[Federal Register Volume 71, Number 80 (Wednesday, April 26, 2006)]
[Notices]
[Pages 24765-24766]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-6250]


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SECURITIES AND EXCHANGE COMMISSION

[Securities Exchange Act of 1934 Release No. 53684]


Order Extending Term of Short Sale Pilot

April 20, 2006.
    On June 23, 2004, the Securities and Exchange Commission 
(``Commission'') approved new and amended short sale regulations in 
Regulation SHO under the Securities Exchange Act of 1934 (the 
``Act'').\1\ On July 28, 2004, the Commission issued an order (``First 
Pilot Order'') creating a one year Pilot (``Pilot'') suspending the 
provisions of Rule 10a-1(a) under the Act \2\ and any short sale price 
test of any exchange or national securities association for short sales 
\3\ of certain securities.\4\ The Pilot was created pursuant to Rule 
202T of Regulation SHO, which established procedures to allow the 
Commission to temporarily suspend short sale price tests so that the 
Commission could study the effectiveness of short sale price tests.\5\ 
The First Pilot Order provided that the Pilot would commence on January 
3, 2005 and terminate on December 31, 2005, and that we might issue 
further orders affecting the operation of the First Pilot Order.\6\ On 
November 29, 2004, we issued an order (``Second Pilot Order'') 
resetting the Pilot to commence on May 2, 2005 and end on April 28, 
2006 to give market participants additional time to make system changes 
necessary to comply with the Pilot.\7\ We are issuing this Order 
(``Third Pilot Order'') to extend the termination date of the Pilot to 
August 6, 2007, the date on which temporary Rule 202T expires. 
Extension of the Pilot termination date will maintain the status quo 
with regard to price tests for Pilot securities and system designs of 
market participants while the staff completes its analysis of the Pilot 
results and the Commission conducts any additional short sale 
rulemaking. All other terms of the First Pilot Order remain unchanged. 
We may issue further orders affecting the operation of the Pilot. For 
the reasons discussed below, the Commission finds that extension of the 
Pilot is necessary and appropriate in the public interest and 
consistent with the protection of investors.\8\
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    \1\ Securities Exchange Act Release No. 50103 (July 28, 2004), 
69 FR 48008 (August 6, 2004) (``Adopting Release'').
    \2\ 17 CFR 240.10a-1.
    \3\ ``Short sale'' is defined in Rule 200 of Regulation SHO, 17 
CFR 242.200.
    \4\ Securities Exchange Act Release No. 50104 (July 28, 2004), 
69 FR 48032 (August 6, 2004). Specifically, the First Pilot Order 
suspended price tests for the following: (1) Short sales in the 
securities identified in Appendix A to the First 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.
    \5\ 69 FR at 48012-13. We stated in the Adopting Release that 
conducting a pilot pursuant to Rule 202T would ``allow us to obtain 
data on the impact of short selling in the absence of a price test 
to assist in determining, among other things, the extent to which a 
price test is necessary to further the objectives of short sale 
regulation, to study the effects of relatively unrestricted short 
selling on market volatility, price efficiency, and liquidity, and 
to obtain empirical data to help assess whether a short sale price 
test should be removed, in part or in whole, for some or all 
securities, or if retained, should be applied to additional 
securities.'' Id. at 48009.
    \6\ 69 FR at 48033.
    \7\ Securities Exchange Act Release No. 50747 (November 29, 
2004), 69 FR 70480 (December 6, 2004).
    \8\ See Section 36 of the Act. In addition, pursuant to Section 
3(f) of the Act, we considered the impact of this extension on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

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[[Page 24766]]

I. New Pilot Termination Date

    We established the Pilot as part of our review of short sale 
regulation in conjunction with the adoption of Regulation SHO.\9\ 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.\10\ The Pilot is 
currently set to terminate on April 28, 2006.
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    \9\ 69 FR at 48032; See Adopting Release at 48013.
    \10\ 69 FR at 48032.
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    To determine whether additional rulemaking is necessary, our staff 
will evaluate the results of the Pilot. Although we do not plan to 
extend the period being studied beyond April 28, 2006, our staff's 
analysis will help them determine whether to recommend changes to the 
current short sale regulatory scheme. If we determine that any new or 
amended rules are necessary, we will commence the rulemaking process. 
This customarily involves issuing a proposing release soliciting 
comments on the proposed changes, analyzing such comments and, finally, 
adopting any final rules. The process of reviewing the data and 
completing any rulemaking will necessarily continue beyond the study 
period.
    We believe that it is in the interest of the markets and investors 
to maintain the price test scheme established by the Pilot until any 
rulemaking resulting from our analysis of the data is complete. Market 
participants made significant changes in their systems and practices to 
comply with the Pilot. Absent an extension of the Pilot's end date of 
April 28, 2006, the pre-Pilot short sale price tests would be restored, 
and market participants would be required to make changes to their 
systems and practices to ensure that they comply with these rules. If 
the Commission thereafter adopts rules that remove or change the nature 
of price tests for some or all securities, market participants would be 
required to change their systems and procedures again, which could 
result in substantial additional costs. Extending the Pilot ending date 
would keep the costs of changes to a minimum and help avoid market 
disruption.
     Prior to commencement of the Pilot, some market participants 
expressed concern about the duration of the Pilot.\11\ We do not 
believe that this concern has borne out. The Second Pilot Order delayed 
the start of the Pilot period because market participants were not 
ready to begin the Pilot during the period specified in the First Pilot 
Order. The Pilot will be in place for slightly more than two years, 
with this extension. Based on our experience with the Pilot for nearly 
a year, the concerns regarding a prolonged time span have proven 
unfounded. Indeed, it would be more disruptive to end the Pilot prior 
to any Commission action rather than to continue it. Market 
participants have already undertaken the costs and burdens of systems 
changes, and have informed us that they would not face any additional 
burdens or costs from continuing the Pilot. The staff has found no 
evidence of market disruption during the Pilot thus far, and we do not 
anticipate that continuing the Pilot will trigger any problems in the 
future.
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    \11\ See Adopting Release, 69 FR at 48012 (discussing comment 
letters regarding the Pilot's duration from the Nasdaq, the NYSE, 
and the STA).
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    In the Regulation SHO adopting release, the Commission stated that 
it ``expects to make information obtained during the pilot publicly 
available.'' \12\ Correspondingly, the Commission's staff arranged for 
the appropriate self-regulatory organizations to make transactional 
short selling data public on a monthly basis on their internet Web 
sites.\13\ To promote the best quality studies and to encourage 
transparency, the Commission expects the SROs to continue releasing 
this transactional data until the end of the Pilot on August 6, 2007.
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    \12\ Id. at n. 9.
    \13\ A list of the internet Web sites making the monthly trading 
data public is available at http://www.sec.gov/spotlight/shopilot.htm.
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    Based on the forgoing, we believe that it is necessary and 
appropriate in the public interest and consistent with the protection 
of investors to extend the termination date of the Pilot to August 6, 
2007. Accordingly, the Pilot will now terminate on August 6, 2007, 
unless otherwise ordered by the Commission.

 II. Conclusion

    We find that extending the termination date of the Pilot to August 
6, 2007, 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 for certain securities and time periods, as set 
forth in the First and Second Pilot Orders, shall terminate on August 
6, 2007, instead of April 28, 2006. The Commission from time to time 
may issue further orders affecting the operation of the Pilot.
    All other provisions of the First Pilot Order and Second Pilot 
Order shall remain in effect.

    By the Commission.
Nancy M. Morris,
Secretary.
 [FR Doc. E6-6250 Filed 4-25-06; 8:45 am]
BILLING CODE 8010-01-P