SEC Criticized For Delaying Short-Selling Changes
March 29, 2007 17:28 pm
WASHINGTON (Dow Jones)--The U.S. Securities and Exchange Commission is coming under criticism for delaying action on persistent problems involving short selling abuses, an area where SEC Chairman Christopher Cox has said existing rules have been inadequate.
The SEC announced this week that it is reopening the public comment period on changes it proposed last summer to tighten its 2004 rule, known as Regulation SHO. Although the comment period closed in mid-September, the SEC said a new, 30-day extension is warranted in light of the "continuing public interest" in the matter and concerns raised by a handful of groups and individuals who complained the agency had not issued data it referenced when proposing the changes.
"There's really no reason why they should delay," U.S. Chamber of Commerce chief operating officer David Chavern said in a telephone interview Thursday. "The things they're proposing make perfect sense." The proposed changes aimed to bolster the SEC's earlier efforts to combat "naked" short sales. Unlike short sellers who borrow shares in hopes of replacing them later and profiting from a price decline, naked short sellers don't borrow shares they sell short, a practice some compare to counterfeiting.
Although Regulation SHO imposed new restrictions and stock delivery requirements, it contained an exception for options market makers and excluded pre-existing failures to deliver stocks sold short. Cox told a House subcommittee Tuesday that the rule proved "inadequate" because of the so-called "grandfather" protections for prior delivery failures. Last July, faced with chronic failures to deliver certain stocks borrowed for short sales, the SEC proposed ending those protections.
Eliminating the "grandfather loophole" and market maker exception are "no-brainers," according to Chavern, who urged the SEC to "move ahead expeditiously with the reforms that they've proposed."
The SEC said it is reopening the proposal for comment after releasing data sought by the American Bar Association and others, including by CTC LLC, which specializes in options trading.
"We provided additional data because the commenters asked for it, and we look forward to considering their views," said SEC spokesman John Nester.
The SEC had previously referenced the data from the National Association of Securities Dealers, but didn't release it because it contained "confidential, company-specific" findings. An edited version of the NASD findings showed many of the stock-delivery failures over a 10-month period in 2005 had pre-existing delivery failures and may have been exempt under the "grandfather" treatment, while others appear to have been covered by the option market maker exemption.
-By Judith Burns
AI
