The U.S. Securities and Exchange Commission has voted to take additional steps that it believes will close loopholes in its short-selling rule, Regulation SHO, further reducing persistent failures to deliver stock within the standard settlement period.

The SEC voted to adopt final amendments to its rules that, it says, will further reduce fails to deliver in certain equity securities. Regulation SHO, which became fully effective in January 2005, provides a regulatory framework governing short sales of securities.

The commission also voted to propose other amendments that would modify the long sale marking requirements of Regulation SHO to require that broker-dealers marking a sale as “long” document the present location of the securities being sold. These amendments are intended to further reduce fails to deliver.

In addition, the commission voted to solicit comment regarding two narrowly-tailored alternatives to elimination of the options market maker exception, which provides that any fail to deliver position in a threshold security resulting from short sales effected by a registered options market maker to establish or maintain a hedge on options positions that were created before the underlying security became a threshold security do not have to be closed out. The proposed amendments would eliminate this exception.

And, the commission voted to remove the so-called “tick test” rule, which provides that a security may be sold short: at a price above the price at which the immediately preceding sale was effected (plus tick), or at the last sale price if it is higher that the last different price (zero-plus tick). Short sales are not permitted on minus ticks or zero-minus ticks, subject to narrow exceptions. The tick test applies only to listed securities, other than Nasdaq-listed securities, traded on an exchange, or otherwise.

On July 28, 2004, the commission issued an order creating a one-year pilot temporarily suspending the tick test and any short sale price test for certain securities. The pilot was created so that the commission could study the effectiveness of short sale price tests. The SEC’s Office of Economic Analysis and academic researchers provided the commission with analyses of the empirical data obtained from the pilot. In addition, the commission held a roundtable to discuss the results of the pilot. “The general consensus from these analyses and the roundtable was that the commission should remove price test restrictions because they modestly reduce liquidity and do not appear necessary to prevent manipulation. In addition, the empirical evidence did not provide strong support for extending a price test to either small or thinly-traded securities not currently subject to a price test,” it said.