WASHINGTON -- The Securities and Exchange Commission voted 3-2 Wednesday in favor of a final rule that will curb short selling for individual securities that decline at least 10% in a single day.
The vote brings an end to almost a year of debate over the practice, in which investors attempt to profit by selling borrowed shares of a stock that is losing value.
Short selling has come under fire from lawmakers and other policy makers in the wake of recent economic turmoil, although its defenders say they are the victims of political rhetoric. Some in the industry have said short selling contributes to market liquidity and hasn't contributed to the recent economic crisis.
From the SEC's perspective, curbing short selling in a manner that keeps investors from abusively driving down stock values will help investor confidence. But the rule comes with a price. Implementation costs for trading centers and broker dealers are expected to be between $70,000 and $90,000, SEC staffers said. Ongoing costs for those entities are estimated at $120,000 per year on average.
In total, the cost to the industry for compliance will run into the billions -- $1 billion for implementation and another $1 billion annually in ongoing costs.
For falling stocks, the SEC's rule will allow short selling only if the price of the security is above the current national best bid. The price test will be triggered for a security any day in which its price declines by 10% or more from the prior day's closing price. The restriction will apply to short-sale orders in that security for the remainder of the day as well as the following day.
Separately, the SEC on Wednesday approved a statement supporting the adoption of global accounting standards for U.S. companies but said that it won't ask companies to adopt the rule before 2015. An earlier timetable suggested companies would be required to comply by 2014.
The SEC last year asked for comments on whether it should reinstate a short-selling restriction known as the "uptick" rule, in which investors can only short a stock after it rises, or ticks higher. Regulators and industry insiders agreed that the previous uptick rule isn't workable with current lightening-fast computer-generated trades. As such, the SEC adopted a much more targeted rule.
"In arriving at the rule we are considering, the commission was cognizant of the benefits that short selling can provide to the markets," said SEC Chairman Mary Schapiro.
"However, we also are concerned that excessive downward price pressure on individual securities, accompanied by the fear of unconstrained short selling, can destabilize our markets and undermine investor confidence in our markets," Ms. Schapiro said.
Republican commissioners Kathleen Casey and Troy Paredes voted against the proposal. Ms. Casey said the commission found no empirical evidence that short selling contributed to the market turmoil of recent years. Mr. Paredes said the rule is "rooted in conjecture and too speculative."
Democratic commissioners Elisse Walter and Luis Aquilar voted in favor of the rule.
The industry won't be pleased with new rule. Goldman Sachs & Co.'s head of U.S. equity trading, Paul Russo, said in a letter to the SEC that a short sale price test "will harm market efficiency and liquidity and will not be effective in further safeguarding the market against abusive short selling."
Some market observers weren't as concerned. "It's reasonably harmless to both sides, it seems fairly logical," said Will Duff Gordon, director of investment management strategy at Data Explorers, which tracks short-selling interest. "It's just a layer of administration for anybody who's a short seller."
The rule generally would apply to all equity securities that are listed on a national securities exchange, whether traded on an exchange or in the over-the-counter market.
During normal market volatility, the rule would affect only a few stocks, according to SEC staffers. During the relatively smooth 2004-2006 years, for example, only about 1.3% of stocks hit the 10% threshold on a given day. From 2001 to 2009, which includes times of greater volatility, 4% of stocks, on average, hit the threshold.
Oct. 10, 2008, shows where the high water mark for the rule would be. On that day, 68% of stocks fell more than 10%.
Rep. Gary Ackerman (D., N.Y.) applauded the SEC's action, saying it is a "vital step towards combating the artificial manipulation of stocks." Mr. Ackerman sponsors more far-reaching legislation calling for the reinstatement of the old uptick rule.
At least a few lawmakers think the rule doesn't go far enough. Sens. Ted Kaufman (D., Del.) and Johnny Isakson (R., Ga.) said the rule will be of "limited use, helping only in the worst-case scenarios that could occur during a terrorist attack or financial crisis."
Market participants will have six months to comply with the requirements.
Separately, the SEC is expected Wednesday to approve a statement saying it supports adopting global accounting standards for U.S. companies, but it won't seek early adoption.
The first time U.S. companies would report under such a system would be no earlier than 2015, according to a summary of the SEC statement. The commission is expected to decide by next year whether it will recommend such a transition.
