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SEC Approves Short-Selling Restrictions

Last week, the SEC approved final rules amending Regulation SHO intended to promote market stability and preserve investor confidence by placing certain restrictions on short selling when a stock is experiencing significant downward price pressure.  Among the alternative approaches the Commission proposed, the Commission approved an "alternative uptick rule" designed to restrict short selling from further driving down the price of a stock that has dropped more than 10 percent in one day.  According to the release, the alternative uptick rule will enable long sellers to stand in the front of the line and sell their shares before any short sellers once the circuit breaker is triggered.

In application, the alternative uptick rule adopted by the Commission "imposes restrictions on short selling only when a stock has triggered a circuit breaker by experiencing a price decline of at least 10 percent in one day. At that point, short selling would be permitted if the price of the security is above the current national best bid."  The rule new rule includes the following features:


    • Short Sale-Related Circuit Breaker: The circuit breaker would be triggered for a security any day in which the price declines by 10 percent or more from the prior day's closing price.




    • Duration of Price Test Restriction: Once the circuit breaker has been triggered, the alternative uptick rule would apply to short sale orders in that security for the remainder of the day as well as the following day.




    • Securities Covered by Price Test Restriction: The rule generally applies to all equity securities that are listed on a national securities exchange, whether traded on an exchange or in the over-the-counter market.




    • Implementation: The rule requires trading centers to establish, maintain, and enforce written policies and procedures that are reasonably designed to prevent the execution or display of a prohibited short sale.


The new rule (Rule 201) will be effective 60 days from its publication in the Federal Register.

The full text of the final rule release is available at:

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