in response to
changes in the securities markets, including changes in trading
strategies and systems used in the marketplace, the Commission added
exceptions to former Rule 10a-1 and granted numerous written requests
for relief from the rule's restrictions. These market changes included
decimalization, the increased use of matching systems that execute
trades at independently derived prices during random times within
specific time intervals,\26\ and the spread of fully automated markets.
In addition, market developments over the years led to the application
of different price tests to securities trading in different
markets.\27\
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    \26\ See, e.g., Letter from Larry E. Bergmann, Senior Associate
Director, Division of Market Regulation, SEC, to Andre E. Owens,
Schiff Hardin & Waite, dated April 23, 2003 (granting exemptive
relief from former Rule 10a-1 for trades executed through an
alternative trading system that matches buying and selling interest
among institutional investors and broker-dealers at various set
times during the day).
    \27\ See, e.g., Securities Exchange Act Release No. 55245 (Feb.
5, 2007), 72 FR 6635 (Feb. 12, 2007). Former Rule 10a-1 applied only
to short sale transactions in exchange-listed securities. In 1994,
the Commission granted temporary approval to NASD to apply its own
short sale rule, known as the ``bid test,'' on a pilot basis that
was renewed annually until the Commission repealed short sale price
tests. NASD's bid test prohibited short sales in Nasdaq Global
Market securities (then known as Nasdaq National Market securities)
at or below the current (inside) bid when the current best (inside)
bid was below the previous best (inside) bid in a security. As a
result, until the Commission eliminated former Rule 10a-1, and
prohibited any self-regulatory organization (``SRO'') from having a
short sale price test in July 2007, Nasdaq Global Market securities
traded on Nasdaq or the OTC market and reported to a NASD facility
were subject to a bid test. Other listed securities traded on an
exchange, or otherwise, were subject to former Rule 10a-1. Nasdaq
securities traded on exchanges other than Nasdaq were not subject to
any price test. In addition, many thinly-traded securities, such as
Nasdaq Capital Market securities, and securities quoted on the over-
the-counter (``OTC'') Bulletin Board and Pink Sheets, were not
subject to any price test wherever traded. According to the
Commission's Office of Economic Analysis (``OEA''), in 2005, prior
to the start of the Pilot, NASD Rule 3350 applied to approximately
2,800 securities, while former Rule 10a-1 applied to approximately
4,000 securities.

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    In July 2004, the Commission adopted Rule 202T of Regulation
SHO,\28\ which established procedures for the Commission to temporarily
suspend short sale price tests for a prescribed set of securities so
that the Commission could study the effectiveness of these tests.\29\
Pursuant to the process established in Rule 202T, the Commission issued
an order creating a one year pilot (``Pilot'') temporarily suspending
the tick test of former Rule 10a-1(a) and any price test of any
exchange or national securities association for short sales of certain
securities.\30\ The Pilot was designed to assist the Commission in
assessing whether changes to current short sale price test regulation
were appropriate at that time in light of then-current market practices
and the purposes underlying short sale price test regulation.\31\
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    \28\ 17 CFR 242.202T.
    \29\ See 17 CFR 242.202T; see also 2004 Regulation SHO Adopting
Release, 69 FR at 48012-48013.
    \30\ See Pilot Release, 69 FR 48032 (commencing the Pilot on
January 3, 2005 and terminating the Pilot on December 31, 2005). On
November 29, 2004, the Commission issued an order resetting the
Pilot to commence on May 2, 2005 and end on April 28, 2006 to give
market participants additional time to make systems changes
necessary to comply with the Pilot. See Securities Exchange Act
Release No. 50747 (Nov. 29, 2004), 69 FR 70480 (Dec. 6, 2004). On
April 20, 2006, the Commission issued an order extending the
termination date of the Pilot to August 6, 2007. See Securities
Exchange Act Release No. 53684 (April 20, 2006), 71 FR 24765 (April
26, 2006).
    \31\ See Pilot Release, 69 FR at 48032. In the 2004 Regulation
SHO Adopting Release we noted that ``the purpose of the [P]ilot is
to assist the Commission in considering alternatives, such as: (1)
Eliminating a Commission-mandated price test for an appropriate
group of securities, which may be all securities; (2) adopting a
uniform bid test, and any exceptions, with the possibility of
extending a uniform bid test to securities for which there is
currently no price test; or (3) leaving in place the current price
tests.'' 2004 Regulation SHO Adopting Release, 69 FR at 48010.
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    OEA gathered the data made public during the Pilot, analyzed the
data and provided the Commission with a summary report on the Pilot
(``OEA Staff's Summary Pilot Report'').\32\ The OEA Staff's Summary
Pilot Report, which was made public, examined several aspects of market
quality including the overall effect of price tests on short selling,
liquidity, volatility and price efficiency.\33\ The Pilot was also
designed to allow the Commission and members of the public to examine
whether the effects of short sale price tests were similar across
stocks.\34\
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    \32\ See supra note 6.
    \33\ OEA selected the securities to be included in the Pilot by
sorting the 2004 Russell 3000, first by listing market and then by
average daily dollar volume from June 2003 through May 2004, and
then within each listing market, selecting every third company
starting with the second. Because the selection process relied on
average daily dollar volume, companies that had their Initial Public
Offering (``IPO'') in May or June 2004, just prior to the Russell
reconstitution, were not included. The securities in the control
group came from the remainder of the 2004 Russell 3000 not included
in the Pilot (excluding the IPOs in May or June 2004 and any
securities added to the Russell 3000 after June 2004). See OEA
Staff's Summary Pilot Report at 22 (discussing the selection of
securities included in the Pilot and the control group).
    \34\ In the 2004 Regulation SHO Adopting Release, the Commission
stated its expectation that data on trading during the Pilot would
be made available to the public to encourage independent researchers
to study the Pilot. See 2004 Regulation SHO Adopting Release, 69 FR
at 48009, n.9. Accordingly, nine SROs began publicly releasing
transactional short selling data on January 3, 2005. The nine SROs
at that time were the Amex, ARCA, BSE, CHX, NASD, Nasdaq, National
Stock Exchange, NYSE and Phlx. The SROs agreed to collect and make
publicly available trading data on each executed short sale
involving equity securities reported by the SRO to a securities
information processor. The SROs published the information on a
monthly basis on their Internet Web sites.
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    As set forth in the OEA Staff's Summary Pilot Report, OEA found
little empirical justification at that time for maintaining short sale
price test restrictions, especially for actively traded securities.
Amongst its results, OEA found that short sale price tests did not have
a significant impact on daily volatility. However, OEA also found some
evidence that short sale price tests dampened intraday volatility for
smaller stocks.\35\
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    \35\ See OEA Staff's Summary Pilot Report, at 55 n. 61-63 and
supporting text.
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    OEA also found that the Pilot data provided limited evidence that
price test restrictions distort a security's price.\36\ In addition,
OEA found that price test restrictions resulted in an increase in quote
depths.\37\ Realized liquidity levels, however, were unaffected by the
removal of short sale price test restrictions.\38\ The Pilot data also
provided evidence that short sale price test restrictions reduce the
volume of executed short sales to total volume and, therefore, act as a
constraint on short selling.\39\ OEA did not find, however, a
significant difference in short interest positions between those
securities subject to a short sale price test versus those securities
that were not subject to such a test during the Pilot.\40\
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    \36\ On the day the Pilot went into effect, listed Pilot
securities underperformed listed control group securities by
approximately 24 basis points. The Pilot and control group
securities, however, had similar returns over the first six months
of the Pilot. See OEA Staff's Summary Pilot Report at 8.
    \37\ See OEA Staff's Summary Pilot Report, at 55 n. 61-63 and
supporting text.
    \38\ This conclusion is based on the result that changes in
effective spreads were not economically significant (less than a
basis point) and that the changes in the bid and ask depth appear
not to affect the transaction costs paid by investors. Arguably, the
changes in bid and ask depth appeared to affect the intraday
volatility. However, OEA concluded that overall, the Pilot data did
not suggest a deleterious impact on market quality or liquidity. See
OEA Staff's Summary Pilot Report at 42, 56.
    \39\ See OEA Staff's Summary Pilot Report at 35.
    \40\ See id.
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    In addition, the Commission encouraged outside researchers to
examine the Pilot data. In response to this request, the Commission
received four completed studies (the ``Academic Studies'') from outside
researchers that specifically examined the Pilot data.\41\ The
Commission also held a public roundtable (the ``Regulation SHO
Roundtable'') that focused on the empirical evidence learned from the
Pilot data (the OEA Staff's Summary Pilot Report, Academic Studies, and
Regulation SHO Roundtable are referred to collectively herein as, the
``Pilot Results'').\42\ The Pilot Results contained a variety of
observations, which the Commission considered in determining whether or
not to propose removal of then-current short sale price test
restrictions and subsequently whether or not to eliminate such
restrictions. Generally, the Pilot Results supported removal of short
sale price test restrictions at that time.\43\ In addition to the Pilot
Results, thirteen other analyses by SEC staff and various third party

researchers were conducted between 1963 and 2004 addressing price test
restrictions.\44\ Among these were several studies that evaluated short
sale price tests during times of severe market decline, including the
market break of May 28, 1962, the market decline in September and
October 1976, the market break of October 19, 1987, and the Nasdaq
market decline of 2000-2001. The results of these studies were mixed,
but generally they found that former Rule 10a-1 did not prevent short
sales in extreme down markets and did limit short selling in up markets
and provided additional support for the removal of short sale price
restrictions.
---------------------------------------------------------------------------

    \41\ See Karl B. Diether, Kuan Hui Lee and Ingrid M. Werner,
2009, It's SHO Time! Short-Sale Price-Tests and Market Quality,
Journal of Finance 64:37-73; Gordon J. Alexander and Mark A.
Peterson, 2008, The Effect of Price Tests on Trader Behavior and
Market Quality: An Analysis of Reg. SHO, Journal of Financial
Markets 11:84-111; J. Julie Wu, Uptick Rule, short selling and price
efficiency, August 14, 2006; Lynn Bai, 2008, The Uptick Rule of
Short Sale Regulation--Can it Alleviate Downward Price Pressure from
Negative Earnings Shocks? Rutgers Business Law Journal 5:1-63
(``Bai'').
    \42\ See supra note 5.
    \43\ See 2006 Price Test Elimination Proposing Release, 71 FR at
75072-75075 (discussing the Pilot Results).
    \44\ See OEA Staff's Summary Pilot Report at 14, 17-22
(discussing the thirteen studies).
---------------------------------------------------------------------------

    In December 2006, the Commission proposed to eliminate former Rule
10a-1 by removing restrictions on the execution prices of short sales,
as well as prohibiting any SRO from having a price test.\45\ The
Commission received 27 comment letters in response to its proposal to
eliminate former Rule 10a-1 and prohibit any SRO from having a short
sale price test. The comments in response to the proposed amendments
varied. Most commenters (including individual traders, academics,
broker-dealers, SROs and trade associations) advocated removing all
price test restrictions.\46\ Generally, these commenters believed that
price test restrictions were no longer necessary due to increased
market transparency and the existence of real-time regulatory
surveillance that could monitor for and detect any potential short sale
manipulation.\47\
---------------------------------------------------------------------------

    \45\ See 2006 Price Test Elimination Proposing Release, 71 FR
75068.
    \46\ See, e.g., letter from Howard Teitelman, CSO, Trillium
Trading (Feb. 6, 2007) (``Teitelman Letter''); letter from S. Kevin
An, Deputy General Counsel, E*TRADE (Feb. 9, 2007) (``E*TRADE
Letter''); letter from Carl Giannone (Feb. 11, 2007) (``Giannone
Letter''); letter from David Schwarz (Feb. 12, 2007) (``Schwarz
Letter''); letter from John G. Gaine, President, MFA (Feb. 12, 2007)
(``MFA Letter''); letter from Lisa M. Utasi, Chairman of the Board
and John C. Giesea, President and CEO, STA (Feb. 12, 2007) (``STA
Letter''); letter from Gerard S. Citera, Executive Director, U.S.
Equities, UBS (Feb. 14, 2007) (``UBS Letter''); letter from Mary
Yeager, Assistant Secretary, NYSE (Feb. 14, 2007) (``NYSE Letter'');
letter from James J. Angel, Ph.D., CFA, Associate Professor of
Finance, McDonough School of Business, Georgetown University (Feb.
14, 2007) (``Angel Letter''); letter from Ira D. Hammerman, SIFMA
Managing Director and General Counsel (Feb. 16, 2007) (``SIFMA
Letter''); see also Securities Exchange Act Release No. 55970 (June
28, 2007), 72 FR 36348, 36350-36351 (July 3, 2007) (``2007 Price
Test Adopting Release'') (discussing the comment letters).
    \47\ See, e.g., Giannone Letter; E*TRADE Letter; STA Letter; UBS
Letter; see also Securities Exchange Act Release No. 55970 (June 28,
2007), 72 FR 36348, 36350-36351 (July 3, 2007) (discussing the
comment letters).
---------------------------------------------------------------------------

    Two commenters (both individual investors) opposed the proposed
amendments noting the need for price tests to prevent ``bear raids.''
\48\ One commenter, although generally in support of removing all price
test restrictions, stated the belief that at some level unrestricted
short selling should be collared.\49\ This commenter supported having a
10% circuit breaker to prevent panic in the event there is a major
market collapse.\50\ The NYSE also noted its concern about unrestricted
short selling during periods of unusually rapid and large market
declines. The NYSE stated that the effects of an unusually rapid and
large market decline could not be measured or analyzed during the Pilot
because such decline did not occur during the period studied.\51\
---------------------------------------------------------------------------

    \48\ See, e.g., letter from Jim Ferguson (Dec. 19, 2006);
letters from David Patch (Jan. 1, 2007; Jan. 12, 2007) (``Patch
Letters'').
    \49\ See Giannone Letter.
    \50\ See id.
    \51\ See NYSE Letter.
---------------------------------------------------------------------------

    Effective July 3, 2007, the Commission eliminated former Rule 10a-1
and added Rule 201 of Regulation SHO prohibiting any SRO from having a
short sale price test.\52\ The Commission stated that it determined to
eliminate all short sale price test restrictions after reviewing the
comments received in response to its proposal to eliminate all short
sale price test restrictions, the Pilot Results, and taking into
account the market developments that had occurred in the securities
industry since the Commission adopted former Rule 10a-1 in 1938.\53\ In
addition, the Commission stated that it believed that the amendments
would bring increased uniformity to short sale regulation, level the
playing field for market participants, and remove an opportunity for
regulatory arbitrage.\54\
---------------------------------------------------------------------------

    \52\ See 2007 Price Test Adopting Release, 72 FR 36348.
    \53\ See id at 36352.
    \54\ See id.
---------------------------------------------------------------------------

C. Changes in Market Conditions Since Elimination of Rule 10a-1

    Recently, market volatility has increased markedly in the U.S., as
well as in every major stock market around the world. Although we are
not aware of specific empirical evidence that the elimination of short
sale price tests has contributed to the increased volatility in U.S.
markets, many members of the public currently associate the removal of
former Rule 10a-1 with the recent volatility, including steep declines
in some securities' prices, and the loss of investor confidence in our
markets.
    In addition, we have received numerous requests for reinstatement
of short sale price test restrictions from a variety of individuals,
including investors, issuers, academics, trade associations, and
members of Congress.\55\ Most of these commenters have asked that we
reinstate short sale price test restrictions because they believe that
such a measure would help restore investor confidence.\56\
---------------------------------------------------------------------------

    \55\ See, e.g., letter to Mary Schapiro, Chairman, from Rep.
Barney Frank and other Members of the House Financial Services
Committee, dated March 11, 2009; letter to Mary Schapiro, Chairman,
Commission, from Professor Constantine Katsoris (``Katsoris
letter''), Fordham University School of Law, dated March 4, 2009;
letter from Albert C. Roelse, dated Feb. 20, 2009; letter from
Robert A. Lee, dated Feb. 10, 2009; letter from Giulio Liotine,
dated Jan. 22, 2009 (``Liotine Letter''); letter from Edward L.
Yingling, American Bankers Association, dated Dec. 16, 2008
(``American Bankers Assn. 2008 Letter''); letter from Peter Brown,
dated Dec. 12, 2008 (``Brown Letter''); letter to Christopher Cox,
Chairman, Commission, from Peter T. King, Member of Congress, dated
Oct. 7, 2008; letter to Christopher Cox, Chairman, Commission, from
Bill Sali, Member of Congress, dated Oct. 1, 2008; letter to
Christopher Cox, Chairman, Commission, from T.J. Rodgers, President
and CEO, Cypress Semiconductor Corp., dated October 1, 2008; letter
to Christopher Cox, Chairman, Commission, from Carl H. Tiedmann,
General Partner, Tiedmann Investment Group, dated Sept. 22, 2008;
letter to Christopher Cox, Chairman, Commission, from Hillary Rodham
Clinton, Senator, dated Sept. 17, 2008 (``Clinton Letter''). The
Commission's Office of Investor Education and Advocacy estimates
that it has received over 4,000 requests (including duplicate
requests) from individuals regarding reinstating a short sale price
test.
    \56\ See, e.g., letter from Chris Baratta, dated March 9, 2009
(``Baratta Letter''); letter from Paul Kent, dated March 7, 2009;
letter from Troy Williams, dated March 6, 2009; letter from Briggs
Diuguid, dated March 5, 2009 (``Diuguid Letter''); letter from Bob
Young, dated March 5, 2009; letter from Kevin Girard, dated March 4,
2009; letter from Mike Rogers, dated March 3, 2009; letter from
George Flagg, dated March 3, 2009; letter from Arleen Golden, dated
March 2, 2009; letter from Doug Cameron, dated March 2, 2009; letter
from Dr. Bill Daniel, dated Feb. 26, 2009; letter from Glenn
Webster, dated Feb. 26, 2009; letter from Robert Lounsbury, dated
Feb. 25, 2009; letter from Karl Findorff, dated Feb. 19, 2009;
letter from Robert Levine, dated Feb. 17, 2009; letter from Robert
Lee, dated Feb. 10, 2009; American Bankers Assn. 2008 letter; letter
from David Campbell and Natalie Win, dated Nov. 25, 2008; letter
from Josh Dodson, dated Nov. 21, 2008; letter from J. Geddes
Parsons, dated Nov. 21, 2008; letter from Charles Rudisill, dated
Nov. 21, 2008; letter from Mike Ryan, dated Nov. 21, 2008; letter
from Jeff Brower, dated Nov. 20, 2008; letter from Mike Abraham,
dated Nov. 20, 2008; letter from Marvin Dingott, dated Nov. 20,
2008; letter from W. Romain Spell, dated Nov. 19, 2008; letter from
Phil Mason, dated Nov. 19, 2008; letter from David Sheridan, dated
Nov. 18, 2008; letter from Lynn Miller, dated Nov. 13, 2008; letter
from Patrick McQuaid, dated Oct. 29, 2008; letter from Scotland
Settle, dated Oct. 27, 2008; letter from Jenna Spurrier, dated Oct.
24, 2008; letter from Joe Garrett, dated Oct. 15, 2008; letter from
Peter Eckle, dated Oct. 11, 2008; letter from Maureen Christensen,
dated Oct. 9, 2008; letter from Richard Vulpi, dated Sept. 24, 2008;
see also Katsoris Letter (stating that elimination of former Rule
10a-1 ``* * * hardly generates confidence on the part of a true
investor who is entrusting his or her life's savings * * * to the
current market'').

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

    Some of these commenters have stated that a lack of price test
restrictions makes them question whether they should invest in the
stock market.\57\ Other commenters have stated that they believe a
short sale price test would aid small investors.\58\ In addition, some
commenters have asserted that restricting the prices at which
securities may be sold short would help address recent steep declines
in securities' prices. For example, the American Bankers Association
(the ``ABA'') noted that its members, ``both large and small, are
telling [the ABA] that short sellers are taking advantage of the uptick
rule's absence and that their stock prices are experiencing excessive
downward price pressure * * *.'' \59\ This commenter further noted that
``its members strongly believe that reinstatement of the uptick rule in
some format would help limit these downward stock spirals and restore
investor confidence.'' \60\
---------------------------------------------------------------------------

    \57\ See, e.g., letter from Tim Zanni, dated Feb. 19, 2009;
letter from Jeff Boyd, dated Feb. 10, 2009.
    \58\ See, e.g., Baratta Letter (noting that while price test
restrictions could not reasonably be expected to prevent market
downturns, they would, in his opinion, ``give the little investor a
chance'' in the current conditions). See also Young Letter
(suggesting that reinstatement of the uptick rule ``will not be a
quick or total fix, but it will help''); letter to Mary Schapiro,
Chairman, Commission, from Paul D. Mendelsohn, President of Windham
Financial Services, Inc., dated March 6, 2009 (stating that he
believes former Rule 10a-1 ``protected'' the markets and that
``suspension of the uptick rule has opened a security hole into our
financial system'').
    \59\ See American Bankers Assn. 2009 Letter.
    \60\ See id. See also letter to Christopher Cox, Chairman,
Commission, from Paul Tudor Jones II, Tudor Investment Corporation,
dated Oct. 10, 2008 (stating that he believes that one way to
``immediately stem the decline'' in the stock market would be to
reinstate the uptick rule); letter to Mary Schapiro, Chairman,
Commission, from James F. Kane, Jr., dated Feb. 6, 2009 (stating
that he believes that reinstating ``the Up-tick Rule will go a long
way in preventing speculators from ganging up on a particular stock
and forcing it down''); Diuguid Letter (stating that while short
sellers ``make efficient markets,'' he is nonetheless concerned that
short selling may be a tool of manipulators when short sales are
``piled on'' a particular company).
---------------------------------------------------------------------------

    In commenting on the recent market volatility and the absence of a
short sale price test, one member of Congress recently stated that
``[o]ne of the simplest but most important and effective initiatives
that the SEC could undertake immediately to combat market volatility is
the reinstatement of a * * * `uptick rule'.'' \61\ A former U.S.
Senator urged the Commission to ``* * * give close consideration to the
many calls for the immediate restoration of the uptick rule whose
repeal has been linked to the recent market volatility and
proliferation of abusive short sale transactions.'' \62\ SRO
representatives and others have also commented on the need for a short
sale price test.\63\ Researchers have also indicated that they believe
that they have collected data that establishes a possible association
between the current market downturn and the elimination of former Rule
10a-1.\64\ In addition, we note that recently there are reports of
significant short selling in connection with credit default swaps,
particularly in the securities of significant financial
institutions.\65\ One commenter has suggested that the interaction
between and amplifying effects of credit default swaps and short
selling may be a reason to reinstate a short sale price test.\66\
---------------------------------------------------------------------------

    \61\ See letter to Mary Schapiro, Chairman, Commission, from
Gary L. Ackerman, Member of Congress, dated Jan. 27, 2009.
    \62\ See Clinton Letter.
    \63\ See, e.g., Edgar Ortega, Short-Sale Rule Undermined as
Bernanke Backs Review, Bloomberg News Service, March 4, 2009 (noting
comments by Duncan Niederauer, CEO, The NYSE/Euronext Group, Inc.,
that imposing a measure such as former Rule 10a-1 ``would go a long
way to adding confidence'' in our markets); Ben Stein, How to Deal
with a 3 A.M. Fear, The New York Times, March 8, 2009; Charles R.
Schwab, Restore the Uptick Rule, Restore Confidence, Wall Street
Journal Online, December 9, 2008. The Federal Reserve Chairman also
recently noted that, while the ``traditional literature on this
doesn't seem to find much effect of the uptick rule,'' short sale
price test restrictions are ``worth looking at'' and that the rule
(i.e., former Rule 10a-1) ``might have had some benefit.'' Monetary
Policy and the State of the Economy: Hearing Before the House
Financial Services Comm., 111th Cong., 1st Sess. (Lexis Federal News
Service at 33) (Feb. 25, 2009). See also letter from Duncan
Niederauer, CEO, The NYSE/Euronext Group, Inc., Robert Greifeld,
CEO, The NASDAQ OMX Group, Inc., Joe Ratterman, CEO, BATS Exchange,
Inc., Joseph Rizzello, CEO, National Stock Exchange, dated March 24,
2009 (``National Exchanges Letter'') (stating that the United States
national securities exchanges welcome the announcement that the
Commission will consider a proposal to adopt a rule to combat
abusive short selling and suggesting that any such rule proposal
include a circuit breaker in the form discussed therein).
    \64\ See D. Harmon and Y. Bar-Yam, 2008, Technical Report on the
SEC Uptick Repeal Pilot, New England Complex Systems Institute; see
also Robert C. Pozen and Dr. Yaneer Bar-Yam, There's a Better Way to
Prevent Bear Raids, The Wall Street Journal, Opinion, November 18,
2008 (stating that the ``uptick rule'' is an effective way to
prevent ``bear raids''). But cf. John C. Bogle, Jr. and Howard
Flinker, Uptick Rule Won't Prevent More Raids by the Bear, The Wall
Street Journal, Opinion Section (November 26, 2008).
    \65\ See George Soros, The Game Changer, available at http://
www.ft.com/cms/s/0/49b1654a-ed60-11dd-bd60-0000779fd2ac.html.
    \66\ See id. (concluding that Lehman, AIG and other financial
institutions were destroyed by ``bear raids'' in which the shorting
of stocks and buying of CDS amplified and reinforced each other).
---------------------------------------------------------------------------

    Questions and comments have been raised about the role that short
selling, and in particular potentially abusive short selling, may have
in connection with the price fluctuations and disruption in our
markets. As such, recently we took a number of short sale-related
actions aimed at addressing these concerns. For example, due to our
concerns that false rumors spread by short sellers regarding financial
institutions of significance in the U.S. may have fueled market
volatility in the securities of some of these institutions, on July 15,
2008, we issued an emergency order (``July Emergency Order'') \67\
pursuant to Section 12(k)(2) of the Exchange Act \68\ which imposed
borrowing and delivery requirements on short sales of the equity
securities of certain financial institutions. We noted in the July
Emergency Order that false rumors can lead to a loss of confidence in
our markets. Such loss of confidence can lead to panic selling, which
may be further exacerbated by ``naked'' short selling. As a result, the
prices of securities may artificially and unnecessarily decline well
below the price level that would have resulted from the normal price
discovery process.\69\ If significant financial institutions are
involved, this chain of events can threaten disruption of our
markets.\70\
---------------------------------------------------------------------------

    \67\ See Securities Exchange Act Release No. 58166 (July 15,
2008), 73 FR 42379 (July 21, 2008).
    \68\ 15 U.S.C. 78l(k).
    \69\ See July Emergency Order, 73 FR 42379.
    \70\ See id.
---------------------------------------------------------------------------

    Due to our concerns regarding the impact of short selling on the
prices of financial institution securities, on September 18, 2008, we
issued another emergency order prohibiting short selling in the
publicly traded securities of certain financial institutions.\71\ Our
concerns, however, have not been limited to financial institutions
given the importance of confidence in our markets and recent rapid and
steep declines in the prices of securities generally.\72\ Such rapid
and steep price declines can give rise to questions about the
underlying financial condition of an institution, which in turn can
erode confidence even without an underlying fundamental basis.\73\ This
erosion of confidence can impair the liquidity and ultimate viability
of an institution, with potentially broad market consequences.\74\
---------------------------------------------------------------------------

    \71\ See Securities Exchange Act Release No. 58592 (Sept. 18,
2008), 73 FR 55169 (Sept. 24, 2008).
    \72\ See, e.g., July Emergency Order, 73 FR 42379; Securities
Exchange Act Release No. 58592 (Sept. 18, 2008), 73 FR 55169 (Sept.
24, 2008) (``Short Sale Ban Emergency Order''); Securities Exchange
Act Release No. 58572 (Sept. 17, 2008), 73 FR 54875 (Sept. 23, 2008)
(``September Emergency Order'').
    \73\ See Short Sale Ban Emergency Order, 73 FR 55169; September
Emergency Order, 73 FR 54875.
    \74\ See id.
---------------------------------------------------------------------------

    These concerns resulted in our issuance on September 17, 2008 of an
emergency order under Section 12(k)(2) of the Exchange Act, in part
targeting

short selling in all equity securities.\75\ Pursuant to the September
Emergency Order we imposed enhanced delivery requirements on sales of
all equity securities under Rule 204T of Regulation SHO.\76\
---------------------------------------------------------------------------

    \75\ See September Emergency Order, 73 FR 54875.
    \76\ See id. We subsequently issued an interim final temporary
rule imposing the delivery requirements of Rule 204T of Regulation
SHO until July 31, 2009. See Securities Exchange Act Release No.
58773 (Oct. 14, 2008), 73 FR 61706 (Oct. 17, 2008) (``Interim Final
Temporary Rule 204T''). We and Commission staff are currently
reviewing the comment letters received in response to that rule. In
addition, we issued an emergency order, and subsequent interim final
temporary rule, to require disclosure of short sales and short
positions in certain securities. The temporary rule expires on
August 1, 2009. We and Commission staff are currently reviewing
comment letters received in response to the temporary rule. See
Securities Exchange Act Release No. 58591 (Sept. 18, 2008). See also
Securities Exchange Act Release No. 58785 (Oct. 15, 2008), 73 FR
61678 (Oct. 17, 2008).
---------------------------------------------------------------------------

    The enhanced close-out requirements of Rule 204T of Regulation SHO
in the September Emergency Order, which, among other things, require
participants of a registered clearing agency to close-out fails to
deliver resulting from short sales of any equity security by purchasing
or borrowing the security by no later than the beginning of trading on
the day after the fail to deliver occurs, appear to be having a
positive effect toward achieving our goal of reducing fails to
deliver.\77\ As we stated in the October 2008 release adopting Rule
204T as an interim final temporary rule, we are concerned about the
potentially negative market impact of large and persistent fails to
deliver.\78\ Thus, our adoption of Rule 204T followed a series of other
steps aimed at reducing such fails to deliver and addressing
potentially abusive short selling. Such steps included eliminating the
``grandfather'' and options market maker exceptions to Regulation SHO's
close-out requirement,\79\ and proposing and subsequently adopting a
``naked'' short selling anti-fraud rule, Rule 10b-21.\80\ Although we
recognize that fails to deliver can occur for legitimate reasons, we
are concerned about the impact of large and persistent fails to deliver
on market confidence. Preliminary results from OEA indicate that our
actions to further reduce fails to deliver and, thereby, address
potentially abusive short selling are having their intended effect. For
example, preliminary results from OEA indicate that fails to deliver in
all equity securities have declined significantly since the adoption of
Rule 204T.\81\
---------------------------------------------------------------------------

    \77\ See September Emergency Order, 73 FR 54875.
    \78\ See Interim Final Temporary Rule 204T, 73 FR at 61708.
    \79\ See Securities Exchange Act Release No. 56212 (Aug. 7,
2007), 72 FR 45544 (Aug. 14, 2007) (eliminating the ``grandfather''
exception to Regulation SHO's close-out requirement); September
Emergency Order, 73 FR 54875 (eliminating the options market maker
exception to Regulation SHO's close-out requirement). Following the
issuance of the September Emergency Order, we adopted amendments
making permanent the elimination of the options market maker
exception. See Securities Exchange Act Release No. 58775 (Oct. 14,
2008), 73 FR 61690 (Oct. 17, 2008).
    \80\ See Securities Exchange Act Release No. 58774 (Oct. 14,
2008), 73 FR 61666 (Oct. 17, 2008); Securities Exchange Act Release
No. 57511 (March 17, 2008), 73 FR 15376 (March 21, 2008).
    \81\ See Memorandum from OEA Re: Impact of Recent SHO Rule
Changes on Fails to Deliver, November 26, 2008 at http://
www.sec.gov/comments/s7-30-08/s73008-37.pdf; Memorandum from OEA Re:
Impact of Recent SHO Rule Changes on Fails to Deliver, March 20,
2009 at http://www.sec.gov/comments/s7-30-08/s73008-107.pdf
(stating, among other things, that the average daily number of
aggregate fails to deliver for all securities decreased from 1.1
billion to 582 million for a total decline of 47.2% when comparing a
pre-Rule to post-Rule period).
---------------------------------------------------------------------------

    Questions persist, however, about the rapid and steep declines in
the prices of securities, and we recognize the concern over the
continuing erosion of investor confidence in our markets. Thus, we have
continued to examine whether there are other actions that the
Commission might consider, including re-evaluating whether a short sale
price test ought to be reintroduced or a circuit breaker rule should be
imposed, in light of the extreme market declines and volatility, as
well as the loss of investor confidence we continue to experience.
    We also note that when we eliminated all short sale price test
restrictions in July 2007, we acknowledged that circumstances may
develop that would warrant relief from the prohibition in Rule 201 of
Regulation SHO for a short sale price test, including a short sale
price test of an SRO, to apply to short sales in any security.\82\
Thus, in determining whether or not to propose a short sale price test
rule or circuit breaker rule, we have considered the recent turmoil in
the financial sector and steep declines and extreme volatility in
securities prices. The turbulence in the financial markets has been
underscored over the past 18 months by events such as the March 2008
sale of Bear Stearns Corporation, and the crisis surrounding the
collapse of Lehman Brothers in September 2008.
---------------------------------------------------------------------------

    \82\ See 2007 Price Test Adopting Release, 72 FR 36348.
---------------------------------------------------------------------------

    In addition, between July 2007 and March 2009, the Dow Jones
Industrial Average (``DJIA'') lost roughly 50% of its value, while the
Standard and Poor's 500 Index fell approximately 54%.\83\ The publicly
traded securities of significant financial institutions have
experienced large reductions in value in 2008 and early 2009.\84\ For
example, one significant financial institution's stock price declined
from approximately $49 per share in the beginning of July 2007, to
approximately $1 per share in March 2009. Similarly, in July 2007,
another significant financial institution's stock price declined from
approximately $49 per share to approximately $3 per share in March
2009. In addition, in 2008, a number of major banks became the subjects
of federal seizure.\85\ A total of 25 banks failed in 2008, resulting
in a $33.5 billion expenditure of the fund used by the Federal Deposit
Insurance Corporation (``FDIC'') to protect individual depositors'
savings.\86\ Put simply, market conditions have changed dramatically in
recent months.\87\
---------------------------------------------------------------------------

    \83\ On July 3, 2007, the DJIA closed at 13,577, and on March 3,
2009, the DJIA closed at 6,726. On July 3, 2007, the S&P 500 Index
closed at 1524.87, and on March 3, 2009, the S&P 500 Index closed at
700.82.
    \84\ We note that we have no empirical evidence that such
falling prices are the result of short selling activity and the lack
of short sale price test restrictions.
    \85\ See, e.g., Office of Thrift Supervision, Receivership Of A
Federal Saving Association, dated Sept. 25, 2008 at http://
files.ots.treas.gov/680024.pdf; Office of Thrift Supervision, Pass-
Through Receivership Of A Federal Savings Association Into A De Novo
Federal Savings Association That Is Placed Into Conservatorship With
the FDIC, dated July 11, 2008 at http://files.ots.treas.gov/
680018.pdf.
    \86\ See Alison Vekshin, Bair Says Insurance Fund Could Be
Insolvent This Year, http://www.bloomberg.com/apps/
news?pid=washingtonstory&sid=alsJZqIFuN3k, March 4, 2009.
    \87\ We note, however, that stock markets have incurred
significant declines in value under former short sale price test
restrictions, most notably the 1987 Market Crash and the 2000 Tech
Bubble Burst.
---------------------------------------------------------------------------

    In addition, as noted above, in response to the proposed amendments
to eliminate former Rule 10a-1, one commenter expressed its concern
about unrestricted short selling during periods of unusually rapid and
large market declines.\88\ This concern has been echoed in recent
comment letters to the Commission.\89\ We note, however, that in the
2007 Price Test Adopting Release, we noted that because of the
Commission's stated objective when it adopted Rule 10a-1 and our
concerns about the potential use of short sales to manipulate stock
prices, OEA examined the Pilot data for any indication that there is an
association between extreme price movements and price test

restrictions. OEA, however, did not find any such association.\90\
---------------------------------------------------------------------------

    \88\ See NYSE letter.
    \89\ See, e.g., Brown Letter (noting that ``the investigation
performed before the uptick rule was rescinded was insufficient,
particularly [because] it covered a period of relative market
stability and studied the side effects of the rule rather than the
primary effect of the rule which would only be seen in a sharply
down market such as we have just suffered''); Liotine Letter
(stating that ``[t]he research done prior to the [amendment] of rule
10-A was far too short'' and that the study should have lasted
longer to ``ensure at least one bear market was involved in the
study'').
    \90\ See 2007 Price Test Adopting Release, 72 FR at 36351.
---------------------------------------------------------------------------

    Due to the extreme market conditions with which we are currently
faced and the resulting deterioration in investor confidence, we
believe it is appropriate at this time to propose amending Regulation
SHO to add a short sale price test or a circuit breaker rule. In
issuing this proposing release, we seek empirical data regarding the
costs and benefits of reinstating short sale price test restrictions or
imposing circuit breaker rules, including the potential impact on
legitimate short selling. We note that although we have received
numerous letters requesting reinstatement of short sale price test
restrictions, such requests have not included empirical data, but
rather focus on what such commenters believe might be the impact on the
markets of reinstating such restrictions. In addition, such requests do
not discuss the potential impact of short sale price test restrictions
on the benefits of legitimate short selling.
    As discussed in this release, we remain mindful that there are
benefits of short selling. For example, legitimate short selling can
play an important and constructive functional role in the markets,
providing liquidity and price efficiency. Short sellers also play an
important role in correcting upward stock price manipulation.\91\
Because short sale price test restrictions may lessen some of these
benefits, it is important that any short sale price test regulation be
designed to limit any potentially unnecessary impact on legitimate
short selling.
---------------------------------------------------------------------------

    \91\ See OEA Staff's Summary Pilot Report, at 9.
---------------------------------------------------------------------------

    We also recognize that some market participants may be advocating
for a short sale price test because such participants may believe that
it would put them at a competitive advantage over other participants
who may be less able to implement or adjust their trading strategies to
account for a short sale price test or may otherwise benefit at the
expense of investors. Other market participants may favor a short sale
price test due to concerns about the imposition of a greater
restriction on short selling.
    We believe that all arguments, both for and against a short sale
price test rule and a possible circuit breaker rule, should be
considered and addressed in light of current market conditions and
recent experience. Thus, we believe it is important at this time to
propose and obtain informed public comment regarding restricting the
prices at which securities can be sold short before determining whether
or not to impose any such restrictions, and what any such restrictions
should be, as well as the proposed circuit breaker rules.
    As discussed in detail below, we are proposing two alternative
price tests. The first test would be the proposed modified uptick rule
that would be based on the national best bid. The second test would be
the proposed uptick rule that would be a modified version of the tick
test under former Rule 10a-1. We are also proposing amendments to Rule
200(g) of Regulation SHO that would require that a broker-dealer mark
certain sell orders ``short exempt.''
    In considering whether to reinstitute short sale price test
restrictions, it is important that the Commission take into account any
extant empirical data and analyses that would shed light on the
potential impact of such restrictions on capital markets. In that
connection, we note that OEA has analyzed the impact that a short sale
price test might have had during a thirteen day period in September of
2008 \92\ as well as whether and the extent to which short selling
drove prices downward during a volatile period in early September
2008.\93\ The first of these studies noted that, although its data were
limited to historical trade and quote data from a period when no price
test was in place and the shape of order book and trading sequences
might have differed had a price test been in place, a price test would
likely have been most restrictive during periods of low volatility,
with greatest impact on short selling in lower priced and more active
stocks.\94\ The second study found that long sellers were primarily
responsible for price declines during this period. It also found that,
on average, short sale volume as a fraction of total volume was highest
during periods of positive returns, noting, however, that it was also
possible that there were instances in which short selling activity
peaked during periods of extreme negative returns.\95\ The Commission
looks forward to receiving additional analysis of relevant data and
factors.
---------------------------------------------------------------------------

    \92\ See Office of Economic Analysis, Analysis of a short sale
price test using intraday quote and trade data, Dec. 17, 2008.
    \93\ See Office of Economic Analysis, Analysis of Short Selling
Activity during the First Weeks of September, 2008, Dec. 16, 2008.
    \94\ See OEA analysis (Dec. 17, 2008), supra note 92.
    \95\ See OEA analysis (Dec. 16, 2008), supra note 93.
---------------------------------------------------------------------------

    Similarly, it is important that the Commission take into account
any extant empirical data and analyses that would shed light on the
potential impact of such restrictions on capital markets, and it looks
forward to receiving analysis of relevant data.

III. Discussion of Proposed Short Sale Restrictions

    We discuss below our price test approach, the alternatives
contained therein and our circuit breaker approach. As noted above, we
preliminarily believe that a price test based on the national best bid
would have advantages over a test based on the last sale price in
today's markets. In particular, we believe that bids generally are a
more accurate reflection of current prices for a security than last
sale prices due to delays that can occur in the reporting of last sale
price information and because last sale price information is published
to the markets in reporting rather than trade sequence.
    In adopting a final rule, we could take several different
approaches, or a combination of approaches. For example, we could
consider a straight prohibition approach prohibiting all persons from
effecting short sales under a price test that references either the
national best bid or the last sale price; a policies and procedures
approach imposing obligations on market participants to adopt policies
and procedures to guard against impermissible short selling; or a
combination of a straight prohibition and a policies and procedures
approach.
    We discuss below the proposed modified uptick rule which would
require trading centers to have policies and procedures reasonably
designed to prevent the execution or display of short sales at
impermissible prices. As an alternative, in Section II.B, below, we
discuss the proposed uptick rule that is based on the last sale price
and that, similar to former Rule 10a-1, would apply a straight
prohibition approach that would prohibit any person from effecting
short sales at impermissible prices. However, either alternative could
ultimately be implemented through a policies and procedures or through
a straight prohibition approach or some combination thereof.
    We also discuss below our circuit breaker approach, which includes
two basic alternatives--a halt and a price test. The proposed circuit
breaker price test rule would temporarily result in either the proposed
modified uptick rule or the proposed uptick rule applying to a specific
security if there was a severe decline in the price of that security.
As with the proposed short sale price test rules, the proposed circuit
breaker price test rules could also be in the form of either a straight
prohibition

or a policies and procedures approach. The proposed circuit breaker
halt rule, which would temporarily halt short selling in a specific
security if there is a severe price decline in that security, could
operate either in addition to, or in place of, a proposed short sale
price test rule.

A. Proposed Modified Uptick Rule

1. Operation of the Proposed Modified Uptick Rule
    We are proposing to amend Rule 201 of Regulation SHO to add a short
sale price test that would use the national best bid as a reference
point for short sale orders. Specifically, the proposed modified uptick
rule would provide that ``[a] trading center shall establish, maintain,
and enforce written policies and procedures reasonably designed to
prevent the execution or display of a short sale order in a covered
security at a down-bid price.'' \96\ The proposed modified uptick rule
defines a ``down-bid price'' as ``a price that is less than the current
national best bid or, if the last differently priced national best bid
was greater than the current national best bid, a price that is less
than or equal to the current national best bid.'' \97\
---------------------------------------------------------------------------

    \96\ See Proposed Rule 201(b)(1).
    \97\ Proposed Rule 201(a)(2).
---------------------------------------------------------------------------

    Thus, under the proposed modified uptick rule, a trading center
would be required to have policies and procedures reasonably designed
to prevent it from executing or displaying any short sale order, absent
an exception, at a price that is below the national best bid. If the
current national best bid is below the last differently priced national
best bid, a trading center would be required to have policies and
procedures reasonably designed to prevent it from executing or
displaying the order unless the order is priced above the current
national best bid. Such a rule might help prevent short sellers from
driving the market down. In addition, the proposed modified uptick rule
might help prevent short sales from being used as a tool to accelerate
a declining market.
    The following example demonstrates the operation of the proposed
modified uptick rule. If the current national best bid in a security is
$47.00, and the immediately preceding national best bid was $46.99
(i.e., the current bid is above the previous bid), a trading center
could immediately execute a short sale order at $47.00 or above.
Similarly, a trading center could display a short sale order priced at
$47.00 or above.\98\ If the current national best bid in a security is
$47.00, and the immediately preceding bid was $47.01 (i.e., the current
bid is below the previous bid), a trading center could execute or
display a short sale order at a price above $47.00.\99\ If the current
national best bid in a security is $47.00, and the immediately
preceding national best bid was $47.00, but that bid was above the
prior national best bid (i.e., the last differently priced national
best bid), a trading center could execute a short sale order at $47.00
or above. Similarly, a trading center could display a short sale order
priced at $47.00 or above.\100\ If the current national best bid is
$47.00, and the immediately preceding national best bid was $47.00, but
that was below the prior national best bid (i.e., the last differently
priced national best bid), a trading center could execute or display a
short sale at a price above $47.00.\101\
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    \98\ A trading center could display a short sale order priced at
$47.00 provided such order would comply with the locking or crossing
requirements of any Commission or SRO rule. See, e.g., 17 CFR
242.610(d).
    \99\ Any such execution or display would also need to be in
compliance with applicable rules regarding minimum pricing
increments. See 17 CFR 242.612.
    \100\ A trading center could display a short sale order priced
at $47.00 provided such order would comply with the locking or
crossing requirements of any Commission or SRO rule. See, e.g., 17
CFR 242.610(d).
    \101\ Any such execution or display would also need to be in
compliance with applicable rules regarding minimum pricing
increments. See 17 CFR 242.612.
---------------------------------------------------------------------------

    The proposed modified uptick rule would apply to any ``covered
security,'' which is defined as an ``NMS stock'' under Rule 600(b)(47)
of Regulation NMS.\102\ Rule 600(b)(47) of Regulation NMS defines an
``NMS stock'' as ``any NMS security other than an option.'' \103\ Rule
600(b)(46) of Regulation NMS defines an ``NMS security'' as ``any
security or class of securities for which transaction reports are
collected, processed, and made available pursuant to an effective
transaction reporting plan, or an effective national market system plan
for reporting transactions in listed options.'' \104\ Thus, the
proposed modified uptick rule would apply to any security or class of
securities, except options, for which transaction reports are
collected, processed, and made available pursuant to an effective
transaction reporting plan.\105\ As a result, the proposed modified
uptick rule generally would cover all securities, except options,
listed on a national securities exchange whether traded on an exchange
or in the over-the-counter (``OTC'') market. It would not include non-
NMS stocks quoted on the OTC Bulletin Board or elsewhere in the OTC
market. We are not proposing to apply the proposed modified uptick rule
to non-NMS stocks quoted on the OTC Bulletin Board or elsewhere in the
OTC market because a national best bid and offer currently is not
required to be collected, consolidated, and disseminated for such
securities. In addition, former Rule 10a-1 did not apply to non-
exchange listed securities quoted on the OTC Bulletin Board or
elsewhere in the OTC market. We recognize, however, that issuers of
securities quoted in the OTC market may believe that they are
particularly vulnerable to abusive short selling. Thus, we seek
specific comment regarding whether the proposed modified uptick rule or
some other form of price test, or any other restrictions on short
sales, should apply to these types of securities.
---------------------------------------------------------------------------

    \102\ See proposed Rule 201(a)(1).
    \103\ 17 CFR 242.600(b)(47).
    \104\ 17 CFR 242.600(b)(46).
    \105\ See proposed Rule 201(a)(1) (providing that a ``covered
security'' shall mean all ``NMS stock'' as defined in Sec.
242.600(b)(47) of Regulation NMS).
---------------------------------------------------------------------------

    The scope of securities covered by the proposed modified uptick
rule would be similar to the scope of securities covered by former Rule
10a-1. Former Rule 10a-1(a) applied to securities registered on, or
admitted to unlisted trading privileges on, a national securities
exchange, if trades of the security were reported pursuant to an
effective transaction reporting plan and information regarding such
trades was made available in accordance with such plan on a real-time
basis to vendors of market transaction information. All securities that
would have been subject to former Rule 10a-1 would also be subject to
the proposed modified uptick rule. In addition, certain securities,
i.e., securities traded on Nasdaq prior to its regulation as an
exchange, that were not subject to former Rule 10a-1, would be subject
to the proposed modified uptick rule.\106\
---------------------------------------------------------------------------

    \106\ When Nasdaq became a national securities exchange in 2006,
absent an exemption from former Rule 10a-1, all Nasdaq securities
would have been subject to former Rule 10a-1. The Commission
provided Nasdaq with an exemption from the application of the
provisions of former Rule 10a-1 to securities traded on Nasdaq
because the Pilot was already in progress, and the Commission
believed it was necessary and appropriate to maintain the status quo
for short sale price tests during the Pilot, and to ensure that
market participants would not be burdened with costs associated with
implementing a price test that might be temporary. See letter to
Marc Menchel, Executive Vice President and General Counsel, NASD,
Inc., June 26, 2006.
---------------------------------------------------------------------------

    Market information for NMS stocks, including quotes, is
disseminated pursuant to three different national market system
plans.\107\ The national

securities exchanges and FINRA participate in these joint-industry
plans (``Plans'').\108\ The Plans establish three separate networks to
disseminate market information for NMS stocks.\109\ These networks are
designed to ensure that, among other things, consolidated bids from the
various trading centers that trade NMS stocks are continually collected
and disseminated on a real-time basis, in a single stream of
information. Thus, all trading centers would have access to the
consolidated bids for all the securities that would be subject to the
proposed modified uptick rule.\110\ As discussed in further detail
below, however, we note that the national best bid can change rapidly
and repeatedly and potentially there might be latencies in obtaining
data regarding the national best bid.
---------------------------------------------------------------------------

    \107\ The three joint-industry plans are (1) the Consolidated
Tape Association Plan (``CTA Plan''), which disseminates transaction
information for securities primarily listed on an exchange other
than Nasdaq, (2) the Consolidated Quotation Plan (``CQ Plan''),
which disseminates consolidated quotation information for securities
primarily listed on an exchange other than Nasdaq, and (3) the
Nasdaq UTP Plan, which disseminates consolidated transaction and
quotation information for securities primarily listed on Nasdaq.
    \108\ Rule 603(b) of Regulation NMS provides that every national
securities exchange on which an NMS stock is traded and national
securities association shall act jointly pursuant to one or more
effective national market system plans to disseminate consolidated
information, including a national best bid and national best offer,
for NMS stocks. See 17 CFR 242.603(b).
    \109\ These networks can be categorized as follows: (1) Network
A--securities primarily listed on the NYSE; (2) Network B--
securities listed on exchanges other than the NYSE and Nasdaq; and
(3) Network C--securities primarily listed on Nasdaq.
    \110\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496, 37503 (June 29, 2005) (``Regulation NMS Adopting
Release'').
---------------------------------------------------------------------------

    The proposed modified uptick rule would apply to any trading center
that executes or displays a short sale order in a covered security. It
would define a ``trading center'' as ``a national securities exchange
or national securities association that operates an SRO trading
facility, an alternative trading system, an exchange market maker, an
OTC market maker, or any other broker or dealer that executes orders
internally by trading as principal or crossing orders as agent.'' \111\
The proposed definition encompasses all entities that may execute short
sale orders. Thus, the proposed modified uptick rule would apply to any
entity that executes short sale orders.
---------------------------------------------------------------------------

    \111\ See 17 CFR 242.600(b)(78); see also proposed Rule
201(a)(7) (providing that the term ``trading center'' shall have the
same meaning as in Sec.  242.600(b)(78) of Regulation NMS).
---------------------------------------------------------------------------

    Under the proposed modified uptick rule, a trading center would be
required to have written policies and procedures reasonably designed to
prevent the execution or display of short sale orders on a down-bid
price. Thus, upon receipt of a short sale order, a trading center's
policies and procedures would have to require that the trading center
be able to determine whether or not the short sale order could be
executed or displayed in accordance with the provisions of proposed
Rule 201(b)(1). If the order is marketable at a permissible price, the
trading center would be able to present the order for immediate
execution or, if not immediately marketable, hold for execution later
at its specified price.
    The proposed modified uptick rule would permit a trading center to
display an order provided it is permissibly priced at the time the
trading center displays the order. If an order is impermissibly priced,
the trading center could, in accordance with policies and procedures
reasonably designed to prevent the execution or display of a short sale
order at a down-bid price, re-price the order at the lowest permissible
price and hold it for later execution at its new price or better.\112\
As quoted prices change, the proposed rule would allow a trading center
to repeatedly re-price and display an order at the lowest permissible
price down to the order's original limit order price (or, if a market
order, until the order is filled).
---------------------------------------------------------------------------

    \112\ For example, if a trading center receives a short sale
order priced at $47.00 when the current national best bid in the
security is $47.00, but the immediately preceding national best bid
was $47.01 (i.e., the current bid is below the previous bid), the
trading center could re-price the order at the permissible offer
price of $47.01, and display the order for execution at this new
limit price.
---------------------------------------------------------------------------

    In addition, paragraph (b)(1)(i) of the proposed rule would require
a trading center's policies and procedures to be reasonably designed to
permit a trading center to execute a displayed short sale order at a
down-bid price provided that, at the time the order was displayed by
the trading center it was permissibly priced, i.e., not on a down-bid
price.\113\ This exception for properly displayed short sale orders
would help avoid a conflict between the proposed modified uptick rule
and the ``Quote Rule'' under Rule 602 of Regulation NMS. The Quote Rule
requires that, subject to certain exceptions, the broker-dealer
responsible for communicating a quotation shall be obligated to execute
any order to buy or sell presented to him, other than an odd lot order,
at a price at least as favorable to such buyer or seller as the
responsible broker-dealer's published bid or published offer in any
amount up to his published quotation size.\114\ Thus, pursuant to this
exception, a trading center would be able to comply with the ``firm
quote'' requirement of Rule 602 of Regulation NMS by executing a
presented order to buy against its displayed offer to sell as long as
the displayed offer to sell was permissibly priced under the proposed
rule at the time it was first displayed, even if the execution of the
transaction would be on a down-bid price at the time of execution.
---------------------------------------------------------------------------

    \113\ See proposed Rule 201(b)(1)(i).
    \114\ See 17 CFR 242.602(b)(2). We note that to the extent that
a short sale order is undisplayed, the proposed modified uptick rule
would prevent the trading center from executing the order unless at
the time of execution, the execution price complies with the
proposed modified uptick rule at the time of execution of the order.
---------------------------------------------------------------------------

    Because a trading center could re-price and display a previously
impermissibly priced short sale order the proposed modified uptick rule
potentially allows for the more efficient functioning of the markets
than the proposed uptick rule because trading centers would not have to
reject or cancel impermissibly priced orders unless instructed to do so
by the trading center's customer submitting the short sale order. We
recognize that some trading centers might not want to re-price an
impermissibly priced short sale order. Thus, re-pricing would not be a
requirement under the proposed modified uptick rule.
    In addition, the proposed modified uptick rule would provide
trading centers and their customers with flexibility in determining how
to handle orders that are not immediately executable or displayable by
the trading center because the order is impermissibly priced. For
example, trading centers could offer their customers various order
types regarding the handling of impermissibly priced orders such that a
trading center either could reject an impermissibly priced order or re-
price the order at the lowest permissible price until the order is
filled.
    The proposed modified uptick rule would focus on a trading center's
written policies and procedures as the mechanism through which to
prevent the execution or display of short sale orders on a down-bid
price. Under this approach, trading centers would be required to have
policies and procedures reasonably designed to prevent the execution or
display of short sale orders at impermissible prices and to surveil the
effectiveness of the policies and procedures. Thus, short sale orders
executed or displayed at impermissible prices would require the trading
center that executed or displayed the short sales to take prompt action
to remedy any deficiencies.
    We also note that the policies and procedures requirements of the
proposed modified uptick rule are similar to those set forth under

Regulation NMS.\115\ In accordance with Regulation NMS, trading centers
must have in place written policies and procedures in connection with
that Regulation's order protection rule.\116\ Thus, trading centers are
already familiar with establishing, maintaining, and enforcing trading-
related policies and procedures, including programming their trading
systems in accordance with such policies and procedures. This
familiarity should reduce the implementation costs of the proposed
modified uptick rule on trading centers.
---------------------------------------------------------------------------

    \115\ See Regulation NMS Adopting Release, 70 FR 37496; see also
17 CFR 242.611.
    \116\ See id.
---------------------------------------------------------------------------

    Similar to the requirements under Regulation NMS in connection with
the order protection rule,\117\ at a minimum, a trading center's
policies and procedures would need to enable a trading center to
monitor, on a real-time basis, the national best bid, and whether the
current national best bid is an up- or down-bid from the last
differently priced national best bid, so as to determine the price at
which the trading center may execute or display a short sale order. In
addition, a trading center would need to have policies and procedures
reasonably designed to permit the execution or display of a short sale
order of a covered security marked ``short exempt'' without regard to
whether the order is at a down-bid price.\118\ A trading center's
policies and procedures would not, however, have to include mechanisms
to determine on which provision a broker-dealer is relying in marking
an order ``short exempt'' in accordance with paragraph (c) or (d) of
the proposed modified uptick rule.\119\
---------------------------------------------------------------------------

    \117\ See id.
    \118\ See Section V below discussing short sale orders marked
``short exempt.''
    \119\ See proposed Rules 201(c) and 201(d).
---------------------------------------------------------------------------

    A trading center would also need to take such steps as would be
necessary to enable it to enforce its policies and procedures
effectively. For example, trading centers could establish policies and
procedures that could include regular exception reports to evaluate
their trading practices. If a trading center's policies and procedures
include exception reports, any such reports would need to be examined
by the trading center to affirm that a trading center's policies and
procedures have been followed by its personnel and properly coded into
its automated systems and, if not, promptly identify the reasons and
take remedial action.
    To help ensure compliance with the proposed modified uptick rule,
trading centers could also have policies and procedures that would
enable a trading center to have a record identifying the current
national best bid at the time of execution or display of a short sale
order, as well as the last differently priced national best bid. Such
``snapshots'' of the market would aid SROs in evaluating a trading
center's written policies and procedures and compliance with the
proposed modified uptick rule. In addition, such snapshots would aid
trading centers in verifying that a short sale order was priced in
accordance with the provisions of proposed Rule 201(b)(1) if bid
``flickering,'' i.e., rapid and repeated changes in the current
national best bid during the period between identification of the
current national best bid and the execution or display of the short
sale order, creates confusion regarding whether or not the short sale
order was executed or displayed at a permissible price. Snapshots of
the market at the time of execution or display of an order would also
aid trading centers in dealing with time lags in receiving data
regarding the national best bid from different data sources. A trading
center's policies and procedures would be required to address latencies
in obtaining data regarding the national best bid. In addition, to the
extent such latencies occur, a trading center's policies and procedures
would need to implement reasonable steps to monitor such latencies on a
continuing basis and take appropriate steps to address a problem should
one develop.
    Trading centers would be required to conduct surveillance under the
proposed modified uptick rule. Proposed Rule 201(b)(2) provides that a
trading center must regularly surveil to ascertain the effectiveness of
the policies and procedures required under the proposed modified uptick
rule and must take prompt action to remedy deficiencies in such
policies and procedures.\120\ This provision would reinforce the
ongoing maintenance and enforcement requirements of proposed Rule
201(b)(1) by explicitly assigning an affirmative responsibility to
trading centers to surveil to ascertain the effectiveness of their
policies and procedures.\121\ Thus, under the proposed modified uptick
rule, trading centers would not be able to merely establish policies
and procedures that may be reasonable when created and assume that such
policies and procedures would continue to satisfy the requirements of
proposed Rule 201(b). Rather, trading centers would be required to
regularly assess the continuing effectiveness of their procedures and
take prompt action when needed to remedy deficiencies. In particular,
trading centers would need to engage in regular and periodic
surveillance to determine whether executions or displays of short sale
orders on impermissible bids are occurring without an applicable
exception and whether the trading center has failed to implement and
maintain policies and procedures that would have reasonably prevented
such impermissible executions or displays of short sale orders.
---------------------------------------------------------------------------

    \120\ See proposed Rule 201(b)(2).
    \121\ We note that Rule 611(a)(2) of Regulation NMS contains a
similar provision for trading centers. See 17 CFR 242.611(a)(2).
---------------------------------------------------------------------------

    The proposed modified uptick rule would differ from the tick test
of former Rule 10a-1, and the alternative proposed uptick rule
discussed below. Similar to former Rule 10a-1, the alternative proposed
uptick rule would be based on the last sale price, rather than the
national best bid, and it would not include an explicit policies and
procedures requirement. The proposed uptick rule would prevent the
execution of short sale orders below the last sale price, unless an
exception applies. The proposed modified uptick rule would prevent the
execution or display of short sale orders below the current national
best bid, unless, among other things, the order is marked ``short
exempt.'' Because the proposed modified uptick rule would use the
national best bid as its reference point, short selling could occur
below the last sale price.
    The two proposed alternative short sale price tests would operate
similarly, however, in that they would be designed to achieve a similar
purpose. In addition, to help limit the impact of the proposed
alternative short sale price tests on legitimate short selling, both
rules would permit short selling at an increment above the national
best bid, or the last sale price, as applicable, in a declining market.
As commenters have noted, the higher the increment the more restrictive
such an increment could be on short selling and could even be
tantamount to a ban on short selling.\122\
---------------------------------------------------------------------------

    \122\ See supra note 94; see also letter from Dan Mathisson,
Managing Director, Credit Suisse Securities USA, LLC, dated March
30, 2009 (``letter from Credit Suisse'') (stating that ``requiring
an uptick of more than one cent would be tantamount to a total ban
for any stock that trades actively'').
---------------------------------------------------------------------------

    In addition, the proposed modified uptick rule, similar to the
proposed uptick rule, would not result in the type of disparate short
sale regulation that existed under former Rule 10a-1.\123\ The proposed
modified uptick rule would apply a uniform rule to trades in the same
securities that can occur in

multiple, dispersed, and diverse markets. One of the reasons for the
elimination of former Rule 10a-1 and the prohibition on any SRO from
having a short sale price test in July 2007 was because the application
of short sale price tests had become disjointed with different price
tests applying to the same securities trading in different markets.
Under the proposed modified uptick rule, all covered securities,
wherever traded, would be subject to one short sale price test, the
proposed modified uptick rule. To further this goal of having a uniform
short sale price test, subsection (e) of proposed Rule 201 would
provide that no SRO shall have any rule that is not in conformity with,
or conflicts with proposed Rule 201.\124\ In addition, just as market
participants would be familiar with the proposed uptick rule because it
is a modified version of former Rule 10a-1 that was in existence for
almost 70 years, market participants would also be familiar with using
the current national best bid as a reference point because NASD's bid
test, which was in existence from 1994 to mid-2007, was based on the
current national best bid.\125\
---------------------------------------------------------------------------

    \123\ See proposed Rule 201(e).
    \124\ See proposed Rule 201(e).
    \125\ See supra note 27 (discussing NASD Rule 3350). Similar to
the proposed modified uptick rule, NASD's bid test referenced the
national best bid and was designed to help prevent short selling at
or below the current national best bid in a declining market. NASD's
bid test, however, took a straight prohibition approach, rather than
a policies and procedures approach, and, by its terms, applied only
to Nasdaq Global Market securities.
---------------------------------------------------------------------------

    We preliminarily believe that a short sale price test based on the
national best bid would be more suitable to today's markets than a
short sale price test based on the last sale price. Although we
recognize that a quotation proposes a transaction, whereas the last
trade price reflects an actual trade, we note that pursuant to
Commission and SRO rules, quotations for all covered securities must be
firm.\126\ By requiring that quotations are firm, the Commission
intended to ensure that quotations provide reliable information to the
marketplace so that broker-dealers are able to make best execution
decisions for their customers' orders and customers are able to make
informed investment decisions.\127\ Moreover, quotation information has
significant value to the marketplace because it reflects the various
factors affecting the market, including current levels of buying and
selling interest.\128\ Both retail and institutional investors rely on
quotation information to understand the market forces at work at a
given time and to assist in the formulation of investment
strategies.\129\
---------------------------------------------------------------------------

    \126\ See e.g., 17 CFR 242.602.
    \127\ See Securities Exchange Act Release No. 43085 (July 28,
2000), 65 FR 47918 (Aug. 4, 2000).
    \128\ See id.
    \129\ See id.
---------------------------------------------------------------------------

    Further, we believe that bids generally are a more accurate
reflection of current prices for a security because changes in the
national best bid are sequenced across trading centers. In contrast,
transactions may be reported within a 90 second window, which can
easily result in out-of-sequence reports. Even transactions that are
executed and reported automatically may be out of sequence if they
occur in different trading centers. For example, trade reporting for
covered securities can involve multiple trading centers reporting
trades in the same stock from different locations using different means
of reporting. In addition, trades are published in reporting sequence,
not trade sequence.\130\ Thus, for those covered securities for which a
significant amount of trading occurs manually, or in multiple trading
centers, a price test based on the national best bid may be a fairer
and more effective means of regulating short selling than a test based
on the last sale price because the manner in which trades are reported
may create up-ticks and down-ticks that may not accurately reflect
actual price movements in the security for the purpose of a test based
on the last sale price.
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    \130\ See FINRA Rule 6380A.
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    The proposed modified uptick rule would be designed to restrict
short selling at successively lower prices and, thereby, might help
prevent short selling, including potentially abusive or manipulative
short selling, from being used as a tool to drive the markets down and
from being used to accelerate a decline in the market by exhausting all
remaining bids at one price level. By seeking to advance these goals,
the proposed modified uptick rule might restore investor confidence in
our securities markets.
    In addition, the proposed modified uptick rule would be designed to
preserve instant execution and liquidity by allowing relatively
unrestricted short selling in an advancing market. As discussed above,
one of the benefits of legitimate short selling is that it provides
market liquidity by, for example, adding to the selling interest of
stock available to purchasers, and, when sellers are covering their
short sales, adding to the buying interest of stock available to
sellers.
    In addition, we believe the proposed modified uptick rule would
accommodate trading systems and strategies used in the marketplace
today, such as the automated trade matching systems that offer price
improvement based on the national best bid and offer. These passive
pricing systems often effect trades at an independently-derived price,
such as at the mid-point of the bid-offer spread. Such pricing would
often not satisfy the tick test of former Rule 10a-1 because matches
could potentially occur at a price below the last reported sale price.
Thus, we provided a limited exception from former Rule 10a-1 for these
trading systems.\131\ The proposed modified uptick rule would
accommodate matching systems that execute trades at an independently
derived price because such systems are designed so that matches occur
above the current national best bid.\132\ Thus, even in a declining
market where a trading center could execute or display an order only if
it is priced above the current national best bid at the time of
execution or display, such matching system executions would comply with
the proposed modified uptick rule.
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    \131\ See, e.g., supra note 26.
    \132\ See id.; see e.g., letter from James A. Brigagliano,
Acting Associate Director, Division of Market Regulation, to Alan J.
Reed, Jr., First Vice President and Director of Compliance, Instinet
Group, LLC. (June 15, 2006) (granting Instinet modified exemptive
relief from Rule 10a-1 for certain transactions executed through
Instinet's Intraday Crossing System); POSIT letter.
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    If we were to adopt the proposed modified uptick rule, we are
proposing that there would be a three month implementation period such
that trading centers would have to comply with the proposed modified
uptick rule three months following the effective date of the proposed
modified uptick rule. We believe that a proposed three month
implementation period would provide trading centers with sufficient
time in which to modify their systems and procedures in order to comply
with the requirements of the proposed modified uptick rule. Because the
proposed modified uptick rule would require the implementation of
policies and procedures similar to those required for trading centers
under Regulation NMS, we believe that a three month implementation
period would be reasonable. The addition of an implementation period
should alleviate any potential disruptive effects of the proposal.
    We realize, however, that a shorter or longer implementation period
may be manageable or preferable. In the Solicitation of Comment below,
we seek specific comment as to what length of implementation period
would be necessary or appropriate, and why, such that trading centers
would be able to

meet the proposed short sale price test restrictions, if adopted.
2. ``Short Exempt'' Provision of Proposed Modified Uptick Rule
    Paragraph (b)(1)(ii) of the proposed modified uptick rule provides
that a trading center's policies and procedures must be reasonably
designed to permit the execution or display of a short sale order of a
covered security marked ``short exempt'' without regard to whether the
order is at a down-bid price.\133\ Thus, a trading center's policies
and procedures must be reasonably designed to recognize when an order
is marked ``short exempt'' so that the trading center's policies and
procedures would not prevent the execution or display of such orders on
a down-bid price.\134\
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    \133\ See proposed Rule 201(b)(1)(ii).
    \134\ See proposed Rule 201(b)(1)(ii).
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    As discussed in more detail below, proposed Rule 200(g)(2) of
Regulation SHO provides that a sale order shall be marked ``short
exempt'' only if the provisions of paragraph (c) or (d) of proposed
Rule 201 are met.\135\ Paragraphs (c) and (d) of the proposed modified
uptick rule set forth when a broker-dealer may mark a short sale order
``short exempt.'' The provisions contained in paragraphs (c) and (d) of
the proposed modified uptick rule are designed to promote the
workability of the proposed modified uptick rule, while at the same
time furthering the Commission's stated goals.
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    \135\ See Section V below discussing proposed Rule 200(g)(2).
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    In addition, we note that the provisions contained in paragraph (d)
of proposed Rule 201 would parallel exceptions to former Rule 10a-1 and
exemptive relief granted pursuant to that rule. These exceptions and
exemptions from former Rule 10a-1, as applicable, had been in place
under former Rule 10a-1 for several years. We are not aware of any
reason that the rationales underlying these exceptions and exemptions
from former Rule 10a-1 would not still hold true today. Moreover, due
to the limited scope of these exceptions and exemptions to former Rule
10a-1, we do not believe that including provisions that would parallel
these exceptions and exemptions to former Rule 10a-1 would undermine
the Commission's stated goals for proposing short sale price test
restrictions.
    Thus, the provisions in proposed Rule 201(d) parallel exceptions to
and exemptive relief granted under former Rule 10a-1, as
applicable.\136\ As set forth in more detail below, however, we seek
comment regarding each of these provisions, including whether or not
these provisions would be appropriate or necessary under the proposed
modified uptick rule.
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    \136\ We note that NASD Rule 3350 contained exceptions to that
rule similar to exceptions to former Rule 10a-1. In addition, we
note NASD Rule 3350 included an exception related to bona fide
market making activity. See infra note 190 and accompanying text
(discussing our decision not to propose that a broker-dealer may
mark an order ``short exempt'' in connection with bona fide market
making activity). See also supra note 125.
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a. Broker-Dealer Provision
    Proposed Rule 201(c) provides that a broker-dealer may mark a short
sale order of a covered security ``short exempt'' if a broker-dealer
that submits a short sale order to a trading center identifies that the
short sale order is not on a down-bid price at the time of submission
of the order to the trading center.\137\ The proposed rule would
require any broker-dealer relying on this provision to establish,
maintain, and enforce written policies and procedures that are
reasonably designed to prevent the incorrect identification of orders
as being priced in accordance with the requirements of proposed Rule
201(c)(1).\138\
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    \137\ See proposed Rule 201(c)(1).
    \138\ See proposed Rule 201(c)(1).
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    We are proposing this provision to provide broker-dealers with the
option to manage their order flow, rather than having to always rely on
their trading centers to manage their order flow on their behalf. In
addition, we note that this provision would not undermine the
Commission's goals for short sale regulation because any broker-dealer
marking an order ``short exempt'' in accordance with this provision
would have to address whether its short sale order was not on a down-
bid price at the time of submission of the order to a trading center.
    As discussed in more detail below, we are proposing amendments to
Rule 200(g) of Regulation SHO to require, in part, that a sale order
shall be marked ``short exempt'' only if the provisions of paragraph
(c) of proposed Rule 201 of the proposed modified uptick rule are
met.\139\
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    \139\ See proposed Rule 200(g)(2).
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    To mark an order ``short exempt'' pursuant to paragraph (c) of the
proposed modified uptick rule, the broker-dealer must have mechanisms
in place to enable the broker-dealer to identify the short sale order
as priced in accordance with the provisions of proposed Rule 201(c)(1).
In accordance with proposed Rule 201(c)(1), these mechanisms must
include written policies and procedures reasonably designed to prevent
the incorrect identification of orders as being permissibly priced in
accordance with the provisions of proposed Rule 201(c)(1).\140\ Thus,
although a broker-dealer relying on this provision in marking an order
``short exempt'' would not need to identify the order as permissibly
priced to the trading center, it would need to have written policies
and procedures in place reasonably designed to enable it to identify
that an order was permissibly priced at the time of submission of the
order to a trading center.\141\
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    \140\ See proposed Rule 201(c)(1).
    \141\ Such policies and procedures would be similar to those
required for trading centers complying with paragraph (b) of the
proposed modified uptick rule.
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    At a minimum, a broker-dealer's policies and procedures would need
to be reasonably designed to enable a broker-dealer to monitor, on a
real-time basis, the national best bid, and whether the current
national best bid is an up- or down-bid from the last differently
priced national best bid, so as to determine the price at which the
broker-dealer may submit a short sale order to a trading center in
compliance with the provisions of proposed Rule 201(c)(1).
    A broker-dealer would also need to take such steps as would be
necessary to enable it to enforce its policies and procedures
effectively.\142\ For example, broker-dealers could establish policies
and procedures that could include regular exception reports to evaluate
their trading practices. If a broker-dealer's policies and procedures
include exception reports, any such reports would need to be examined
to affirm that a broker-dealer's policies and procedures have been
followed by its personnel and properly coded into its automated systems
and, if not, promptly identify the reasons and take remedial action.
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    \142\ See proposed Rule 201(c)(1).
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    To ensure compliance with proposed Rule 201(c)(1), a broker-dealer
could also have policies and procedures that would enable it to have a
record identifying the current national best bid at the time of
submission of a short sale order, as well as the last differently
priced national best bid. Such ``snapshots'' of the market would also
aid SROs in evaluating a broker-dealer's written policies and
procedures and compliance with proposed Rule 201(c). In addition, such
snapshots would aid broker-dealers in verifying that a short sale order
was priced in accordance with the provisions of proposed Rule 201(c)(1)
if bid flickering during the period between identification of the
current national best bid and the

submission of the short sale order to a trading center creates
confusion regarding whether or not the short sale order was submitted
at a permissible price. Snapshots of the market at the time of
submission of an order would also aid broker-dealers in dealing with
time lags in receiving data regarding the national best bid from
different data sources. A broker-dealer's policies and procedures would
be required to address any such latencies in obtaining data regarding
the national best bid. In addition, to the extent such latencies occur,
a broker-dealer's policies and procedures would need to implement
reasonable steps to monitor such latencies on a continuing basis and
take appropriate steps to address a problem should one develop.
    Surveillance would be a required part of a broker-dealer's
satisfaction of its legal obligations. Proposed Rule 201(c)(1) provides
that a broker-dealer must regularly surveil to ascertain the
effectiveness of the policies and procedures required under proposed
Rule 201(c)(2) and must take prompt action to remedy deficiencies in
such policies and procedures.\143\ This provision would reinforce the
ongoing maintenance and enforcement requirements of proposed Rule
201(c)(2) by explicitly assigning an affirmative responsibility to
broker-dealers to surveil to ascertain the effectiveness of their
policies and procedures.\144\ Thus, under proposed Rule 201(c)(1) and
(c)(2), broker-dealers would not be able to merely establish policies
and procedures that may be reasonable when created and assume that such
policies and procedures would continue to satisfy the requirements of
the proposed rule. Rather, broker-dealers would be required to
regularly assess the continuing effectiveness of their procedures and
take prompt action when needed to remedy deficiencies. In particular,
each broker-dealer would need to engage in regular and periodic
surveillance to determine whether it is submitting short sale orders
marked ``short exempt'' without complying with the requirements of
proposed Rule 201(c)(1) and whether the broker-dealer has failed to
implement and maintain policies and procedures that would have
reasonably prevented such impermissible submissions.
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    \143\ See proposed Rule 201(c)(2).
    \144\ We note that Rule 611(a)(2) of Regulation NMS contains a
similar surveillance provision. See 17 CFR 242.611(a)(2).
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b. Seller's Delay in Delivery
    The proposed modified uptick rule provides that a broker-dealer may
mark an order ``short exempt'' if the broker-dealer has a reasonable
basis to believe that the seller owns the security being sold and that
the seller intends to deliver the security as soon as all restrictions
on delivery have been removed.\145\ Specifically, proposed Rule
201(d)(1) provides that a broker-dealer may mark a short sale order of
a covered security ``short exempt'' if the broker-dealer has a
reasonable basis to believe the short sale order of a covered security
is by a person that is deemed to own the covered security pursuant to
Rule 200 of Regulation SHO,\146\ provided that the person intends to
deliver the security as soon as all restrictions on delivery have been
removed.\147\
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    \145\ Subsection (e)(1) of former Rule 10a-1 contained an
exception relating to a seller's delay in the delivery of
securities. The provision in proposed Rule 201(d)(1) parallels the
exception contained in former Rule 10a-1(e)(1).
    \146\ 17 CFR 242.200.
    \147\ See proposed Rule 201(d)(1). This proposed provision is
also consistent with Rule 203(b)(2)(ii) of Regulation SHO that
provides an exception from the ``locate'' requirement of Rule
203(b)(1) of Regulation SHO for ``[a]ny sale of a security that a
person is deemed to own pursuant to Sec.  242.200, provided that the
broker or dealer has been reasonably informed that the person
intends to deliver such security as soon as all restrictions on
delivery have been removed * * *'' 17 CFR 242.203(b)(2)(ii).
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    Rule 200(g)(1) of Regulation SHO provides that a sale can be marked
``long'' only if the seller is deemed to own the security being sold
and either (i) the security is in the broker-dealer's physical
possession or control, or (ii) it is reasonably expected that the
security will be in the broker-dealer's physical possession or control
by settlement of the transaction.\148\ Thus, even where a seller owns a
security, if delivery will be delayed, such as in the sale of formerly
restricted securities pursuant to Rule 144 of the Securities Act of
1933, or where a convertible security, option, or warrant has been
tendered for conversion or exchange, but the underlying security is not
reasonably expected to be received by settlement date, such sales must
be marked ``short.'' As a result, proposed Rule 201(d)(1) would be
necessary to allow for sales of securities that although owned, are
subject to the provisions of Regulation SHO governing short sales due
solely to the seller being unable to deliver the security to its
broker-dealer prior to settlement based on circumstances outside the
seller's control.
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    \148\ See 17 CFR 242.200(g)(1).
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c. Odd Lot Transactions
    Proposed Rule 201(d)(2) would provide that a broker-dealer may mark
a short sale order ``short exempt'' if the broker-dealer has a
reasonable basis to believe that the short sale order is by a market
maker to off-set a customer odd-lot \149\ order or liquidate an odd-lot
position which changes such broker-dealer's position by no more than a
unit of trading.\150\
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    \149\ Proposed Rule 201(a)(5) provides that the term ``odd lot''
shall have the same meaning as in 17 CFR 242.600(b)(49). Rule
600(b)(49) defines an ``odd lot'' as ``an order for the purchase or
sale of an NMS stock in an amount less than a round lot.'' 17 CFR
242.600(b)(49).
    \150\ See proposed Rule 201(d)(2). SRO rules define a ``unit of
trading'' or ``normal unit of trading,'' and generally means 100
shares, i.e., a round lot. For example, FINRA Rule 6320A(7) defines
a ``normal unit of trading'' to mean ``100 shares of a security
unless, with respect to a particular security, FINRA determines that
a normal unit of trading shall constitute other than 100 shares.''
NYSE Rule 55 states that ``[t]he unit of trading in stocks shall be
100 shares, except that in the case of certain stocks designated by
the Exchange the unit of trading shall be such lesser number of
shares as may be determined by the Exchange, with respect to each
stock so designated * * *.''
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    Under former Rule 10a-1, an exception for certain odd-lot
transactions was created in an effort to reduce the burden and
inconvenience that short sale restrictions would place on odd-lot
transactions. In 1938, the Commission found that odd-lot transactions
played a very minor role in potential manipulation by short selling.
Initially, sales of odd-lots were not subject to the restrictions of
Rule 10a-1.\151\ However, the Commission became concerned over the
volume of odd-lot transactions, which possibly indicated that the
exception was being used to circumvent the rule. As a result, the
exception was changed to include the two odd lot exceptions described
below.\152\
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    \151\ The Commission initially adopted three exceptions for odd-
lot transactions. While the first one, excepting all odd-lot
transactions, seemed to make other odd-lot exceptions unnecessary,
the 1938 adopting release included all three exceptions without
discussion. See supra note 24, Former Rule 10a-1 Adopting Release 3
FR 213.
    \152\ See Securities Exchange Act Release No. 11030 (Sept. 27,
1974), 39 FR 35570 (Oct. 2, 1974).
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