securities laws to address potentially abusive short selling?
    2. We note that our decision to propose a short sale price test was
based, in part, on the recent changes in market conditions and investor
confidence.\278\ To what extent, if any, would a short sale price test,
such as the proposed modified uptick rule or the proposed uptick rule,
be necessary or appropriate in light of recent changes in market
conditions? Please explain and provide empirical data in support of any
arguments and/or analyses. How would the proposed modified uptick rule
or the proposed uptick rule affect market conditions today? Please
explain and provide empirical data in support of any arguments and/or
analyses.
---------------------------------------------------------------------------

    \278\ See Section II.C.
---------------------------------------------------------------------------

    3. How effective would the proposed modified uptick rule or the
proposed uptick rule be in allowing relatively unrestricted short
selling in an advancing market? Please explain and provide empirical
data in support of any arguments and/or analyses. How effective would
the proposed modified uptick rule or proposed uptick rule be at helping
to prevent short selling, including potentially abusive or manipulative
short selling, from being used as a tool for driving the market down or
from being used to accelerate a declining market by exhausting all
remaining bids at one price level, causing successively lower prices to
be established by long sellers? Please explain and provide empirical
data in support of any arguments and/or analyses. Could the proposed
modified uptick rule or proposed uptick rule be modified to better meet
these goals? If so, how? Please explain and provide empirical data in
support of any arguments and/or analyses.
    4. We also note our concern regarding investor confidence based on
the numerous requests for reinstatement of short sale price test
restrictions.\279\ Would reinstating a short sale price test
restriction such as the proposed modified uptick rule or proposed
uptick rule help restore investor confidence? If so, why? If not, why
not? Please explain and provide empirical data or other specific
information in support of any arguments and/or analyses.
---------------------------------------------------------------------------

    \279\ See id.
---------------------------------------------------------------------------

    5. In addition to investor confidence and market volatility, we
have stated that we are concerned about potentially abusive short
selling. Would the proposed modified uptick rule or proposed uptick
rule help address potentially abusive short selling? If so, how? If
not, why not? Please explain and provide empirical data in support of
any arguments and/or analyses.
    6. We note that short selling provides the market with important
benefits, including market liquidity and pricing efficiency.\280\ What
effect, if any, would the proposed modified uptick rule or proposed
uptick rule have on market liquidity? Please explain and provide
empirical data in support of any arguments and/or analyses. What
effect, if any, would the proposed modified uptick rule or proposed
uptick rule have on pricing efficiency? Please provide empirical data
in support of any arguments and/or analyses.
---------------------------------------------------------------------------

    \280\ See Section II.A.
---------------------------------------------------------------------------

    7. We also note that short selling may be used to illegally
manipulate stock prices.\281\ What impact, if any, would the proposed
modified uptick rule or proposed uptick rule have on ``bear raids''?
Please explain and provide empirical data in support of any arguments
and/or analyses. To what extent, if any, does unrestricted short

selling exacerbate a declining market? Please explain and provide
empirical data in support of any arguments and/or analyses.
---------------------------------------------------------------------------

    \281\ See id.
---------------------------------------------------------------------------

    8. Is there a need for short sale price test restrictions? If there
is a need for a short sale price test, would the proposed modified
uptick rule be the best test? If so, why? If not, why not? Would the
proposed uptick rule be the best test? If so, why? If not, why not?
What are the costs and benefits of the proposed modified uptick rule
versus the proposed uptick rule? What would be the general costs and
benefits of short sales being subject to the proposed modified uptick
rule? What would be the general costs and benefits of short sales being
subject to the proposed uptick rule? Should we consider other forms of
short sale price tests? If so, what forms? What would be the costs and
benefits of any alternative forms of short sale price tests? Please
explain and provide empirical data in support of any arguments and/or
analyses.
    9. Would the proposed modified uptick rule or proposed uptick rule
be an appropriate short sale price test in the current decimals
environment? Would the proposed modified uptick rule or proposed uptick
rule be more suitable in a decimals environment with multiple trading
centers? Please explain and provide empirical data in support of any
arguments and/or analyses.
    10. Should the proposed modified uptick rule or proposed uptick
rule be limited to specific sectors or industries, such as financials,
due to the unique harms or susceptibility to harms to those industries
or sectors from the potential adverse effect of short selling in a
declining market? If so, please describe the types of industries or
sectors that should be covered and the unique harms or susceptibility
to harm to which they are subject. Please also describe the mechanisms
or criteria that should be used to determine which entities fall within
these industries or sectors.
    11. 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 both proposed rules, all covered
securities, wherever traded, would be subject to one short sale price
test. What are the advantages or disadvantages of having a uniform
short sale price test in the covered securities across all markets?
Please explain.
    12. How would trading systems and strategies used in today's
marketplace be impacted by the proposed modified uptick rule or
proposed uptick rule? How might market participants alter their trading
systems and strategies in response to either proposed rule, if adopted?
To further the goal of having a uniform short sale price test, both the
proposed modified uptick rule and proposed uptick rule would provide
that no SRO shall have any rule that is not in conformity with, or
conflicts with either proposed rule. Is this prohibition necessary or
appropriate? Would there ever be a need for an SRO to institute its own
short sale price test? If so, why?
    13. One of the reasons for the elimination of former Rule 10a-1 was
that the disjointed application of the rule resulted in an un-level
playing field among market participants. Could implementation of a
short sale price test through a policies and procedures approach
applicable to a ``trading center'' lead to disproportionate burden
among market participants? In what way? Would a straight prohibition
implementation approach be preferable in this regard? To what extent
could the proposed exceptions to either alternative rule contribute to
a disproportionate burden on certain market participants? What effect
might there be on relative competitive advantages of different market
participants if the short sale price test were based on an increment
larger than a penny?
    14. What impact, if any, would the trading requirements of
Regulation NMS have on implementing the proposed modified uptick rule
or proposed uptick rule?
    15. To what extent does the ability to obtain a short position
through the use of derivative products such as options, futures,
contracts for difference, warrants, credit default swaps or other swaps
(so-called ``synthetic short sales'') or other instruments (such as
inverse leveraged exchange traded funds) undermine the goals of short
sale price test restrictions, such as the proposed modified uptick rule
and the proposed uptick rule? Will synthetic short sales increase if
the Commission adopts either alternative short sale price test? What
effects might such an increase have on market liquidity and pricing
efficiency? Please explain.
    16. Before determining whether to adopt a short sale price test
restriction on a permanent basis, should we adopt a rule that would
apply, on a pilot basis, the operation of a short sale price test
restriction for specified securities? Such an approach would allow us
to study the effects on, among other things, market volatility, price
efficiency, and liquidity during the recent changes in market
conditions. What would be other benefits of taking this approach? What
would be the costs of taking this approach? Would the costs associated
with programming systems to apply a short sale price test restriction
on specified securities outweigh any benefits of having a pilot? If we
were to take this approach, how long would it take to program systems
to apply a short sale price test restriction to specified securities?
Similar to the Pilot conducted immediately prior to the elimination of
former Rule 10a-1, the securities that could be subject to the pilot
could be comprised of a subset of the Russell 3000 index, or such other
securities as necessary or appropriate in the public interest and
consistent with the protection of investors after giving due
consideration to the security's liquidity, volatility, market depth and
trading market. Would it be appropriate for such a pilot to be
comprised of a subset of the Russell 3000 index? How should the
securities that would comprise a pilot be selected? Please explain the
reasons for any suggested selection method. Such a pilot could remain
in effect for one or two years. Would a one or two year pilot be an
appropriate period of time? If so, why? If not, why not? Please provide
specific reasons to support any views in favor of establishing another
time period. Please provide any additional details regarding how a
pilot could be structured in terms of the securities to be selected,
the time-frame of the pilot, and the types of restrictions that could
be placed on short selling of such securities.
    17. In connection with the Pilot conducted immediately prior to our
elimination of former Rule 10a-1, SROs publicly released transactional
short selling data so that data would be available to the public to
encourage independent researchers to study the Pilot. If we were to
adopt a rule that would apply, on a pilot basis, a short sale price
test restriction on specified securities, we would expect to make
information obtained during any such pilot publicly available. In
addition, we would expect SROs to again make data available to the
public during any such pilot. Would there be any costs associated with
making short selling data available to the public during the period of
a pilot? What would be the benefits of making such data available to
the public?
    18. Commenters have stated that the Pilot conducted prior to the
elimination of former Rule 10a-1 was insufficient, in part, because it
only covered a period

of relative market stability \282\ and that the Pilot should have
lasted longer to ``ensure at least one bear market was involved in the
study.'' \283\ Did the Pilot cover a sufficient period of time?
---------------------------------------------------------------------------

    \282\ See Brown Letter supra note 55.
    \283\ See id.
---------------------------------------------------------------------------

    19. The proposed implementation period for both of the proposed
rules would be three months from the effective date of the proposed
rule, if adopted. Would a three month implementation period be
appropriate for the proposed modified uptick rule? Would a three month
implementation period be appropriate for the proposed uptick rule?
Should there be a shorter or longer implementation period for either
proposed rule? Please explain.
Questions Regarding Proposed Modified Uptick Rule
    1. The proposed modified uptick rule would define the term ``down-
bid price'' to mean 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. Should this definition be altered? If
the last differently priced national best bid was greater than the
current national best bid, should short selling be restricted to a cent
above the current national best bid, or a higher or lower increment? If
so, why? If a specific increment is suggested, please describe what
impact such increment would have on short selling. What increment, if
any, would be tantamount to a ban on short selling? Please provide
empirical data in support of any arguments and/or analyses.
    2. The proposed modified uptick rule would allow short selling at
the current national best bid in an advancing market. Should the
proposed modified uptick rule instead require a trading center to have
policies and procedures reasonably designed to permit short selling
only at a price above the current national best bid such that short
selling would occur only at a higher price than the current national
best bid, and only on a passive basis? Would such an approach be more
effective at preventing short selling, including potentially
manipulative or abusive short selling, from being used as a tool to
drive down the market or from being used to accelerate a declining
market than the approach set forth in the proposed modified uptick rule
or proposed uptick rule? If so, how? If not, why not? What effect would
an approach that allows short selling only at a price above the current
national best bid have on the benefits of short selling, such as
providing price efficiency and liquidity? Would this approach be easier
to program into trading and surveillance systems than the approach in
the proposed modified uptick rule or proposed uptick rule? If so, why?
If not, why not? Should an approach that allows short selling only at a
price above the current national best bid be combined with a policies
and procedures approach similar to that discussed under the proposed
modified uptick rule or a prohibition approach similar to that
discussed under the proposed uptick rule? What would be the advantages
and disadvantages, including costs and benefits of each of these
approaches as combined with a short sale price test that permits short
selling only at a price above the current national best bid?
    3. The proposed modified uptick rule would apply to a ``covered
security'' which is defined to mean an NMS stock as that term is
defined in Regulation NMS. Is it appropriate for the proposed modified
uptick rule to apply only to NMS stocks? Should the definition of a
``covered security'' instead be a security that is registered on, or
admitted to unlisted trading privileges on, a national securities
exchange? If so, why? If not, why not? Should the definition of
``covered security'' be expanded to include all NMS securities,
including options? If so, why? If not, why not?
    4. Should the proposed modified uptick rule be extended to Non-NMS
stocks, such as stocks quoted on the OTC Bulletin Board and Pink
Sheets? How would a national best bid be determined for sales of such
securities?
    5. The proposed modified uptick rule has as its reference point for
a permissible short sale the current national best bid in relation to
the last differently priced national best bid. To what extent would the
sequence of bids play a role in determining when short sales can be
executed or displayed by trading centers, or submitted by broker-
dealers relying on the exception to the proposed modified uptick rule
in proposed Rule 201(c)? Are there any regulatory or operational
reasons to allow markets to use their own bid information in regulating
short sales under the proposed modified uptick rule? Would allowing
markets to use their own bid information affect the operation or
effectiveness of the proposed modified uptick rule? If so, how? If
trading centers and broker-dealers marking orders ``short exempt''
pursuant to proposed Rule 201(c) take snapshots of the market at the
time of execution, display, or submission of the short sale order, as
applicable, would such snapshots address any concerns regarding the
sequence of bids? If not, what other policies and procedures could
trading centers and broker-dealers put in place to address these
concerns?
    6. The proposed modified uptick rule would require trading centers
to establish, maintain, and enforce written policies and procedures
reasonably designed to prevent the execution or display by the trading
center of impermissibly priced short sale orders. Are the proposed
modified uptick rule's requirements for what trading centers' policies
and procedures would be required to include appropriate? Please
explain. Pursuant to proposed Rule 201(b)(1)(ii) 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. Thus, a trading center's policies and procedures must be able to
recognize an order marked ``short exempt.'' Is the inclusion of this
requirement in a trading center's policies and procedures appropriate?
Please explain.
    7. Proposed Rule 201(b)(2) would require that trading centers
regularly surveil to ascertain the effectiveness of the policies and
procedures required by proposed Rule 201(b)(1) and promptly take action
to remedy deficiencies in such policies and procedures. Would all
trading centers readily be able to monitor on a real-time basis the
national best bid and the last differently priced national best bid?
Are there other ways to surveil that would not be on a real-time basis
that would be equally or more effective? Please explain. What systems
and surveillance changes by trading centers would be necessary to meet
the requirements of the proposed modified uptick rule? Should
additional requirements be placed on trading centers that execute or
display short sale orders in covered securities? If so, what should
such requirements be? Is a policies and procedures approach preferable
to a prohibition (as was the case under former Rule 10a-1) on any
person executing a short sale on a down-bid price? What would be the
costs and benefits of a policies and procedures approach as compared to
such a prohibition? Should the Commission consider instead a
prohibition with regard to some or all of the entities regulated by the
Commission, rather than one on ``any person,'' as was the case under
former Rule 10a-1? What about an approach that imposed a policies and
procedures requirement on some or all of the entities regulated by the
Commission and a prohibition on ``any person''?

What would be the costs and benefits of an approach that used both a
prohibition and a policies and procedures requirement on some or all of
the entities regulated by the Commission? What would be the costs and
benefits of each of these approaches?
    8. Under the proposed modified uptick rule, a trading center or
broker-dealer, as applicable, would need to take such steps as would be
necessary to enable it to enforce its policies and procedures
effectively. For example, trading centers and broker-dealers, as
applicable, could establish policies and procedures that could include
regular exception reports to evaluate their trading practices. Should
the proposed modified uptick rule require trading centers and broker-
dealers subject to the policies and procedures requirements of the rule
to have exception reports? Please explain. What would be the costs and
benefits of such a requirement? Would such costs and benefits differ
depending on the size of the trading center or broker-dealer?
    9. Under the proposed modified uptick rule, if an order is
impermissibly priced, the trading center could re-price the order at
the lowest permissible price and hold it for later execution at its new
price or better. As quoted prices change, the proposed modified uptick
rule would allow a trading center to repeatedly re-price and display an
order at the lowest permissible price down to the order's original
limit order price (or, if a market order, until the order is filled).
In effect, what would be the consequences of the proposed modified
uptick rule? What would be the impact of the proposed modified uptick
rule on speed of executions, transaction costs, and order flow? In
addition, if a trading center were not to re-price an order, what would
be the impact on speed of executions, transaction costs, and order
flow?
    10. Proposed Rule 201(b)(1)(i) provides that a trading center's
policies and procedures must be reasonably designed to permit the
execution of a displayed short sale order of a covered security if, at
the time of display of the short sale order, the order was not at a
down-bid price. Is it appropriate that the proposed modified uptick
rule would not preclude execution of a short sale order that was not
priced in accordance with proposed Rule 201(b)(1) provided that the
short sale order complied with the requirements of proposed Rule
201(b)(1) at the time it was displayed? If so, why? If not, why not?
Please explain.
    11. Proposed Rule 201(c) provides that a broker-dealer may mark an
order ``short exempt'' provided the broker-dealer complies with the
requirements of that paragraph of the proposed rule. Would it be
appropriate to permit a broker-dealer to mark a short sale order
``short exempt'' if it complies with the requirements of paragraph (c)
of the proposed rule? Should this provision apply to entities other
than, or in addition to, broker-dealers? Would the determination of the
down-bid price for certain orders at the time of submission and others
at the time of execution or display cause unnecessary confusion in the
market? What systems and surveillance changes by broker-dealers would
be necessary to meet the requirements of this provision?
    12. The proposed modified uptick rule would not apply at times the
national best bid is not collected, processed, and disseminated. Is
this appropriate? Would this result in a substantial portion of short
selling moving to times when the national best bid is not collected,
processed, and disseminated? Would this undermine the effectiveness of
the proposed modified uptick rule at helping to prevent short selling,
including potentially abusive or manipulative short selling, from being
used as a tool to drive down markets or to accelerate a price decline?
Should the proposed modified uptick rule apply even at times the
national best bid is not collected, processed, and disseminated? If so,
why? If not, why not? If it were to apply during trading sessions when
the national best bid is not collected, processed, and disseminated,
how should it apply (e.g., using the national best bid at the end of
the trading session)? What would be the costs and benefits of applying
the proposed modified uptick rule at times the national best bid is not
collected, processed, and disseminated, including the impact on
liquidity and price efficiency? What would be the costs and benefits of
applying the proposed modified uptick rule at times the national best
bid is collected, processed, and disseminated, including the impact on
liquidity and price efficiency?
    13. The proposed modified uptick rule includes a number of
provisions that would permit a broker-dealer to mark a short sale order
``short exempt.'' Pursuant to proposed Rule 201(b)(1)(ii) a trading
center's policies and procedures must be reasonably designed to permit
the execution or display of a short sale order marked ``short exempt''
without regard to whether the order is at a down-bid price. In addition
to the provisions under paragraphs (c) and (d) of the proposed modified
uptick rule regarding when a broker-dealer may mark an order ``short
exempt,'' are there other provisions that the proposed modified uptick
rule should include? Should the proposed modified uptick rule permit a
broker-dealer to make a short sale order ``short exempt'' in connection
with short selling activity and electronic trading systems that match
and execute customer orders at random times within specific time
intervals, and at independently derived prices? If so, please explain.
If such a provision would be appropriate or necessary, what conditions
should apply? Should such a provision include conditions similar to the
conditions set forth in Rule 201(c)(8) of the proposed uptick rule?
Should the proposed modified uptick rule permit a broker-dealer to mark
a short sale order ``short exempt'' in connection with locked or
crossed markets? If so, please explain how a conflict could arise in
connection with the proposed modified uptick rule and locked or crossed
markets and what should be the conditions of any such provision. Should
the proposed modified uptick rule permit a broker-dealer to make a
short sale order ``short exempt'' when the broker-dealer is fulfilling
specific obligations? If so, please explain.
    14. Would any of the provisions under paragraph (c) or (d) under
the proposed modified uptick rule be susceptible to abuse? If so, how?
Are there conditions that would address this concern?
    15. Proposed Rule 201(d)(1) would permit a broker-dealer to mark a
short sale order of a covered security ``short exempt'' if the seller
owns the security sold and intends to deliver the security as soon as
all restrictions on delivery have been removed. Would this provision be
necessary or appropriate? Should any conditions or limitations apply?
If so, why? If not, why not?
    16. Proposed Rule 201(d)(2) would permit a broker-dealer to mark a
short sale order of a covered security ``short exempt'' in connection
with certain odd lot transactions. Is this provision necessary or
appropriate? Should proposed Rule 201(d)(2) apply to all market makers
in odd-lots or should it be more limited? If so, why and how?
    17. Proposed Rule 201(d)(3) would permit a broker-dealer to mark a
short sale order of a covered security ``short exempt'' in connection
with certain bona fide domestic arbitrage transactions. Would this
provision be necessary or appropriate? Should the provision be narrowed
or broadened? If so, state specifically why, and how it should be
restructured in relation to the purposes of the proposed modified
uptick rule. Proposed Rule 201(d)(3)

parallels the exception in former Rule 10a-1(e)(7) which, consistent
with Regulation T at the time, referred to a ``special arbitrage
account.'' Because Regulation T no longer refers to a ``special
arbitrage account'' but instead refers to a ``good faith account'',
proposed Rule 201(d)(3) would also refer to a ``good faith account.''
Should proposed Rule 201(d)(3) refer to a ``special arbitrage account''
or a ``good faith account''? Please explain. Is a separate account,
whether a ``special arbitrage account'' or ``good faith account,''
necessary or appropriate for this provision? If so, why? If not, why
not?
    18. Proposed Rule 201(d)(4) would permit a broker-dealer to mark a
short sale order of a covered security ``short exempt'' in connection
with certain international arbitrage transactions. Would this provision
be necessary or appropriate? Should the provision be narrowed or
broadened? If so, state specifically why, and how it should be
restructured in relation to the purposes of the proposed modified
uptick rule. Proposed Rule 201(d)(4) parallels the exception in former
Rule 10a-1(e)(8) which, consistent with Regulation T at the time,
referred to a ``special international arbitrage account.'' Because
Regulation T no longer refers to a ``special international arbitrage
account'' but instead refers to a ``good faith account,'' proposed Rule
201(d)(4) would also refer to a ``good faith account.'' Should proposed
Rule 201(d)(4) refer to a ``special international arbitrage account''
or a ``good faith account''? Please explain. Is a separate account,
whether a ``special arbitrage account'' or ``good faith account,''
necessary or appropriate for this provision? If so, why? If not, why
not? Should proposed Rule 201(d)(4) be combined with proposed Rule
201(d)(3)? If so, why? If not, why not? Should depository receipts of a
security be deemed the same security as the security represented by
such depository receipt? Why or why not?
    19. Proposed Rule 201(d)(5) would permit a broker-dealer to mark a
short sale order of a covered security ``short exempt'' in connection
with sales by underwriters or syndicate members participating in a
distribution in connection with over-allotments, and lay-off sales by
such persons in connection with a distribution of securities. Would
this provision be necessary or appropriate for both and/or either over-
allotments and lay-off sales? Under what circumstances would an
underwriter or syndicate member price an offering below the national
best bid? What market impact, if any, would there be if the provision
were extended to short sales below the national best bid?
    20. Proposed Rule 201(d)(6) would permit a broker-dealer to mark a
short sale order of a covered security ``short exempt'' where a broker-
dealer is facilitating customer buy or long sale orders on a riskless
principal basis. Would this provision be appropriate or necessary? Are
the conditions set forth in proposed Rule 201(d)(6) appropriate? Should
the conditions be narrowed or broadened in any way? Please explain.
    21. Proposed Rule 201(d)(7) would permit a broker-dealer to mark a
short sale order of a covered security ``short exempt'' in connection
with certain VWAP transactions. Would this provision be necessary or
appropriate? Should the proposed provision be modified in any way? If
so, please explain. Are all of the proposed conditions appropriate, or
should any be eliminated or modified? Should any other conditions be
added? In place of a provision limited to VWAP transactions, would it
be more appropriate to permit a broker-dealer to mark a short sale
order of a covered security ``short exempt'' in connection with ``any
short sale at a price that is not based, directly or indirectly, on the
quoted price of the covered security at the time of execution and for
which the material terms were not reasonably determinable at the time
the commitment to execute the order was made''? \284\ If this provision
would be more appropriate, please explain why. What types of benchmark
orders would such a provision capture? If we were to use this
alternative language, how should we determine the ``material terms'' of
the short sale? Should there be any conditions on the use of this
alternative proposed provision?
---------------------------------------------------------------------------

    \284\ See also 17 CFR 242.611(7).
---------------------------------------------------------------------------

    22. Should the proposed modified uptick rule include a ``short
exempt'' marking provision specific to the daily opening of trading at
each trading center, particularly given that there are multiple trading
centers with non-synchronous opening auctions? Please explain. Should
there be a ``short exempt'' marking provision specific to the opening
of trading after a trading halt? Please explain. Should there be a
``short exempt'' marking provision specific to short selling at the
closing of trading at each trading center? Please explain.
    23. Should the proposed modified uptick rule include a ``short
exempt'' marking provision for transactions in exchange traded funds
and similar products? If so, what should be the qualifications and/or
conditions related to such provision? We note the Commission previously
exempted ETFs from Rule 10a-1, subject to various conditions.\285\
---------------------------------------------------------------------------

    \285\ See, e.g., 2003 Proposing Release at 62988.
---------------------------------------------------------------------------

    24. Should the proposed modified uptick rule include a ``short
exempt'' marking provision for short sale orders that are not pursuant
to a ``regular way'' contract?
    25. The proposed modified uptick rule does not contain a ``short
exempt'' marking provision in connection with market makers engaged in
bona fide market making activity. Should there be such a provision to
facilitate market making activity by broker-dealers? If so, why? What
consequences would there be, if any, to the markets if broker-dealers
are not permitted to mark such orders ``short exempt''? Please
describe. If the proposed modified uptick rule were to permit broker-
dealers to mark short sale orders pursuant to bona fide market making
activity as ``short exempt'' what qualifications and/or conditions
should apply?
    26. When the Commission repealed short sale price tests in 2007, it
also provided that no SRO could have or adopt its own short sale price
test. One reason for removing short sale price tests was the existence
of different types of prices tests (e.g., the tick test of Rule 10a-1
and the NASD bid test). Should the proposed modified uptick rule be an
SRO rule?
    27. Under a straight prohibition, any person is liable for an
impermissible short sale, even if the sale is the product of an error.
Should we include an exception for inadvertent errors, if the person
can demonstrate that the error was inadvertent? When would an
inadvertent error occur? How could a person demonstrate that the non-
compliant short sale was an inadvertent error?
    28. The short sales that qualify for the ``broker-dealer''
provision in proposed Rule 201(c) are still subject to the provisions
of the proposed modified uptick rule and would be required to be marked
as ``short exempt.'' Should these short sales be marked as ``short
exempt'' or is another mark more appropriate? What effect, if any,
would marking these short sales as ``short exempt'' have on compliance
or surveillance relative to another mark? What would be the costs
associated with implementing a mark especially for these short sales?
Questions Regarding Proposed Uptick Rule
    1. Should the proposed uptick rule have a policies and procedures
approach for some or all of the entities

regulated by the Commission similar to the approach under the proposed
modified uptick rule? If so, why? If not, why not? Or, should the
Commission also adopt a prohibition on ``any person'' for the proposed
uptick rule, in addition to a policies and procedures requirement on
some or all of the entities regulated by the Commission? What would be
the costs and benefits of a policies and procedures requirement, as
compared to the proposed prohibition? What would be the costs and
benefits of an approach that used both a prohibition and a policies and
procedures requirement on some or all of the entities regulated by the
Commission?
    2. The proposed uptick rule would apply to a ``covered security''
which is defined as an NMS security, other than an option, in which
trades in such securities are reported pursuant to an effective
transaction reporting plan and for which information as to such trades
is made available in accordance with such plan on a real-time basis to
vendors of market transaction information. Should the definition of a
``covered security'' be changed to apply to a security registered on,
or admitted to unlisted trading privileges on, a national securities
exchange, if trades in such securities are reported pursuant to an
effective transaction reporting plan and information as to such trades
is made available in accordance with such plan on a real-time basis to
vendors of market transaction information? If so, why? Would such a
definition result in securities other than NMS stocks being subject to
the proposed uptick rule? If so, please describe those types of
securities and the costs and benefits of applying the proposed uptick
rule to such securities. Should the definition of ``covered security''
be expanded to include all NMS securities, including options? If so,
why? If not, why not?
    3. The proposed uptick rule would apply to NMS stocks quoted in the
OTC market, but not to non-NMS stocks quoted in the OTC market. What
form of price test, if any, should apply to non-NMS stocks quoted in
the OTC market, and why? If a price test should apply to non-NMS
stocks, to what types of non-NMS stocks should it apply? Please
explain. How should such a price test be implemented? In addition, we
seek comment regarding whether the market is structured in a manner
that would make regulation of non-NMS stocks practical.
    4. Could any operational concerns regarding implementation of the
proposed uptick rule be remedied by market participants taking
snapshots of the market at the time of effecting a short sale? Such
snapshots could provide a record of the last sale price and the
direction of the market for a particular security at the time of
effecting the short sale. Would any additional exceptions be necessary
to address time lags in the receipt of last sale price information from
data feeds? If so, please explain, including providing any suggested
language for such an exception.
    5. The proposed uptick rule would not apply to short sales in
covered securities while last sale price information is not collected,
calculated and disseminated on a real-time basis. Would this result in
a substantial portion of short selling moving to times when last price
information is not collected, calculated, and disseminated on a real-
time basis? Would this undermine the effectiveness of the proposed
modified uptick rule at helping to prevent short selling, including
potentially abusive or manipulative short selling, from being used as a
tool to drive down markets or to accelerate a price decline? Would it
be appropriate to apply the proposed uptick rule while last sale price
information is not collected, calculated and disseminated on a real-
time basis? Please explain. What would be the costs and benefits of
applying the proposed uptick rule during after-hours trading sessions,
including the impact on liquidity and price efficiency? Please explain.
What would be the costs and benefits of not applying the proposed
uptick rule during after-hours trading sessions, including the impact
on liquidity and price efficiency? Please explain.
    6. Former Rule 10a-1 included a provision that permitted markets to
use the last sale prices on their own markets as the reference point
for measuring the permissibility of short sales. Specifically, former
Rule 10a-1(a)(2) provided: ``* * * any exchange, by rule, may require
that no person shall, for his own account or the account of any other
person, effect a short sale of any such security on that exchange (i)
below the price at which the last sale thereof, regular way, was
effected on such exchange, or (ii) at such price unless such price is
above the next preceding different price at which a sale of such
securities, regular way, was effected on such exchange, if that
exchange determines that such action is necessary or appropriate in its
market in the public interest or for the protection of investors; and,
if an exchange adopts such a rule, no person shall, for his own account
or for the account of any other person, effect a short sale of any such
security on such exchange otherwise than in accordance with such rule *
* *.'' This provision was added to former Rule 10a-1 in response to
certain SROs asserting that the last trade price on the consolidated
system should not be the reference point for the tick test of former
Rule 10a-1 because last trade price data was not available in a timely
manner and because the principal exchanges did not have adequate
information retrieval systems on their floors to ensure adherence with
former Rule 10a-1.\286\ Should the proposed uptick rule include a
similar provision? With the spread of fully automated markets and the
advances in the dissemination of market information, is such a
provision necessary or desirable in today's markets? Please explain the
costs and benefits of permitting each market to use the last sale price
in its market as the reference point under the proposed uptick rule.
---------------------------------------------------------------------------

    \286\ See Securities Exchange Act Release No. 11276 (Mar. 5,
1975), 54 FR 12522 (Mar. 19, 1975) (release proposing subparagraph
(a)(2) in response to stated operational and other difficulties
associated with complying with Rule 10a-1); see also Securities
Exchange Act Release No. 11468 (June 12, 1975), 40 FR 25442 (June
16, 1975) (adoption of proposed changes adding subparagraph (a)(2)).
---------------------------------------------------------------------------

    7. Former Rule 10a-1(a)(3) included a provision that allowed for an
adjustment to the sale price of a security after the security went ex-
dividend, ex-right, or ex any other distribution when determining the
price at which a short sale may be effected. Specifically, former Rule
10a-1(a)(3) provided: ``In determining the price at which a short sale
may be effected after a security goes ex-dividend, ex-right, or ex-any
other distribution, all sale prices prior to the ``ex'' date may be
reduced by the value of such distribution.'' Would this provision be
necessary under the proposed uptick rule? Please explain.
    8. Former Rule 10a-1(e)(6) contained an ``equalizing exception''
that applied to securities registered on, or admitted to unlisted
trading privileges on, a national securities exchange, for which trades
in such securities were not reported to an effective transaction
reporting plan and for which information as to such trades was not made
available in accordance with such plan on a real-time basis to vendors
of market transaction information. For such securities, it allowed
short sales to be effected on a national securities exchange (provided
the exchange approved the sale), if such sale was necessary to equal
the price of the security on that exchange with the price of the
security on the principal exchange for the security. The Commission
stated that this exception

was afforded to persons on regional exchanges to enhance the liquidity
on those exchanges with respect to orders naturally flowing to those
exchanges.\287\ The Commission also noted, however, that the exception
may have resulted in providing an incentive to divert orders from the
principal exchange market to avoid the impact of former Rule 10a-1,
because it allowed short sales to be effected on regional exchanges at
prices below the last sale price on the principal exchange.\288\ We
have determined not to include this exception in the proposed uptick
rule because we believe it would not make sense in light of the
proposed reference point (the last sale reference point in the
consolidated system). The exception in former Rule 10a-1(e)(6) was
originally adopted in 1938 when the permissibility of short sales under
former Rule 10a-1 was determined for each particular exchange by
comparing the price of the proposed short sale to the immediately
preceding price of the security to be sold short on that exchange. The
exception was modified, but retained, following amendments to former
Rule 10a-1 to reference the last trade price reported to the
consolidated system or in a particular exchange market. The proposed
uptick rule uses as the reference price the last sale price reported
pursuant to an effective transaction reporting plan only. Thus, we
believe a similar exception to the exception contained in former Rule
10a-1(e)(6) would not be necessary. Are there any reasons to include in
the proposed uptick rule a similar exception to that contained in
former Rule 10a-1(e)(6)? Please explain.
---------------------------------------------------------------------------

    \287\ See Securities Exchange Act Release No. 11468 (June 12,
1975), 40 FR 25442 (June 16, 1975) (adopting amendments to Rule 10a-
1 and discussing the operation of Rule 10a-1(e)(6) as in effect
prior to and after amendment).
    \288\ See id.
---------------------------------------------------------------------------

    9. As discussed in detail above under Section III.B.2.c. we have
incorporated into proposed Rule 201(c)(10) and (c)(11), proposed
exceptions to address any potential conflict between the proposed
uptick rule and the Quote Rule arising from a trade-through. These
exceptions are substantially in the form in which they were included in
subsections (e)(5)(ii) and (e)(11) of former Rule 10a-1. Are these
exceptions appropriate or necessary? Should these exceptions be revised
in any way? If so, please provide suggested language. Proposed Rule
201(c)(10) would allow an SRO, by rule, to prohibit its registered
specialists and registered exchange market makers from availing
themselves of the exemption afforded by paragraph (c)(10) if that SRO
determines that such action is necessary or appropriate in its market
in the public interest or for the protection of investors. Is this
provision appropriate or necessary? Would any SRO avail itself of this
provision? If not, why not? If so, why and how?
    10. Former Rule 10a-1 contained an exception in paragraph (e)(5)(i)
that permitted market makers to effect short sales at the same price as
the last sale price even if the last sale price was on a zero-minus
tick. Specifically, former Rule 10a-1(e)(5)(i) provided an exception
for: ``Any sale of a security * * * (except a sale to a stabilizing bid
complying within Rule 104 of Regulation M) by a registered specialist
or registered exchange market maker for its own account on any exchange
with which it is registered for such security, or by a third market
maker for its own account over-the-counter, i. Effected at a price
equal to or above the last sale, regular way, reported for such
security pursuant to an effective transaction reporting plan * * *
Provided, however, That any exchange, by rule, may prohibit its
registered specialist and registered exchange market makers from
availing themselves of the exemption afforded by this paragraph (e)(5)
if that exchange determines that such action is necessary or
appropriate in its market in the public interest or for the protection
of investors.'' Unless prohibited by exchange rule, this exception was
intended to permit registered specialists or market makers to protect
customer orders against transactions in other markets in the
consolidated system by allowing them to sell short at a price equal to
the last trade price reported to the consolidated system, even if that
sale was on a minus or zero-minus tick.\289\ Although former Rule 10a-1
included this exception for market makers, exchanges adopted rules that
prohibited their registered specialists and market makers from availing
themselves of this exception.\290\ Thus, we have determined not to
include a similar exception in the proposed uptick rule.\291\ Would a
similar exception under the proposed uptick rule for registered market
makers be appropriate or necessary? If the proposed uptick rule were to
include a similar exception, should the exception be substantially in
the form in which it was included in former Rule 10a-1(e)(5)(i)? If so,
why? If not, why not? Please explain any recommended changes.
---------------------------------------------------------------------------

    \289\ See supra note 188. Former Rule 10a-1(a)(1)(i) referenced
the last sale price reported to an effective transaction reporting
plan, but former Rule 10a-1(a)(2) also permitted an exchange to make
an election to use the last sale price reported in that exchange
market. Certain exchanges, such as the NYSE, implemented short sale
price test rules consistent with former Rule 10a-1(a)(2). See, e.g.,
former NYSE Rule 440B.
    \290\ See former NYSE Rule 440B.
    \291\ See supra Section III.A.2.i. (discussing our decision not
to propose that a broker dealer may mark an order ``short exempt''
in connection with bona fide market making activity).
---------------------------------------------------------------------------

    11. The proposed uptick rule would include a number of exceptions.
In addition to the exceptions contained in the proposed uptick rule,
are there other exceptions that should be included? For example, should
the Commission provide an exception from the proposed uptick rule for
transactions in exchange traded funds? If so, what should be the
qualifications and/or conditions for relief? If not, please explain why
not. In addition, we note that under former Rule 10a-1 the Commission
granted conditional relief to allow requesting exchanges \292\ and
broker-dealers \293\ to execute short sales in after-hours crossing
sessions at a price equal to the closing price of the security.\294\
Absent relief, such short sales could have violated former Rule 10a-1
in that the matching price (the closing price) of a security could have
been on a minus or zero-minus tick with respect to the last sale in the
consolidated transaction reporting system. In granting this conditional
relief, the Commission noted that short sale transactions executed at
the closing price generally do not represent the type of abusive
practices that former Rule 10a-1 was designed to prevent. In
particular, the Commission stated that short sale orders entered in the
after-hours crossing sessions cannot influence the matching price, but
rather are priced by unrelated order flow and transactions occurring
during the primary trading session, which are subject to former Rule
10a-1. Should we codify the exemptive

relief granted under former Rule 10a-1 as an exception from the
proposed uptick rule? Under current market conditions, do closing price
transactions create potentially manipulative incentives for broker-
dealers, such that they should not be granted an exception?
---------------------------------------------------------------------------

    \292\ See, e.g., letter re: Off-Hours Trading by the Amex,
[1991] Fed. Sec. L. Rep. (CCH) ] 79,802 (Aug. 5, 1991); letter re:
Operation of Off-Hours Trading by the NYSE, [1991] Fed. Sec. L. Rep.
(CCH) ] 79,736 (June 13, 1991).
    \293\ See, e.g., letter re: Burlington Capital Markets (July 1,
2003); letter re: Bear, Stearns & Co., Inc. (Jan. 19, 1996); Letter
re: AZX, Inc. (Nov. 15, 1995); letter re: Instinet Corporation
Crossing Network, [1992] Fed. Sec. L. Rep. (CCH) ] 76,290 (July 1,
1992); letter re: Portfolio System for Institutional Trading, [1991-
1992] Fed. Sec. L. Rep. (CCH) ] 76,097 (Dec. 31, 1991).
    \294\ The relief was generally subject to the conditions that:
(1) Short sales of a security in the after-hours matching session
shall not be effected at prices lower than the closing price of the
security on its primary exchange; (2) persons relying on these
exemptions shall not directly or indirectly effect any transactions
designed to affect the closing price on the primary exchange for any
security traded in the after-hours matching session; and (3)
transactions effected in the after-hours matching session shall not
be made for the purpose of creating actual, or apparent, active
trading in or otherwise affecting the price of any security.
---------------------------------------------------------------------------

    12. Proposed Rule 201(c)(1) would provide an exception to allow
short sales to be submitted without regard to the proposed uptick rule
if the seller owns the security sold and the seller intends to deliver
the security as soon as all restrictions on delivery have been removed.
Would this exception be necessary or appropriate? Should any conditions
or limitations apply to the exception? If so, why? If not, why not?
    13. Proposed Rule 201(c)(2) would provide an exception for any sale
by a broker-dealer of a covered security for an account in which it has
no interest pursuant to an order marked ``long.'' Would this exception
be appropriate or necessary? Should any conditions or limitations apply
to the exception? If so, why? If not, why not?
    14. Proposed Rule 201(c)(3) would provide a limited exception for
odd lot transactions. Would this exception be appropriate or necessary?
Should the proposed exception apply to all market makers in odd-lots or
should the exception be more limited? Would this exception be
susceptible to abuse? If so, how? Should all odd-lot transactions have
an exception from the proposed uptick rule? Would providing an
exception for all odd-lot transactions result in a risk of increased
short sale manipulation, e.g., would traders break up trades into 99
share odd-lots in order to avoid the proposed uptick rule?
    15. Proposed Rule 201(c)(4) would provide an exception from the
proposed uptick rule for certain bona fide domestic arbitrage
transactions. Should the exception be narrowed or broadened? If so,
state specifically why, and how it should be restructured in relation
to the purposes of the proposed uptick rule. Proposed Rule 201(c)(4)
parallels the exception in former Rule 10a-1(e)(7) which, consistent
with Regulation T at the time, referred to a ``special arbitrage
account.'' Because Regulation T no longer refers to a ``special
arbitrage account'' but instead refers to a ``good faith account'',
proposed Rule 201(c)(4) would also refer to a ``good faith account.''
Should proposed Rule 201(c)(4) refer to a ``special arbitrage account''
or a ``good faith account''? Please explain.
    16. Proposed Rule 201(c)(5) would provide an exception from the
proposed uptick rule for certain international arbitrage transactions.
Should the proposed exception be narrowed or broadened? If so, state
specifically why, and how it should be restructured in relation to the
purposes of the proposed uptick rule. Proposed Rule 201(c)(5) parallels
the exception in former Rule 10a-1(e)(8) which, consistent with
Regulation T at the time, referred to a ``special international
arbitrage account.'' Because Regulation T no longer refers to a
``special international arbitrage account'' but instead refers to a
``good faith account'', proposed Rule 201(c)(5) would also refer to a
``good faith account.'' Should proposed Rule 201(c)(5) refer to a
``special international arbitrage account'' or a ``good faith
account''? Please explain. Should proposed Rule 201(c)(4) be combined
with proposed Rule 201(c)(5)? If so, why? If not, why not? Should
depository receipts of a security be deemed the same security as the
security represented by such depository receipt? Why or why not?
    17. Proposed Rule 201(c)(6) would provide an exception from the
proposed uptick rule for sales by underwriters or syndicate members
participating in a distribution in connection with over-allotments and
lay-off sales by such persons in connection with a distribution of
securities. Under what circumstances would an underwriter or syndicate
member price an offering below the last sale? What market impact, if
any, would there be if the exception were extended to short sales below
the last sale?
    18. Would the exception for VWAP transactions contained in proposed
Rule 201(c)(7) be appropriate or necessary? Are all of the proposed
conditions appropriate, or should any be eliminated or modified? Should
any other conditions be added? Should the proposed exception be
modified in any way? If so, please explain. Would the following
exception be more appropriate for excepting transactions such as short
sale orders on a VWAP basis: The provisions of the proposed uptick rule
shall not apply to ``any short sale at a price that was not based,
directly or indirectly, on the quoted price of the covered security at
the time of execution and for which the material terms were not
reasonably determinable at the time the commitment to execute the order
was made''? \295\ If this exception would be more appropriate, please
explain why. What types of benchmark orders would such an exception
capture? If we were to use this alternative language, how should we
determine the ``material terms'' of the short sale? Should there be any
conditions on the use of this alternative proposed exception?
---------------------------------------------------------------------------

    \295\ See also 17 CFR 242.611(a)(7).
---------------------------------------------------------------------------

    19. Would the exception for transactions pursuant to certain
electronic trading systems that match buying and selling interest in
proposed Rule 201(c)(8) be appropriate? Should the proposed exception
be modified in any way? If so, please explain.
    20. Proposed Rule 201(c)(9) would provide an exception from the
proposed uptick rule for broker-dealers facilitating customer buy or
long sale orders on a riskless principal basis. Are the conditions set
forth in proposed Rule 201(c)(9) in connection with the ``riskless
principal'' exception appropriate? Should the conditions be narrowed or
broadened in any way? Please explain.
    21. Proposed Rule 201(c)(12) would provide for an exception from
the proposed uptick rule for short sales by registered market makers or
specialists publishing two-sided quotes to sell short to facilitate
customer market and marketable limit orders regardless of the last sale
price. Would this proposed exception be appropriate? Should additional
qualifications and/or conditions be placed on such a proposed
exception? If so, please describe any such qualifications and/or
conditions including the purpose of such qualifications and/or
conditions. Is this proposed exception necessary in highly liquid
securities where there is likely to be sufficient selling interest
without the specialist's or market maker's quote? Should this proposed
exception be limited in some way? Please explain.
    22. Should there be an exception specific to the daily opening of
trading at each trading center, particularly given that there are
multiple trading centers with non-synchronous opening auctions? Please
explain. Should there be an exception specific to the opening of
trading after a trading halt? Please explain. Should there be an
exception specific to short selling at the closing of trading at each
trading center? Please explain.
    23. Under the proposed uptick rule, short sales could not be
executed at a price below the last sale price of a security. In
addition, short sale orders could be executed at the last sale price
only if it is higher than the last different price for the security. Is
a one-cent trading increment appropriate for the proposed uptick rule?
Why or why not? If a higher increment is suggested, please describe
what impact such increment would have on short selling. What increment,
if any, would be tantamount to a ban on short selling?

Please provide empirical data in support of any arguments and/or
analyses.
    24. When the Commission repealed short sale price tests in 2007, it
also provided that no SRO could have or adopt its own short sale price
test. One reason for removing short sale price tests was the existence
of different types of prices tests (e.g., the tick test of Rule 10a-1
and the NASD bid test). Should the proposed uptick rule be an SRO rule?
Questions Regarding Circuit Breakers Generally
    1. The Commission believes that the erosion of investor confidence
and questions concerning the volatility in the securities markets
necessitate review of various alternatives with respect to short
selling restrictions. Would a short selling circuit breaker be more
appropriate than a market-wide short sale price test restriction in
current market conditions? If so, why? If not, why not? Would a short
selling circuit breaker provide more potential benefit to the market
than a market-wide short sale price test restriction? Please explain.
For example, would a short selling circuit breaker be a more
appropriate means for the Commission to achieve the objective of
helping to prevent short selling from being used as a tool to drive
down the market? Please explain. Would a short selling circuit breaker
rule help to address the Commission's concerns regarding investor
confidence? If so, why and how? If not, why not?
    2. Would implementation of a circuit breaker be less or more costly
than the implementation of a market-wide short sale price test
restriction? The proposed circuit breaker rules would, when triggered,
impose short selling restrictions for the trading day on which the
circuit breaker is triggered. Should the circuit breaker rules instead
impose short sale price tests for multiple days? How many days? Would
there be any additional costs associated with a circuit breaker that
persisted for multiple trading days? Would a circuit breaker that when
triggered imposed a temporary halt on short selling be more or less
costly than one that resulted in a short sale price test restriction?
Please explain. Would a short selling circuit breaker be generally
easier to implement in a Regulation NMS environment than a market-wide
short sale price test restriction such as the proposed modified uptick
rule, or the proposed uptick rule.
    3. To which securities should a short selling circuit breaker
apply? Should a short selling circuit breaker apply to all NMS stocks?
If so, why? If not, why not and to which securities should a short
selling circuit breaker apply? Should a short selling circuit breaker
also apply to securities traded over-the-counter?
    4. The Commission is seeking comment on the potential impacts of a
short selling circuit breaker on market function and efficiency. What
would be the impact of a short selling circuit breaker when triggered
on the liquidity of individual securities? What would be the impact of
a short selling circuit breaker on capital formation? What would be the
impact of a short selling circuit breaker on price discovery? Would
different circuit breaker alternatives have different impacts on
liquidity, capital formation and price discovery? Would a multiple day
circuit breaker pose any unique costs? Please explain.
    5. Would circuit breakers pose any unique issues related to the
daily opening of trading, the opening of trading after a trading halt,
or the closing of trading? Please explain.
    6. Should a short selling circuit breaker be limited in its
application to specific industry sectors that are historically
susceptible to extreme volatility or disproportionately high levels of
short selling? If so, why? If not, why not? If a circuit breaker should
be limited to apply only to certain sectors, what sectors should be
included? Please explain. For example, should a circuit breaker apply
only to the financial sector? If so, how should the financial sector be
defined for purposes of determining which issuers' securities are
subject to the circuit breaker thresholds? Please explain.
    7. Currently, the marketwide circuit breaker rules are SRO rules.
Should a short selling circuit breaker be a SRO rule or a Commission
rule? Who should be responsible for implementing a short selling
circuit breaker? Should trading centers be responsible for implementing
a short selling circuit breaker when triggered? Should any person
effecting a short sale be responsible for implementing a short selling
circuit breaker? Should market participants be responsible for
programming their own systems to prevent submission of a short sale
order in violation of the circuit breaker? Please explain.
    8. Who should be responsible for monitoring the price declines of
individual securities that may trigger the short selling circuit
breaker (e.g., broker-dealers, SROs)? Please explain. How should
information about the triggering of a circuit breaker in an individual
security be disseminated to the market? Who should be responsible for
disseminating that information? For example, the CMS is the primary
means of dissemination for the current SRO Circuit Breakers and
regulatory halts. Should the CMS be the primary means by which
participants are made aware that a short selling circuit breaker has
been triggered with respect to an individual security? Please explain.
Should the exchanges be responsible for publishing daily lists of the
individual securities subject to the restrictions of a short selling
circuit breaker? What cost would be associated with dissemination of
circuit breaker notifications and what entities would bear expense in
upgrading systems to ensure compliance with a short selling circuit
breaker? Please explain.
    9. What would be the advantages and disadvantages of a short
selling circuit breaker combined with a short selling halt versus those
of a short selling circuit breaker combined with short sale price test
restrictions? Please explain.
    10. What would be the advantages and disadvantages of short selling
circuit breakers in general? Please explain.
    11. To what extent would market participants' ability to create
short positions through the use of derivatives or other instruments
undermine the effectiveness of a short selling circuit breaker? If this
would occur, would it be more or less significant in the context of a
short selling circuit breaker as compared to a short sale price test
restriction? What effects would any increase in ``synthetic short
sales'' after a circuit breaker is reached during a rapid market
decline have on market volatility, liquidity, and price efficiency?
Would a short selling circuit breaker create an unlinking of equity
markets from derivatives market prices?
    12. Would a short selling circuit breaker result in exacerbated
downward pressure as the trigger was approached, creating a ``magnet
effect''? Would any such ``magnet effect'' differ between a circuit
breaker that when triggered imposed a short selling halt, and a circuit
breaker that when triggered imposed a short sale price test
restriction? Please explain and provide empirical data and analysis
where appropriate to support the explanation.
    13. Before determining whether to adopt a short selling circuit
breaker on a permanent basis, should we adopt a rule that would apply,
on a pilot basis, the operation of a short selling circuit breaker on
individual securities? If so, what variation of a short selling circuit
breaker should be applied on a pilot basis? Should the pilot circuit
breaker when triggered result in short selling halts in individual
securities, or rather should such a pilot circuit breaker impose short
sale price test restrictions

on individual securities? Please explain. Such an approach would allow
us to study the effects on, among other things, market volatility,
price efficiency, and liquidity during the recent changes in market
conditions. What would be other benefits of taking this approach? What
would be the costs of taking this approach? Would the costs associated
with programming systems to apply a short selling circuit breaker on
specified individual securities outweigh any benefits of having a
pilot? If we were to take this approach, how long would it take to
program systems to apply a short selling circuit breaker in specified
individual securities? Would it take longer or be more difficult to
implement a short selling circuit breaker that when triggered imposed
short selling halts? Would it take longer or be more difficult to
implement a short selling circuit breaker that when triggered imposed
short sale price test restrictions? Please explain. Similar to the
Pilot conducted immediately prior to the elimination of former Rule
10a-1, the securities that could be subject to the pilot could be
comprised of a subset of the Russell 3000 index, or such other
securities as necessary or appropriate in the public interest and
consistent with the protection of investors after giving due
consideration to the security's liquidity, volatility, market depth and
trading market. Would it be appropriate for such a pilot to be
comprised of a subset of the Russell 3000 index? How should the
securities that would comprise a pilot be selected? Please explain the
reasons for any suggested selection method. Such a pilot could remain
in effect for one or two years. Would a one or two year pilot be an
appropriate period of time? If so, why? If not, why not? Please provide
specific reasons to support any views in favor of establishing another
time period.
    14. In connection with the Pilot conducted immediately prior to our
elimination of former Rule 10a-1, SROs publicly released transactional
short selling data so that data would be available to the public to
encourage independent researchers to study the Pilot. If we were to
adopt a rule that would apply, on a pilot basis, a short selling
circuit breaker on individual securities, we would expect to make
information obtained during any such pilot publicly available. In
addition, we would expect SROs to again make data available to the
public during any such pilot. Would there be any costs associated with
making short selling data available to the public during the period of
a pilot? What would be the benefits of making such data available to
the public?
    15. The proposed circuit breaker rules would not be triggered if
there is a severe decline in the price of any NMS security within 30
minutes of the end of regular trading hours on any trading day. As
noted above, former NYSE Rule 80A provided that a circuit breaker would
not trigger program trading restrictions after 3:25 p.m., or
approximately 35 minutes before the close. Is 30 minutes an appropriate
time to limit the proposed circuit breaker rules? Is 35 minutes more
appropriate? At what point during the trading day would it be too
disruptive to implement a circuit breaker rule? Is a 30 minute period
sufficient to avoid major disruptions to the markets? Do thinly traded
NMS securities raise additional concerns? If a circuit breaker would
otherwise be triggered toward the end of the trading day, what
alternative short sale restriction would be helpful in addressing a
severe market decline in the price of a particular NMS security? Please
provide any data if available.
    16. Should a circuit breaker be based on an intra-day decline from
that day's opening price? For instance, should the circuit breaker be
triggered by a 10% decline from the opening price during regular
trading hours?
    17. As proposed, the proposed circuit breaker rules, once
triggered, would impose a short selling halt or a short sale price test
restriction in the individual security until the close of the
consolidated system.\296\ Should the short selling halt or short sale
price test restriction conclude at the end of regular trading hours
(which are from 9:30 a.m. until 4 p.m. EST)? \297\ Should we consider
extending the short selling halt or short sale price test, when
triggered, for a longer period of time? Should the halt be extended
until the opening of regular trading hours on the next trading day?
Please explain.
---------------------------------------------------------------------------

    \296\ See Sections III.A.3 and III.B.3. discussing the after-
hours trading with regard to the proposed modified uptick rule and
the proposed uptick rule, respectively.
    \297\ See supra note 274.
---------------------------------------------------------------------------

Questions Regarding Proposed Circuit Breaker Halt Rule
    1. If a short selling circuit breaker was to be imposed, should
short selling in individual securities be halted entirely during a
period of severe decline in the price of the security? If so, why? If
not, why not? Please explain.
    2. If short selling should be halted during periods of severe
decline in the price of an individual security, how should the decline
be measured? Should the decline be tied to a market index or the price
of an individual security? Should illiquidity in the market for an
individual security be a factor in measuring a decline in the price of
a security for purposes of determining whether to halt short selling in
a particular security? Please explain.
    3. If short selling should be halted during periods of severe
decline in the price of an individual security, on what price should
the decline be based? Should the decline be based on the previous day's
closing price? If the decline is measured by the prior day's closing
price at the end of regular trading hours, should it be based on the
closing price reported in the consolidated system, or some other widely
disseminated price? Please explain.
    4. The proposed circuit breaker rules would impose a short sale
halt on any security that declines in price 10% or more relative to the
prior day's closing price for that security. We note that a low trigger
level may result in more securities becoming subject to a halt or some
securities becoming subject to a halt more frequently, resulting in
potential increases in costs, decreases in liquidity, and decreases in
market quality for the affected security. Also, the impact of a lower
trigger level may be greater for thinly traded securities and higher
volatility securities than for other securities. However, if a high
level is established, more securities may face severe price declines
for longer periods before a halt is imposed. This also may affect
thinly traded securities more than other securities. Is 10% an
appropriate trigger for a circuit breaker rule that results in short
sale halt? If not, at what level should a halt take place? Should the
trigger be different for thinly traded or higher volatility securities?
Should the halt take place after a 10% decline, or a higher/lower
level? Should the initial halt take place after a 5% decline, or a 15%
decline, or a 20% decline, or some other decline? Please explain.
Should the decline be measured as a percentage of the individual
security's price or should another value be used? Please explain. For
example, should the decline measurement for the circuit breaker
threshold be based on the dollar amount of the decline, i.e., $5? If
so, how should the thresholds be determined in relation to the price
level of the individual stock? Should the percentage decline be linked
to the stock's price level such that stocks with lower prices must
experience a greater percentage decline before the circuit breaker is
triggered? If so, what thresholds are appropriate? Please explain. If
the percentage decline is linked to price level, what additional

operational burdens would be experienced if stock values were required
to be continuously monitored due to frequent fluctuation? Please
explain. What costs and benefits may accrue from having the decline
based on a dollar amount rather than a value derived from a percentage
of the share value? What potential problems or benefits may arise from
pegging a short selling circuit breaker threshold to a decline in a
stock's dollar amount? Please explain.
    5. The proposed circuit breaker halt rule would impose a short
selling halt for the trading day following the triggering of the
circuit breaker. Is this an appropriate length of time? If so, why? If
not, why not, and how long should the halt persist? Should the length
of the halt vary depending on the time during the day that the circuit
breaker is triggered? \298\ We note that increasing the length of a
halt to an additional day or multiple additional days may increase
costs, reduce market quality, and reduce liquidity in that security.
This may affect thinly traded securities and higher volatility
securities more than other securities. However, decreasing the period
of time to less than a trading day, such as limiting the halt to an
hour or a few hours following the trigger, may reduce the effectiveness
of the halt. Would it be more beneficial for a 10% intraday decline to
trigger a periodic halt in short selling rather than a halt for the
trading day? Should it result in a multiple day halt in short selling?
Please explain. How disruptive to normal trading would a multiple day
halt be compared to a halt for one trading day? If short selling is
halted after the circuit breaker is triggered in the wake of a 10%
intraday decline, and the value of the stock continues to decline
throughout the day to the point where it is down 20% at closing, should
short selling be allowed to resume the following trading day? If so,
why? If not, why not? Please explain. Should a 20% or greater intraday
decline result in a halt on short selling for multiple trading days?
For example, would it be appropriate for a 20% intraday decline on the
day the circuit breaker is triggered to result in a 3-day halt in short
selling, a 5-day halt in short selling, or a 10-day halt in short
selling? Specifically, what length of a short selling halt would be
appropriate for the various levels of decline in excess of 10%? Should
volatility of the individual security be considered? Please explain.
---------------------------------------------------------------------------

    \298\ See 1998 Release supra note 230 and accompanying text
(discussing that SRO Circuit Breaker rules vary the length of the
trading halt depending on the time of day the halt is triggered and
the amount of the decline triggering the halt).
---------------------------------------------------------------------------

    6. Should different stocks be subject to different levels of
decline before the circuit breaker is triggered? For example, should a
higher trigger level apply to more liquid stocks than to less liquid
stocks? Should different trigger levels be based on market
capitalization or volatility of individual securities? If so, what
parameters should apply and what criteria should be used to determine
those parameters? Please explain.
    7. Would a circuit breaker that when triggered halts short selling
in a particular security result in increased selling pressure by short
sellers in anticipation of the halt for securities experiencing large
price declines? Please explain and provide data and analysis to support
the explanation. What provisions, if any, would facilitate an orderly
re-entry of a security after a halt on short selling? Please explain.
    8. What benefits would be associated with a short selling circuit
breaker that when triggered imposes short selling halts? Could such a
short selling halt help stabilize the market for the individual
security? If so, why? If not, why not? Could the short selling halt
benefit investors by allowing the market to ``cool off'' with respect
to that individual security? Please explain. Could a temporary short
selling halt imposed by a circuit breaker result in an increase in
investor confidence? Please explain.
    9. What costs would be associated with implementing a short selling
circuit breaker for individual securities that when triggered imposed a
halt on short selling? Please explain. What would it cost to update
systems in a manner necessary to ensure compliance with such a circuit
breaker? Would the expenditure necessary to ensure compliance be
primarily an ``up-front'' cost? Would the expenditure necessary to
ensure compliance require long-term investment? Please explain. What
technological challenges would be encountered in updating systems to
ensure compliance with a short selling circuit breaker that applied to
individual securities and when triggered imposed halts on short
selling? Please explain. How long would it take to update systems in a
manner that ensured compliance with such a short selling circuit
breaker? Please explain.
    10. Should a short selling circuit breaker that when triggered
imposed a halt on short selling contain exceptions? If so, why? If not,
why not? Please explain. Should the circuit breaker contain an
exception for bona fide market making? If so, why? If not, why not?
Should such an exception apply to: Registered market makers, block
positioners, other market makers obligated to quote in the over-the-
counter market, in each case that are selling short the individual
securities subject to the short selling halt? If so, why? If not, why
not, and what entities should be excepted under a bona fide market
making exception? Should the circuit breaker provide an exception that
would allow short sales that occur as a result of automatic exercise or
assignment of an equity option held prior to the effectiveness of the
short selling halt due to expiration of the option? If so, why? If not,
why not? Please explain. Should the circuit breaker contain an
exception for options market makers selling short as part of bona fide
market making and hedging activities related directly to bona fide
market making in derivatives on the individual security subject to the
halt? If so, why? If not, why not? Please explain. The circuit breaker
halt rule as proposed includes an exception for hedging activity by
market makers engaged in bona fide market making, but it does not
provide an exception for hedging of convertible securities or for
convertible arbitrage activities by persons who are not market makers
engaged in bona fide market making activities at the time of the short
sale. Should we consider exceptions for convertible arbitrage and/or
the hedging of convertible securities by persons who are not market
makers engaged in bona fide market making? Would such exceptions reduce
the effectiveness of the rule? How often would this exception be used?
Please explain and provide empirical data to support explanations/
analyses.
    11. What other exceptions should be considered or included in such
a circuit breaker? Please explain.
    12. What would be an appropriate implementation period for the
circuit breaker? Would a three-month implementation period be
appropriate for a circuit breaker that when triggered imposed short
selling halts on individual securities? Is more or less time necessary?
Please explain.
    13. Should the exception for owned securities be limited to Rule
144 securities, similar to the Short Sale Ban, or expanded to include
other securities that a seller is deemed to own but are not included
under Rule 200(b) of Regulation SHO?
    14. We are proposing to include an exception for marker makers,
including over-the-counter market makers, that sell short as part of
bona fide market making and hedging activity directly related to bona
fide market making in

derivative securities based on covered securities or exchange traded
funds and exchange traded notes of which covered securities are a
component. Similar to the Short Sale Ban, should we also provide that
this exception would not apply to any market maker that knows that the
customer's or counterparty's transaction would result in the customer
or counterparty establishing or increasing an economic net short
position (i.e., through actual positions, derivatives, or otherwise) in
a covered security? Do the same concerns apply for a short sale halt
that would only be in place for one trading day? What if the proposed
circuit breaker halt rule prohibits short selling in a particular
security for longer than one trading day when triggered? How long of a
period would necessitate including such a provision?
    15. Should the proposed circuit breaker halt rule be adopted in
addition to a permanent, marketwide short sale price test restriction
rule? Thus, while a short sale price test restriction rule would be in
place as a permanent, marketwide rule, a circuit breaker would also
trigger a short selling halt in any security that suffers a severe
price decline.
    16. Should the proposed circuit breaker halt rule apply to non-NMS
securities? Would a 10% trigger level cause some non-NMS securities to
be halted too frequently? Should we consider a different trigger for
non-NMS securities?
    17. As an alternative to a circuit breaker rule that prohibits
short selling at any price after the trigger price is reached, should
we consider instead a price limit rule that would prohibit short
selling in a particular NMS security at a price lower than 10% below
the prior day's close? Unlike a circuit breaker rule, a price limit
rule would continue to allow short selling at prices above the limit
price after the limit has been reached. Would 10% be the appropriate
limit? Should it be higher or lower? Please explain.
    18. We propose including an exception for sales of securities that
the seller is deemed to own pursuant to Rule 200(b) of Regulation SHO
because these are sales of owned securities. Are broker-dealers able to
identify short sales as sales of Rule 200(b) owned securities on an
intra-day basis so that the exception would be useful when a circuit
breaker is triggered?
Questions Regarding Circuit Breaker Price Test Rule
    1. Should a short selling circuit breaker impose a short sale price
test restriction on individual equity securities, rather than halt
short selling for individual securities when triggered? For example,
following a 10% decline in a security's price, as measured from the
prior day's closing price, should a circuit breaker result in a
temporary short sale price test restriction in the form of the proposed
modified uptick rule or the proposed uptick rule? Please explain.
    2. Should we consider a circuit breaker rule that, when triggered,
would prohibit short selling in a particular NMS security on a downbid
unless the short sale is effected at a price that is more than 10%
greater than the prior day's closing price? Would 10% be an appropriate
requirement? Should it be higher or lower? Should we have different
percentages for different types of securities (e.g., based on
volatility, market capitalization, volume traded)? Please explain.
    3. The proposed circuit breaker rules would impose a short sale
price test on any security that suffers a decline in price of 10% or
more relative to the prior day's closing price for that security. We
note that a low trigger level may result in more securities becoming
subject to a short sale price test or some securities becoming subject
to a short sale price test more frequently, resulting in potential
increases in costs, decreases in liquidity, and decreases in market
quality for the affected security. Also, the impact of a lower trigger
level may be greater for thinly traded securities or higher volatility
securities than for other securities. However, if a high level is
established, more securities may face severe price declines for longer
periods before the short sale price test is imposed. This also may
affect thinly traded securities more than other securities. Unlike a
circuit breaker that results in a halt, however, a circuit breaker that
results in a short sale price test would not prohibit short selling but
would restrict short selling to a rising market. Also, the short sale
price test would be limited to a trading unit increment, which may
result in fewer costs and reduced loss of liquidity than a short sale
halt. Is 10% an appropriate trigger for a circuit breaker rule that
results in short sale price test? If not, at what percentage trigger
level should short sale price test restrictions be imposed? Would a 10%
trigger level be appropriate? Would a higher or lower trigger level be
appropriate? Should the trigger be different for thinly traded or
higher volatility stocks? Should we consider market capitalization in
determining different trigger levels?
    4. What short sale price test restrictions would be most
appropriate in combination with a short selling circuit breaker? Should
the circuit breaker when triggered result in a short sale price test
based on the national best bid, similar to the proposed modified uptick
rule? Please explain. Should the circuit breaker when triggered result
in a short sale price test based on the last sale price, similar to the
proposed uptick rule? Please explain. Should the circuit breaker when
triggered result in a short sale price test that requires short sale
orders to be initiated only at a price above the highest prevailing
national best bid by posting a quote for a short sale order above the
national bid? If so, why? If not, why not? If the circuit breaker when
triggered results in a short sale price test restriction based on the
national best bid (the proposed modified uptick rule), should short
selling be restricted to a specific increment above the current
national best bid, such as one cent above the national best bid? Or
should a higher or lower increment apply? Please explain. If a specific
increment is suggested, what impact would such an increment have on
short selling in the individual security? Please explain. What
increment, if any, would be tantamount to a halt on short selling
during the period in which the circuit breaker is in effect? Please
explain and provide empirical data and analysis in support of any
arguments and/or analyses.
    5. The proposed circuit breaker halt rule would impose a short sale
price test for the trading day following the triggering of the circuit
breaker. Is this an appropriate length of time? If so, why? If not, why
not, and how long should the short sale price test persist? We note
that increasing the length of a halt to an additional days or multiple
additional days may increase costs, reduce market quality, and reduce
liquidity in that security. This may affect thinly traded securities or
higher volatility securities more than other securities. However,
decreasing the period of time to less than the trading day, such as
limiting the short sale price test to an hour or a few hours following
the trigger, may reduce the effectiveness of the short sale price test.
Would it be more beneficial for a 10% intraday decline to trigger a
short sale price test in short selling for a few hours rather than for
the trading day? Should it result in a multiple day short sale price
test? Please explain. How disruptive to normal trading would a multiple
day short sale price test be compared to a halt for one trading day? If
short selling is restricted by a price test after the circuit breaker
is triggered in the wake of a 10% intraday decline, and the value of
the stock continues to decline

throughout the day to the point where it is down 20% at closing, should
short selling be allowed to resume the following trading day? If so,
why? If not, why not? Please explain. Should a 20% or greater intraday
decline result in a short sale price test for multiple trading days?
For example, would it be appropriate for a 20% intraday decline on the
day the circuit breaker is triggered to result in a 3-day price test
restriction in short selling, a 5-day restriction on short selling, or
a 10-day restriction on short selling? Specifically, what length of a
restriction would be appropriate for the various levels of decline in
excess of 10%? Should we consider a different period for higher
volatility stocks? Should we consider market capitalization in
determining different trigger levels? Please explain.
    6. What benefits would be associated with a short selling circuit
breaker that when triggered imposed short sale price test restrictions?
Could the short sale price test restrictions help stabilize the market
for the individual security? If so, why? If not, why not? Could the
short sale price test restrictions benefit investors by allowing the
market to ``cool off'' with respect to that individual security? Please
explain. Could a circuit breaker that when triggered imposes short sale
price test restrictions result in an increase in investor confidence?
Please explain.
    7. What are the benefits, if any, of a circuit breaker that when
triggered imposes short sale price test restrictions, versus a
permanent, market-wide short sale price test such as the modified
uptick rule or the proposed uptick rule? Please explain and support
explanations with data and analysis where appropriate.
    8. What costs would be associated with implementing a short selling
circuit breaker that when triggered imposed short sale price test
restrictions? Please explain. What would be the degree of financial
expenditure involved in updating systems in a manner necessary to
ensure compliance with such a circuit breaker? Would the expenditure
necessary to ensure compliance be primarily an ``up-front'' cost? Would
the expenditure necessary to ensure compliance require long-term
investment? Please explain. How would the costs of a circuit breaker
that when triggered imposes short sale price test restrictions compare
with the costs of a permanent short sale price test such as the
proposed modified uptick rule or the proposed uptick rule? Please
explain.
    9. What technological challenges would be encountered in updating
systems to ensure compliance with a short selling circuit breaker that
when triggered imposed short sale price test restrictions on individual
securities? Please explain. How long would it take to update systems in
a manner that ensured compliance? Please explain. Would a short selling
circuit breaker that when triggered imposed short sale price test
restrictions impede the efficient functioning of the equity markets? If
so, why? If not, why not? Please explain. Are there any other
operational challenges that may arise from implementing a short selling
circuit breaker that when triggered imposed short sale price test
restrictions? Please explain. Would the operational challenges
presented impede the effectiveness of such a short selling circuit
breaker? Please explain.
    10. Are there other short sale price test restrictions that should
be considered in combination with a short selling circuit breaker?
Please explain.
    11. Should a circuit breaker that when triggered imposed short sale
price test restrictions include exceptions? Please explain. If such a
circuit breaker is based on the proposed modified uptick rule, should
it contain the same exceptions as those contemplated in the proposed
modified uptick rule? If so, why? If not, why not? If other or
different exceptions are warranted for such a circuit breaker, what
should they be? Please explain. If a circuit breaker is based on the
proposed uptick rule, should it contain the same exceptions as those
contemplated in the proposed uptick rule? If so, why? If not, why not?
If other or different exceptions are warranted for such a circuit
breaker, what should they be? Please explain.
    12. Should a circuit breaker that when triggered imposed short sale
price test restrictions contain a general market maker exception? If
so, why? If not, why not? If so, should the market maker exemption be
limited to registered market makers, exchange-based market makers, or
apply to over-the-counter market makers as well? Should upstairs
customer facilitation be exempted from a short selling circuit breaker?
Should parties involved in delta neutral hedging be excepted from a
short selling circuit breaker? Should parties involved with index
arbitrage be excepted from a short selling circuit breaker that when
triggered imposed short sale price test restrictions? What other
exceptions may be appropriate? Please explain.
    13. What implementation period would be necessary for the circuit
breaker? Would a three month implementation period be appropriate for a
circuit breaker that when triggered imposed short sale price test
restrictions on individual securities? Is more or less time necessary?
Please explain.
    14. One commenter suggested a circuit breaker that, when triggered,
would prohibit any person from selling short except at an upbid.\299\
Should a circuit breaker that triggers a bid-based price restriction
for a particular security be expanded to prohibit short sales both on a
downbid and at the bid? Thus, once triggered, short sales in the
particular security could only be executed or displayed, or effected,
at an upbid. We note that such a rule would be stricter than the
proposed circuit breaker modified uptick rule, which would permit short
sales at the bid unless the bid is on a downbid. As a result, this
proposal may result in additional costs, reduce liquidity, and reduce
market quality. However, this proposed rule may also establish a longer
``break'' before short selling resumes. Would it be appropriate to
change the proposed circuit breaker modified uptick rule to require
that, following the trigger of the circuit breaker, short sales could
only be effected at an upbid? Please explain why this may be more
appropriate.
---------------------------------------------------------------------------

    \299\ See National Exchanges Letter, supra note 63.
---------------------------------------------------------------------------

    15. Would it be more appropriate for the resulting price test to be
based on a policies and procedures rule or a straight prohibition? For
instance, a circuit breaker that triggers a policies and procedures
rule would require trading centers to incur immediate upfront costs to
establish policies and procedures that would be implemented and
enforced once a circuit breaker is triggered for a particular security.
Would a circuit breaker that triggers a straight prohibition incur
fewer costs? Please explain.

V. Marking

    Rule 200(g) of Regulation SHO provides that a broker-dealer must
mark all sell orders of any security as ``long'' or ``short.'' \300\ As
initially adopted, Regulation SHO included an additional marking
requirement of ``short exempt'' applicable to short sale orders if the
seller was ``relying on an exception from the tick test of 17 CFR
240.10a-1, or any short sale price test of any exchange or national
securities association.'' \301\ We adopted amendments to Rule 200(g) of
Regulation SHO to remove the ``short exempt'' marking requirement in
conjunction with our elimination of former Rule 10a-1.\302\
---------------------------------------------------------------------------

    \300\ See 17 CFR 242.200(g).
    \301\ See 2004 Regulation SHO Adopting Release, 69 FR 48008.
    \302\ See 2007 Price Test Adopting Release, 72 FR 36348.

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

    In conjunction with the proposed amendments to Rule 201 of
Regulation SHO to add a short sale price test or a circuit breaker
rule, we are proposing to amend Rule 200(g) of Regulation SHO to again
impose a ``short exempt'' marking requirement. Specifically, proposed
Rule 200(g) would provide that ``[a] broker or dealer must mark all
sell orders of any equity security as ``long,'' ``short,'' or ``short
exempt.'' \303\
---------------------------------------------------------------------------

    \303\ See proposed Rule 200(g) of the proposed modified uptick
rule and of the proposed uptick rule.
---------------------------------------------------------------------------

    In addition, proposed Rule 200(g)(2) of the proposed modified
uptick rule would provide that a sale order shall be marked ``short
exempt'' only if the provisions of paragraph (c) or (d) of proposed
Rule 201 are met.\304\ This ``short exempt'' marking requirement would
provide a record that a broker-dealer is availing itself of the
provisions of paragraph (c) or (d) of the proposed modified uptick
rule.
---------------------------------------------------------------------------

    \304\ See proposed Rule 200(g)(2) of the proposed modified
uptick rule.
---------------------------------------------------------------------------

    Proposed Rule 200(g)(2) of the proposed uptick rule or the proposed
circuit breaker rules would provide that a sale order shall be marked
``short exempt'' only if the seller is relying on an exception from the
price test of Sec.  242.201.\305\ This ``short exempt'' marking
requirement would provide a record that short sellers are availing
themselves of the various exceptions to the application of the
restrictions of the proposed uptick rule.\306\
---------------------------------------------------------------------------

    \305\ See Proposed Rule 200(g)(2).
    \306\ The improper marking of a short sale order as ``short
exempt'' by the broker-dealer would be a violation of proposed Rule
200(g)(2) and Exchange Act Section 10(a). In addition, the improper
marking of a short sale order as ``short exempt'' could, in some
circumstances, result in liability under the antifraud provisions of
the federal securities laws; the liability of the broker-dealer that
marked the order, and of the trading center that displayed or
executed the order, would turn on whether those entities acted with
the mental state required under the applicable antifraud provisions.
---------------------------------------------------------------------------

    The records provided pursuant to the ``short exempt'' marking
requirements of proposed Rule 200(g) of the proposed short sale price
test rules and the proposed circuit breaker rules would aid
surveillance by SROs and the Commission for compliance with the
provisions of either of those short sale price test restrictions. In
addition, if the Commission were to adopt a policies and procedures
approach, such as is proposed in conjunction with the proposed modified
uptick rule, the proposed ``short exempt'' marking requirement would
provide an indication to a trading center regarding whether it must
execute or display a short sale order with regard to whether the short
sale order is at a down-bid price.
    If we were to adopt the proposed ``short exempt'' marking
requirement of proposed Rule 200(g) of the proposed short sale price
test rules or the proposed circuit breaker rules, we are proposing an
implementation period under which market participants would have to
comply with this requirement three months following the effective date
of the proposed marking requirement. We believe that this proposed
implementation period would provide market participants with sufficient
time in which to modify their systems and procedures in order to comply
with the proposed marking requirements. We realize, however, that a
shorter or longer implementation period may be manageable or
preferable. Thus, we seek specific comment as to what length of
implementation period would be necessary or appropriate, and why, such
that market participants would be able to meet the proposed marking
requirements, if adopted.

Request for Comment

    We seek comment generally on all aspects of the proposed amendment
to Rule 200(g) of Regulation SHO. In addition, we seek comment on the
following:
    1. What type of costs, if any, would be associated with requiring
sell orders to be marked ``short exempt'' when relying on an exception
under proposed Rule 201? What types of costs, if any, would be
associated with not requiring sell orders to be marked ``short exempt''
when relying on an exception under proposed Rule 201?
    2. Should the proposed rule require a broker-dealer marking a sell
order ``short exempt'' to identify the specific provision on which the
broker-dealer is relying in marking the order ``short exempt''? If not,
why not?
    3. What would be a sufficient implementation period for making any
systems changes necessary to allow sell orders to be marked ``short
exempt''?
    4. Please describe any anticipated difficulties in complying with a
``short exempt'' marking requirement.
    5. The ``short exempt'' marking has historically been used only for
short sales that are excepted from a short sale price test. For
instance, the ``short exempt'' marking was not available for short
sales that were excepted from the Regulation SHO locate requirement of
Rule 203(b). We are, however, proposing to require short sales that are
excepted from the proposed circuit breaker halt rule, when triggered,
to be marked ``short exempt.'' Would a ``short exempt'' marking be
needed for the proposed circuit break rules if circuit breakers operate
in place of short sale price test restrictions?

VI. Overseas Transactions

    In connection with former Rule 10a-1, the Commission consistently
took the position that the rule applied to trades in securities subject
to that rule where the trade was ``agreed to'' in the U.S., but booked
overseas.\307\ In addition, in the 2004 Regulation SHO Adopting Release
we stated that any broker-dealer using the United States jurisdictional
means to effect short sales in securities traded in the United States
would be subject to Regulation SHO, regardless of whether the broker-
dealer is registered with the Commission or relying on an exemption
from registration.\308\ For example, a U.S. money manager decides to
sell a block of 500,000 shares in an NMS stock. The money manager
negotiates a price with a U.S. broker-dealer, who sends the order
ticket to its foreign trading desk for execution. In our view, this
trade occurred in the United States as much as if the trade had been
executed by the broker-dealer

at a U.S. trading desk. Under either the proposed short sale price test
rules or the proposed circuit breaker rules, if the short sale is
agreed to in the U.S., it must be effected in accordance with the
requirements of those proposed rules, unless otherwise excepted.
---------------------------------------------------------------------------

    \307\ See Securities Exchange Act Release No. 27938 (Apr. 23,
1990), 55 FR 17949 (Apr. 30, 1990) (stating that the no-action
position exempting certain index arbitrage sales from former Rule
10a-1 would not apply to an index arbitrage position that was
established in an offshore transaction unless the holder acquired
the securities from a seller that acted in compliance with former
Rule 10a-1 or other comparable provision of foreign law). See also
Securities Exchange Act Release No. 21958 (Apr. 18, 1985), 50 FR
16302 (Apr. 25, 1985) at n. 48 (stating that, ``Rule 10a-1 does not
contain any exemption for short sales effected in international
markets.''). The question of whether a particular transaction
negotiated in the U.S. but nominally executed abroad by a foreign
affiliate is a domestic trade for U.S. regulatory purposes was also
addressed in the Commission's Order concerning Wunsch Auction
Systems, Inc. (WASI). The Commission stated its belief that ``trades
negotiated in the U.S. on a U.S. exchange are domestic, not foreign
trades. The fact that the trade may be time-stamped in London for
purposes of avoiding an SRO rule does not in our view affect the
obligation of WASI and BT Brokerage to maintain a complete record of
such trades and report them as U.S. trades to U.S. regulatory and
self-regulatory authorities and, where applicable, to U.S. reporting
systems.'' See Securities Exchange Act Release No. 28899 (Feb. 20,
1991), 56 FR 8377 (Feb. 28, 1991). In what is commonly referred to
as the ``fax market,'' a U.S. broker-dealer acting as principal for
its customer negotiates and agrees to the terms of a trade in the
U.S., but transmits or faxes the terms overseas to be ``printed'' on
the books of a foreign office. This practice of ``booking'' trades
overseas was analyzed in depth in the Division of Market
Regulation's Market 2000 Report. In the Report, the Division
estimated that at that time approximately 7 million shares a day in
NYSE stocks were faxed overseas, and many of these trades were
nominally ``executed'' in the London over-the-counter market. See
Division of Market Regulation, SEC, Market 2000: An Examination of
Current Equity Market Developments (Jan. 1994), Study VII, p. 2.
    \308\ See 2004 Regulation SHO Adopting Release, 69 FR at 48104,
n. 54.
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Request for Comment

    1. Would the proposed modified uptick rule, proposed uptick rule,
or circuit breaker rules, if adopted, result in sellers transacting
short sales in foreign markets where they would not be subject to a
short sale price test rather than in U.S. markets? If so, please
explain.
    2. For short sales agreed to in the United States and executed
overseas, would the time the short sale is agreed to in the U.S. be the
appropriate time to be used to establish the price against which the
proposed uptick rule, proposed modified uptick rule, or circuit breaker
rule, would be determined?
    3. Please identify any challenges or difficulties that could arise
in applying the proposed modified uptick rule or proposed uptick rule
to short sales agreed to in the United States and executed overseas?
    4. Would the proposed modified uptick rule, proposed uptick rule,
circuit breaker proposals, or any other restriction on short sales, be
easier to implement and enforce for short sales agreed to in the United
States but executed overseas? Please explain.
    5. What would be the costs and benefits of applying the proposed
modified uptick rule, proposed uptick rule, the alternative circuit
breaker rules, or any other restriction on short sales to short sales
agreed to in the United States and executed overseas?

VII. Exemptive Procedures

    The proposed alternative short sale price test rules and the
alternative circuit breaker rules would establish procedures for the
Commission, upon written request or its own motion, to grant an
exemption from the rules' provisions, either unconditionally or on
specified terms and conditions, if the Commission determines that such
exemption is necessary or appropriate in the public interest and is
consistent with the protection of investors.\309\ Pursuant to this
provision, we would consider and act upon appropriate requests for
relief from the proposed short sale price tests' provisions and the
proposed short sale circuit breakers' provisions, if adopted, and would
consider the particular facts and circumstances relevant to each such
request and any appropriate conditions to be imposed as part of the
exemption. We solicit comment regarding including a provision for
exemptive procedures in the proposed short sale price test rules and
the proposed circuit breaker rules.
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    \309\ See proposed Rule 201(e) of the proposed uptick rule;
proposed Rule 201(f) of the proposed modified uptick rule; proposed
Rule 201(g) of the proposed circuit breaker halt rule and proposed
circuit breaker uptick rule; and proposed Rule 201(h) of the
proposed circuit breaker modified uptick rule.
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VIII. Paperwork Reduction Act

A. Background

    Certain provisions of the proposed amendments to Regulation SHO
would impose new ``collection of information'' requirements within the
meaning of the Paperwork Reduction Act of 1995 (``PRA'').\310\ We have
submitted the collection of information to OMB for review and approval
in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. An agency may
not conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a currently valid OMB
control number. OMB has not yet assigned a control number to the new
collection of information.
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    \310\ 44 U.S.C. 3501 et seq.
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    We are proposing amendments to Rules 201 and 200(g) of Regulation
SHO under the Exchange Act. The proposed amendments to Rule 201 include
two alternative price tests that would impose restrictions on the
prices at which certain securities would be able to be sold short.\311\
The first alternative short sale price test would be a proposed
modified uptick rule. The second alternative short sale price test
would be a proposed uptick rule. We are also proposing alternative
circuit breaker rules that would establish limitations on short selling
in a particular security during severe market declines in the price of
that security.\312\ The first alternative circuit breaker rule would be
the proposed circuit breaker halt rule. The second alternative circuit
breaker rule would be the proposed circuit breaker modified uptick
rule. The third alternative circuit breaker rule would be the proposed
circuit breaker uptick rule. In addition, we are proposing to amend
Rule 200(g) of Regulation SHO to impose a ``short exempt'' marking
requirement and to also require that a broker-dealer mark a sell order
``short exempt'' only if the provisions in proposed Rule 201(c) or (d)
of the proposed modified uptick rule (or the proposed circuit breaker
modified uptick rule) are met, or if a seller is relying on an
exception in proposed Rule 201(c) of the proposed uptick rule (or the
proposed circuit breaker uptick rule), or if a seller is relying on an
exception in proposed Rule 201(c) of the proposed circuit breaker halt
rule.\313\
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    \311\ See proposed Rule 201.
    \312\ See proposed Rule 201.
    \313\ See proposed Rules 200(g) and 200(g)(2).
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B. Summary

    As detailed below, several provisions under the proposed amendments
to Regulation SHO would impose a new ``collection of information''
within the meaning of the PRA.
1. Policies and Procedures Requirement Under Proposed Modified Uptick
Rule
    The proposed modified uptick rule would impose a new ``collection
of information'' within the meaning of the PRA.\314\ 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 a short sale order of a covered security at a
down-bid price.\315\ In addition, a trading center would be required to
have policies and procedures reasonably designed to permit the
execution or display of a short sale order of a covered security marked
``short exempt'' without regard to whether the order is at a down-bid
price.\316\ Thus, upon acceptance of a short sale order, a trading
center's policies and procedures would have to be reasonably designed
to permit the trading center to be able to determine whether or not the
short sale order is priced in accordance with the provisions of
proposed Rule 201(b)(1) and to recognize when an order is marked
``short exempt'' such that the trading center's policies and procedures
do not prevent the execution or display of such orders on a down-bid
price.\317\
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    \314\ The discussion of the PRA as it applies to the proposed
modified uptick rule applies equally to the proposed circuit breaker
modified uptick rule.
    \315\ Proposed Rule 201(b)(1). A ``down bid'' is defined 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.'' Proposed Rule 201(a)(2).
    \316\ See proposed Rule 201(b)(1)(ii). See also Section V,
above, regarding the proposed ``short exempt'' marking requirement.
    \317\ See proposed Rule 200(g)(2). The broker-dealer marking the
order ``short exempt'' would have responsibility for being able to
identify on which provision to the proposed modified uptick rule it
was relying in marking the order ``short exempt.''
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    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. As mentioned above, a trading center would need to have policies
and procedures governing how to recognize and handle orders that a
trading center receives as marked ``short exempt'' pursuant to proposed
Rule 200(g)(2).\318\ A trading center's policies and procedures also
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 would be required to implement reasonable steps in its
policies and procedures to monitor such latencies on a continuing basis
and take appropriate steps to address a problem should one develop.
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    \318\ Id.
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    A trading center would also need to take such steps as would be
necessary to enable it to enforce its policies and procedures
effectively. As part of its written policies and procedures, a trading
center also would be required to regularly surveil to ascertain the
effectiveness of its policies and procedures and take prompt remedial
steps.\319\ The nature and extent of the policies and procedures that a
trading center would be required to establish to comply with these
requirements would depend upon the type, size, and nature of the
trading center.
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    \319\ 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. See proposed Rule 201(b)(2). We note that Rule 611(a)(2)
of Regulation NMS contains a similar provision for trading centers.
See 17 CFR 242.611(a)(2).
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2. Identification of Short Sale Orders and Policies and Procedures
Requirement Under the Proposed ``Broker-Dealer'' and ``Riskless
Principal'' Provisions
    The proposed modified uptick rule contains a ``broker-dealer''
provision that would require a new ``collection of information'' under
the PRA. Proposed Rule 201(c)(1) 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 has
identified that the short sale order is not on a down-bid price at the
time of submission of the order to the trading center.\320\ This
provision would require a new ``collection of information'' in that a
broker-dealer marking an order ``short exempt'' under proposed Rule
201(c)(1) must identify both a short sale order as priced in accordance
with the requirements of proposed Rule 201(c)(1) and establish,
maintain, and enforce written policies and procedures reasonably
designed to prevent the incorrect identification of orders as being
priced in accordance with the requirements of proposed Rule
201(c)(1).\321\
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    \320\ See proposed Rule 201(c)(1).
    \321\ See proposed Rule 201(c)(1). As part of its written
policies and procedures, a broker-dealer also would be required to
regularly surveil to ascertain the effectiveness of its policies and
procedures and take prompt remedial steps. See proposed Rule
201(c)(2). This provision is intended to reinforce the ongoing
maintenance and enforcement requirements of the provision contained
in proposed Rule 201(c)(1) by explicitly assigning an affirmative
responsibility to broker-dealers to surveil to ascertain the
effectiveness of their policies and procedures. See id.
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    While the proposed uptick rule itself does not contain a
``collection of information'' requirement within the meaning of the
PRA, the proposed uptick rule does contain a ``riskless principal''
exception that would require a new ``collection of information'' under
the PRA.\322\ The proposed modified uptick rule also contains a
``riskless principal'' provision that would require a new ``collection
of information'' under the PRA. Specifically, proposed Rule 201(d)(6)
of the proposed modified uptick rule and Rule 201(c)(9) of the proposed
uptick rule would allow a broker-dealer to mark short sale orders of a
covered security ``short exempt'' where a broker-dealer is facilitating
customer buy orders or sell orders where the customer is net long, and
the broker-dealer is net short but is effecting the sale as riskless
principal, provided certain conditions are satisfied.\323\
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    \322\ The discussion of the PRA as it applies to the proposed
uptick rule applies equally to the proposed circuit breaker uptick
rule.
    \323\ See proposed Rule 201(d)(6). As a result, a trading
center's policies and procedures would need to be reasonably
designed to permit the execution or display of such orders without
regard to whether the order is at a down-bid price. See proposed
Rule 201(b)(1)(ii).
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    Proposed Rules 201(d)(6) of the proposed modified uptick rule and
201(c)(9) of the proposed uptick rule would require a new ``collection
of information'' in that each would require a broker-dealer marking an
order ``short exempt'' under these provisions to have written policies
and procedures in place to assure that, at a minimum, the customer
order was received prior to the offsetting transaction; the offsetting
transaction is allocated to a riskless principal account within 60
seconds of execution; and that it has supervisory systems in place to
produce records that enable the broker-dealer to accurately and readily
reconstruct, in a time-sequenced manner, all orders on which the
broker-dealer relies pursuant to this provision.\324\
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    \324\ See proposed Rule 201(c)(9) of the proposed uptick rule
and Rule 201(d)(6) of the proposed modified uptick rule.
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3. Proposed Marking Requirements
    While the current marking requirements in Rule 200(g) of Regulation
SHO, which require broker-dealers to mark all sell orders of any equity
security as either ``long'' or ``short,'' \325\ would remain in effect,
proposed Rule 200(g) would add a new marking requirement of ``short
exempt.'' \326\ In addition, the proposed amendments to Rule 200(g)(2)
would require that a broker-dealer mark a sell order ``short exempt''
only if the provisions in paragraph (c) or (d) of the proposed modified
uptick rule (or paragraph (c) or (d) of the proposed circuit breaker
modified uptick rule) are met, or if the seller is relying on an
exception in paragraph (c) of the proposed uptick rule (or paragraph
(c) of the proposed circuit breaker uptick rule), or if the seller is
relying on an exception in paragraph (c) of the proposed circuit
breaker halt rule.\327\ The proposed ``short exempt'' marking
requirements would impose a new ``collection of information.''
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    \325\ 17 CFR 242.200(g).
    \326\ See proposed Rule 200(g). See also Section V above
discussing proposed Rule 200(g).
    \327\ See proposed Rule 200(g)(2).
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C. Proposed Use of Information

1. Policies and Procedures Requirement Under Proposed Modified Uptick
Rule
    The information that would be collected under the proposed modified
uptick rule's written policies and procedures requirement would help
ensure that the trading center does not execute or display any
impermissibly priced short sale orders, unless an order is marked
``short exempt'' in accordance with the rule's requirements. This
written policies and procedures requirement would also provide trading
centers with flexibility in determining how to comply with the
requirements of the proposed modified uptick rule. The information
collected also would aid the Commission and SROs that regulate trading
centers in monitoring compliance with the price test's requirements. It
also would aid trading centers and broker-dealers in complying with the
rule's requirements.

2. Identification of Short Sale Orders and Policies and Procedures
Requirement Under the Proposed ``Broker-Dealer'' and ``Riskless
Principal'' Provisions
    Proposed Rule 201(c)(1) of the proposed modified uptick rule would
include a ``broker-dealer'' provision that would permit a broker-dealer
to mark a short sale order in a covered security ``short exempt'' if
the broker-dealer has identified the order as not being at a down-bid
price at the time of submission of the order to the trading center.
This provision would include a policies and procedures requirement that
would be designed to help prevent incorrect identification of orders
for purposes of the proposed modified uptick rule's broker-dealer
provision.
    Moreover, the information collection under the written policies and
procedures requirement in the ``riskless principal'' exception in
proposed Rule 201(c)(9) of the proposed uptick rule and the ``riskless
principal'' provision in proposed Rule 201(d)(6) of the proposed
modified uptick rule would help assure that broker-dealers comply with
the requirements of these proposed provisions. The information
collected would also enable the Commission and SROs to examine for
compliance with the requirements of these proposed provisions.
3. Proposed Marking Requirements
    Proposed Rule 200(g) would impose a ``short exempt'' marking
requirement.\328\ In addition, proposed Rule 200(g)(2) would require