SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

submitted analyses that are not directly relevant for the uptick rule proposal. They are
included in the present discussion to illustrate why they are not relevant.
Pre-borrow requirement and hard-to-borrow stocks
DRAFT
Several issuers (Overstock, Life Partners) claim that the reinstatement of some form of
uptick rule may not be sufficient to solve the problem of abusive short selling and they
refer to analysis provided by the Shapiro and Pham Study, which advocates a pre-borrow
requirement. The Shapiro study focuses on failures to deliver and Rule 204T, not on the
uptick rule. It is flawed for many reasons and is not reliable for a pre-borrow decision,
but it should be viewed as irrelevant for the uptick proposal.
On a related issue, Michael Lipkin, provided a theoretical study of the price-evolution of
hard-to-borrow stocks, which are either subject to regulatory short-selling restrictions or
have insufficient float available for lending, and concluded that short-sale restrictions
result in inflated prices and volatilities. The constraint modeled in this study is much
broader than the uptick rule; so we doubt that the results would apply to the less
restrictive uptick-type rules.
ETF
In its comment letter, The European Investor Association claimed that the removal of the
uptick rule has caused destabilizing growth of REIT market associated with ETF
development. Many ETFs were not subject to the uptick rule. We therefore doubt that
ETFs grew out of a removal of the uptick rule. A destabilizing growth in the REIT
market is, however, something that may require additional study to determine if there is a
regulatory cause or solution.
Other regulatory events
Vadim Timkovsky provided a study that compares strategy-based margining to riskbased
margining. He claims that high volatility and price declines of October 2008 have a
direct link to this alternative approach to portfolio margining of customer accounts.
However, the analysis studies a Pilot program that gradually introduced the use of the
risk-based approach to margin accounts, but has no relevance to the uptick debate.
Rule 105
Professor Austin Murphy concluded that short selling can harm companies that need to
raise capital. However, this study provides no empirical analysis of short selling or short
interest. If anything, the concerns expressed in the paper are most relevant to Rule 105
but not the uptick rule.
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