Cox: Intend To Extend Short-Sale Rules Marketwide
July 24, 2008: 02:14 PM EST
By Judith Burns
Of DOW JONES NEWSWIRES
WASHINGTON -(Dow Jones)- Securities and Exchange Commission Chairman Christopher Cox said U.S. regulators intend to extend restrictions on short- sales to the entire market.
"That's our intent," Cox said in response to questions at a House Financial Services Committee hearing on Thursday.
Cox told reporters after the hearing that the SEC staff also is discussing changes that would require disclosure of significant short positions, similar to requirements to divulge big long position in stocks. Cox raised that possibility in an op-ed published Thursday by The Wall Street Journal.
The SEC issued an emergency order last week, which took effect Monday, to tighten requirements for short sales in Fannie Mae (FNM) and Freddie Mac (FRE), the federally sponsored housing-finance giants, and 17 primary dealers in U.S. Treasury debt, chiefly big Wall Street firms such as Goldman Sachs & Co. (GS), Lehman Brothers (LEH) and Merrill Lynch & Co. (MER). The order is set to run through Tuesday, but could be extended to mid-August.
Rep. Gary Ackerman, D-N.Y., questioned why the new restrictions apply only to 19 stocks rather than the entire market.
"Who are we protecting if we're not protecting everybody?" asked Ackerman.
Cox said the 19 stocks were targeted because they are now eligible to borrow from the Federal Reserve, something that had previously been limited to commercial banks. But he said the SEC aims to extend "operational protections" marketwide.
The SEC also is revisiting price tests for short sales other than the so- called "tick test" which it abolished last year, Cox added.
Ackerman has introduced legislation to reinstate the uptick rule, which allowed short sales only when stock prices are ticking higher, saying it seemed to work very well when it was in place.
Cox said a thorough study of stocks in the Russell 3000 index found the tick test was ineffective in markets that use decimal pricing, reducing price changes to pennies. He said the SEC is looking at alternative price tests, based on five or 10-cent price moves.
Short sellers sell borrowed shares which they hope to replace later at lower prices, profiting from stock price declines. The practice is legal, but has long been controversial. The SEC has put restrictions in place in recent years to curb abusive "naked" short sales, in which stocks are not borrowed before short sales. That effort was extended with the emergency order, which calls for borrowing or arranging to borrow shares in advance of short sales in the 19 targeted stocks.
- By Judith Burns, Dow Jones Newswires, 202-862-6692; Judith.Burns@ dowjones.com
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