U.S. regulators adopt rules against naked short-selling


By Marcy Gordon, AP

WASHINGTON — Federal regulators on Wednesday took measures aimed at reining in aggressive forms of short-selling that were blamed in part for the demise of Lehman Brothers and which some feared could be used against other vulnerable companies in a turbulent market.

The Securities and Exchange Commission adopted rules it said would provide permanent protections against abusive “naked” short-selling. Unlike the SEC’s temporary emergency ban this summer covering naked short-selling in the stocks of mortgage finance giants Fannie Mae and Freddie Mac and 17 large investment banks, the new rules apply to trading in the broader market.

In a further move, SEC Chairman Christopher Cox said he planned to ask his four fellow commissioners to consider on an emergency basis a new rule that would require hedge funds and other large-scale investors to disclose their short positions _ the stocks they have borrowed and sold but not yet replaced.

The rule would be designed to ensure transparency in short-selling in general, beyond the practice of naked short-selling, Cox said in a statement issued Wednesday night. Investment managers with more than $100 million holdings in securities would be required to promptly begin public reporting of their daily short positions.

Sens. Charles Schumer and Hillary Clinton, New York Democrats, asked the SEC to temporarily ban all short-selling, not just naked short-selling, of stocks of major financial companies.

“The SEC has the power to take a temporary but important step to help restore a measure of stability to our financial markets,” the two said in a statement. “We are urging the (SEC) to act swiftly in order to preserve New York’s position as the world’s pre-eminent financial center and protect tens of thousands of New York jobs.”

The new SEC rules adopted Wednesday remove an exception for market makers in options on stocks from rules restricting naked short-selling and tighten anti-fraud regulations related to that activity. The changes make clear that anyone who lies about their intention or ability to deliver the stocks underlying a short-sale transaction in time for settlement violates the law if they fail to deliver them.

Short sellers bet that a stock’s price will fall so that they can profit from it. They borrow shares of the stock and sell them. If the price drops, they buy cheaper actual shares to cover the borrowed ones, pocketing the difference.

Naked short-selling occurs when sellers don’t even borrow the shares before selling them, and then look to cover positions immediately after the sale.

Another new rule will require short sellers and their brokers to deliver underlying stocks in the transactions by three days after the date of the short sale, or face penalties for failing to do so. That rule takes effect Thursday but was adopted on an interim basis and the SEC is seeking public comment on it for 30 days.

“These several actions today make it crystal clear that the SEC has zero tolerance for abusive naked short- selling,” Cox said in a statement. The agency’s divisions, including enforcement attorneys and market inspectors, “will now have these weapons in their arsenal in their continuing battle to stop unlawful manipulation,” he said.

The new rules take effect at 12:01 a.m. EDT (0401 GMT) on Thursday.