Brokers fear Utah law.
StockGate: Naked Short Selling Scandal Poised To Overrun Brokers’ Frenetic Defenses / FinancialWire®
June 6, 2006 (FinancialWire) The brokerage industry is mounting an increasingly active campaign against Utah regulators in a frantic attempt to prevent the growing scandal around naked short selling from seeding regulation in other states.
Investment banks including Morgan Stanley (NYSE: MS), Fidelity Investments, and Bear Stearns (NYSE: BSC) have been scrambling to limit the damage from the new law while companies impacted by short selling, like Overstock.com (NASDAQ: OSTK), have praised lawmaker efforts.
Several Utah lawmakers have said they hope their efforts will prove to be the vanguard of a nationwide effort to shield investors from institutions intent on unfairly manipulating the market. Republican state representative Jim Ferrin told media outlets that the nation will "probably look to our state to see what good comes of [the law]."
Naked short selling involves the sale of a stock that the seller does not own. In legitimate short sale operations, the seller gambles that the stock's price is about to fall. The sale is locked in at a high price and the seller then purchases the "sold" shares at a lower price to fulfill the trade.
Critics of the practice say it has been abused by large institutions to drive down the value of companies and rampant failures to deliver the sold stocks endanger the stability of the market.
Utah's governor recently signed a law to limit the activity of entities involved in short sales. The law also companies impacted by short sales the ability to sue brokers and strengthens existing regulations with stiff fines.
Brokers were blindsided by the law and have scrambled to mount an effective response. Some have warned that the broker industry will abandon Utah and there are persistent threats of court action.
Critics say Utah's law violates federal law and would result in lengthy, expensive court challenges. The Securities Industry Association of New York and Washington has said the SEC already has regulations governing short selling and that The National Securities Markets Improvement Act requires any state regulation to adhere to federal standard.
The Securities Industry Association, of New York and Washington, sent a letter to the governor May 25, saying that the law could "result in a time consuming and expensive court challenge." The SIA contends that the law violates the National Securities Markets Improvement Act, which prohibits state regulations of national markets if they differ from federal securities rules.
Brokers fear that if left unchecked, the Utah law could spawn copy-cat legislation in all 50 states creating an overwhelming administrative burden. Industry insiders are already complaining about the paper work generated by federal regulations and say that individual states are likely to pass subtly different laws, creating a compliance nightmare.
Utah lawmakers have said they understand why the industry opposes their actions but that they believe naked short selling to be a legitimate problem that the SEC has yet to properly address and that they hope Utah's actions will bring the issue national attention.
AI
