Economic Stabilization Advisory Group | November 11, 2008

Global Clampdown on Selling: an Overview (v3)

Authorities around the world have taken action to prohibit or place regulatory restrictions on short selling.1 These measures come at a time of deteriorating financial market conditions, prompting large declines in market values and the introduction of rescue packages for troubled banks. The short selling restrictions were prompted by the concern that steep falls in the share prices of financial institutions would undermine confidence in those institutions and hamper their efforts to raise capital. Regulators took the view that short selling was exacerbating market falls.

The restrictions on short selling increase the risks for a number of financial institutions, from hedge funds to the proprietary trading desks of banks. Short selling has historically been an integral part of many trading and investing strategies, and also a hedging tool. Those engaged in such activities must now ensure they do not fall foul of the new restrictions.

The purpose of this note is to provide an overview of the global response to short selling. It describes the actions taken in major financial jurisdictions, and provides a summary of the obligations imposed and exemptions available.

The first version of this note was published on October 17, 2008.2 An update was published on October 24, 2008. 3 Since then, regulators in some jurisdictions have adopted further measures or made amendments to the measures previously adopted.4 The current version of the note takes into account those measures and is based on information available to us on November 10, 2008.

1 Short selling is the practice of profiting from declines in share prices. It involves the selling of shares that the seller does not own, but which the seller borrows from another party. The seller returns the shares to the lender by buying them back from the market after their price has fallen. Traders can also take a short in a share by, among other things, buying an equity put option or selling a single stock future. 2 Available at http://www.shearman.com/esag_101708/. 3 The following jurisdictions had adopted further or amended previous measures: United Kingdom, Brazil, India, Australia and Singapore. The update is available at http://www.shearman.com/esag_102408/. 4 Japan, United Kingdom, Italy, India and The Netherlands.

LNDOCS01/579096.1 2

UNITED STATES OF AMERICA ACTION TAKEN PROHIBITIONS / RESTRICTIONS AFFECTED EXEMPTIONS OTHER PROVISIONS The Short Sale Ban Order

The U.S. Securities and Exchange The Short Sale Ban Order prohibited short The Short Sale Ban Order provided a list of The Short Sale Ban Order provided Commission (the “SEC”) issued an sales in certain publicly traded securities of 799 financial institutions (“Included Financial exceptions for: emergency order on September 18, 2008, financial institutions. Firms”), in whose securities short selling ▪ Short sales by bona fide market makers; (the “Short Sale Ban Order”) prohibiting was prohibited. A list of these firms is short sales of the securities of certain available on the SEC’s Internet website at ▪ Short sales that occur as a result of financial institutions for a limited period. http://www.sec.gov/rules/other/2008/34- automatic exercise or assignment of an 58592.pdf. equity option held prior to effectiveness of On September 21, 2008, the SEC the Short Sale Ban Order due to amended certain provisions of the Short The SEC later amended the Short Sale Ban expiration of the option; Sale Ban Order. Order to give national securities exchanges ▪ Short sales effected by options market the ability to expand this list. These makers when short selling as part of bona On October 2, 2008, the SEC temporarily expanded lists were published on the fide market making and hedging activities extended the Short Sale Ban Order. websites of various national securities related directly to bona fide market exchanges. making in derivatives; provided that a The Short Sale Ban Order expired on may not effect a short sale October 8, 2008 with the coming into in a covered security if the market maker force of the Emergency Economic knows that the customer’s or Stabilization Act 2008. counterparty’s transaction will result in the customer or counterparty establishing or increasing an economic net short position in the issued share capital of a firm covered by the Short Sale Ban Order. ▪ Short sales that occur as a result of the expiration of futures contracts held prior to effectiveness of the order; ▪ Short sales effected by the writer of a call option in any covered security as a result of assignment following exercise by the holder of that call option; and ▪ Short sales pursuant to Rule 144 of the U.S. Securities Act of 1933.

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Form SH Order

The SEC issued an emergency order on Form SH, which will be non-public, requires Section 13(f) securities are “equity securities The following are exceptions to the filing September 18, 2008 (the “Form SH Order”), institutional investment managers that of a class described in section 13(d)(1) of requirement: requiring institutional money managers that exercise “investment discretion” with respect the Act that are admitted to trading on a ▪ No disclosure is required for any period exercise discretion over $100,000,000 or to accounts holding “section 13(f) securities” national securities exchange or quoted on during which no short sales have been more to file a new form (Form SH) with the having an aggregate fair market value on the automated quotation system of a effected since the previous filing of a SEC weekly. the last trading day of any month of any registered securities association.” (Rule 13f- Form SH; and calendar year of at least $100,000,000 to 1(c) of the U.S. Securities and Exchange On October 15, 2008, the SEC adopted file a new form with the SEC. This new form, Act of 1934). ▪ No disclosure is required where on each Temporary Form SH as an interim final Form SH, must be filed electronically with calendar day of the calendar week, (a) the temporary rule, expiring on August 1, 2009. the SEC on the last business day of every start of day short position, the gross calendar week immediately following a week number of securities sold short during the in which the manager effected short sales. day and the end of day short position each constitute less than one quarter of For each section 13(f) security sold during one percent of the class of the issuer’s the previous week, Form SH requires the section 13(f) securities issued and following daily information: outstanding as reported on the issuer’s most recent annual or quarterly or current ▪ The date of the transaction; report, unless the manager knows or has ▪ The institutional investment manager by reason to believe the information EDGAR Central Index Key; contained therein is inaccurate, and ▪ The issuer name and CUSIP for the (b) the fair market value of the start of day relevant securities; position, the gross number of securities sold short during the day and the end of ▪ The start of day short position; day short position are each less than ▪ The gross number of securities sold short $10,000,000. during the day; and ▪ The end of day short position. The following short sales need not be reported on Form SH:

For purposes of Form SH, a “short position” ▪ Where on any calendar day of the is the aggregate gross short sales of an calendar week, (a) the start of day short issuer’s section 13(f) securities (excluding position, the gross number of securities options), less purchases to close out a short sold short during the day or the end of sale in the same manner. The Form SH day short position in the section 13(f) short position is not net of long position in security constitutes less than one quarter the issuer. of one percent of that class of the issuer’s section 13(f) securities issued and

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outstanding as reported on the issuer’s most recent annual or quarterly or current report, unless the manager knows or has reason to believe the information contained therein is inaccurate, and (b) the fair market value of the start of day position, the gross number of securities sold short during the day or the end of day short position is less than $10,000,000; provided the institutional money manger designates its reliance on this exception on the Form SH; and ▪ Where a broker or dealer seeks to execute a customer order, either in whole or in part, through a riskless principal transaction, and a short sale results from a sale order of a customer who is net long the section 13(f) security, or a purchase order of a section 13(f) security.

Amendments to Regulation SHO Order

On September 17, 2008, the SEC proposed Rule 204T of Regulation SHO imposes a Rule 204T affects all publicly traded equity Rule 204T provides the following Rule 10b-21: On September 17, 2008, the certain amendments to Regulation SHO (the penalty on any “participant” of a “registered securities. exemptions: SEC proposed Rule 10b-21, which is an “Regulation SHO Order”). clearing agency”, and any broker-dealer ▪ Participants that can demonstrate on their antifraud rule that prohibits any person from from which it receives trades for clearance books and records that such fail to deliver intentionally deceiving a broker-dealer, or a These amendments (a) impose penalties for and settlement, for having a fail to deliver position resulted from a long sale must buyer, as to the intention or ability of that failing to deliver an equity security position at a registered clearing agency in deliver securities of like kind and quality person to deliver shares on the settlement (“Rule 204T”) and (b) eliminate the “options any equity security. Specifically, any by no later than the beginning of regular date. This rule is not intended to limit or market maker” exception. participant of a registered clearing agency trading hours on the third consecutive restrict the applicability of the general must, by no later than the beginning of settlement day following the settlement antifraud provisions of the federal securities On October 14, 2008, the SEC adopted regular trading hours on the settlement day date; laws. Rule 204T on an interim final temporary following the settlement date, immediately basis, expiring on July 31, 2009. close out the fail to deliver position by ▪ Participants that fail to deliver positions in On October 14, 2008, the SEC adopted Rule 144 securities must deliver securities On October 14, 2008, the SEC adopted the borrowing or purchasing securities of like Rule 10b-21 substantially as proposed. kind and quantity. of like kind and quality by no later than the elimination of the “options market maker beginning of regular trading hours on the exception” as proposed. thirty-sixth consecutive settlement day following the settlement date;

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Any participant and related broker-dealer ▪ Participants with fail to deliver positions who does not comply with the close-out attributable to bona fide market making rules discussed above (a) will be prohibited activities by a registered market maker, from accepting a short sale order in the options market maker, or other market equity security from another person, and maker obligated to quote in the over-the- (b) will be prohibited from effecting a short counter market (“Market Makers”) must sale in the equity security for its own deliver securities of like kind and quantity account, without first borrowing the security by no later than the beginning of regular or entering into a bona fide arrangement to trading hours on the third consecutive borrow the related security. Furthermore, settlement day following the settlement any such participant must notify any broker date; and or dealer from which it receives trades for clearance and settlement of the existence of ▪ Brokers or dealers who purchase a fail to deliver position that has not been securities prior to the beginning of regular closed out in accordance with the trading hours on the settlement day after rule (together with (a) and (b) above, the the settlement date for a long or short “Penalties”). sale to close out an open short position, and if (a) the purchase is bona fide; If a participant of a registered clearing (b) the purchase is executed on, or after, agency reasonably allocates a portion of a the trade date but by no later than the end fail to deliver position to another registered of regular trading hours on the settlement broker or dealer for which it clears trades or date for the transaction; (c) the purchase from which it receives trades for settlement, is of a quantity of securities sufficient to based on such broker’s or dealer’s short cover the entire amount of the open short position, the provisions of Rule 204T will position; and (d) the broker or dealer can apply to such registered broker dealer only. demonstrate that it has a net long position A broker or dealer that has a fail to deliver or net flat position on its books and position must immediately notify the records on the settlement day for which participant that it has become subject to the the broker or dealer is seeking to Penalties. demonstrate that it has purchased shares to close out its open short position (the Rule 203(b)(3) of Regulation SHO was “Broker Dealer Exemption”). amended to eliminate the options market maker exception from Regulation SHO’s The Penalties will not apply to the close-out requirement. Under Regulation following: SHO as it existed prior to this amendment, ▪ Brokers or dealers who timely certify to the requirement to close failed positions in the participant of a registered clearing

6 certain “threshold” securities did not apply to agency that they have not incurred a fail short sales by a registered options market to deliver position on a settlement date for maker, if and to the extent that the short a long or short sale in an equity security sales are effected by the registered options for which the participant has a fail to market maker to establish or maintain a deliver position at a registered clearing hedge on an options position that was agency or that they are in compliance with created before the security became a the Broker Dealer Exemption; and threshold security. ▪ Market Makers that can demonstrate that they do not have open short positions in the equity security at the time of any additional short sales.

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EU JURISDICTIONS

Short selling under the European Market Abuse Directive

The Market Abuse Directive is a measure adopted by the European Union to impose a uniform regime for dealing with market abuse. The Directive has been implemented in all the European Union countries. It does not prohibit short selling as such. However, any short selling activity will fall within the prohibitions of the Directive if it involves “insider dealing” (Articles 2 and 3 of the Directive) or “” (Article 5 of the Directive). Many EU jurisdictions have a set of rules that define in detail what does and does not amount to market abuse. The recent measures against short selling have usually taken the form of a clarification of these rules that effectively regards short selling of certain stocks to be market abuse, by taking the view that such short selling in times of extreme market volatility effectively involves market manipulation.

UNITED KINGDOM UNITED KINGDOM: MEASURES RELATING TO FINANCIAL STOCKS ACTION TAKEN PROHIBITIONS / RESTRICTIONS STOCKS AFFECTED DISCLOSURE OBLIGATIONS EXEMPTIONS OTHER PROVISIONS The UK’s Financial Services It is market abuse to enter into a The restrictions apply to a net short position in a It is market abuse for a person Persons acting in the capacity of Fund managers: Authority has adopted two new transaction that has the effect (on “UK Financial Sector Company”, i.e. certain with a “disclosable short position” market makers (which can include measures (Short Selling (No 2) its own or with other transactions) financial sector companies whose shares are to fail to make “adequate ongoing those who are not registered as If a fund manager holds short Instrument and Short Selling (No of: admitted to trading on a market established under disclosure” of that position. market makers with an exchange) positions on behalf of a non- 3) Instrument) to deal with short ▪ creating a net short position in the rules of a recognized investment exchange are exempt from both the discretionary client, the prohibition selling of financial sector stocks. a UK financial sector (including the London , virt-x, AIM Disclosable short position: means prohibition and the disclosure and the disclosure obligations company; or or PLUS) or in respect of which a request for a net short position representing obligation, including the apply to the client (although the These measures make a number admission to trading on such a market has been an economic interest of 0.25% or disclosure obligation that relates fund manager can disclose on of amendments to the Code of ▪ increasing any net short made. more of the issued (ordinary and to rights issue securities. behalf of a client). Market Conduct (which can be position in a UK financial preference) share capital of a found in the MAR sourcebook of sector company that the The FSA has compiled the following non-exhaustive company. A market maker is defined as an In the case of discretionary clients the FSA handbook). The Code is person had immediately before list of such companies which can be found at: entity that ordinarily, as part of its and where an individual fund is published by the FSA and September 19, 2008. http://www.fsa.gov.uk/pubs/other/Shortselling_list.p Adequate ongoing disclosure: is business, deals as principal in housed within a legal entity other provides authoritative guidance on The restriction does not apply to df. disclosure on a Regulatory equities, options or derivatives than the fund manager, the the market abuse offense transactions or orders entered Information Service (such as the (whether OTC or exchange- prohibition applies to the legal (prohibited by section 118 of the prior to September 19, 2008, nor Where an economic interest in a UK Financial London Stock Exchange’s RNS traded): entity housing the individual fund. Financial Services and Markets to net short positions arising Sector Company arises due to a position in a service) by no later than 3.30 p.m. However, the disclosure obligation Act 2000). purely due to a change in delta as basket of securities, index or an exchange-traded on the business day following (i) to fulfill orders received from applies to both the legal entity a result of, for example, buy- fund and the components of the basket, index or (a) the first day on which the clients, to respond to a client’s housing the fund and the fund

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Two new evidential provisions are backs, share issuances or fund are predominantly UK Financial Sector position is held; and requests to trade or to hedge manager (although the fund inserted into the Code: changing market conditions. Companies, then such economic interest must be (b) each day on which the short positions arising out of those manager can disclose on behalf of paragraph 1.9.2C(E), which included when determining whether the person has position changes. dealings; and/or a fund). effectively makes short selling of “Net short position” is any net a net short position or a disclosure obligation. financial sector stocks market short position giving rise to an If a person’s net short position (ii) in a way that ordinarily has the Fund managers must disclose abuse, and paragraph 1.9.2D(E), economic exposure to the issued A person is not allowed to short an index that is not falls below 0.25%, one last effect of providing liquidity on a their aggregate short position which imposes disclosure share capital (shares and predominantly composed of UK Financial Sector disclosure of that fact is required. regular basis to the market on across all the funds that they requirements. convertible bonds but not debt Companies and then take long positions in its both bid and offer sides of the manage on a discretionary basis. securities) of a company. constituents other than UK Financial Sector market in comparable size. The new measures will cease to It covers positions arising from Companies, if to do so would result in a new or Different trading desks: have effect on January 19, 2009 any instrument: options, futures, increased net short position in one or more UK New or increased net short unless the FSA decides to extend CFDs, spread-bets, etc, whether Financial Sector Companies. positions arising from proprietary If a firm has several trading desks them. The FSA will be publishing exchange-traded or OTC. trading strategies where the main that are part of the same legal a consultation in January 2009. intention is to create a short entity, the aggregate position of position are not exempt. the legal entity is taken into account, excluding positions falling within the market maker exemption.

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UNITED KINGDOM: MEASURES RELATING TO RIGHTS ISSUE SECURITIES ACTION TAKEN OBLIGATIONS STOCKS AFFECTED EXEMPTIONS On June 12, 2008, the FSA adopted the Short Selling It is a market abuse for a person to fail to give Rights issue securities: the measure applies to securities which Positions held in the capacity of market maker are Instrument 2008. adequate disclosure when reaching or exceeding a are the subject of a rights issue and the position is reached or excluded when determining whether a “disclosable “disclosable short position” that relates, directly or exceeded during a rights issue period. short position” has been reached or exceeded. The Instrument, which came into effect on June 20, indirectly, to rights issue securities. The securities must also have been admitted to trading on a 2008, inserts new provisions – paragraphs 1.9.2A(E) market established under the rules of a recognized investment and 1.9.2B(R) – into the Code of Market Conduct. “Disclosable short position”: a net short position exchange (including the London Stock Exchange, virt-x, AIM or representing an economic interest of 0.25% or more PLUS) or in respect of which a request for admission to trading The effect of these new Code provisions is effectively of the issued capital of any company (i.e. not just UK on such a market has been made. to impose a disclosure requirement on those reaching Financial Sector Companies), taking into account any or exceeding a disclosable short position in rights form of economic interest in the shares of the “Rights issue period” is the period that commences on the date a issue securities. company (excluding interests held in the capacity of a company announces a rights issue and which ends on the date market maker). that the shares issued under the rights issue are admitted to trading on a prescribed market. Adequate disclosure is disclosure made on a Regulatory Information Service (such as the London Stock Exchange’s RNS service) by no later than 3.30 p.m. on the business day following the date on which the disclosable short position is reached or exceeded. The disclosure must include the name of the person who has the disclosable short position, the disclosable short position and the name of the issuer of the qualifying instruments.

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BELGIUM ACTION TAKEN PROHIBITIONS / RESTRICTIONS STOCKS AFFECTED DISCLOSURE OBLIGATIONS EXEMPTIONS OTHER PROVISIONS The Banking Finance and Prohibition on uncovered short The measures apply to stock (i.e. shares) Anyone who holds a net economic The following exemptions apply: Fund Managers: Insurance Commission (“CBFA”) positions. and any kind of derivative instrument short position which represents an adopted new rules on (including futures) in the following financial economic interest in excess of (i) Market makers on the derivatives In the case of short positions held September 19, 2008, which were Short positions without adequate institutions: 0.25% of the capital of the issuers market and liquidity providers on by fund managers on behalf of non- confirmed by a Royal Decree of coverage are prohibited. of the stocks affected must report the cash market (as defined in the discretionary clients, the obligations September, 23, 2008. Dexia SA this to the CBFA and the market by Rulebook of Euronext) are exempt. apply to the client. The short seller must have any appropriate means. The rules are intended to prohibit coverage consisting of the Fortis NV/SA (ii) Block trade counterparties are In the case of short positions held “naked shorting”, i.e. selling shares securities that have been sold or “Net economic short position” also exempt: financial by fund managers on behalf of to another without ‘complete the securities to which a derivative KBC Groep NV means any instrument (shares, intermediaries (licensed banks and discretionary clients, the fund coverage’ (e.g. where the seller transaction relates. Coverage contracts for differences, spread investment companies) may sell manager is subject to the does not own or has not borrowed through derivatives is not adequate: KBC Ancora CVA bets, options, etc) giving rise to an blocks to their clients without having obligations. the shares). the seller must either possess the exposure, whether direct or indirect, the securities at hand and therefore securities concerned before selling ING Groep NV in the equity share capital of the have a temporary short position. Where the fund manager has a The new rules came into force at them on the market or before company. However, when a client wants to mandate to manage more than one 10.00 a.m. on Monday, creating a covered short position. sell a block to his intermediary, the individual fund, it should aggregate September 22, 2008. The disclosure obligation does not latter must ascertain that his client all the positions of its discretionary Short positions arising due to a apply to orders entered prior to has appropriate coverage. funds for the purposes of The rules will cease to have effect derivative instrument must also be 10.00 a.m., on determining whether it is required to on December 21, 2008 unless adequately covered. The rules September 22, 2008. (iii) Financial intermediaries make disclosure. extended by the CBFA. cover both OTC and exchange- (licensed banks and investment traded instruments and even Disclosure to the market must be companies) that are usually active Different legal entities in a group: transactions entered into abroad. made through an internationally- as market makers in OTC markets distributed press release. As for (cash or derivatives) by offering sell Where short positions are held Adequate coverage includes: notification to the CBFA, market and buy prices are also exempt. across different legal entities, the

▪ possession of the securities prior participants can send their calculation of the net short position to selling (e.g. by borrowing the notification either by email to and the disclosure should be made securities); [email protected] or by fax at the group level. to + 32 2 220 59 03. ▪ putting in place arrangements prior to selling on The disclosure to the market must the basis of which the securities be on a net basis, whilst that to the will be delivered at the latest at CBFA has to be on a gross basis.

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D+3 where D is the date of the The aggregated net economic short short-sale; and position should be broken down into

▪ buying the securities prior to its component parts. selling them where the securities If a person’s net short position falls will be delivered at the latest on below 0.25%, then one last D+3. disclosure of that fact is required. Qualified intermediaries are required to take reasonable The disclosure obligation also measures to ascertain that their applies to those with a net short clients have appropriate coverage position that arises after for their proposed transactions. For September 21, 2008; not as a result clients with direct market access, of any transaction if it is at or above intermediaries should, as a the 0.25% threshold. minimum, obtain a general representation about their coverage.

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FRANCE ACTION TAKEN PROHIBITIONS / RESTRICTIONS STOCKS AFFECTED DISCLOSURE OBLIGATIONS EXEMPTIONS OTHER PROVISIONS The French Autorité des Marchés It is now prohibited (regarded as The restrictions apply to a naked short It is market abuse for any person holding Neither the prohibition nor the For orders in the order book but Financiers (AMF) issued a press release the offense of market abuse) for selling of stocks of “credit institutions or a net short position representing an disclosure obligation apply to not executed on or before on September 19, 2008 (available in a person to enter into a insurance companies” whose shares are economic interest of 0.25% or more of investment service providers September 22, 2008, the English at http://www.amf- transaction (defined as any spot, admitted to trading on a regulated the issued share capital of an affected acting as market makers, intermediary must ascertain that france.org/documents/general/8424_1.p forward or optional transactions market in France (i.e. Euronext Paris, company to fail to disclose it to the AMF liquidity providers or as the sellers actually own the df) and a Q&A on September 23, 2008 whether for own account or for MATIF and MONEP). and to the public at the latest on the counterparties for block trades in securities and, if the intermediary (available in English at http://www.amf- third parties) with the purpose or trading day following the date of the equities. is not the custodian, the client france.org/documents/general/8429_1.p effect of violating or The AMF has compiled an exhaustive transaction (a specific form is available in must provide a formal statement Market makers and liquidity df) to deal with short selling of financial circumventing the following list of such companies which can be English at http://www.amf- to this effect. Otherwise, such providers are defined for these sector stocks. provisions: found in English at http://www.amf- france.org/documents/general/8435_1.pd orders must be cancelled. purposes as market members france.org/documents/general/8425_1.p f). ▪ Any investor giving a sell order that have a contract with This press release strengthens already df. As regards the creation of a short for one of the affected Euronext or that manage a existing measures inserted in the The AMF clarified some issues related to position using derivatives, the securities with deferred liquidity contract signed with the Règlement général de l’AMF (General disclosure obligations. In particular: AMF clearly stated that investors settlement service requested issuer or are authorized financial rules of the AMF). The most significant of are not allowed to use must hold 100% of the ▪ Positions in the same group shall be intermediaries in France whose these pre-existing measures is that an derivatives to create a short securities (including through a calculated on a consolidated basis. regular business is to quote bid investor must be able to deliver position. They may only use stock loan) to be sold on its and ask prices on OTC or cash securities sold three trading days after ▪ Portfolio management companies must derivatives to hedge long account with its financial aggregate all of the short positions in or derivative markets. the trade date. intermediary. positions. the stocks of a given issuer for CIS or The AMF has explained that The new measures came into force on ▪ Any investment service management account. intermediaries acting as The AMF further stated that September 22, 2008. They will cease to provider receiving a sell order counterparties for block trades in trades in index derivatives are have effect on December 22, 2008 for one of the affected equity may respond to a client’s not prohibited per se. However, if unless the AMF decides to extend them. securities must require its buy order without owning the the hedging of such trades client to deposit the securities securities and thus find requires the sale of affected to be sold on its account with themselves temporarily in a short securities, the seller must own the investment service position. However, if the client the securities at the time of the provider before the order is gives a sell order where the intended sale. executed. If the investment intermediary is likely to act as service provider is not the counterparty, the intermediary custodian of the client’s must ensure that the client assets, it must get an explicit actually owns the affected statement from the client that it securities.

13 holds the relevant securities. This explicit statement may take the form of a client’s undertaking to comply with the ownership requirement. Although stock loans are not prohibited outright, financial institutions are required to abstain from lending the affected stocks. However, financial institutions may lend affected shares in order to cover existing positions, to meet commitments made before these measures were implemented or if the transaction is not related to creating short positions.

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GERMANY ACTION TAKEN PROHIBITIONS / RESTRICTIONS STOCKS AFFECTED DISCLOSURE OBLIGATIONS EXEMPTIONS OTHER PROVISIONS The Federal Financial Supervisory The decree prohibits transactions The decree does not contain any The decree provides for the N/a. Authority (BaFin) on September 19, that result in a short position or in an The prohibition applies to short sales specific disclosure obligations in following exemptions: 2008 issued a General Decree increase in a short position in shares of shares of the following financial addition to the general disclosure sector companies: ▪ “Name-to-follow” transactions temporarily prohibiting naked short issued by certain specified obligations for securities transactions (Aufgabe-geschäfte) by lead sales of shares of eleven companies companies in the financial services under the German Securities Trading ▪ Aareal Bank AG brokers (Skontro-führer) within in the financial sector. The ban took sector. Only naked short Act (Wertpapierhandelsgesetz, the meaning of Sec. 95 of the effect on September 20, 2008 and transactions, i. e. transactions in the WpHG). Such disclosure rules ▪ Allianz SE German Commercial Code will apply until December 31, 2008. specified shares that are not backed currently do not provide for any (Handelsgesetzbuch, HGB); However, the prohibition will be by securities lending, are affected by notification obligations for short reviewed on an ongoing basis and the prohibition. ▪ AMB Generali Holding AG selling transactions. ▪ Transactions of persons who are BaFin is able to revoke it to promptly under a contractual obligation to respond to any further changes in The ban also applies to intra-day ▪ Commerzbank AG make binding buy and sell bids the market. Positions existing before short positions. (e.g. market makers; designated September 20, 2008 are not ▪ Deutsche Bank AG sponsors) to the extent that such covered by the prohibition. A short position within the meaning transactions are required for the of the decree arises when at the time ▪ Deutsche Börse AG performance of their contractual The ban was supplemented by a of the transaction if the seller of the obligations; and ▪ Deutsche Postbank AG General Decree issued on shares: ▪ Short sales used to secure September 21, 2008 to clarify that already existing positions. certain transactions are considered (a) does not own such shares; or ▪ Hannover Rückversicherung AG Pursuant to a further decree issued legitimate and are therefore on September 21, 2008, an exempted from the ban on short (b) does not have any enforceable ▪ Hypo Real Estate Holding AG additional exemption was provided selling. legal claim under the law of to transactions agreed by market ▪ MLP AG obligations or under property law participants with a customer for the A translation of both decrees can be (i) to be transferred title in shares of ▪ Münchener Rückversicherungs- settlement of a transaction in shares found at: the same class, or (ii) that results in Gesellschaft AG concluded at a fixed or definable the title in shares of the same class price (so called fixed-price http://www.bafin.de/cln_116/nn_7204 being transferred. transaction). 86/SharedDocs/Artikel/EN/Service/M eldungen/meldung__080919__leerve In consequence, in case of (non- rkauf.html?__nnn=true prohibited) short sales backed by securities lending, such securities lending transactions must be

15 concluded simultaneously with the respective short sale at the latest. As from September 20, 2008, new issues of put instruments (put warrants, put certificates) may no longer be hedged by a short position in shares. The same applies to CFDs to the extent they are hedged by transactions resulting in a net short position in shares.

On the other hand, the sale of futures (short futures) and the purchase of put options (long puts) are not affected by the ban. This is also true for the sale of a call option (short call).

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IRELAND ACTION TAKEN PROHIBITIONS / RESTRICTIONS STOCKS AFFECTED DISCLOSURE OBLIGATIONS EXEMPTIONS OTHER PROVISIONS The Irish Financial Services It is market abuse to enter a The restrictions apply to stocks of Disclosure is required by any person Persons acting in the capacity of The IFSRA has indicated that Regulatory Authority (the “IFSRA”) transaction or arrangement after Irish publicly quoted banks. These who holds an economic interest market makers are exempt from the shorting of the ISEQ Index, although amended the Market Abuse September 18, 2008 which has the are listed in Rule 10.1 of the Market involving 0.25 per cent. or more prohibition. covered by the rule, will not result in Rules (March 2006) by introducing effect of generating a net economic Abuse Rules as: (i.e. the aggregate net short position any action on its behalf, but this will rules prohibiting short selling of benefit, including increasing any net ▪ The Governor and Company of the of 0.25 per cent. or above) of the Market making positions are exempt be kept under review. stocks of Irish publicly quoted banks short position, which would arise Bank of Ireland; issued shared capital of one of the from the disclosure obligations. effective from midnight on from a fall in the price of the shares Irish publicly quoted banks. The prohibition and disclosure September 18, 2008 requiring in an Irish publicly quoted bank. ▪ Allied Irish Banks Plc; A market maker: obligations apply to all ways in which ▪ Irish Life and Permanent Plc; and disclosure of certain short positions Individual short and long positions ▪ is a person who is or has been an economic interest, direct or from September 23, 2008. An existing short position can be ▪ Anglo Irish Bank Corporation. underlying the net position do not operating as a market maker indirect, can be created, including continued or traded to reduce or need to be disclosed. ordinarily as part of their business; spread betting and CFDs. The IFSRA has not stated when the close out the short position. and measures will terminate but will keep If the net short position falls below The prohibition and disclosure them under continuous review. A net short position which does not 0.25 per cent, the IFSRA must be ▪ includes persons recognized as a obligations apply throughout the day, arise because of a notified of this. market maker by a Market including short positions taken intra- transaction/arrangement entered into Operator. day and closed-out before the end of after September 18, 2008 to create Disclosure must be made: the day. that short position is not prohibited (but it may be disclosable). 1. By 3.30 p.m. on each day on and The prohibition and disclosure after September 23, 2008 (even if obligations apply to any person A short position may be established the size of the net short position has benefiting from creating a short post September 19, 2008, provided not changed since the previous position, including a contracting party the short position offsets or partially disclosure); and an intermediary who assists in offsets a long position in relation to putting the transaction or the same company. 2. Using an RIS system. Disclosure arrangements in place. The guidance can be made directly to an RIS, with indicates that the person should simultaneous notification to the understand the purpose or Company Announcements Office consequence of such (the “CAO”) of the Irish Stock transactions/arrangements. Exchange Limited. Alternatively, indirect disclosure can be made to an RIS through the CAO.

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The disclosure must set out the name of the person who has the position, the company in which the position is held, the percentage of the issued share capital of the company and the amount of the position.

18

ITALY ACTION TAKEN PROHIBITIONS / RESTRICTIONS STOCKS AFFECTED DISCLOSURE OBLIGATIONS EXEMPTIONS OTHER PROVISIONS Consob, the Italian securities By virtue of Resolutions 16622; Any share of a company listed and None. These prohibitions and restrictions The clearing and settlement systems markets regulator, has adopted three 16645; and 16652, all sale of shares traded on Italian-regulated markets. do not apply to the activities carried are required to adopt any and all measures on short sales of shares. of companies listed and traded on out, in the performance of their measures to prevent Italian-regulated markets must be functions by: that may cause an On September 22, 2008, Consob backed by the ownership and right to unusual price decrease of the issued Resolution 16622, which dispose of such securities by the (i) market makers referred to under affected shares. provides for a prohibition on “naked” seller. Article 1, paragraph 5-quater of short sales of bank and insurance Legislative Decree No. 58 of company shares; on October 1, Ownership and right to dispose of February 24, 1998; and 2008, it issued Resolution 16645, the securities must exist from the which expressly prohibits all short time of submission of the sale order (ii) specialists and liquidity providers sales of such shares; and, through to the time of settlement of as defined in the Listing Rules of the subsequently, on October 10, 2008, the relevant trade. regulated markets organized and Consob issued Resolution 16652, managed by Borsa Italiana S.p.A. which provides for a prohibition of all Borrowed securities, irrespective of short sales of shares of any the technical form of such borrowing, company listed and traded on Italian- are not considered as “owned” or regulated markets. “disposable” for the purposes of this prohibition. Resolution 16622 became effective at 00.01 a.m. on September 23, 2008 and will expire at 11.59 p.m. on October 31, 2008.

Resolution 16645 became effective at 2.00 p.m. on October 1, 2008 and will expire at 11.59 p.m. on October 31, 2008. On October 29, 2008, Consob amended Resolution 16652 extending the expiration date to 11.59 p.m. of December 31, 2008. These measures are aimed at ensuring the proper conduct of

19 trading and the integrity of the markets, due to the recent evolution of the market situation.

20

LUXEMBOURG ACTION TAKEN PROHIBITIONS / RESTRICTIONS STOCKS AFFECTED DISCLOSURE OBLIGATIONS EXEMPTIONS OTHER PROVISIONS On September 19, 2008, the The CSSF prohibits market The prohibitive measures apply not There are no particular disclosure Market makers are generally exempt In the event that Luxembourg market Commission de Surveillance du participants from carrying out naked only to the shares themselves but to requirements. from the new short selling participants enter into transactions in Secteur Financier (CSSF) issued a short sales where the underlying all instruments (e.g. CFDs, options, prohibitions. This exemption covers respect of securities admitted to press release relating to the assets are stocks of a credit futures or depository receipts) that market makers only when, in the trading on any other regulated prohibition of uncovered (“naked”) institution or insurance undertaking give rise to an exposure to the particular circumstances of each market, they must apply the rules as short selling in publicly quoted banks admitted to trading on the regulated issued share capital of a company, in transaction, they are acting in that set out by the competent regulator of and insurance companies (available market of the Luxembourg Stock particular the following institutions: capacity and with the intention of that regulated market. in English at Exchange (excluding securities providing liquidity and exercising http://www.cssf.lu/uploads/media/pre admitted to trading on the Euro Dexia S.A. genuine market making activities. ssrelease__short_selling290908__0 MTF), whether for its own account or 1.pdf). On September 29, 2008, the on behalf of clients. Fortis N.V./S.A. CSSF issued a further press release elaborating on the earlier press When performing such transactions Foyer S.A. release (available in English at on behalf of their clients, market http://www.cssf.lu/uploads/media/pre participants must ensure that the ssrelease__short_selling290908__0 clients are able to deliver the stocks 1.pdf). on the settlement date.

The CSSF considers such naked Uncovered or , in short sales to be incompatible with this context, means a transaction the regulatory requirements (including an OTC one) which results governing market conduct, in in the creation of a net short position particular where such sales distort or or increases any net short position manipulate the market. that was held prior to September 19, 2008. Only net (and not gross) short Although the prohibition is positions are prohibited (provided considered by the CSSF to be of a there is no duration mismatch temporary nature, no definite date for between the netted positions). review thereof has been set by the CSSF. Market participants who are long will be able to hedge their long positions by way of buying protection (in particular in the form of derivatives).

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THE NETHERLANDS ACTION TAKEN PROHIBITIONS / RESTRICTIONS STOCKS AFFECTED NOTIFICATION OBLIGATIONS EXEMPTIONS OTHER PROVISIONS The Netherlands Authority for the It is prohibited to enter into a The AFM has produced the following A person that holds or obtains a Those acting in the capacity of Investment Managers: Financial Markets (“AFM”) has transaction or to place a trading list of financial enterprises: “notifiable short position” in a market maker are exempt from the adopted measures effectively order that (either by itself or in financial enterprise, regardless of new rules (i.e. from both the Non-discretionary clients: prohibiting short selling of certain combination with other transactions Aegon N.V. how and when this position has prohibition and the notification Dutch financial enterprises. or trading orders) has the following arisen, is required to make “proper requirement). Where the investment manager effect: ING Groep N.V. contiguous notification” of that manages on a non-discretionary Anyone contravening the prohibition position. “Market maker” for these purposes is basis, both the prohibition and the will be regarded by the AFM as (a) creating a net short position in a Fortis N.V. a person or entity that, ordinarily as notification obligation apply to the having committed market financial enterprise; or “Proper contiguous notification” part of its business, deals as client, although the manager can manipulation, prohibited by BinckBank N.V. means notification to the AFM not principal in equities and/or make a notification on behalf of the Section 5:58 of the Financial (b) increasing a net short position in later than the working day following derivatives (whether OTC, client (provided the client is clearly Supervision Act. a financial enterprise which position Kas Bank N.V. each day on which the notifiable exchange-traded or on an MTF) in a identified). existed before October 5, 2008. short position is held. way that ordinarily has the effect of The measures came into effect on SNS Reaal N.V. providing liquidity on a regular basis Discretionary clients: October 5, 2008, initially applying for The prohibition does not apply to a “Notifiable short position” means a to the market on both bid and offer a period of 30 days. The AFM transaction entered into or a trading Van der Moolen Holding N.V. net short position representing an sides of the market in comparable Where an investment manager extended the measures on October order placed prior to October 5, economic interest in the total issued size. Trading in circumstances other manages on a discretionary basis 31, 2008 until January 17, 2009. 2008. Van Lanschot N.V. capital of the financial enterprise than genuinely for the provision of and where client positions are concerned of 0.25% or more. liquidity is not exempt. Market segregated from the manager and On October 10, 2008, the AFM “Net short position” means a net makers are not expected to hold from each other in one or more published new measures which short position giving rise to an If a person’s net short position falls significant short positions, other than accounts, the prohibition applies at came into effect on October 11, economic exposure to the issued below the 0.25% threshold, then one for brief periods. the level of the individual clients. 2008. Substantively speaking, there share capital of a financial last notification of that fact is is no difference between the new enterprise. In calculating whether required. A person or an entity does not have Where the investment manager measures and the measures of one holds a short position, every to be a market maker within the manages collective investment October 5, 2008. These latest form of economic interest in the Where a person has a structure that definition of the Euronext Rulebook schemes on a discretionary basis, measures have been adopted in issued capital of the financial includes more than one legal entity, to take advantage of the exemption, the prohibition applies at the fund connection with the entry into force enterprise concerned should be the notification should be made at nor does it have to be registered with level. If the fund in question is an on October 11, 2008 of legislation on included. the group level, provided the an exchange or platform. umbrella fund with a number of sub- the basis of which, amongst other notification clearly states which funds, the prohibition applies at the things, it is stated beyond all doubt Such economic interest can be positions belongs to which entity. All sub-fund level. that the AFM can take measures created by any financial instrument the positions within the group must against short selling. that gives rise, directly or indirectly, be aggregated. The notification obligation applies at to an exposure to the issued share the level of both the person to which Both the term and the contents of the capital of a financial enterprise. the prohibition applies and at the

22 measures can be modified in the level of the investment manager, meantime. The AFM has set out The rules apply to both uncovered although the manager can make answers to frequently asked and covered short positions and notifications on behalf of clients. questions (see www.afm.nl). The apply to OTC and on-exchange AFM may publish additional FAQs or transactions. They apply to all In respect of itself, the investment clarify existing ones as further transactions executed in or from the manager is required to notify its questions arise. Not all FAQs are Netherlands, regardless of the aggregate net short position across discussed in this overview. trading platform on which the all of the funds it manages on a transaction takes place. discretionary basis.

Different trading desks:

If trading desks within a firm are housed within the same legal entity, the aggregate position of the legal entity (across all desks holding positions in financial companies) would be expected to apply for these purposes, excluding positions taken under the market maker exemption.

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NON-EU JURISDICTIONS

AUSTRALIA5 ACTION TAKEN PROHIBITIONS / RESTRICTIONS STOCKS AFFECTED DISCLOSURE OBLIGATIONS EXEMPTIONS OTHER PROVISIONS The Australian Securities and Covered and naked short selling of All listed ASX securities and Where covered short selling is Exemptions are available for: ASIC had modified the law to ensure Investments Commission (“ASIC”) Australian stock exchange (“ASX”) managed investment products. permitted, the short selling ▪ Certain hedging by market makers that trading of exchange traded has by Class Order prohibited listed securities and managed Post November 18, 2008 until transaction needs to be disclosed. in certain circumstances; options is largely unaffected other covered short selling of all securities, investment products. These reporting requirements are than by certain reporting January 27, 2009 (subject to any ▪ Certain transactions; managed investment products and further ASIC announcements) the equivalent to end of trading day net requirements. stapled securities quoted on licensed ban will only apply to financial short sale position disclosure under ▪ Hedging in relation to obligations to markets in Australia, subject to stocks. Financial stocks are defined the ASX Market Rules. The reporting underwrite a /distribution certain exceptions. This prohibition as stocks of entities in the S&P/ASX requirements came into effect on reinvestment plan; came into effect on September 22, 200 Financial Index (which will September 19, 2008, and apply to ▪ Hedging being issued securities 2008. include property trusts and five other trading from September 22, 2008. on conversion of a convertible that The ban is expected to be lifted for APRA supervised listed entities not Reporting requirements also apply to converts by reference to a VWAP; non-financial stocks on in this index). certain naked short positions in ▪ Hedging of pre-September 22, November 18, 2008. The ban on trading of exchange traded options. 2008 exposures; covered short selling for financial As part of lifting the ban on non- ▪ Certain dealing in government stocks is expected to be in place until financials, ASIC with ASX will put in bonds; January 27, 2009. place disclosure and reporting ▪ Sales of products in certain arrangements that will apply from the circumstances where a contract Generally naked short selling is also time the ban is lifted (expected to be for purchase of products existed prohibited subject to certain November 18, 2008 for non financial prior to a contract to sell the exceptions. stocks). The details of these products; and reporting requirements have not yet been released. ▪ Sales of products where there is delivery within three days, certain

other conditions are met and delivery is not achieved using borrowed products.

5 This information is up to date as of 24 October 2008.

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BRAZIL ACTION TAKEN PROHIBITIONS / RESTRICTIONS DISCLOSURE OBLIGATIONS EXEMPTIONS OTHER PROVISIONS The Brazilian Securities Exchange The CVM took the position that it has not All short sales are made visible to the CBLC None. The CBLC limits the exposure of its Commission (“CVM”) published on identified evidence of any market abuse at the time of settlement if the investor is centralized securities lending facility to October 14, 2008 an explanatory note related to short selling transactions. For this compelled to obtain a loan of securities from individual investors, brokers and shares. The prepared as a response to a media release reason, CVM stated that there is no need for the centralized facility or to purchase shares limits are set out by the CBLC under its self- of the IOSCO Technical Committee any additional prohibition or restriction in on the market to cover its sale. regulatory authority. (Instruction CVM n. 283 Members’ Initiatives Relating To Restrictions addition to currently applicable constraints, of July 10, 1998 and CBLC Operating on Short Sales. The CVM stated in the note which are embedded in the operating rules of The CBLC tracks all securities lending Procedures, Chapter VI - item 8). The limits that Brazil already had considerable the CBLC. transactions and gathers information are: restrictions and procedures in place relating regarding the identities of parties, the terms, ▪ The facility cannot lend to a single investor to short selling. As a result, it did not find amounts and market value of the securities more than 3% of the free float of a single sufficient evidence of abusive short selling in on loan and the collateral offered to secure issuer; the Brazilian market. The note also states the loan. (Instruction CVM n. 441 of that the existing legal, regulatory and self- November 10, 2006). The CVM has full ▪ The facility cannot lend to a single broker regulatory framework within which short access to this information. more than 6.5% of the free float of a selling transactions are conducted provides single issuer; and an adequate regulatory environment for short Additionally, CBLC makes public aggregate ▪ The facility cannot lend in the aggregate selling. information on a daily basis (CBLC more than 20% of the free float of a single Operating Procedures, Chapter VI - item 3.3) issuer. Currently, the Brazilian Clearing and Custody regarding the outstanding number of shares The CBLC is responsible for monitoring its Corporation (“CBLC”), the clearing house for of each issuer that have been lent to exposure and may compel a party to close the São Paulo Stock Exchange (the investors, the value of the outstanding out a position whenever one of the above “Bovespa”), is the only institution authorized contracts and the percentage of the limits is exceeded. by CVM to offer securities lending services outstanding shares of an issuer represented (National Monetary Council Resolution by such shares, among other aggregate The CBLC requires an investor or its broker (CMN) No. 3.539 of February 28, 2008 and information regarding the lending facility. to post collateral as a condition to any Instruction CVM No. 441 of November 10, securities lending transaction (CBLC 2006). Operating Procedures, Chapter VI - item 4.3.1). The CBLC is responsible for the settlement Investors are required to return the securities of all trades, including short selling to the facility on the maturity date. If the transactions, and for regulating its operating securities are not returned at the specified procedures. In its regulations relating to time or the loan is not renewed, investors are operating procedures, the CBLC sets out deemed to be in default and are assessed

25 rules for covering short sales and for fines of 0.2% of the amount of the securities securities lending. owed. Any short sale must be covered by the time required for the deposit of the securities in Upon a default, investors must pay twice the preparation for the settlement of the trade on fee originally owed for the securities loan T+3. If the seller does not deposit the until the securities are returned. relevant securities at the proper time, the CBLC will compel the investor to borrow the If the securities are not returned on the securities from a central lending facility maturity date, CBLC may also issue a buy operated by the CBLC. If the investor does order on behalf of the investor for the not have sufficient collateral posted in its purchase of the undelivered securities, name, the broker for the trade will have the enforce the collateral on hand or require the margin assessed from its net position in the cash settlement of the loan (CBLC Operating clearing house. If no securities are available Procedures, Chapter VI - item 6). for lending in the centralized facility, the settlement of the trade may be postponed while a mandatory buy order is issued on behalf of the investor or the acting broker. In limited circumstances, other measures may be taken to unwind the transaction. Margin requirements for securities lending transactions, which are reviewed continually, have increased slightly in recent weeks with respect to certain shares, reflecting increased volatility in the market for such shares.

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CANADA ACTION TAKEN PROHIBITIONS / RESTRICTIONS STOCKS AFFECTED EXEMPTIONS OTHER PROVISIONS In Canada, emergency measures were taken The order banned short sales in certain The order provided a list of certain financial The orders (as amended during the process) The emergency rules discussed in the with respect to short sales of certain financial publicly traded securities of financial sector sector issuers that were both (a) listed on the provided the following exemptions: columns on the left have now expired, but it sector shares. While these measures have issuers. Toronto Stock Exchange (“TSX”) and is worth remembering that short sales in now expired, various continuing restrictions (b) inter-listed in the United States (the (i) short sales conducted in accordance with Canada remain subject to a number of exist and there are proposals for new On September 22, 2008, it was clarified that “Financial Sector Issuers”). the Investment Industry Regulatory restrictions, including: measures, as briefly discussed in the column this applied only to common equity Organization of Canada’s Universal Market on the right under ‘Other Provisions’. securities. Trades on other marketplaces in Canada Integrity Rules (“UMIR”), Rule 3.1, ▪ the obligation to inform the selling dealer On September 19, 2008, the Ontario and over-the-counter trades were also Restrictions on Short Selling, sections 2(a) that a short sale is occurring; Securities Commission (the “OSC”) issued a affected. [certain program trades], 2(b) [certain market temporary order prohibiting the short selling maker trades], (d) [certain derivatives market ▪ a prohibition, with certain exceptions, on of securities of certain financial sector The Financial Sector Issuers were as maker trades] and (g) [certain ETF trades]; selling on a “downtick” (and special issuers inter-listed in the U.S. “as a follows: provided that a dealer fulfilling market maker requirements apply to entering short sale precautionary measure to prevent regulatory obligations may not effect a short sale in the orders prior to market opening and in the arbitrage” as a result of U.S. initiatives and to Aberdeen Asia-Pacific Income Investment common equity securities of the Financial case of or distributions); promote fair and orderly markets in Ontario. Company Ltd. (note that this issuer’s name Sector Issuers if the market maker ought (Temporary Order, In the Matter of Certain was removed on September 22 as it is not reasonably to know that the client’s or ▪ a “soft” locate requirement (the regulator Financial Sector Issuers, September 19, inter-listed), Bank of Montreal, The Bank of counterparty’s transaction will result in the has indicated that one should have a 2008). Nova Scotia, Canadian Imperial Bank of client or counterparty establishing or “reasonable expectation” of settling any Commerce, Fairfax Financial Holdings increasing an economic net short position trade); and This order was restated on September 22, Limited, Kingsway Financial Services Inc., (i.e. through actual positions, derivatives or 2008 to reflect changes made in the United Manulife Financial Corporation, Quest otherwise) in the issued share capital of a ▪ restrictions on insiders, including directors, States and to remove an erroneously Capital Corp., Royal Bank of Canada, Sun Financial Sector Issuer covered by the officers and over 10% voting shareholders, included issuer. Life Financial Inc., Thomas Weisel Partners temporary order; of Canada Business Corporations Act Group Inc., The Toronto-Dominion Bank, and incorporated companies from effecting On October, 3, 2008, the order was, in Lynch & Co., Canada Ltd. (which, (ii) “block facilitation” short sales conducted short sales. addition to being again amended slightly, while not inter-listed, had issued securities by a registered dealer as principal to extended to October 8, 2008, so as “to exchangeable into securities of Merrill Lynch facilitate with a client or counterparty (a) a Brokers selling shares that constitute short parallel the extensions of the SEC Short & Co., Inc.). securities transaction that has a current sales are required to mark the trade as a Selling Orders.” (Reasons for the Decision to market value of $200,000 or more in a single short sale (or, in certain cases, as a “short Extend the Temporary Cease Trade Order, transaction, or in several transactions at exempt” trade, if that marker is available), In the Matter of Certain Financial Sector approximately the same time, provided that and the “bundling” of both short and long Issuers, October 8, 2008). the position is liquidated or hedged as soon positions as a single order is restricted. as possible; or (b) a derivatives transaction

27

The order expired at 11:59 p.m. on that has a notional value of $200,000 or Note that a short sale is deemed (see October 8, 2008. more in a single transaction, or in several section 3.1 of IIROC’s Universal Market transactions at approximately the same time, Integrity Rules) to include settling with certain transactions valued at over $200,000, borrowed stock, selling restricted securities provided that they are liquidated or hedged (with special requirements applying to sales as soon as possible, and in each case of U.S. restricted stock), or where the provided further that a dealer may not effect securities would expect to be received as a a short sale in the common equity securities result of certain other transactions after the of the Financial Sector Issuers if the dealer ordinary course settlement date of the sale. ought reasonably to know that the client’s or counterparty’s transaction will result in the As well, legended or otherwise restricted client or counterparty establishing or securities may not constitute “good delivery” increasing an economic net short position of the securities in question, and may also (i.e. through actual positions, derivatives or not be able to be used to settle a short sale otherwise) in the issued share capital of a borrowing. Finally, off-exchange sales are Financial Sector Issuer covered by the restricted in Canada, in order to enhance temporary order; transparency, and brokers are considered “gatekeepers” and may as a result be (iii) short sales conducted in order to comply required to report violations to regulators. with UMIR Rule 5.2, Best Price Obligation; On October 15, 2008, the Canadian SRO, (iv) short sales conducted by a person or IIROC, introduced further proposals, subject company as a result of the automatic to comment in certain cases, to further exercise or assignment of an equity option, regulate both short sales and failed trades. or in connection with settlement of a futures These will require reporting of failed trades contract, held prior to the effectiveness of the after 10 trading days, limit the ability to order due to expiration of the option or cancel or vary executed trades, and allow futures contract; IIROC to designate certain securities as ineligible for short sales entirely. They may (v) short sales that are sales of a security also involve the imposition of hard “pre- subject to any restriction on sale imposed by borrow” requirements in the case of persons applicable securities legislation or by an who have executed failed trades, the Exchange or QTRS as a condition of the possible amendment to or removal of current listing or quoting of the security, where the short sale price restrictions and the potential security is beneficially owned by the seller removal of current requirements to file bi- and the sale is made under an exemption monthly aggregate short position reports. from the prospectus requirements in

28

accordance with applicable securities legislation (e.g. sales of Canadian “restricted” securities, such as those legended or otherwise subject to resale restrictions, that are sold to an accredited investor acting as principal);

(vi) short sales conducted to adjust a hedged derivative position in order to maintain the risk exposure either hedged under (ii) above or that existed at the time the order became effective; and

(vii) short sales conducted by a writer of a call option that effects a short sale in a common equity security of a Financial Sector Issuer as a result of assignment following exercise by the holder of the call.

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HONG KONG ACTION TAKEN PROHIBITIONS / RESTRICTIONS STOCKS AFFECTED DISCLOSURE OBLIGATIONS EXEMPTIONS The Securities and Futures Commission There has been no significant change in the Any share of a company listed and traded on Pursuant to section 172 of the SFO, all The position of a market maker in securities (“SFC”), Hong Kong’s securities and futures position in Hong Kong recently in relation to the SEHK. market participants, when conducting short is different from that of other market markets regulator, has issued several press short selling. selling which is permitted by the SEHK, are participants in relation to the application of releases on short selling in Hong Kong. required to flag the order as a short selling the legal and regulatory requirements on Only covered short selling for certain order in the SEHK trading system. short selling. Some of the key points raised in the latest designated securities as prescribed by the press releases include the following: SEHK is permitted. The Eleventh Schedule does not apply to ▪ Naked short selling has always been Maker Short Selling, unlawful in Hong Kong pursuant to Naked short selling is strictly prohibited in Structured Product Liquidity Providers Short section 170 of the Securities and Futures Hong Kong. Selling, Designated Index Arbitrage Short Ordinance (Cap 571) (“SFO”). Selling, Stock Futures Hedging Short Selling, Structured Product Hedging Short Selling ▪ Only covered short selling for certain and Options Hedging Short Selling. designated securities as prescribed by the Stock Exchange of Hong Kong (“SEHK”) is permitted. Short selling is governed by the Eleventh Schedule of the SEHK Trading Rule (“the Eleventh Schedule”). ▪ Short selling may be executed only on the SEHK at or above the best current asking price (the “tick rule”). There were proposals earlier in the year to scrap the tick rule, but that has now been withdrawn in light of the market situation. ▪ The rules also require a full audit trail to be kept for covered short sales (i.e. when clients place short selling orders, they must provide documentary confirmation to their brokers or agents that the sale is shorted and it is covered). ▪ There is no temporary ban on covered short selling.

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INDIA

Short selling is not prohibited in India by the Securities and Exchange Board of India (“SEBI”), the financial regulator. In fact, in terms of SEBI Circular dated December 20, 2007 and RBI circular dated December 31, 2007, the category of persons who can lawfully engage in short selling has been widened to include institutional investors. Prior to this measure, only retail investors were allowed to short sell. It is now possible for institutional investors, such as Foreign Institutional Investors (“FIIs”) to engage in short selling, and arrangements have been put in place for a securities lending and borrowing scheme to facilitate short sales. The new regime includes the following requirements:

▪ Naked short selling is not permitted in the Indian securities market. Hence, all investors selling securities must be able to honor their commitments to deliver the sold securities at the time of settlement.

▪ Furthermore, institutional investors are not permitted to engage in “day trading”, i.e. squaring off their transactions intra-day. In other words, all transactions will be grossed for institutional investors at the custodians’ level and the institutions are required to fulfill their obligations on a gross basis. The custodians, however, may continue to settle their deliveries on a net basis with the stock exchanges.

▪ When placing an order in a short selling transaction, institutional investors must disclose upfront the fact that the transaction is a short sale. Retail investors must also make such disclosures, although they are allowed to make disclosure at the end of the trading hours on the date of the transaction.

▪ All short sales must comply with the prescribed process provided for by the exchanges.

In addition to short selling on the Indian exchanges, FIIs have also been engaged in borrowing and lending of Indian stocks on an offshore basis. This process is undertaken by FIIs who hold idle stocks on behalf of their clients against Overseas Derivative Instruments (ODIs) issued to them. These underlying securities are lent by the FIIs to off-shore entities (not registered with SEBI) at an offshore level, thereby influencing valuations directly and creating selling pressure on the underlying stocks in the Indian market. Further, such overseas lending is not regulated either in the offshore market or by SEBI within India. In light of the above, vide press releases issued on October 15 and 16, 2008, SEBI instructed FIIs/sub-accounts to disclose details of the quantity of the securities lent to entities outside India, i.e. jurisdictions where ODIs are issued by the FII, twice a week, on a consolidated basis. Upon a perusal of the data collected in this manner, the SEBI Chairman issued a press release on October 20, 2008 expressing his disapproval of stock lending activities on Indian securities undertaken by FIIs abroad. This disapproval was further reiterated by the Chairman in a meeting with the FII industry on October 22, 2008. In view of the above, the possibility of a formal ban on such overseas lending in the event FIIs fail to curb fresh borrowings overseas cannot be ruled out. Simultaneously, in order to persuade FIIs to cease overseas lending and borrowing and use the securities lending and borrowing scheme in India instead, SEBI has taken a re-look at the short selling mechanism established in India. Consequently, SEBI Circular dated October 31, 2008 has introduced the following changes:

▪ Stocks can now be lent/borrowed for 30 days instead of seven days. ▪ Market timings for the stock lending and borrowing session have been increased from the present one hour to the normal trade timings of 9:55 am to 3:30 pm. These changes are a step forward towards bringing the domestic short selling scenario at par with the international regime. SEBI is likely to introduce further amendments to the current securities lending/borrowing process in the future.

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JAPAN ACTION TAKEN PROHIBITIONS / RESTRICTIONS STOCKS AFFECTED DISCLOSURE OBLIGATIONS EXEMPTIONS OTHER PROVISIONS Japan’s Financial Services Agency There have been no new prohibitions The enhanced disclosure obligation On October 14, 2008, the Financial None regarding the new disclosure None. has expressed its intention to or restrictions on short selling in of the stock exchanges applies to all Services Agency requested stock obligation. cooperate with the Securities and Japan, but the following restrictions stocks. exchanges to enhance their Exchange Surveillance Commission have already been in place with disclosure requirements regarding and the stock exchanges to conduct regard to trading of all listed stocks: short sales. Specifically, whereas a thorough monitoring of market previously only the aggregate price manipulation and other market (i) Traders are required to verify and of short selling regarding all stocks abuse, including stricter enforcement mark whether or not the transactions on a monthly basis was requested, of restrictions on short selling. in question are short selling; and now the aggregate price of short selling regarding all stocks and In addition to the above measures, (ii) Short selling is prohibited, in aggregate price of short selling by on October 14, 2008, the Financial principle, at prices not higher than sector (33 sectors in total) on a daily Services Agency requested the stock the latest market price announced by basis is required. exchanges to institute enhanced the stock exchange concerned. On October 28, 2008 the Financial disclosure requirements in relation to On October 28, 2008, the Financial Services Agency announced that it short selling. Services Agency of Japan will be adopting additional On October 28, 2008, the Financial announced that it will be adopting regulations, to be effective in mid- Services Agency, the Securities and regulations, to be effective November, to require short sellers Exchange Surveillance Commission November 4, 2008, to prohibit naked holding a position equal to or greater and the short selling of stocks. As an interim than a certain amount (to be, in began a joint investigation of any measure until these regulations are principle, 0.25% of the total issue of past violations of existing short adopted, the Financial Services the relevant stock) to disclose such selling restrictions. Agency requested stock exchanges position to the stock exchanges to not take naked short selling through their securities firm. The orders. stock exchanges will be required to publish such information. All of the new regulations will be temporary for the time being.

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PEOPLE’S REPUBLIC OF CHINA Short selling is not currently allowed in China. The relevant government authorities in China have nonetheless been drawing up plans to approve margin trading and short selling of shares as part of their efforts to develop local markets since 2006 by promulgating rules and regulations on margin trading and short selling. However, the introduction of these practices has been delayed due to various reasons. In order to improve the liquidity of the securities market of China and provide investors with a new tool for risk management, the China Securities Regulatory Commission (“CSRC”) announced the trial introduction of margin trading and short selling of shares on October 5, 2008, despite global market turmoil and recent moves to limit short selling elsewhere around the world. According to the CSRC, only carefully selected brokerages would be initially approved to provide these services, and no clear timetable has been set up for the trial program yet. Further notification is expected to be published by the CSRC in the near future to specify the criterion and approval procedures for qualified brokerages.

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SINGAPORE ACTION TAKEN PROHIBITIONS / RESTRICTIONS STOCKS AFFECTED DISCLOSURE OBLIGATIONS EXEMPTIONS OTHER PROVISIONS On September 22, 2008, Singapore With effect from September 25, All securities, including structured N/A N/A A market participant may lodge an Exchange Limited (the “SGX”) issued 2008, the following penalties will be warrants and certificates, which are appeal with the SGX through its a Clearing Directive to introduce imposed for failed deliveries: quoted on the SGX-ST. broking firm to waive the penalty measures, including penalties, to imposed within three business days deter failed deliveries of securities in (i) All failed deliveries: five per from the date of receipt of the the ready market and the buying-in cent. of the value of a failed trade notification of penalty. The SGX will market. However, no prohibitions or (subject to a minimum of S$1,000); assess each individual appeal, taking disclosure obligations specific to and into account relevant factors short selling were imposed by the including the intent behind the trade, SGX. (ii) Failed deliveries in the buying-in the profile of the trade/traders, as market: an additional S$50,000 well as the impact of the trade on the and/or disbarment from participation integrity of the settlement process, Securities quoted on the securities in the buying-in market. and inform the broking firm of the exchange of the SGX, Singapore results of its appeal in writing within Exchange Securities Trading Limited The minimum sum S$1,000 will be 10 business days from the date of (the “SGX-ST”), are traded under the reviewed by the SGX from time to the notification. book-entry settlement system of The time to assess its effectiveness in Central Depository (Pte) Limited deterring settlement failure. (“CDP”), a wholly-owned subsidiary of the SGX. CDP acts as a depository and clearing organization by holding securities for its account holders and facilitating the clearance and settlement of securities transactions between its account holders through electronic book-entry changes in the securities accounts maintained by its account holders. When naked short selling results in a failed delivery of securities to CDP on the settlement date, CDP is required to close-out the short sale transaction by buying-in from the

34 buying-in market. On October 21, 2008, the SGX issued a press release announcing that the measures introduced have been successful, as there has been only a few isolated incidences of failed delivery in the buying-in market and a significant reduction in failed deliveries in the ready market. The SGX will be engaging market participants shortly, in a public consultation, to establish a permanent disciplinary framework for penalizing failed deliveries. Until then, the existing measures will continue to apply.

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UNITED ARAB EMIRATES6 ACTION TAKEN PROHIBITIONS / RESTRICTIONS STOCKS AFFECTED DISCLOSURE OBLIGATIONS EXEMPTIONS OTHER PROVISIONS The Securities and Commodities (i) Under Article 18(14) of the All. N/A None. Should the SCA find a UAE-licensed Authority of the United Arab Emirates Brokers Regulation, brokers licensed broker in breach of the provisions of (the “SCA”) has not addressed short in the UAE are obliged to ascertain the Brokers and/or the trading selling in its laws, rules and/or the ownership of the securities Regulation, it is entitled to withdraw regulations. The SCA has, however, before they execute an order. the brokerage license from the recently made public statements on broker concerned. numerous occasions and said that (ii) Under Article 5 of the Trading “short selling” practices were Regulation, brokers licensed in the prohibited. UAE are not allowed to execute any orders on behalf of the investor that Despite the fact “short selling” as includes borrowing. such is not prohibited under the legislation, the prohibition can be derived from the SCA’s general powers under the SCA Regulation No. 1 of 2000 as to Brokers (“Brokers Regulation”) and/or the SCA Regulation No. 2 of 2001 on Trading, Clearing and Settlement (“Trading Regulation”).

6 This information is up to date as at 24 October 2008.

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This publication is intended only as a general discussion of the issues covered in it. It should not be regarded as legal advice. The description of regulatory action given is not intended to be a comprehensive summary or discussion of regulators’ activities and may be subject to further regulatory changes. Furthermore, this publication does not deal with the rules governing specific products or investment vehicles (such as the special restrictions that apply to short selling by UCITS funds in Europe), nor the disclosure or notification obligations applicable generally to financial market participants.

We would be pleased to provide additional details or advice about specific situations if desired. If you wish to receive more information on the topics covered in this publication, you may contact your regular Shearman & Sterling contact person or any of the following:

CONTACTS & CONTRIBUTORS Shearman & Sterling LLP – LONDON Shearman & Sterling LLP – NEW YORK Broadgate West 599 Lexington Avenue 9 Appold Street New York, New York 10022 London, EC2A 2AP United States of America United Kingdom

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Shearman & Sterling LLP – HONG KONG Shearman & Sterling LLP – TOKYO 12/F, Gloucester Tower Fukoku Seimei Building, 5th Floor The Landmark 2-2-2 Uchisaiwaicho 15 Queen's Road Central, Central Chiyoda-ku, Tokyo, 100 Hong Kong, China Japan

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Matthew Bersani Masahisa Ikeda Partner Partner [email protected] [email protected] T: +852 2978 8096 T: +81 3 5251 1601

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Shearman & Sterling LLP – SINGAPORE Shearman & Sterling LLP – SHANGHAI 6 Battery Road #25-03 11th Floor, Platinum Singapore, 049909 233 Taicang Road Singapore Shanghai, 200020, China

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Shearman & Sterling LLP – ROME Shearman & Sterling LLP – SÃO PAULO Via Borgognona, 47 Avenida Brigadeiro Faria Lima, 3400 00187 Roma 04538-132 Italy São Paulo - SP, Brazil

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Fabio Fauceglia Richard S. Aldrich Jr. Partner Partner [email protected] [email protected] T: +39 06 697 679 208 T: +55 11 3702 2201

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The following law firms contributed the sections dealing with their respective countries:

IRELAND IRELAND

Arthur Cox Earlsfort Centre A&L Goodbody Solicitors Earlsfort Terrace International Financial Services Centre Dublin 2 North Wall Quay Ireland Dublin 1 Tel: 00 353 1 618 0000 www.arthurcox.com Ireland Tel: +353 1 649 2000 Robert Cain www.algoodbody.ie Direct Line: + 353 1 618 1146 Brian McDermott, Partner Email: [email protected] Direct Line: +353 1 649 2307 Email: [email protected] UNITED ARAB EMIRATES INDIA

Al Tamimi & Company Amarchand & Mangaldas & Suresh A. Shroff & Co. Dubai International Financial Centre Peninsula Chambers 6th floor, Building 4 East Peninsula Corporate Park Sheikh Zayed Road Ganppatrao Kadam Marg, Lower Parel (W) Dubai, UAE Mumbai – 400 013 Tel: +971 4 364 1641 Tel: +91(0)11 2692 0500 www.tamimi.com Vandana Shroff, Partner Lynette Brown, Partner Direct Line: +91-22-2496 4455/ 6660 4455 Tel: +971 4 364 1641 Email: [email protected] Email: [email protected]

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PEOPLE’S REPUBLIC OF CHINA BELGIUM

Haiwen & Partners Lydian Lawyers 21/F Beijing Silver Tower Tour & Taxis 2 Dong San Huan North Road Havenlaan - Avenue du Port 86c b113 Beijing 100027, China 1000 Brussels Tel: (8610) 844 15888 Belgium [email protected] Tel: +32 (0) 2 787 9000 http://www.lydian.be

Vincent Dirckx, Partner Direct Line: +32 2 787 90 85 Email: [email protected]

AUSTRALIA BRAZIL

Mallesons Stephen Jaques Mattos Filho, Veiga Filho, Marrey Jr. e Quiroga Advogados LLP Level 61, Governor Phillip Tower 135 East 57th Street 12th Floor 1 Farrer Place New York, NY, USA 10022 Sydney NSW 2000 Tel: +1 646 695 1100 Australia http://www.mattosfilho.com.br Tel: +61 2 9296 2000 Sydney Daniel Calhman de Miranda, Partner http://www.mallesons.com/ Direct Line: +1 646 695-1101 Email: [email protected] Mark McFarlane, Partner Direct Line: + 61 2 9296 2478 Email: [email protected]

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THE NETHERLANDS HONG KONG

NautaDutilh N.V. Richards Butler in association with Reed Smith LLP P.O. BOX 7113 20F Alexandra House 1007 JC Amsterdam 16-20 Chater Road The Netherlands Central, Hong Kong Tel: +31 20 717 1000 Tel: + 852 2810 8008 http://www.nautadutilh.com http://www.reedsmith.com/

Pim Rank, Partner C.J. Williams, Partner Direct Line: +31 20 71 71 864 Direct Line: +852 2507 9738 Email: [email protected] Email: [email protected]

CANADA SINGAPORE

Stikeman Elliott Allen & Gledhill LLP 5300 Commerce Court West One Marina Boulevard #28-00 199 Bay Street Singapore 018989 Toronto, ON M5L 1B9 Tel: +65 6890 7188 Tel: + 1 416 869 5500 http://www.gledhill.com.sg/ www.stikeman.com Tan Tze Gay, Partner Simon Romano, Partner Direct Line: +65 6890 7712 Direct Line: + 1 416 869 5596 E-mail: [email protected] Email: [email protected] LUXEMBOURG LUXEMBOURG

Arendt & Medernach Di Stefano, Sedlo & Moyse 14, rue Erasme Avocats à la Cour B.P. 39 24, Avenue Marie Thérèse L-2010 Luxembourg L-2132 Luxembourg Tel.: (+352) 40 78 78 1 Tel. : (+352) 262 562 1 www.arendt-medernach.com http://www.dsmlegal.com/

Adrian Sedlo, Partner François Warken, Partner [email protected] Direct Line: +352 40 78 78 216 Email: [email protected]

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