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SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

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submitted analyses that are not directly relevant for the uptick rule proposal. They are<br />

included in the present discussion to illustrate why they are not relevant.<br />

Pre-borrow requirement and hard-to-borrow stocks<br />

DRAFT<br />

Several issuers (Overstock, Life <strong>Part</strong>ners) claim that the reinstatement of some form of<br />

uptick rule may not be sufficient to solve the problem of abusive short selling and they<br />

refer to analysis provided by the Shapiro and Pham Study, which advocates a pre-borrow<br />

requirement. The Shapiro study focuses on failures to deliver and Rule 204T, not on the<br />

uptick rule. It is flawed for many reasons and is not reliable for a pre-borrow decision,<br />

but it should be viewed as irrelevant for the uptick proposal.<br />

On a related issue, Michael Lipkin, provided a theoretical study of the price-evolution of<br />

hard-to-borrow stocks, which are either subject to regulatory short-selling restrictions or<br />

have insufficient float available for lending, and concluded that short-sale restrictions<br />

result in inflated prices and volatilities. The constraint modeled in this study is much<br />

broader than the uptick rule; so we doubt that the results would apply to the less<br />

restrictive uptick-type rules.<br />

ETF<br />

In its comment letter, The European Investor Association claimed that the removal of the<br />

uptick rule has caused destabilizing growth of REIT market associated with ETF<br />

development. Many ETFs were not subject to the uptick rule. We therefore doubt that<br />

ETFs grew out of a removal of the uptick rule. A destabilizing growth in the REIT<br />

market is, however, something that may require additional study to determine if there is a<br />

regulatory cause or solution.<br />

Other regulatory events<br />

Vadim Timkovsky provided a study that compares strategy-based margining to riskbased<br />

margining. He claims that high volatility and price declines of October 2008 have a<br />

direct link to this alternative approach to portfolio margining of customer accounts.<br />

However, the analysis studies a Pilot program that gradually introduced the use of the<br />

risk-based approach to margin accounts, but has no relevance to the uptick debate.<br />

Rule 105<br />

Professor Austin Murphy concluded that short selling can harm companies that need to<br />

raise capital. However, this study provides no empirical analysis of short selling or short<br />

interest. If anything, the concerns expressed in the paper are most relevant to Rule 105<br />

but not the uptick rule.<br />

11<br />

<strong>SEC</strong>_<strong>OEA</strong>_<strong>FCIC</strong>_001770

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