The Securities and Exchange Commission voted unanimously to propose tightening restrictions intended to combat manipulative short selling ahead of stock offerings.
Current SEC rules bar short sellers from covering short sales with shares obtained in a follow-on offering within the next five days. Nevertheless, SEC officials said they have seen a number of cases where short sellers skirted the requirement, making easy profits at the expense of companies seeking to raise additional capital.
Under the proposed change, anyone who has executed a short sale in the five-day period before the offering would be barred from purchasing shares in the offering. If adopted, the new restrictions would permit short selling within five days in advance of an offering, or buying shares in the offering, but not both.
Short selling involves sales of borrowed shares, producing profits when stock prices decline. SEC Chairman Christopher Cox said the SEC is considering tighter restrictions to prevent manipulative trading that artificially depresses prices in stock offerings.
SEC officials said the proposed change is narrowly targeted and would not cover derivative trading or private offerings, including PIPE transactions -- private investments in public equity.
The SEC will seek public comment on the proposal. Final adoption requires a second vote by the five-member commission.
Meanwhile, the SEC also voted to propose abolishing decades-old restrictions that allow short sales only when stock prices are rising. If approved in a second vote by the five-member commission, the SEC would abolish rules allowing short sales only when stock prices are moving up. The change would apply to the SEC's own rules and those set by U.S. market self-regulatory groups.
Short sellers sell borrowed shares in hopes of profiting from declining prices. Since the 1930s, the SEC has allowed short sales only when a stock price is rising, not falling, and stock markets have used their own price tests for short selling, based on the last sale or bid. An SEC experiment to temporarily lift such restrictions for some stocks found the limits aren't needed to prevent manipulation, SEC market regulation division director Erik Sirri said Monday.