Document ID: SEC-2008-1289-0001
Agency: sec
Document Type: Notice
Title: Emergency Order Pursuant to Section 12(k)(2) of the Securities Exchange Act of 1934 Taking Temporary Action to Respond to Market Developments
Posted Date: 2008-09-23T04:00Z

[Federal Register: September 23, 2008 (Volume 73, Number 185)]
[Notices]               
[Page 54875-54877]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23se08-117]                         

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

SECURITIES AND EXCHANGE COMMISSION

[Securities Exchange Act of 1934; Release No. 34-58572/ September 17, 
2008]

 
Emergency Order Pursuant to Section 12(K)(2) of the Securities 
Exchange Act of 1934 Taking Temporary Action To Respond to Market 
Developments

    The Commission continues to be concerned that there is a 
substantial threat of sudden and excessive fluctuations of securities 
prices and disruption in the functioning of the securities markets that 
could threaten fair and orderly markets. As evidenced by our recent 
publication of an emergency order under Section 12(k) of the Securities 
Exchange Act of 1934 (the ``July Emergency Order''),\1\ we are 
concerned about the possible unnecessary or artificial price movements 
based on unfounded rumors regarding the stability of financial 
institutions and other issuers exacerbated by ``naked'' short selling. 
Our concerns, however, are no longer limited to just the financial 
institutions that were the subject of the July Emergency Order. In 
addition, we have become concerned that some persons may take advantage 
of issuers that have become temporarily weakened by current market 
conditions to engage in inappropriate short selling in the securities 
of such issuers.
---------------------------------------------------------------------------

    \1\ See Exchange Act Release No. 58166 (July 15, 2008).
---------------------------------------------------------------------------

    Given the importance of confidence in our financial markets as a 
whole, we have become concerned about sudden and unexplained declines 
in the prices of securities. Such price declines can give rise to 
questions about the underlying financial condition of an issuer, which 
in turn can create a crisis of confidence without a fundamental 
underlying basis. This crisis of confidence can impair the liquidity 
and ultimate viability of an issuer, with potentially broad market 
consequences.
    As a result of these recent developments, the Commission concluded 
that there continues to exist a substantial threat of sudden and 
excessive fluctuations of securities prices generally and disruption in 
the functioning of the securities markets that could threaten fair and 
orderly markets. Based on this conclusion, the

[[Page 54876]]

Commission is exercising its powers under Section 12(k)(2) of the 
Securities Exchange Act of 1934.\2\ Pursuant to Section 12(k)(2), in 
appropriate circumstances the Commission may issue summarily an order 
to alter, supplement, suspend, or impose requirements or restrictions 
with respect to matters or actions subject to regulation by the 
Commission.
---------------------------------------------------------------------------

    \2\ This finding of an ``emergency'' is solely for purposes of 
Section 12(k)(2) of the Exchange Act and is not intended to have any 
other effect or meaning or to confer any right or impose any 
obligation other than set forth in this Order.
---------------------------------------------------------------------------

    We have concluded that it is necessary to impose enhanced delivery 
requirements on sales of all equity securities, by adding and making 
immediately effective a temporary rule to Regulation SHO, Rule 204T. 
The temporary rule imposes a penalty on any participant \3\ of a 
registered clearing agency,\4\ and any broker-dealer from which it 
receives trades for clearance and settlement, for having a fail to 
deliver position at a registered clearing agency in any equity 
security. In addition, we have concluded it is necessary to make 
immediately effective amendments to Rule 203(b)(3) of Regulation SHO 
that eliminate the options market maker exception from Regulation SHO's 
close-out requirement. We are also making immediately effective Rule 
10b-21, a ``naked'' short selling antifraud rule.\5\ We intend these 
enhanced delivery requirements and the antifraud rule to impose 
powerful disincentives to those who might otherwise exacerbate 
artificial price movements through ``naked'' short selling.
---------------------------------------------------------------------------

    \3\ The term ``participant'' has the same meaning as in section 
3(a)(24) of the Exchange Act. See 15 U.S.C. 78c(a)(24).
    \4\ The term ``registered clearing agency'' means a clearing 
agency, as defined in section 3(a)(23)(A) of the Exchange Act, that 
is registered as such pursuant to section 17A of the Exchange Act. 
See 15 U.S.C. 78c(a)(23)(A) and 78q-1, respectively.
    \5\ Rule 204T, as set forth in this Order, applies only to fails 
to deliver resulting from trades that occur after this Order becomes 
effective. Rule 203(b)(3) of Regulation SHO, as amended by this 
Order, continues to apply to fails to deliver that occurred prior to 
the Order becoming effective. For example, if a participant has a 
fail to deliver position in a threshold security that has persisted 
for six consecutive settlement days prior to the effective date of 
this Order and the fail continues to persist until the thirteenth 
settlement day, the participant must still close out its position 
pursuant to Rule 203(b)(3).
---------------------------------------------------------------------------

    In addition, in these unusual and extraordinary circumstances, we 
believe such requirements are in the public interest and for the 
protection of investors to maintain fair and orderly securities 
markets, and to prevent substantial disruption in the securities 
markets.
    This emergency requirement should significantly reduce any 
possibility that ``naked'' short selling may contribute to the 
disruption of markets in these securities. We described in the releases 
in which we proposed and adopted Regulation SHO the bases for the 
current delivery requirements Regulation SHO imposes. We believe, 
however, that the unusual circumstances we now confront require the 
enhanced requirements we are imposing today.
    It is ordered that, pursuant to our Section 12(k)(2) powers, we are 
adding Sec.  242.204T to read as follows:

Sec.  242.204T  Short Sales.

    (a) A participant of a registered clearing agency must deliver 
securities to a registered clearing agency for clearance and settlement 
on a long or short sale in any equity security by settlement date, or 
if a participant of a registered clearing agency has a fail to deliver 
position at a registered clearing agency in any equity security for a 
long or short sale transaction in that equity security, the participant 
shall, by no later than the beginning of regular trading hours on the 
settlement day following the settlement date, immediately close out the 
fail to deliver position by borrowing or purchasing securities of like 
kind and quantity; Provided, however:
    (1) If a participant of a registered clearing agency has a fail to 
deliver position at a registered clearing agency in any equity security 
and the participant can demonstrate on its books and records that such 
fail to deliver position resulted from a long sale, the participant 
shall by no later than the beginning of regular trading hours on the 
third consecutive settlement day following the settlement date, 
immediately close out the fail to deliver position by purchasing 
securities of like kind and quantity; or
    (2) If a participant of a registered clearing agency has a fail to 
deliver position at a registered clearing agency in any equity security 
sold pursuant to Sec.  230.144 of this chapter for thirty-five 
consecutive settlement days after the settlement date for a sale in 
that equity security, the participant shall, by no later than the 
beginning of regular trading hours on the thirty-sixth consecutive 
settlement day following the settlement date for the transaction, 
immediately close out the fail to deliver position by purchasing 
securities of like kind and quantity;
    (b) If a participant of a registered clearing agency has a fail to 
deliver position in any equity security at a registered clearing agency 
and does not close out such fail to deliver position in accordance with 
the requirements of paragraph (a) of this section, the participant and 
any broker or dealer from which it receives trades for clearance and 
settlement, including any market maker that would otherwise be entitled 
to rely on the exception provided in Sec.  242.203(b)(2)(iii), may not 
accept a short sale order in the equity security from another person, 
or effect a short sale in the equity security for its own account, to 
the extent that the broker or dealer submits its short sales to that 
participant for clearance and settlement, without first borrowing the 
security, or entering into a bona-fide arrangement to borrow the 
security, until the participant closes out the fail to deliver position 
by purchasing securities of like kind and quantity and that purchase 
has cleared and settled at a registered clearing agency;
    (c) The participant must notify any broker or dealer from which it 
receives trades for clearance and settlement, including any market 
maker that would otherwise be entitled to rely on the exception 
provided in Sec.  242.203(b)(2)(iii):
    (1) That the participant has a fail to deliver position in an 
equity security at a registered clearing agency that has not been 
closed out in accordance with the requirements of paragraph (a) of this 
section; and
    (2) When the purchase that the participant has made to close out 
the fail to deliver position has cleared and settled at a registered 
clearing agency; and
    (d) Definitions: (1) For purposes of this section, the term 
settlement date shall mean the business day on which delivery of a 
security and payment of money is to be made through the facilities of a 
registered clearing agency in connection with the sale of a security.
    (2) For purposes of this section, the term regular trading hours 
has the same meaning as in Rule 600(b)(64) of Regulation NMS (17 CFR 
242.600(b)(64).
    It is further ordered that, pursuant to our Section 12(k)(2) 
powers, Sec.  242.203(b)(3)(iii) of Regulation SHO is amended by 
revising paragraphs (b)(3)(iii) and (b)(3)(v) to read as follows:
    (iii) Provided, however, that a participant of a registered 
clearing agency that has a fail to deliver position at a registered 
clearing agency in a threshold security on the effective date of this 
amendment and which, prior to the effective date of this amendment, had 
been previously excepted from the close-out requirement in paragraph 
(b)(3) of this section (i.e., because the participant of a registered 
clearing agency had a fail to deliver position in

[[Page 54877]]

the threshold security that is attributed to short sales effected by a 
registered options market maker to establish or maintain a hedge on 
options positions that were created before the security became a 
threshold security), shall immediately close out that fail to deliver 
position, including any adjustments to the fail to deliver position, 
within 35 consecutive settlement days of the effective date of this 
amendment by purchasing securities of like kind and quantity;
* * * * *
    (v) If a participant of a registered clearing agency entitled to 
rely on the 35 consecutive settlement day close-out requirement 
contained in paragraph (b)(3)(i), (b)(3)(ii), or (b)(3)(iii) of this 
section has a fail to deliver position at a registered clearing agency 
in the threshold security for 35 consecutive settlement days from the 
effective date of the amendment, the participant and any broker or 
dealer for which it clears transactions, including any market maker, 
that would otherwise be entitled to rely on the exception provided in 
paragraph (b)(2)(iii) of this section, may not accept a short sale 
order in the threshold security from another person, or effect a short 
sale in the threshold security for its own account, without borrowing 
the security or entering into a bona-fide arrangement to borrow the 
security, until the participant closes out the fail to deliver position 
by purchasing securities of like kind and quantity;
    It is further ordered that, pursuant to our Section 12(k)(2) 
powers, we are adding Sec.  240.10b-21 to read as follows:

Sec.  240.10b-21  Deception in connection with a seller's ability or 
intent to deliver securities on the date delivery is due.

    PRELIMINARY NOTE to rule 10b-21: This rule is not intended to 
limit, or restrict, the applicability of the general antifraud 
provisions of the federal securities laws, such as section 10(b) of the 
Act and rule 10b-5 thereunder.
    It shall also constitute a ``manipulative or deceptive device or 
contrivance'' as used in section 10(b) of this Act for any person to 
submit an order to sell an equity security if such person deceives a 
broker or dealer, a participant of a registered clearing agency, or a 
purchaser about its intention or ability to deliver the security on or 
before the settlement date, and such person fails to deliver the 
security on or before the settlement date. For purposes of this 
section, settlement date is as defined in Sec.  242.204T of this 
chapter.
    This Order shall be effective at 12:01 a.m. EDT on September 18, 
2008, and shall terminate at 11:59 p.m. on October 1, 2008 unless 
further extended by the Commission.

    By the Commission.
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-22166 Filed 9-22-08; 8:45 am]

BILLING CODE 8010-01-P