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Shorting

By Judith Burns
Of DOW JONES NEWSWIRES

WASHINGTON -(Dow Jones)- Federal regulators have approved a new requirement for brokers to report short positions in stocks that trade over the counter. The Securities and Exchange Commission announced Tuesday that it has approved the National Association of Securities Dealers' proposal for expanded short-position reporting.

Short selling involves sales of borrowed stock. Short sellers profit when the stock price falls, allowing them to replace borrowed shares at a lower price.

The NASD now requires its members to keep records and file monthly reports of total short positions in their own accounts and those of their customers, but the rule applies only to exchange-listed stocks and those on the Nasdaq Stock Market.

Once the change takes effect, the same short-position records and monthly reports must be made for shares traded over the counter. The NASD said the change will increase information available to those who buy and sell OTC stocks.

NASD Regulation Inc. board members approved the rule change last summer and filed it with the SEC last fall. The NASD said those who commented generally supported the idea. The expanded reporting requirement is expected to take effect by late spring or early summer. An NASD spokesman wasn't immediately available to comment.

R. Cromwell Coulson, chief executive of Pink Sheets LLC, a privately owned New York firm that provides pricing and financial information for OTC stocks, applauded the move.

"How great is that," Coulson said in a telephone interview. He predicts investors will benefit from having more light shed on short sales "because dark corners are not good for markets."

Coulson petitioned the SEC in January 2005 to require NASD members to file short-position reports for all publicly traded stocks, including the approximately 4,800 quoted in the Pink Sheets and 3,300 trading on the OTC Bulletin Board.

The Pink Sheets CEO figures the new reports will help combat penny-stock frauds such as "pump and dumps," in which manipulators convince investors to buy a stock while the manipulators are selling. He also expects the OTC short-sales reports to shed light on reports of widespread "naked" short selling abuses.

"Naked" sales occur when shares are sold by sellers who don't borrow them and have no intention of doing so. Coulson expects the expanded reports will show that legitimate market makers are not engaged in "naked" short sales of OTC stocks, although many of those who commented to the SEC in support of his petition took the opposite view.

Once the new monthly reports are filed to the NASD, Coulson said the Pink Sheets will make them available free of charge. His only complaint is that the reports aren't filed more often: He'd prefer daily reporting on short positions.

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