This article was originally published 18 September, 2008

On September 17, 2008, the U.S. Securities and Exchange Commission ("SEC") issued an emergency order (the "Emergency Order") adopting temporary rules aimed at abusive "naked" short selling activity. The new temporary rule provisions are effective as of 12:01 am E.T. on Thursday, September 18, 2008 and shall terminate at 11:59 p.m. on October 1, 2008, unless the SEC provides for further extension of the temporary rule provisions. The SEC also took action to adopt other rules to be immediately effective.

New Temporary Rule Imposes Hard T+3 Close-Out Requirement On Sales Of Equity Securities

The SEC has adopted, on a temporary basis, new Rule 204T of Regulation SHO, imposing a hard close-out requirement in connection with sales of securities occurring after the effective date of the Emergency Order (i.e., after 12:01 am on September 18, 2008). More specifically, a participant of a registered clearing agency ("participant"), mostly clearing firms, must deliver the applicable securities sold to a registered clearing agency three days after the sale transaction date, or T+3. In the event that the securities are not delivered by T+3, then, by the beginning of regular trading on the next settlement date (T+4), Rule 204T requires that the participant close-out the fail-to-deliver position by borrowing or purchasing securities. If the participant can prove that the fail-to-deliver was caused by a long sale, then, by no later than the beginning of regular trading on the third settlement day after the normal settlement date (T+6), the participant is required to close-out such fail-to-deliver by purchasing securities (i.e., borrowing is not permitted).

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