Corporate & Securities Law

By Jim Hamilton

UK Legislation Contains Strong Short Selling Provisions

The recently enacted UK Financial Services Act of 2010 authorizes the Financial Services Authority to adopt rules prohibiting persons from engaging in short selling and requiring persons who have engaged in short selling to provide detailed information about the short selling, including how and when such disclosure must be made. The FSA rules may apply to short selling engaged in before the rules are adopted when the resulting short position is still open when the rules are adopted. When the short selling relates to UK financial instruments, the FSA rules will apply to short selling wholly outside the UK by persons outside the UK. But the FSA must, when making short selling rules, have regard to any international agreement as to measures to be taken in respect of short selling.

The Act defines short selling as when a person enters into a transaction which creates, or relates to, another financial instrument; and the effect of the transaction is to confer a financial advantage on the person in the event of a decrease in the price or value of the shorted instrument.

Upon a breach of the short selling rules, the FSA may impose a penalty in an amount it considers appropriate or impose censure. When imposing a penalty, the FSA must consider the seriousness of the contravention and whether it was deliberate or reckless; and whether the person on whom the penalty is to be imposed is an individual.

Even before the passage of the Financial Services Act, the Financial Services Authority was active in regulating short-selling. On September 18, 2008, the FSA introduced short selling measures in relation to stocks in UK financial sector companies on an emergency basis. This was done because of concerns about the potential for market abuse resulting from short selling and the consequent destabilizing effects in the extreme conditions prevailing. The measures effectively banned the active creation or increase of net short positions in the stocks of UK financial sector companies and required disclosure to the market of significant short positions in those stocks. They were set to expire on January 16, 2009. Following a short consultation in January 2009, the FSA allowed the ban to expire but extended the disclosure obligation until June 30, 2009.

The FSA then extended the short selling disclosure obligation without time limit. The FSA believes that maintaining the disclosure obligation will help continue to minimize the potential for market abuse and disorderly markets in financial sector stocks. It will also enhance transparency in that sector. As is the case at present, disclosures will need to be made if a net short position exceeds 0.25% of a company?s issued shared capital or increases by 0.1% bands above that, for example, net short position reaches 0.35%. 0.45% and so on.
While the FSA did not set an expiration date, the regulator emphasized that if does not intend for it to apply permanently in its current form. The FSA pledged to also continue to engage in the international dialogue on short selling.

Full post as published by Jim Hamilton's World of Securities Regulation on April 19, 2010 (boomark / email).