Subject:       

SEC Emergency Order Regarding Short Sales, Effective Monday July 21, 2008

Pursuant to the SEC’s Emergency Order (http://sec.gov/rules/other/2008/34-58166.pdf)

(the “Order”), anyone effecting a short sale in one of the securities listed in Appendix A of the Order using the means or instrumentalities of interstate commerce must (1) borrow or arrange to borrow the security or otherwise have the security available to borrow in its inventory prior to effecting such short sale, and (2) deliver the security on settlement date.  This applies to all orders submitted for execution on any exchange in the United States. Short sales to be effected as a result of a put options exercise are subject to the SEC Order.  

Exceptions

Today, the SEC announced certain exceptions to the Order.  According to that announcement (http://www.sec.gov/rules/other/2008/34-58190.pdf), the following entities are excepted from the “borrow or arrange to borrow” requirement of the Order: registered market makers, block positioners, or other market makers obligated to quote in the over-the-counter market, that are selling short as part of bona fide market making and hedging activities related directly to bona fide market making in: (a) Appendix A Securities; (b) derivative securities based on Appendix A Securities, including standardized options; and (c) exchange traded funds of which Appendix A Securities are a component.  The settlement date delivery requirement of the Order still applies to these entities. 

Effective Date and Securities Covered

The Order and the applicable exceptions are effective at 12:01 a.m. EDT on Monday, July 21, 2008, and terminates at 11:59 p.m. EDT on July 29, 2008, unless further extended by the SEC.  Please see the below chart for the list of securities covered by the Order.

Some Important Q&As

The SEC adopted a temporary measure to combat “naked” short sales in certain
securities. The SEC’s Emergency Order requires any person selling short a
designated security to borrow, or arrange to borrow, the security being sold short in
advance of the sale, provided the security is not available to borrow from inventory.
Below is general information designed to assist you in understanding this new “preborrow”
requirement.

Q. What is the pre-borrow requirement?
A. The pre-borrow requirement is designed to ensure that securities will be timely
delivered for settlement of a short sale. In a pre-borrow arrangement, the lender
confirms to the borrower that shares are available for timely delivery and
affirmatively agrees to reserve the shares for exclusive use by the borrower. The
SEC’s Emergency Order also requires delivery of the borrowed shares by settlement
date.

Q. To which securities does the temporary pre-borrow requirement apply?
A. The pre-borrow requirement applies solely to the following equity securities: BNP
Paribas Securities Corp. (BNPQF or BNPQY), Bank of America Corporation (BAC),
Barclays PLC (BCS), Citigroup Inc. (C), Credit Suisse Group (CS), Daiwa Securities
Group Inc. (DSECY), Deutsche Bank Group AG (DB), Allianz SE (AZ), Goldman,
Sachs Group Inc. (GS), Royal Bank ADS (RBS), HSBC Holdings PLC ADS (HBC), J. P.
Morgan Chase & Co. (JPM), Lehman Brothers Holdings Inc. (LEH), Merrill Lynch &
Co., Inc. (MER), Mizuho Financial Group, Inc. (MFG), Morgan Stanley (MS), UBS AG
(UBS), Freddie Mac (FRE), and Fannie Mae (FNM). No other securities are covered by
the temporary pre-borrow requirement.

Q. When does the temporary pre-borrow requirement become effective?
A. At 12:01 AM EST on Monday, July 21, 2008.

Q. When does the temporary pre-borrow requirement terminate?
A. At 11:59 PM EST on Tuesday, July 29, 2008. Please note that the SEC may elect
to extend the duration of the temporary requirement -- any extension would be
publicly communicated by means of a written SEC order.

Q. Is a “locate” the same as a “pre-borrow?”
A. No. A pre-borrow is a more formal arrangement where a lender has identified and
agreed to reserve specific securities for exclusive use by the borrower. A locate does
not generally possess such characteristics.

Q. Will the affected securities be on Lek’s “Easy to Borrow” list?
A. No. The 19 securities will not be on Lek’s Easy to Borrow list when the temporary
pre-borrow requirement is in effect.

Q. Are short sales in connection with a put option exercise covered by the
SEC’s Emergency Order?
A. Yes. The submission of a put option exercise notice to Lek will be viewed as an
indication that you obtained a pre-borrow for any short sale connected to the
exercise.

Q. Are clients required to obtain a pre-borrow on an order-by-order basis or may clients secure a pre-borrow for a defined amount and then execute short sales up to that defined amount during that trading day?
A. Clients may proceed either way, as each approach would satisfy the pre-borrow
requirement. Additionally, clients may “recycle” or re-use a pre-borrow intra-day to
the extent the clients buy to cover during the day and the net short position does not
exceed the pre-borrow at any point. However, any pre-borrowed securities not used
to cover short sales executed that trading day will be returned unless you notify Lek
that you are requesting to pre-borrow those securities again. All pre-borrows are
subject to Lek’s standard policies.

Q. How can clients obtain pre-borrows from Lek ?
A. Clients should contact their regular coverage person or they may contact the
Stock Loan Desk at 212-509-7328.

Q. Are there any deadlines for requesting pre-borrows?
A. Due to DTC operating hours, Lek will not be able to fulfill any pre-borrow
requests after 2:30 PM EST. Any requests received after 2:30 PM EST may be
fulfilled based on availability from our internal inventory.

Q. Will a pre-borrow cost more?
A. Although the pricing for shares obtained through a pre-borrow will be competitive
and based upon market supply and demand, among other things, additional charges
may apply. Because Lek maintains a global reach, we are currently well positioned to
obtain shares for our clients.

Q. Can clients execute a short sale through Lek if they obtain a pre-borrow from another broker-dealer, such as a prime broker?
A. Yes, so long as the client validly represents that it has obtained a pre-borrow from
another source and Lek has a basis to reasonably rely upon the client’s
representation.

Q. How does the SEC’s Emergency Order apply to Lek prime brokerage customers?
A. Lek prime brokerage customers must obtain a pre-borrow from prior to executing
any short sales.

Q. How should clients provide representations to Lek regarding pre-borrows obtained from third party sources?
A. For orders placed via phone, you should identify the pre-borrow source when
placing the order. For orders submitted electronically (e.g., via FIX), you should
identify the source of the pre-borrow in the locate field. In both cases, you agree
that the pre-borrow source information constitutes your representation that: (i) you
actually obtained a pre-borrow for the shares from the identified source in
compliance with the SEC’s Emergency Order, and (ii) Lek may reasonably rely upon
your representation.

Q. Does the pre-borrow requirement apply to Lek clients that are registered as broker-dealers with the SEC and FINRA?
A. Yes. There are no exceptions to the pre-borrow requirement based on status as a
broker-dealer, although certain activities conducted by broker-dealers may be
eligible for an exception to the pre-borrow requirement (e.g., short sales effected in
the course of bona fide market making activity). Please consult the 2nd SEC Order
(link provided below) for more details.

Q. If a broker-dealer sends a short sale order to Lek for execution, which firm is required to comply with the pre-borrow requirement?
A. The firm sending the order. The obligation to comply with the pre-borrow
requirement in this scenario would not rest with Lek absent a written agreement by
Lek to explicitly take on that obligation. The same result would hold true if another
broker-dealer’s short sale order were executed through a Lek MPID or mnemonic as
part of a sponsored access or DMA arrangement.

Q. What action might be taken by Lek if shares are not delivered at settlement?
A. Lek may initiate a buy-in as soon as permitted under applicable SRO rules.
Additionally, if Lek lacks a basis to reasonably rely upon a client’s representation, the
ability to sell short may be suspended/terminated or short sales may be restricted to
only those orders supported by a Lek pre-borrow.

Q. Does the pre-borrow requirement apply to short sale transactions negotiated and effected entirely outside the US?
A. No. The pre-borrow requirement applies only to short sales that are negotiated
and/or effected through the means or instrumentalities of interstate commerce (e.g.,
phone calls, FIX messages, e-mails, IMs or faxes that touch the US). If a US broker dealer
is involved in effecting the transaction, the pre-borrow requirement will apply.

Q. Has the SEC made any other changes to the short sale rules?
A. No. All other provisions of SEC Regulation SHO remain unmodified.

Q. Where can clients find more information?
A. 1st SEC Order: http://www.sec.gov/rules/other/2008/34-58166.pdf
2nd SEC Order: http://sec.gov/rules/other/2008/34-58190.pdf