Effective Date of Alternative Uptick Rule

May 7, 2010

In February 2010, we reported that the U.S. Securities and Exchange Commission (the “SEC”) adopted a new Rule 201 (the “Alternative Uptick Rule”), which would amend Regulation SHO to impose restrictions on the price at which a short sale transaction may be effected in a national market system (“NMS”) security following an intra-day price decline of 10% or more from the prior day’s closing price.1 New Rule 201 will take effect on May 10, 2010, and all trading centers will have six (6) months from that date to comply with the Rule.2 The Alternative Uptick Rule effectively reinstates a modified version of the pre-2007 uptick rule, but instead of imposing a permanent market-wide ban or restriction, it acts as a circuit breaker and only applies to short sales effected in the relevant declining security.

The principal requirements of the Alternative Uptick Rule are as follows:

  1. The rule only applies to NMS securities other than options. Accordingly, this rule generally covers all securities, except options, listed on a national securities exchange whether traded on an exchange or in the over-the-counter market.3
  2. The circuit breaker restrictions on short sales will only be triggered if the intra-day price of a NMS security declines at least 10% from its prior day’s closing price. If the circuit breaker restrictions are not triggered, no new short selling restrictions will be imposed.
  3. If the circuit breaker restrictions are triggered, short selling in that NMS security is restricted for the remainder of that day as well as for the following day, unless the short sale is marked “short exempt.”4
  4. Once the circuit breaker restrictions are triggered by an NMS security’s price decline, short sales in that security are still permitted, so long as they are effected at a price that is higher than the national current best bid.

The Alternative Uptick Rule requires trading centers to establish, maintain and enforce written policies and procedures reasonably designed to prevent the execution or display of short sale orders equal to or below the current national best bid when the circuit breaker restrictions are triggered (i.e., when the price of the NMS security has decreased intra-day by 10% or more from that security’s previous day’s closing price.) A trading center’s policies and procedures must also be reasonably designed to permit the execution or display of a short sale order marked “short exempt,” regardless of whether the order is at a price that is less than or equal to the current national best bid. In addition, the Alternative Uptick Rule imposes an affirmative responsibility on trading centers to ascertain the effectiveness of their required policies and procedures and to take prompt action to remedy any deficiencies.

We will continue to monitor developments in the SEC’s rules concerning Regulation SHO and will provide further updates for material developments.

The SEC adopting release for new Rule 201 (Release No. 34-61595) may be viewed in its entirety via the internet at http://www.sec.gov/rules/final.shtml.

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If you have any questions concerning the Alternative Uptick Rule, please contact an attorney in the Investment Management or Capital Markets Groups at Seward & Kissel LLP.


1 See Seward & Kissel LLP memorandum regarding SEC Adoption of Alternative Uptick Rule dated February 26, 2010.

2 Unlike the pre-2007 uptick rule, which applied to any person, the alternative uptick rule applies only to “trading centers.” A trading center is defined as a national securities exchange or national securities association that operates a self-regulated trading facility, an alternative trading system, an exchange market maker, an over-the-counter market maker or any other broker or dealer that executes orders internally by trading as principal or crossing orders as agent.

3 The Alternative Uptick Rule does not apply to derivatives, such as options, futures, warrants, contracts for differences or swap agreements. According to the SEC, the Rule is formulated with the specific structure of the equity markets in mind, and to apply the Rule to derivatives would significantly complicate the implementation process. SEC Release No. 34-61595.

4 A short sale order is marked “short exempt” if the broker-dealer submitting the order either (a) identifies the order as being at a price above the current national best bid at the time of submission or (b) has a reasonable basis to believe that short sale falls into one of the following exceptions: (i) the seller owns the security being sold and intends to deliver the security as soon as all delivery restrictions have been removed; (ii) the sale is made to offset a customer odd-lot order or to liquidate an odd-lot position that changes the broker-dealer’s position by no more than a unit of trading; (iii) the sale is associated with certain bona fide domestic or international arbitrage transactions; (iv) the sale is made for purposes of a lay-off sale or for distribution in connection with an over-allotment option; (v) the sale facilitates a buy or sell order where the customer is net long and the broker-dealer is net short but is effecting the sale as a riskless principal; or (vi) the order is executed at the volume-weighted average price of a security for the trading day and the security sold is actively traded or part of a basket of transactions.