S.E.C. Emergency Rule to Curb Short Selling
By REUTERS
Published: July 16, 2008
WASHINGTON (Reuters) — The Securities and Exchange Commission will issue an emergency rule Tuesday to curb short selling in major financial firms, including Fannie Mae and Freddie Mac, the commission said.
Short sellers borrow shares they consider overvalued and sell them. If the price drops, they repurchase the shares, return them and pocket the difference.
The rule to be announced Tuesday will halt “naked” short sales, in which the investor sells stock that has not yet been borrowed.
The emergency rule would require any person making a short sale in the listed securities to borrow the securities before the short sale is effected and deliver the securities on the settlement date.
The rule is expected to be adopted Tuesday and last for 30 days. It comes after a week in which Fannie Mae and Freddie Mac, the giant mortgage-finance firms, plunged on concerns they were undercapitalized.
Short sellers have been in the spotlight since the Bear Stearns crisis. Lawmakers have asked the S.E.C. to investigate whether the short sellers and market speculators contributed to the firm’s collapse.
The commission’s chairman, Christopher Cox, said at a Senate Banking Committee hearing Tuesday that this emergency rule would be more effective than the so-called tick test rule, which was repealed June 2007.
The tick test rule allowed short sales only when the last sale price was higher than the previous price. That means a trader cannot short a stock if the movement prior to the short sale is down.
Mr. Cox said the S.E.C. was going to look at whether some other kind of a price test might be useful for “circumstances such as those we find ourselves in now.”
“We are very open to that,” Mr. Cox said.
The rule, adopted a decade after the 1929 stock market crash, was designed to prevent short sellers from adding to the downward pressure on a stock that is already falling sharply.
The S.E.C. has already proposed another rule to curb naked short selling abuses and prevent market price manipulation. It is not known when the S.E.C. will adopt this rule.
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