[Federal Register Volume 69, Number 233 (Monday, December 6, 2004)]
[Notices]
[Pages 70480-70482]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-3469]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 50747]


Securities Exchange Act of 1934; Order Delaying Pilot Period for 
Suspension of the Operation of Short Sale Price Provisions

November 29, 2004.
    On July 28, 2004, we issued an order (``Pilot Order'') establishing 
a one year Pilot (``Pilot'') suspending the provisions of Rule 10a-1(a) 
under the Securities Exchange Act of 1934 (the ``Act'') \1\ and any 
short sale price test of any exchange or national securities 
association for short sales \2\ of certain securities.\3\ The Pilot 
Order provided

[[Page 70481]]

that the Pilot would commence on January 3, 2005 and terminate on 
December 31, 2005, and that we may issue further orders affecting the 
operation of the Pilot Order.\4\ In response to information that we 
have received from market participants, we are issuing this Order 
(``Second Pilot Order'') to reset the Pilot to commence on May 2, 2005 
and end on April 28, 2006. All other terms of the Pilot Order remain 
unchanged. We may issue further orders affecting the operation of the 
Pilot. We find that the delay of the commencement of the Pilot is 
necessary and appropriate in the public interest and consistent with 
the protection of investors.\5\
---------------------------------------------------------------------------

    \1\ 17 CFR 240.10a-1.
    \2\ ``Short sale'' is defined in Rule 200 of Regulation SHO, 17 
CFR 242.200.
    \3\ Securities Exchange Act Release No. 50104 (July 28, 2004), 
69 FR 48032 (August 6, 2004). Specifically, the Pilot Order 
suspended price tests for the following: (1) Short sales in the 
securities identified in Appendix A to the Pilot Order; (2) short 
sales in the securities included in the Russell 1000 index effected 
between 4:15 p.m. EST and the open of the effective transaction 
reporting plan of the Consolidated Tape Association (``consolidated 
tape'') on the following day; and (3) short sales in any security 
not included in paragraphs (1) and (2) effected in the period 
between the close of the consolidated tape and the open of the 
consolidated tape on the following day.
    \4\ 69 FR at 48033.
    \5\ See Section 36 of the Act. In addition, pursuant to Section 
3(f) of the Act, we considered the impact of these modifications on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

I. New Pilot Period

    We established the Pilot as part of our review of short sale 
regulation in conjunction with the adoption of Regulation SHO.\6\ The 
Pilot is designed to assist us in assessing whether changes to short 
sale regulation are necessary in light of current market practices and 
the purposes underlying short sale regulation.\7\ In order to achieve 
this goal, it is critical that the data we receive on short sales of 
Pilot securities during the term of the Pilot is accurate and 
comprehensive. This is possible only if market participants execute all 
short sales of Pilot stocks without regard to any short sale price 
test.
---------------------------------------------------------------------------

    \6\ 69 FR at 48032; Securities Exchange Act Release No. 50103 
(July 28, 2004), 69 FR 48008 (August 6, 2004) (the ``Adopting 
Release'').
    \7\ 69 FR at 48032.
---------------------------------------------------------------------------

    Pursuant to Regulation SHO, brokers and dealers are required to 
mark short sale orders of Pilot stocks effected during any Pilot period 
as ``short exempt'' so that such orders are not subject to price 
tests.\8\ Since the adoption of Regulation SHO and the order 
establishing the Pilot, our staff has communicated extensively with 
self-regulatory organizations and brokers and dealers in order to 
facilitate the implementation of Regulation SHO and the Pilot. During 
the course of this process, our staff was informed that a large number 
of brokers and dealers believe it would be inefficient and very costly 
for them to comply with this marking requirement for Pilot stocks under 
the time frame established by the Pilot Order. According to these 
brokers and dealers, they and their customers would need to make 
significant systems changes to be sure that short sale orders for Pilot 
stocks are marked properly and that the marking is maintained at each 
stage of processing the order. They also assert that these systems 
changes will be more extensive, costly and time-consuming to implement 
than they had anticipated during the comment period for Regulation SHO.
---------------------------------------------------------------------------

    \8\ Rule 200(g) of Regulation SHO requires that brokers and 
dealers mark all sell orders of any equity security as ``long,'' 
``short,'' or ``short exempt.'' 17 CFR 242.200(g). The Adopting 
Release states that short sales of pilot securities effected during 
any pilot period should be marked ``short exempt.'' 69 FR at 48012.
---------------------------------------------------------------------------

    The order processing systems of brokers and dealers and their 
customers are predominantly electronic. Currently, many of these 
systems are not programmed to automatically identify and mark Pilot 
stocks as ``short exempt'' or to recognize a ``short exempt'' marking. 
A broker-dealer may have many different internal systems that are 
linked together, and each of its customers may have different systems 
through which the customer communicates orders to the broker-dealer. 
According to the market participants, modifying these systems and their 
interconnections presents significant programming challenges.
    For example, market participants state that these systems currently 
are not equipped to change orders marked ``short'' to ``short exempt.'' 
Broker-dealer firms have advised our staff that it will be difficult to 
implement systems changes under the time frame established by the Pilot 
Order to identify and change all orders marked short so that all short 
sales of Pilot stocks are processed as intended by Regulation SHO and 
the Pilot, i.e., without regard to any short sale price test.
    Finally, broker-dealer firms have asked us to consider the 
possibility that the systems changes may be in effect only for the one-
year duration of the Pilot. Even if the brokers and dealers and their 
customers were able to make the necessary systems changes with 
reasonable expenditure of time and money, at the conclusion of the 
Pilot, brokers and dealers and their customers may be required to 
change their systems again, which would result in additional costs.
    In this context, we have been informed that a number of market 
centers have offered to assist their broker-dealer members in executing 
short sales in Pilot stocks in a manner consistent with Regulation SHO. 
According to these market centers, they would process all short sale 
orders of Pilot stocks without any short sale price test, regardless of 
whether the broker-dealers had marked the orders as ``short exempt.'' 
The market centers would do this by ``masking'' short sale instructions 
on Pilot stocks and executing the short sales as ``short exempt.'' 
Therefore, brokers and dealers and their customers would not be 
required to make extensive, and possibly temporary, systems changes, 
and short sales of Pilot stocks would be executed appropriately.
    We have been informed that both the brokers and dealers and the 
market centers agree that the market centers' proposals to ``mask'' 
short sale orders in Pilot stocks for the duration of the Pilot would 
be more efficient than having the brokers and dealers and their 
customers make necessary systems changes. Some market centers, however, 
would be required to make significant changes to their systems, and we 
understand that some of the market centers would not be able to 
complete all the necessary systems changes by January 3, 2005. We have 
been informed that the market centers would be ready to ``mask'' orders 
on May 2, 2005.
    Based on the forgoing, we believe that it is necessary and 
appropriate in the public interest and consistent with the protection 
of investors to delay the commencement of the Pilot until May 2, 2005. 
For the Commission to fully evaluate the effectiveness of short sale 
price restrictions, the data must be complete and accurate. The delay 
will provide an opportunity for systems to be modified in a manner that 
will help achieve the purposes of the Pilot.\9\ Accordingly, the Pilot 
will now commence on May 2, 2005 and will end on April 28, 2006.
---------------------------------------------------------------------------

    \9\ In addition, resetting the commencement date of the Pilot 
would allow the market centers to continue implementation of systems 
to electronically record all short sale orders, including manual 
orders.
---------------------------------------------------------------------------

    The compliance date for all other provisions of Regulation SHO 
remains January 3, 2005. This Second Pilot Order does not affect the 
responsibility of brokers and dealers to comply with the requirements 
of Regulation SHO, including the order marking requirements.\10\ By 
issuing this Second Pilot Order, we are providing an opportunity for 
firms to work with the

[[Page 70482]]

market centers to develop cost effective means of executing trades of 
Pilot stocks. Brokers and dealers, however, retain the responsibility 
to appropriately mark the orders of Pilot stocks upon commencement of 
the Pilot on May 2, 2005.
---------------------------------------------------------------------------

    \10\ We believe that an exemption from the order marking 
requirements may be necessary and appropriate to allow broker-
dealers to avail themselves of the order ``masking'' process 
described above for Pilot stocks, if implemented by the market 
centers. Accordingly, prior to the commencement of the Pilot, we 
will consider written requests for appropriate relief from the order 
marking requirements for Pilot stocks.
---------------------------------------------------------------------------

II. Conclusion

    We find that delaying implementation of the Pilot until May 2, 
2005, for the reasons stated above, is necessary and appropriate in the 
public interest and consistent with the protection of investors.
    Accordingly, it is hereby ordered that the suspension of the 
provisions of Rule 10a-1(a) and any short sale price test of any 
exchange or national securities association shall commence on May 2, 
2005 and shall terminate on April 28, 2006. The Commission from time to 
time may issue further orders affecting the operation of the Second 
Pilot Order.
    All other provisions of the Pilot Order shall remain in effect.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E4-3469 Filed 12-3-04; 8:45 am]
BILLING CODE 8010-01-P