SEC Approves Changes To Short-Selling Rules
Last update: 6/13/2007 2:02:15 PM(Updates throughout with additional details on rule changes, quotes from SEC commissioners, notes votes were unanimous.)
By Judith Burns Of DOW JONES NEWSWIRES
WASHINGTON (Dow Jones)--The Securities and Exchange Commission voted Wednesday to abolish longstanding rules that restrict short sales in declining markets and approved another change to tighten rules intended to curb manipulative short sales, including so-called "naked" short sales.
The first change, approved in a 5-0 vote, ends decades-long restrictions by the SEC and U.S. markets on selling short as prices are falling. An experiment in lifting the rules for select stocks showed there was little justification for retaining restrictions such as the New York Stock Exchange's "tick" test, SEC Chairman Christopher Cox said. Elimination of SEC's short-sale price restrictions and rules barring markets from using a "tick" or "bid" test to control short sales will take effect immediately after the rule change is published in the Federal Register, SEC staffers said.
Barriers to short sales when prices are moving lower date from the 1930s, when regulators sought to prevent "bear" raids that could send prices spiraling downward. The advent of decimal trading has made it harder to comply with such restrictions, and with better market surveillance, "we've determined that the rule simply is not needed," said SEC Commissioner Paul Atkins.
A second change approved by the SEC modifies Regulation SHO, which the agency adopted in 2004 to curb abusive short sales. The SEC voted unanimously Wednesday to eliminate a controversial exception to the 2004 rule that shielded existing short positions from a Regulation SHO requirement to deliver hard-to-borrow shares within 13 days of settlement. Once the change takes effect, short positions previously protected by the grandfather clause must be closed out within 35 days.
Short selling involves sales of borrowed securities, producing profits when prices decline. The practice is legal, but the SEC's Regulation SHO sought to prevent "naked" short sales, in which short sellers don't borrow securities they sell. Among other things, the SEC regulation, which took effect in 2005, imposed new deadlines on closing out short positions by delivering borrowed shares. SEC officials said delivery failures have declined about 35% overall since Regulation SHO took effect and have fallen about 53% for hard-to-borrow stocks defined as "threshold" securities.
Longstanding, persistent delivery failures seem to be due to the grandfather protections and a shield for short positions held by option market makers, Cox said. He said delivery failures hurt investors and companies, and may be a sign of naked short selling. "It continues to be a problem, particularly in the microcap space," Cox told reporters after the SEC meeting. SEC Commissioner Annette Nazareth said ending the grandfather protections won't have adverse effects, such as volatile trading, that prompted the SEC to adopt the shield in 2004.
SEC Commissioner Kathleen Casey also endorsed the change, saying the benefit of doing so more than offsets concerns that a "squeeze" on outstanding short positions might roil stock markets. To shed light on delivery failures, the SEC plans to make aggregateDepository Trust Co. data available on the SEC Web site shortly, after removing certain confidential information from the data feed already supplied to regulators by the DTC.
Agency staffers said providing hard data on delivery failures may reduce the number of requests the SEC has received for such data under the Freedom of Information Act.
The SEC abandoned earlier plans to narrow protections for option market makers and voted Wednesday to seek comment on eliminating the exception altogether, or adopting an alternative approach. One alternative would set a 35-day delivery requirement on failures resulting from short sales to hedge option series established by an options market maker before a stock is designated as a threshold security. A second would set the delivery deadline at 35 days or 13 days after the expiration of all options series in a portfolio, whichever is earlier.
Additionally, the SEC adopted a requirement for brokers marking a sale as an outright "long" sale to document the location of the shares being sold. The SEC also modified an exception from short-selling restrictions for unwinding net short index-arbitrage positions, available provided the market hasn't declined by 2% or more from the prior day's close, based on a market index.
The SEC voted to substitute the New York Composite Index for the Dow Jones Industrial Average as the applicable market-decline index. In a last-minute change, the SEC deferred action on a fourth rule that would have tightened short sales in connection with public offerings, but Cox said it plans to take up the matter shortly, perhaps later this month. -By Judith Burns, Dow Jones Newswires; 202-862-6692; Judith.Burns@dowjones.com (END) Dow Jones Newswires |
