On February 24, 2010, the Securities and Exchange Commission ("SEC") adopted Rule 201 to Regulation SHO (17 C.F.R. §242.201).  Rule 201, the "Alternative Uptick Rule," will restrict short selling of listed securities that suffer a 10 percent decline in price in one day, based upon the previous day's closing price.  The 10 percent decline threshold is known as the "circuit breaker."  Once the circuit breaker is tripped for a security, the Alternative Uptick Rule will restrict short selling of securities for the remainder of the day and for the following day.

The Alternative Uptick Rule, the text of which has not yet been made available, will only permit the short sales of covered securities at a price above the national best bid, as quoted by a market or broker-dealer pursuant to an effective national market system plan.  The Alternative Uptick Rule will become effective 60 days from the date published in the Federal Register, but market centers and broker-dealers will have six months following effectiveness to implement procedures designed to comply with the Alternative Uptick Rule.

The SEC adopted exemptions from the Alternative Uptick Rule consistent with those exceptions that existed under prior Rule 10a-1, including:

  • Short sale orders submitted by broker-dealers that are priced above the national best bid at the time of submission to a market center; broker-dealers must establish and implement policies and procedures designed to comply with the terms of this exception and will be required to monitor the efficacy of such policies and procedures.
  • Sales by a seller that is deemed to own the security but is technically considered a short seller due to delivery delays, provided that such seller intends to deliver the security as soon as restrictions on delivery have been removed.
  • Sale of a covered security by a market maker to offset customer odd-lot orders or to liquidate an odd-lot position in certain instances.
  • Sales by broker-dealers of a covered security for an account in which the broker-dealer has no interest, pursuant to an order marked long.
  • Short sales in connection with international and domestic arbitrage strategies.
  • Sales of a covered security at the volume weighted average price ("VWAP").
The SEC adopted an additional amendment to Rule 200(g) of Regulation SHO (17 C.F.R. §242.200(g)) to require sellers that claim an exemption from the Alternative Uptick Rule to mark such order "short exempt."

Securities covered by the new rule are any NMS securities as defined in 17 C.F.R. §242.600(b)(47). Generally,  NMS securities are all equity securities listed on a national securities exchange, regardless of whether or not the security trades on a national market or over-the-counter.  An update to this release will follow when the SEC publishes the release discussing the adoption of the Alternative Uptick Rule and the text of the final rule is made available.