CHIEF EXECUTIVE OFFICER/MANAGING PARTNER, CHIEF FINANCIAL OFFICER, COMPLIANCE AND LEGAL DEPARTMENTS

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1 Information Memo Member Firm Regulation NYSE Regulation, Inc. 20 Broad Street New York, NY nyse.com Number July 23, 2007 ATTENTION: TO: SUBJECT: CHIEF EXECUTIVE OFFICER/MANAGING PARTNER, CHIEF FINANCIAL OFFICER, COMPLIANCE AND LEGAL DEPARTMENTS ALL MEMBER ORGANIZATIONS SEC AND NYSE AMENDMENTS CONCERNING SHORT SALE RULES Introduction On June 28, 2007, the Securities and Exchange Commission ( SEC or Commission ) issued a release adopting amendments to its rules governing short sales (the Adopting Release ). 1 Specifically, SEC amendments eliminate Rule 10a-1 2 under the Securities Exchange Act of ( Exchange Act ). Additionally, the amendments add Rule 201 of Regulation SHO 4 to provide that no price test, including any price test by any selfregulatory organization ( SRO ), shall apply to short selling in any security. Rule 200(g) of Regulation SHO, 5 as amended, removes the requirement that a broker-dealer mark a sell order of an equity security as short exempt if the seller is relying on an exception from Rule 10a-1, or any price test of any exchange or national securities associations, as this rule is no longer necessary with the elimination of the price test requirements. On July 6, 2007 NYSE filed for immediate effectiveness amendments to the following rules to conform Exchange standards with the SEC amendments: 104 (Dealings by Specialists); 111 (Reports of Executions); 123A (Miscellaneous Reports); 123C (Market on the Close Policy and Expiration Procedures); 421(Periodic Reports); 440B (Short Sales); 440C (Short Sale Borrowing and Delivery Requirements); 440F (Public Short Sale Transactions Effected on the Exchange); 440G (Transactions in Stocks and 1 See Exchange Act Release No (June 28, 2007), 72 FR (July 3, 2007) ( Adopting Release ) CFR a U.S.C. 78a et seq CFR CFR (g).

2 2 Warrants for the Accounts of Members, Allied Members and Member Organizations); 902 (Off-Hours Trading Orders); 1000 (Automatic Execution of Limit Orders Against Orders Reflected in NYSE Published Quotation); and 1003 (Application of Tick Tests) 6 (see Exhibit A). Background Rule 10a-1 was adopted by the Commission as a means to restrict short selling in a declining market. 7 Rule 10a-1(a) covered short sales in securities, listed on a national securities exchange or admitted to unlisted securities trading privileges on a national securities exchange if trades of the security are reported pursuant to an effective transaction reporting plan, and information regarding such trades is made available in accordance with such plan on a real-time basis to vendors of market transaction information. 8 Rule 10a-1(a)(1) provided that, subject to certain exceptions, a listed security may be sold short either at a price above the price at which the immediately preceding sale was effected (plus tick) 9 or at the last sale price if it is higher than the last different price (zero-plus tick). These requirements are commonly described as tick tests. Prior to the recent SEC amendments, short sales were not permitted on minus ticks or zero-minus ticks, subject to narrow exceptions. In 2004, the Commission adopted Regulation SHO to update short sale regulation in light of numerous market developments since short sale regulation was first adopted in Rule 202T of Regulation SHO 11 established procedures for the Commission to temporarily suspend price tests so that the Commission could study their utility and effectiveness in connection with short sales. 12 In July 2004, under the authority of Rule 202T the SEC issued an order to establish a pilot program to suspend for one-year the provisions of Rule 10a-1(a) and any price test of any exchange or national securities association for short sales of certain securities. 13 This pilot program, and subsequent extensions, was designed to assist the Commission in assessing whether changes to current short sale regulations were necessary in light of current market practices See SR-NYSE See Exchange Act Release No (Jan. 24, 1938), 3 FR 213 (January 26, 1938). 8 Rule 10a-1 uses the term "effective transaction reporting plan" as defined in Rule 600 of Regulation NMS (17 CFR ) under the Exchange Act. See 17 CFR a-1(a)(1)(i). 9 The last sale price is the price reported pursuant to an effective transaction reporting plan, i.e., the consolidated tape, or to the last sale price reported in a particular marketplace. Under Rule 10a-1, the Commission gives market centers the choice of measuring the tick of the last trade based on executions solely on their own exchange rather than those reported to the consolidated tape. See 17 CFR a- 1(a)(2). 10 See Exchange Act Release No (July 28, 2004), 69 FR 48008, (August 6, 2004) ( Regulation SHO Adopting Release ) CFR T. 12 See Exchange Act Release No (April 20, 2006) (which states Temporary Rule 202T expires August 6, 2007). 13 See Exchange Act Release No (July 28, 2004), 69 FR (August 6, 2004). 14 The Commission rescheduled the pilot program to commence on May 2, 2005 and terminate on April 28, See Exchange Act Release No (November 29, 2004), 69 FR (December 6, 2004); see also NYSE Information Memos (December 22, 2004) and (April 27, 2005) which explains the establishment of the second pilot Order.

3 3 In December 2006, the Commission, based on a careful study of the pilot program results and the status of current price test restrictions, proposed the above-discussed amendments to certain rules governing short sales. 15 The amendments became effective upon publication in the Federal Register 16 on July 3, 2007 with a July 6, 2007 compliance date. However, note that the SEC has issued a no-action letter to the American Stock Exchange LLC which states that, based on facts presented and representations made, the Division of Market Regulation will not recommend enforcement action under Rule 200(g) if an SRO continues to accept orders marked as short exempt for a period of ninety days from the July 6, 2007 compliance date of the amendments. 17 Impact on Exchange Rules As noted above, on July 6, 2007, in order to harmonize its rules with the SEC amendments, NYSE filed for immediate effectiveness rule amendments to remove all references to rescinded Rule 10a-1, to short sale price test provisions, and to the short exempt marking requirement. NYSE Rule 440B (Short Sales) The amendments to NYSE Rule 440B delete in its entirety an Explanatory Note that incorporated by reference Rule 10a-1 and Rules 200 and 203 of Regulation SHO, as this text no longer reflects the current regulatory structure resulting from the abovementioned expiration of Rule 202T and the SEC amendments that rescind Rule 10a-1 and prohibit any SRO price tests on short sales. 18 The amendments also delete sections (a) - (c) of Rule 440B to reflect the rescission of Rule 10a-1. Rule 440B(a) imposed restrictions on certain short sales pursuant to Rule 10a-1; Rule 440B(c) suspended subsection (a) for such time and as to such securities as are designated under the SEC pilot; and Rule 440B(b) restricted short sales by a specialist in which such specialist was registered for his own account or any other person in reliance upon the exemption provided under Rule 10a-1(e)(5). 15 See Adopting Release, footnote 6 which clarifies that the amendments affect price tests and related marking requirements only. 16 See Exchange Act Release No. 72 FR (July 3, 2007). 17 See Letter from Josephine Tao, Assistant Director, Division of Market Regulation, SEC to Jeffrey P. Burns, Vice President and Associate General Counsel, American Stock Exchange LLC dated July 2, 2007, available at: see also Letter from Josephine Tao, Assistant Director, Division of Market Regulation, SEC to Ira Hammerman, Sr. Managing Director and General Counsel, Securities Industry and Financial Markets Association, dated July 2, 2007, available at, (which states that based on the representations and facts made, the Division of Market Regulation will not recommend enforcement action under Rule 200(g) if a brokerdealer marks a short order short exempt, rather than short, for a period of ninety days after the July 6, 2007 compliance date of the amendment to Rule 200(g) subject to specified conditions). 18 The Explanatory Note generally described changes to short sale regulation and implementation dates. Specifically, the Explanatory Note explained the tick test under Rule 10a-1, incorporated the pilot program orders issued under Regulation SHO by the SEC, which suspended the NYSE tick test and any SRO price test for designated securities.

4 4 With respect to the Supplementary Material of Rule 440B, the amendments delete all references to Rule 10a-1 and its requirements in Rule 440B.10 (which set forth the application of Rule 440B in connection with Rule 10a-1 and Regulation SHO) and delete the reference to Rule 10a-1 in Rule 440B.11. The amendments also delete, in their entirety, Rules 440B.12 (which set forth the place of transaction requirements in connection with Rule 10a-1) and 440B.15 (which described prices at which short sales were to be made in accordance with Rule 10a-1). Further, the amendments to Rule 440B.13 delete reference to the short exempt marking requirement and delete, in its entirety, Rule 440B.20 which set forth such marking requirement. The Supplementary Material of Rule 440B has been renumbered to reflect the amendments. Rule 440C (Short Sale Borrowing and Delivery Requirements) The amendments to NYSE Rule 440C, which governs borrowing and deliveries against short sales, delete a provision that incorporated Rule 10a-1 by reference. Rule 421 (Periodic Reports) NYSE Rule 421 requires that member organizations submit to the Exchange periodic reports with respect to short positions in securities, covering such time period as may be designated by the Exchange. Rule , by reference, exempted from this reporting requirement short positions meeting the requirements of Rule 10a-1(e)(1), (6), (7), (8) or (10). Though the amendments to Rule delete the reference to these rule provisions (based on the rescission of Rule 10a-1), the language from the provisions has been added to the text of Rule because it has been deemed appropriate to retain these exceptions to the short sale reporting requirements. Other Rules The amendments to NYSE Rules 104, 111, 123A, 123C, 1000, 1003 delete all references to Rule 10a-1 and short sale tick tests. Further, the amendments delete references to the short exempt marking requirement in NYSE Rules 440F, 440G and 902. Any questions regarding this Information Memo may be directed to Anand Ramtahal at (212) , Glen Garofalo at (212) , Stephen Kasprzak at (212) or Michael Troha at (212) Grace B. Vogel Executive Vice President Member Firm Regulation

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