SEC Issues Emergency Order to Deter Uncovered Short Sales in Certain Financial Institutions

The SEC has issued an emergency order to deter naked short selling in the publicly traded securities of 19 specific financial services firms, including Fannie Mae and Freddie Mac (a list of the issuers is set forth below). Under the order, prior to effecting a short sale in any of the affected securities, a person must have borrowed or arranged to borrow the security, or otherwise have the security available to borrow in its inventory, and must deliver the security on the settlement date of the transaction. As such, the order extends the borrowing requirements beyond the usual "locate" requirement and requires short sellers to earmark shares for delivery under their short sales.

The order takes effect at 12:01 a.m. Eastern Time on Monday, July 21, 2008, and terminates at 11:59 p.m. Eastern Time on Tuesday, July 29, 2008, unless further extended by the SEC. The SEC's order will create additional compliance obligations for both sell-side and buy-side firms. Additional clarification of the order from the SEC and its staff is anticipated over the coming days.

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