SEC to Pursue Limits On Stock Short Sales
Agency Is Under Political Pressure to Act

By Zachary A. Goldfarb
Washington Post Staff Writer
Wednesday, April 8, 2009

The Securities and Exchange Commission today holds its first policymaking session of the year, and under political pressure plans to introduce several proposals to restrict the short-selling of stock that many economists, including those inside the agency, say are likely to have little effect.

A number of financial firm executives, investors and lawmakers have blamed aggressive short-selling for collapsing the stocks of banks and other Wall Street companies last fall. In a short sale, traders make money when a firm's shares decline in value.

Today's meeting, the first held under new SEC Chairman Mary L. Schapiro, will examine several proposals to curb short sales. The commission is expected to formalize the proposals, allowing for 60 days of comment before deciding to vote on whether to implement them.

The proposals would try to make it more difficult for short sellers to push down a stock's price when it is already declining. One way to do so would be to allow speculators to bet against a stock only when it moves at a higher price than its last trade. On any given day, a stock may trade more than tens of thousands of times.

A more dramatic proposal would ban short-selling in a stock if it has declined by a set percentage in a day.

The SEC has been here before. In 2007, after intense study by the commission's staff and economists, the SEC decided to end the uptick rule, a Depression-era regulation that allowed people to bet against a stock only when it was "ticking" up.

Last fall, in the market crisis, the SEC temporarily banned short-selling in financial stocks -- a move then-SEC Chairman Christopher Cox said he regretted as a hasty response to political pressure.

In recent weeks, the SEC's economists have circulated an outside study that found that the removal of the uptick rule in 2007 had no effect of the price of stocks.

Charles M. Jones, a professor at Columbia Business School who co-authored the study, said he was skeptical about proposals to regulate short-selling.

"It's really being done because there's this perception that there are bear raiders, or people pushing the price around, and there is concern that there are short sellers doing that," he said. "Call them manipulative or abusive. But we haven't been able to find them in the data."

SEC officials say they are proposing the rules simply to give investors confidence that the commission is evaluating whether abusive techniques are unfairly driving down share prices. They say that it is not a foregone conclusion that the new rules will take effect; rather, they are hoping for a period of study.

"This is an issue that has both strong supporters and detractors, and we will be very deliberative in our effort to determine what is in the best interest of investors," Schapiro said Monday.

The SEC's two Democratic commissioners, Elisse B. Walter and Luis A. Aguilar, said they welcomed the chance to take a fresh look at short-selling rules, but had no position yet on whether new rules were necessary. Republican commissioner Troy A. Paredes declined to comment, and Republican commissioner Kathleen L. Casey could not be reached for comment.

People familiar with the Republican commissioners' thinking said they had major doubts about whether the new rules are necessary.

"Some are very passionate about bringing back the uptick rule, and some just are equally passionate about the adverse impact it may have on price discovery," Aguilar said yesterday. "I welcome a more structured discussion."

Walter said the commission would look in particular for any empirical studies documenting the impact of short-selling on last fall's market meltdown.

"There is a very serious concern about investor confidence in the market, and a lot of the input we have gotten thus far suggests a link between that and the issue of short-selling," she said.

The SEC began drafting new short-selling rules at the behest of Schapiro after she took office in late January. Since then, a number of prominent lawmakers have hounded her on the issue.

Six senators, including Ted Kaufman (D-Del.) and Johnny Isakson (R-Ga.), recently wrote Schapiro urging her to institute new rules.

"As the new leader at the SEC, you have an opportunity to clarify the commission's commitment to end abusive short-selling," the senators wrote.

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