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SEC Seeks To 'Modernize' Short-Selling Regs - Official

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NYBob Member Level  Friday, 03/30/07 05:05:03 AM
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SEC Seeks To 'Modernize' Short-Selling Regs - Official



By Daisy Maxey, Of DOW JONES NEWSWIRES

NEW YORK -(Dow Jones)- The Securities and Exchange Commission is taking a " carefully honed approach" in its efforts to address short-selling abuses with as little restriction as possible and is hoping to make recommendations by late spring, an SEC official said.

The goal is to modernize regulations to prevent abusive and manipulative short-selling practices with minimal impact on liquidity, James Brigagliano, an associate director in the SEC's market regulation division, said Thursday. Brigagliano made his comments at an educational seminar on regulatory issues for hedge fund managers sponsored by the Managed Funds Association, a hedge fund trade group.

On the sidelines of the conference, held at the City University of New York, he also discussed briefly the commission's efforts to look into the practice of some big investors, including hedge funds, to vote shares that they have borrowed, but don't own.

Short sellers borrow shares, then sell them, hoping that they can buy the shares back later at a lower price to repay their loan. Some sell shares that they haven't actually borrowed, which is known as naked short selling. Short selling is a common practice among many hedge funds.

The SEC has proposed changes to three regulations - one governing short selling in connection with public offerings; another governing failure to deliver shares on time after a stock transaction; and a short-sale price test, which restricts the prices at which short sales may be executed.

The commission proposed in December that Rule 105, which governs short selling in connection with public offerings, be altered. The rule bars a person who sells short just before an offering is made from covering that short sale using securities purchased in the offering. It's meant to prevent activities that may artificially depress market prices and reduce offering prices, but there have been numerous violations, Brigagliano said. "In recent years we have brought a number of actions" related to violations of the rule, he said.

The commission recommended in December that any short seller be banned from purchasing any security in the offering during the Rule 105 restriction period. The period to file comments on the proposed change ended in February, and the commission is now reviewing the 13 comments it received, Brigagliano said.

The commission also proposed an amendment in July that would eliminate one provision and limit another provision of a regulation known as Regulation SHO, which governs failure to deliver shares on time after stock transactions take place. The regulation, which went into effect in January 2005, imposes close-out requirements on broker-dealers for securities in which a substantial number of failures to deliver have occurred. The commission recommended eliminating a provision known as the "grandfather clause," which exempts some failure to deliver from the closeout requirement. It also proposed narrowing an exception for registered options market makers.

The commission will consider how any change in Reg SHO could affect prime brokerage arrangements, he said.

In addition, the commission has proposed the elimination of the short-sale price test, commonly know as the "tick test." The "tick test," meant to prevent downward manipulation of stock prices, allows short sales only at a price above the last sale price.

The rule has been in place since 1938 despite significant developments in the marketplace, Brigagliano said. Decimalization and changes in market strategies have undermined the effectiveness of the test, he said. "The current price test may not be a good fit for the modern markets," he said.

The commission started a pilot program in 2004 to test the short-sale price restriction by temporarily suspending the rule on about 1,000 securities, and concluded that those stocks weren't more susceptible to patterns associated with downward manipulation, Brigagliano said.

The comment period on the elimination of the "tick test" ended in February, and the commission is reviewing the 26 comments it received, he said.

As for the practice by large investors to sway corporate contests by voting shares that they don't actually own, Brigagliano said that the issue is important to SEC Chairman Christopher Cox. The commission is collecting information and "will discuss at some point in the future what, if any, change we would recommend to insure that votes are properly counted," he said.

-By Daisy Maxey, Dow Jones Newswires; 201 938 4048; daisy.maxey@dowjones.com


(END) Dow Jones Newswires
03-23-070951ET
Copyright (c) 2007 Dow Jones & Company, Inc

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