Legislation Introduced to Bring Back the Uptick Rule
WASHINGTON (Dow Jones)--A U.S. lawmaker wants to bring back Depression-era restrictions on short sales.
Rep. Gary Ackerman, D-N.Y., introduced legislation Wednesday that would reinstate the so-called uptick rule, allowing short sales only at a price higher than that of the previous trade. The 1938 rule, which prevents short sales as prices are trading down, was scrapped by the Securities and Exchange Commission in mid-2007.
Ackerman's bill calls for the SEC to put the uptick rule back in place within 90 days of the legislation becoming law. Ackerman, who serves on the House Financial Services Committee, said the rule is needed again because many volatile stocks that it was designed to protect are being driven down by "manipulative short sale practices."
"Reinstatement of the uptick rule would help curb these abuses and ensure greater stability and confidence in the market," Ackerman said in a statement. "Under the uptick rule, fewer companies would fail, less investors would be driven out of the market, and more capital would remain in our stock markets."
Short sellers sell borrowed stock in hopes of replacing it later at lower prices, profiting from declining stock prices. The practice is legal, but critics say restrictions are needed to prevent stocks from being pummeled by unbridled short selling. SEC Chairman Christopher Cox told the Senate Banking Committee on Tuesday that the SEC is looking at alternatives to the uptick rule.
The SEC announced an emergency order to tighten borrowing requirements for short sales in 19 stocks, including Wall Street companies and federally-sponsored housing-finance giants Fannie Mae (FNM) and Freddie Mac (FRE). The order takes effect starting Monday and could run for up to 30 days.
Once the order kicks in, brokers who execute short sales in the 19 stocks will have to borrow them first, and effectively "lock them up," said SEC Commissioner Paul Atkins.
Atkins said the new restrictions shouldn't be a hardship since most brokers already borrow shares, or arrange to borrow them, in advance of executing short sales now.
"We'll see if there are any difficulties that the firms have doing it," Atkins said after a midday speech to the Exchequer Club. He told reporters the 19 stocks targeted by the order are widely-held, liquid shares, and that he doubts short sellers will have any difficulty shorting them once the pre-borrowing requirement takes effect.
Atkins said the list of 19 shares is limited to Fannie Mae, Freddie Mac and Wall Street's primary dealers that are subject to market "turmoil" at present. SEC officials have said they might look to broaden the list to other shares, something Akins said he advocates.
Asked about reinstating the uptick rule, Atkins said the SEC eliminated it based on evidence that it wasn't needed and didn't affect stock trading. He said whether the SEC should revisit the matter again "is a matter of constant study."
Atkins, a Republican, is stepping down at month's end. He gave the usual disclaimer that his remarks reflect his views, not those of the commission.
-By Judith Burns, Dow Jones Newswires, 202-862-6692; Judith.Burns@dowjones.com
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