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SEC joins UK in halting short selling of financial stocks

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The Securities and Exchange Commission, acting in concert with the Financial Services Authority in the UK, has taken temporary emergency action to prohibit short selling in financial compa

The Securities and Exchange Commission, acting in concert with the Financial Services Authority in the UK, has taken temporary emergency action to prohibit short selling in financial companies in order, the US financial industry regulator says, to ‘protect the integrity and quality of the securities market and strengthen investor confidence’.

The commission’s action, carried out under Section 12(k)(2) of the Securities Exchange Act of 1934, will apply to the securities of 799 financial companies and is effective immediately; it will expire one minute before midnight on October 2.

The order may be extended beyond 10 business days if the SEC deems it necessary in the public interest and for the protection of investors, but may not exceed a total of 30 calendar days.

The FSA took similar action at midnight last night to place the stocks of 29 listed UK banks, insurers and financial holding companies off limits to short sellers for three months. The SEC says it and the UK regulator are consulting on an ongoing basis with regard to short selling matters and will continue to co-operate in carrying out regulatory actions.

‘The commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets,’ says SEC chairman Christopher Cox.

‘The emergency order temporarily banning short selling of financial stocks will restore equilibrium to markets. This action, which would not be necessary in a well-functioning market, is temporary in nature and part of the comprehensive set of steps being taken by the Federal Reserve, the Treasury, and the Congress.’

The SEC says its action ‘calls a time-out to aggressive short selling’ in financial institution stocks, because of the essential link between their stock price and confidence in the institution. The US regulator will continue to consider measures to address short selling concerns in other publicly-traded companies.

‘Under normal market conditions, short selling contributes to price efficiency and adds liquidity to the markets,’ the commission said in a statement. ‘At present, it appears that unbridled short selling is contributing to the recent, sudden price declines in the securities of financial institutions unrelated to true price valuation.

‘Financial institutions are particularly vulnerable to this crisis of confidence and panic selling because they depend on the confidence of their trading counterparties in the conduct of their core business.’

The SEC has taken further steps designed to help stabilise market conditions. It is temporarily requiring institutional money managers to report new short sales of certain publicly-traded securities, in the same way that they are already required to report their long positions in these securities.

The regulator is also temporarily easing restrictions on the ability of securities issuers to repurchase their securities, with the aim of giving issuers more flexibility to buy back their securities and help restore liquidity during a period of ‘unusual and extraordinary’ market volatility.

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