SEC Rule on 'Naked' Short-Selling Now Permanent
Federal regulators on Monday made permanent an emergency rule aimed at reducing abusive short-selling, put in at the height of last fall's market turmoil.
The Securities and Exchange Commission announced that it took the action on the rule targeting so-called "naked" short-selling, which was due to expire Friday.
Short-sellers bet against a stock. They generally borrow a company's shares, sell them, and then buy them when the stock falls and return them to the lender—pocketing the difference in price.
"Naked" short-selling occurs when sellers don't even borrow the shares before selling them, and then look to cover positions sometime after the sale.
The SEC rule includes a requirement that brokers must promptly buy or borrow securities to deliver on a short sale.
At the same time, the SEC has been considering several new approaches to reining in rushes of regular short-selling that also can cause dramatic plunges in stock prices.
Investors and lawmakers have been clamoring for the SEC to put new brakes on trading moves they say worsened the market's downturn starting last fall. SEC Chairman Mary Schapiro has said she is making the issue a priority.
The five SEC commissioners voted in April to put forward for public comment five alternative short-selling plans.
One option is restoring a Depression-era rule that prohibits short sellers from making their trades until a stock ticks at least one penny above its previous trading price.
The goal of the so-called uptick rule is to prevent selling sprees that feed upon themselves—actions that battered the stocks of banks and other companies over the last year.
Another approach would ban short-selling for the rest of the trading session in a stock that declines by 10 percent or more.
In addition to making the "naked" short-selling rule permanent, the SEC and its staff are working with major stock exchanges to make data on short-sale transactions and volumes publicly available through the exchanges' Web sites, the SEC announcement said.
It will result in "a substantial increase" over the amount of information currently required, the agency said.
"Today's actions demonstrate the (SEC's) determination to address short-selling abuses while at the same time increasing public disclosure of short-selling activities that affect our markets," Schapiro said in a statement.