SEC Adopts Restrictions On The Short Selling Of Stocks That Experience Sharp Price Declines

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On February 24, 2010, the Securities and Exchange Commission (SEC) adopted a new rule that will limit the short selling of any stock that has declined in price by more than 10 percent in one day. In those circumstances, short sales will be permitted in a stock only if the price exceeds the current national best bid. The SEC stated that the purpose of adopting a short-sale-related “circuit breaker” was to prevent short selling from further driving down the price of the stock and to enable long sellers to be able to sell their shares prior to short sellers once the circuit breaker is triggered. The new Rule 201, an amendment to existing Regulation SHO, was adopted by a 3-2 vote of the SEC commissioners, with the dissenting commissioners arguing that Rule 201 was not necessary and could impair the proper functioning of the financial markets. In adopting Rule 201, the SEC reinstated a limited version of price restrictions on short sales that it had discarded only three years ago as antiquated and ineffective.

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