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January 1, 2007

SEC to Ban Short-Sale Price Tests

By Peter Chapman

The Securities and Exchange Commission, following a two-year trial period, is proposing to permanently abolish price tests for short sales.

If the regulator gets its way, traders will remain free to short stock on a downtick, something they've been able to do so since May 2005. That's when the SEC instituted a pilot program as part of Regulation SHO that temporarily abolished the 67-year-old price-test rules.

The move by the regulator follows the completion of studies done on the effects of the nearly two-year-old Reg SHO trial on market quality.

According to the studies by the SEC and three groups of university professors allowing traders to short on a downtick did not adversely affect the market,

The pilot, or Rule 202T, is part of a package of rules comprising Reg SHO that went into effect in May 2005 and is slated to end this August.

The pilot temporarily eliminates Rule 10a-1 of the Securities Exchange Act of 1934 and former NASD Rule 3350.

Also under the SEC's proposal, the self-regulatory organizations will not be able to impose their own price-based restrictions on short selling. That idea has been met with protest from the exchanges previously.

Industry members have until next month to comment on the proposal.