US securities regulator extends emergency short-selling order

SEC extends emergency short-selling order to August 12 and indicates more permanent rulemaking will follow

WASHINGTON, DC – The US Securities and Exchange Commission (SEC) has extended an emergency order issued on July 15 designed to enhance investor protection against naked short selling in the securities of financial institutions to which the Federal Reserve has granted temporary access to liquidity facilities. The extended order will be in effect until 11:59 pm EDT on August 12, 2008, and will not be further extended.

The decision to extend the order for a second 10-day period, in addition to furthering the purposes of the original order, will allow staff to collect and analyse additional data on the effect of the order's provisions, says the SEC. After the extended order expires, the commission has indicated it will move to consider rulemaking to provide additional protection against abusive naked short selling in the broader market, while allowing the legitimate short selling essential to efficient, highly liquid markets.The SEC’s order requires short sellers in the securities of the designated institutions to arrange to borrow the securities at the time of sale so the buyers will receive the stock they purchased on time. Selling short without borrowing the stock to be sold, and failing to deliver it, is called naked short selling.

“The order is designed to protect legitimate short selling in these securities, but helps prevent illegitimate naked short selling and potential ‘distort and short’ manipulation,” says SEC chairman Christopher Cox. “In addition to continuing the existing order against naked short selling, the Commission will continue exploring other remedies for the broader marketplace to further protect investors from ‘distort and short’ artists.”

The move has angered industry commentators. Edward Yingling, president and CEO of the American Bankers Association (ABA), says: “We are disappointed and deeply concerned about the decision of the Securities and Exchange Commission to extend the emergency order banning the short selling of 19 financial stocks without including all publicly traded banks.

“ABA is concerned that those market participants that are actively involved in executing short-selling strategies will focus their naked short-selling strategies on the publicly traded banks and bank holding companies not covered by the order. As the Commission is aware, it would be an understatement to say that short interest in financial services companies has greatly increased over the past year. Without such action to include bank stocks in the ban, the potential exists that the Commission’s action could backfire and disrupt an industry that is essential to the functioning of the economy.”

He adds: “We hope that the Commission will revisit the matter following the expiration of the emergency order on August 12 when it proceeds to the consideration of rulemaking.”