SEC to Limit Short Sales of Major Financial Firms

The U.S. Securities and Exchange will issue an emergency rule later Tuesday to stop "naked" short selling in major financial firms, including Fannie Mae and Freddie Mac, the SEC said.

Short sellers borrow shares they consider overvalued and sell them. If the price drops, they repurchase the shares, return them and pocket the difference.


The rule would require any person making a short sale in the listed securities to borrow the securities before the short sale is effected and deliver the securities on settlement date.

The new restrictions were first announced by SEC Chairman Christopher Cox during testimony before the Senate Banking Committee.

"Today the commission will issue an order designed to enhance protections against naked shortselling in the securities of primary dealers Fannie Mae & Freddie Mac ," Cox said. "The emergency order will provide that all short sales of the securites primary dealers Fannie & Freddie will be subject to a pre-borrow reqiurement."