As expected, the Securities and Exchange Commission has voted to seek comment on whether to impose short sale price restrictions or circuit breaker restrictions in an effort to promote market stability and restore investor confidence.

Following a pilot program that eliminated short sale price test restrictions from roughly a third of the largest stocks, the SEC eliminated short sale price tests in June 2007. Then, last July, amid extreme market volatility, the SEC issued an emergency order imposing borrowing and delivery requirements on short sales of the equity securities of certain financial institutions, and in September, the Commission issued an emergency order prohibiting short selling in the stocks of some financial institutions.

Since then, some investors, brokerage firms, stock exchanges, and members of Congress have increased calls for the SEC to re-instate the rule or a modified version of it.

At its April 8 open meeting, the Commission voted to propose two approaches to restrict short selling. One would apply on a market-wide and permanent basis, while the other would apply only to a particular security during severe market declines in that security.

The proposals for a market-wide approach include a modified uptick rule—a market-wide short sale price test based on the national best bid, and an uptick rule—a market-wide short sale price test based on the last sale price or tick.

The temporary “circuit breaker” approaches include a proposed circuit breaker halt rule that would ban short selling in a particular security for the remainder of the day if there’s a severe decline in price in that security; a proposed circuit breaker modified uptick rule that would impose a short sale price test based on the national best bid in a particular security for the remainder of the day if there's a severe decline in price in that security, and a proposed circuit breaker uptick rule that would impose a short sale price test based on the last sale price in a particular security for the remainder of the day if there's a severe decline in price in that security.

The SEC also proposed amendments to Regulation SHO to require that a broker-dealer mark a sell order “short exempt” if the seller is relying on an exception to a short sale price test restriction or a circuit breaker rule.

The full text of the rule proposals will be posted to the SEC Website as soon as possible. Comments on the proposed amendments will be due 60 days after their publication in the Federal Register.

In her opening remarks, SEC chairman Mary Schapiro noted that the Commission plans to hold a Roundtable on the topic on May 5.