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SEC Set To Curb Short Selling Of Stocks

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The Associated Press

Published: September 16, 2008

WASHINGTON - With Wall Street engulfed in crisis, the Securities and Exchange Commission is planning measures to rein in aggressive forms of short-selling that were blamed in part for the demise of Lehman Brothers and which some fear could be turned against other vulnerable companies.

During emergency meetings between federal officials and investment bank executives over the weekend, SEC Chairman Christopher Cox indicated to the bankers that the agency plans in a few days to impose new permanent protections against abusive "naked" short-selling, a person familiar with the matter said Monday.

Unlike the SEC's temporary emergency ban this summer covering naked short-selling in 19 stocks, the new measures would apply to trading in the broader market.

The person spoke on condition of anonymity because the SEC actions haven't been officially announced.

The measures likely would include removing an exception for market makers in options on stocks from rules restricting naked short-selling and a tightening of anti-fraud rules related to that activity, according to the person familiar with the matter.

Those two measures could be put in place administratively by quick approval of the SEC commissioners. Another change, reducing from 13 to five the number of days that short-sellers would have to deliver stocks after an initial failure to do so, would require a public meeting and formal vote to propose it as a new rule.
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.

Some investors contend that naked short-selling, if left unchecked, would have given hedge funds and other aggressive short sellers an unfair advantage to move on to other attack victims after Lehman Brothers Holdings Inc. Merrill Lynch & Co. - being bought by Bank of America Corp. in a $50 billion shotgun deal - or giant insurer American International Group Inc., which reportedly appealed to the Federal Reserve for emergency funding, were said to be among the likely targets.

New York Gov. David Paterson said Monday that AIG will be allowed to use $20 billion in assets held by its subsidiaries to provide cash needed for the company to stay in business. Paterson asked state insurance regulators to essentially allow AIG to provide a bridge loan to itself.

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