By Zachary A. Goldfarb
Washington Post Staff Writer
Wednesday, February 24, 2010; A09
Federal regulators, who have vacillated for years over whether to curb short selling, are expected to approve new restrictions Wednesday on the practice of betting that a company's shares will decline, according to sources familiar with the plans.
The new rules by the Securities and Exchange Commission will seek to strike a middle ground between those who argue that limits on short selling are ineffective and perhaps damaging, and those who argue that they are a necessary measure to prevent speculators from pouncing on a stock when it is quickly declining.
The new restrictions will only affect stocks that have already declined a set amount, probably 10 percent, during any given day, said the sources, who spoke condition of anonymity because the agency hasn't publicly discussed its final rule. For these stocks, the rules will allow traders to short sell only under certain technical conditions. These restrictions should slow down the decline of a company's shares if they are already in a tailspin.
The new policy, which is likely to be approved despite the objections of some commissioners, comes after the SEC has gone back and forth on the issue for several years. The agency abandoned limits on the practice in July 2007, concluding after a comprehensive study that curbs were unnecessary.
Then, during the market crisis of fall 2008, the agency banned short selling in many of the financial stocks that were falling fast. The ban expired, and then-SEC Chairman Christopher Cox said he regretted the decision to prohibit short selling as an emotional response to political pressure over the sliding stock market.
As incoming SEC chairman early last year, Mary L. Schapiro faced intense pressure from lawmakers and others to take action on short selling. She pledged to do so, and a set of short-selling restrictions was the first proposal to be made by the agency under her tenure.
Since then, the proposal has been revised several times. The SEC is likely to vote on an approach that would only let traders bet against a company's shares at a higher price than what other traders are willing to pay to buy the shares. The rules would take effect eight months after their approval.
Some firms that rely on short selling are skeptical.
"Despite extensive evidence that short selling serves investors by being a counterweight to irrational optimism, the new restrictions will ultimately harm the interests of the very investors the regulator is pledged to protect," said Matt Well, a spokesman for the Coalition of Private Investment Companies, which represents many hedge funds.