Monday, July 27, 2009

U.S. Issues New Rules on Short-Selling

By KARA SCANNELL The Securities and Exchange Commission issued new rules to govern short-selling, promising investors fresh information about the volume and velocity of negative bets placed against companies. But it dropped a requirement that hedge funds disclose details of short positions to regulators. Short-selling came under political attack after the market selloff last year, with the practice banned for financial stocks during 14 trading days. A number of studies showed the ban had a limited effect on the market, and regulators have struggled to determine the best way to regulate short-selling without crimping market activity. The SEC will offer more information on short-selling, but won't ban naked short-selling. Here, Chairman Mary Schapiro in Washington last week. The SEC's new rules are a middle ground. They finalize temporary rules requiring traders to complete a short sale within four days. They create more disclosure, but still delay the information by a month. They also aggregate short-position data for individual stocks but keep individual money manager positions confidential. Hedge funds fought such disclosures, saying it would be tantamount to revealing trading secrets. The SEC said self-regulatory organizations, such as the Financial Industry Regulatory Authority, will begin posting on their Web sites "in the next few weeks" more information about short sales, including something akin to a " ticker tape" that will show, on a one-month delay, the exact time at which a trader places a short-sale and the size of the position. The anonymous data would enable investors and others to determine, forensically, if traders were in some way piling on a company in an improper, coordinated way. Financial companies and several lawmakers have argued that short sellers' attacks on a company's shares can undermine its stability, citing alleged "bear raids" of financial firms that rely on broad market confidence to stay in business. Short sellers have said their trades reflect a legitimate belief that a stock is overvalued. The self-regulatory organizations, such as Finra, will also publish daily aggregate volume information of short-selling in each exchange-traded stock. The SEC also would speed up disclosure of failed short trades, when a trader never completes the trade by replacing the borrowed stock, across all companies from once a quarter to twice a month. Failed trades are an indication, but not evidence, that a stock has been manipulated. The SEC, however, is backing away from its earlier move to require hedge funds and other money managers to disclose weekly their short positions once they reach a certain concentration. The disclosure requirement for hedge-fund managers was a measure adopted on a temporary basis as markets were seizing up last fall. The SEC didn't offer any explanation for its decision to let the rule expire, but one reason may have been that money managers weren't providing material information on their positions anyway. The SEC is pushing to gain more regulatory oversight of hedge funds as part of a broader financial regulation overhaul proposed by the Obama Administration. SEC Chairman Mary Schapiro said Monday's moves showed the agency's "determination to address short-selling abuses" while increasing public disclosure of short-selling activities. "We look forward to working with the SEC as they and the self-regulatory organizations develop a public database online to better understand the role that short selling plays in our capital markets," said a spokesman for the Coalition of Private Investment Companies, a hedge-fund lobbying group. Lawmakers are concerned the SEC isn't doing enough to rein in potentially abusive short-selling, known as a naked short sale. In a naked short sale, the trader never actually borrows the stock. Some executives have argued naked short selling allows market manipulators to drive down shares artificially. Under a rule that was finalized Monday, short-sellers must complete the trade within four days by replacing the borrowed stock, or they have failed to deliver and are subject to penalties. Last week, seven senators urged the SEC to reduce the potential for abusive naked short-selling by instituting a so-called "hard locate" or preborrow requirement, essentially locking up stock so it can't be lent out to anyone else. Sen. Ted Kaufman (D.-Del.), who has prodded the SEC to take additional steps, said in a statement that he was disappointed it didn't go further to restrict naked short selling. "Instead of proposing action today to deal with the problem, the SEC apparently is content to let potential solutions sit on the shelf for another two months," he said. Last summer the SEC instituted an emergency measure requiring traders to lock in contracts to borrow stock in a limited number of financial companies before initiating a short sale. Wall Street firms and hedge funds said it amounted to a ban on short selling because it drove up the price to borrow those stocks. The SEC said on Monday it would hold a roundtable in September to discuss a hard-locate or preborrow requirement, among other issues. Write to Kara Scannell at

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