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The Securities and Exchange Commission on Wednesday outlined sweeping restrictions on "naked" short-selling in an effort to prevent pessimistic investors from driving down stock prices too far, too fast.

The new rules force short-sellers and their broker-dealers to deliver their borrowed securities within three days of the transaction date. Market makers are no longer immune from the naked short rules.

Another new regulation also makes short sellers liable for fraud to lie about their intention or ability to deliver securities in time for settlement.

"These several actions today make it crystal clear that the SEC has zero tolerance for abusive naked short selling," SEC Chairman Christopher Cox said in a statement. Regulators "will now have these weapons in their arsenal in their continuing battle to stop unlawful manipulation," he added.

In an ordinary short sale, an investor borrows a stock for a fee, and sells it betting that the price will go down. He then buys back the stock at a later time to return it to the owner. In "naked" short sales, the investor must locate shares to borrow, but does not actually borrow or deliver them.

The SEC had put in place temporary restrictions on naked short selling of certain financial stocks over the summer as several firms were suffering from precipitous declines in market value. When those temporary rules expired in August, the stocks continued falling hard and fast, culminating in federal takeovers of Fannie Mae (FNM Quote - Cramer on FNM - Stock Picks), Freddie Mac (FRE Quote - Cramer on FRE - Stock Picks) and American International Group (AIG Quote - Cramer on AIG - Stock Picks) and a bankruptcy filing by Lehman Brothers (LEH Quote - Cramer on LEH - Stock Picks).

The new rules will apply to all securities and are effective as of 12:01 a.m. on Thursday.

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