By Marcy Gordon, AP Business Writer
Monday July 27, 2009, 8:03 pm EDT
WASHINGTON (AP) — Federal regulators on Monday made permanent an emergency rule put in at the height of last fall’s market turmoil that aims to reduce abusive short-selling.
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.
Brokers acting for short sellers must find a party believed to be able to deliver the shares within three days after the short-sale trade. If the shares aren’t delivered within that time, there is deemed to be a “failure to deliver.” Brokers can be subject to penalties if the failure to deliver isn’t resolved by the start of trading on the following day.
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.
Some securities industry officials, however, have maintained that the SEC’s emergency order on “naked” short-selling brought unintended negative consequences, such as wilder price swings and turbulence in the market.
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.
Schapiro said last week the SEC could decide on a final course of action in “the next several weeks or several months.”