SEC Finalizes Measures to Curb Improper Short Selling
Tuesday, July 28, 2009
The Securities and Exchange Commission on Monday announced a pair of measures that aim to quell concerns that speculators are driving down share prices through improper short selling.
High-profile Wall Street executives have complained that speculators played an outsized role in crashing the stock values of several major financial services companies last year. Lawmakers have hammered the SEC to take more dramatic steps to fight short selling.
The new measures will lead to greater disclosures but don't impose any significant new restrictions on short selling. Also, a requirement has been dropped that some financial firms disclose short positions on a confidential basis to the SEC.
"Today's actions demonstrate the commission's determination to address short-selling abuses while at the same time increasing public disclosure of short selling activities that affect our markets," SEC Chairman Mary Schapiro said in a statement.
The SEC is considering several other options to curb short selling, such as making it more difficult for speculators to pounce on a stock when it is already declining sharply.
One of the measures announced Monday is geared toward disclosing more information about short sales. Under the plan, the Web sites of several of Wall Street's self-regulatory institutions will publish data about how many short sales occur in a company's stock on a given day. In addition, the Web sites will publish the time and size of individual daily short-sale transactions in a company's stock, with a one-month delay. The disclosure requirements take effect in the coming weeks.
Another measure seeks to make it harder for speculators to participate in what the SEC calls "abusive" short selling.
In ordinary short selling, a trader borrows shares from other investors and then sells them. If the stock declines in value, the trader buys the shares back at a lower price, making a profit. The shares are then returned. The amount of short selling is limited by the amount of shares available to be borrowed.
In "abusive" short selling, a trader keeps on selling shares without regard to the number of shares available to be borrowed, thereby putting heavy downward pressure on a stock's price.
The new rule requires brokerage firms to locate shares that could be borrowed before allowing short sales. It permits, as an alternative, that short sellers find the shares to borrow on their own.
A temporary requirement to limit abusive short sales had been in place since the fall; now it will be made permanent.
The SEC would also increase disclosures on its Web site of "fails-to-deliver," which occur when an investor or a brokerage doesn't locate or identify shares to borrow. This can happen for legitimate reasons, such as a technical breakdown, but it also can be indicative of improper short selling.
Sen. Ted Kaufman (D-Del.), who has been leading the charge on Capitol Hill for tougher rules, was unsatisfied with the SEC's actions.
"The SEC apparently is content to let potential solutions sit on the shelf for another two months. Given the dangers of abusive short selling, if the market were to decline precipitously again and the banks propped up by taxpayer funds were to become vulnerable again, that is not an insignificant risk," he said in a statement.
The SEC also announced a roundtable for September to discuss some of the more dramatic potential curbs on short selling that Kaufman and others favor.