SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

Reg SHO Pilot Report DRAFT 9/14/2006
With the adoption of Regulation SHO in July 2004, the Commission decided to defer
consideration of the uniform bid test and the proposed exemptions (proposed Rule 201), in order
to first observe the results of the pilot program. 37 In connection with the establishment of a Pilot,
the parameters governing a Pilot were expanded to include a broader spectrum of securities than
envisioned in the proposing release, and the length of the Pilot was shortened to one year. As
stated in the adopting release,
the purpose of the Pilot is to assist the Commission in considering alternatives, such as:
(1) eliminating a Commission-mandated price test for an appropriate group of securities,
which may be all securities; (2) adopting a uniform bid test, and any exceptions, with the
possibility of extending a uniform bid test to securities for which there is currently no
price test; or (3) leaving in place the current price restrictions.
The details of the program, including the list of securities included in the Pilot, were specified in
the Commission’s Pilot Order of July 28, 2004. 38 The Pilot was originally scheduled to begin on
January 3, 2005 and last for one year. However, because the industry needed more time to
prepare their systems, the start date was postponed until May 2, 2005, and later, the terminal date
of the Pilot was extended until August 6, 2007 to maintain the status quo for pilot stocks until the
Commission evaluates the results of the study and considers potential rulemaking on price
restrictions. 39 The Pilot Order suspends Rule 10a-1 and the bid test for approximately a third of
the Russell 3000 stocks. The methodology for selecting the pilot stocks is detailed in the Pilot
Order, and is summarized in section IV, below.
III Previous Evidence
The previous evidence on price restrictions gives us insight into how price restrictions
work. In particular, it examines the effectiveness of the rules and the effect that the rules have on
37 SEC Release No. 34-50103, July 28, 2004.
38 SEC Release No. 34-50104, July 28, 2004.
39 SEC Release No. 34-53684, April 20, 2006.
Prepared by the Office of Economic Analysis 16
DRAFT