US

Proposed Regulation SHO: A Mixed Bag for Short Sellers and Their Critics

Brandon Becker, Soo J. Yim, John C. Nagel, and Jerome Roche Wilmer, Cutler & Pickering, Washington

On 29 October 2003, the Securities and Exchange Commission (SEC or Commission) published a long-awaited proposal to overhaul the existing framework for regulating short sale transactions. ¹ Proposed Regulation SHO would replace Rules 3b-3, 10a-1, and 10a-2 under the Securities Exchange Act of 1934 (Exchange Act). ² Among other things, Regulation SHO would consolidate and expand stock locate requirements and replace the existing ‘bid’ and ‘tick’ tests with a new ‘uniform price’ test. Short sellers and their critics will both have reason to praise and criticize the Commission’s proposal. Moreover, irrespective of the technical aspects of the proposal, all securities market participants will find the Commission’s assertions about the extraterritorial application of these rules of interest. Comments on the proposed new rules were due by 5 January 2004.