New Short Sale Rules Imminent
Traders Magazine Online News, January 6, 2010
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New Short Sale Rules Imminent
Traders Magazine Online News, January 6, 2010
Peter Chapman
New short sale rules are on the way.
The Securities and Exchange Commission, after wrestling with the issue for nearly a year, is expected to adopt a price-test rule for short sales this month. Also, the U.S. Congress is likely to add at least three new short sale rules to the Securities Exchange Act of 1934 as part of its overhaul of financial services regulation.
Sources tell Traders Magazine that the SEC is close to reinstating restrictions on traders who want to sell stock short. The Commission struck the nearly 70-year old uptick rule from the books in 2007, but proposed several possible replacements last year in the wake of heavy pressure to do so from the American public and the Congress.
"There are pretty strong indications that there will be some form of a price test adopted this month," said one DC-based attorney who did not want his name disclosed.
It is not known which one of the proposed rules will become law, but the betting is on the so-called "alternate uptick rule" proposed by the SEC last August. The rule would require traders who want to short stock to do so by posting an offer at least 1 cent above the best bid. Traders could not short by hitting the bid, the faster of the two selling techniques.
The alternate uptick rule was first proposed by a group of four exchange operators last spring and includes the option of a circuit breaker. If a circuit breaker test was also adopted, short selling would only be restricted if a given stock started falling dramatically--by 10 percent or so over the previous days' closing price.
Most trading houses are opposed to any new rules, seeing them as unnecessary. Still many are resigned to the inevitability of a new rule. Most hope the SEC will include a circuit breaker test with any rule it adopts.
The SEC would not comment for this article.
Much of the pressure on the SEC to reinstate a price-test rule came from Congress. Senators Ted Kaufman, D-Del., and Johnny Isakson, R-Ga., kicked things off with a bill last March that would've forced the SEC to bring back the uptick rule. Now Rep. Barney Frank, D-Mass., is driving the agenda.
As part of H.R. 4173, the "Wall Street Reform and Consumer Protection Act of 2009," the sweeping overhaul of regulation of the financial services industry, Congressman Frank has added a little noted amendment targeting short sellers.
The so-called Managers Amendment, which only became public in December, would add three new rules to the '34 Act. The first would require every institutional investment manager that shorts stock to disclose its short positions to the SEC every week, much as these organizations disclose their long positions every quarter.
The SEC would then be required to make the information public every month. The amendment does not direct the regulator to disclose the identity of the short seller. It did however leave room for the SEC to provide "additional information."
If the SEC did decide to disclose the identity of the short seller, "that would seriously affect what people do," Ed Johnsen, a partner with Winston & Strawn, said.
The SEC instituted a similar rule mandating disclosure for one year between summer 2008 and summer 2009 before letting it expire. It then said it was working with the nation's exchanges to come up with a disclosure plan.
The second amendment would add a clause to the Act that makes it illegal for someone to effect a "manipulative short sale of any security." In addition, the clause prods the SEC to add its own rules enforcing the new amendment.
The third amendment could potentially have the biggest impact on short sellers. It requires broker-dealers to instruct their customers that they have the right to refuse to loan their stocks for short-selling purposes.
Because stocks sold short are typically borrowed from investors, a refusal on the part of the shareholder to lend would make it impossible for traders to effect a short sale.
Most stocks however are owned by institutions, while the anti-short selling backlash has come mostly from the American public. Large institutions make money lending their securities and so far have shown little appetite for eliminating the practice.
Where the new regulation may have an impact is on less liquid, hard-to-borrow stocks owned by the retail public. "There may be certain short selling that can't get done because the stocks that had been hard to borrow are now harder to borrow," Johnsen said.
The Frank amendment is part of the House version of the bill. The Senate is still working on its version. The two must ultimately be reconciled before the bill becomes law. While it is possible the Frank amendment could be dropped from the final bill, Johnsen, for one, believes that to be unlikely.
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4kids
all jmo
10/5/07 -- there are no coincidences here ...
oh and like many other longs .. not selling at this level --
