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SEC to act on abusive short selling: source By Rachelle Younglai
Mon Sep 15, 2:36 AM ET

WASHINGTON (Reuters) - U.S. securities regulators plan to take action on abusive short selling of stock before the end of the week, a source briefed on the matter said on Monday.

The measures came as Lehman Brothers Holdings Inc (LEH.N) filed for bankruptcy protection, intensifying concerns that other major financial stocks would accelerate their losses.

The Securities and Exchange Commission will likely adopt proposals to strengthen its short-selling rule, including one that deems it fraudulent for customers to deceive broker-dealers about their intention or ability to deliver securities in time for settlement.

The SEC will also move forward with a plan that would shorten the time in which traders must buy back stock if they fail to deliver a security by the settlement date.

But the SEC will not reinstate and broaden a temporary emergency rule that required traders to preborrow stock before executing a short sale.

Two months ago, regulators were faced with similar market turmoil when IndyMac bank was seized by regulators and investors were concerned that Lehman and mortgage finance giants Fannie Mae (FNM.N) and Freddie Mac (FRE.N) were veering towards insolvency.

At the time, the SEC announced plans to crack down on rumor-mongering and issued an emergency rule aimed at curbing illegal naked short selling in 19 major finance stocks, including Lehman, Freddie and Fannie.

A "naked" short sale occurs when an investor sells stock that has not yet been borrowed.

Broker-dealers will sometimes accidentally fail to deliver stock to investors who have arranged to borrow it. If this is done intentionally, it is illegal.

That rule proved to be controversial, however. Broker-dealers said the requirement was onerous, companies whose stock was not on the SEC's list wanted the same protections, and short sellers complained about being targeted.

When the emergency order ended in mid-August, the SEC set about crafting rules -- which it had been expected to adopt late in September -- to be applied to all stocks.

Mortgage giants Fannie and Freddie have since been taken over by the government. Lehman has been forced to file for bankruptcy after failing to find a buyer.


http://news.yahoo.com/s/nm/20080915/bs_nm/sec_shortselling_dc;_ylt=At99fRATam8Umkx81hAWp5bgtY54