Short-Sale Rules Will Be Priority: SEC Chairman

The head of the Securities and Exchange Commission said Tuesday she is making the issue of new rules restricting short-selling a priority as the agency hears from an array of interests about ways to limit trades that bet against a stock.

Investors and lawmakers have been clamoring for the SEC to put new brakes on trading moves they say worsened the market's downturn.

"I have made it a priority to evaluate the issue of short-selling regulation, and ensure that any future policies in this area are the result of a deliberate and thoughtful process," SEC Chairman Mary Schapiro said at the start of a public "round-table" meeting organized by the agency.


Schapiro has said the SEC must evaluate the costs and benefits of new restrictions.

Representatives of companies including General Electric, Credit Suisse, JPMorgan Chase, Charles Schwab and Fidelity Investments, as well as the New York Stock Exchange, the Nasdaq Stock Market and several universities are participating in the forum.

One option the SEC has advanced 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.

Schapiro and the other four SEC commissioners voted unanimously last month to put forward five alternative short-selling plans. They could settle on one and formally approve it sometime after the 60-day public comment period that began in early April.

Short-selling involves borrowing a company's shares, selling them, then buying them back when the stock falls and returning them to the lender. The short seller pockets the difference in price.

Many financial and some other company stocks were targeted by short sellers in the market turmoil that began in mid-2008. GE was among 870 U.S. companies, mostly financial institutions, whose stock was subject to an unprecedented ban against all short-selling put in effect by the SEC last fall. The ban remained in place for several weeks until Congress enacted the $700 billion financial bailout plan.

Short-selling is legal and widely used on Wall Street. But as the market has plunged, investors and lawmakers have pressed the SEC to reinstate the uptick rule. They say its absence since mid-2007 fanned market volatility, prompting bands of hedge funds and other investors to target weak companies with an avalanche of short-selling.

Although many in the public blame short-selling for enflaming market volatility over the past 18 months, Schapiro has noted there is no "specific empirical evidence" that the absence of the uptick rule fueled it. Schapiro has acknowledged the SEC's difficult task in striking a balance between stemming market abuses to bolster investors' confidence and stifling the legitimate benefits of short-selling.

Proponents of short-selling say it can make markets more efficient, bring in more capital and raise warning signs about weak or badly managed companies. Professional short sellers and some analysts also have warned that restricting short-selling could distort edgy markets.

But companies and regulators maintain that the practice widened the scope of the financial crisis and contributed to the collapse in value last fall of many bank stocks and the demise of Lehman Brothers.

Another option floated by the SEC, is a "circuit breaker" for stock prices. That approach, in three variations, either bans short-selling outright for the rest of the trading session in a stock that declines 10 percent or more, or restricts short-selling of the stock for the rest of the session based on its previous sale price or highest bid.

The fifth alternative, known as an upbid rule, would allow short sellers to come in only at a price above the highest current bid for the stock.