The Securities and Exchange Commission has announced that it is extending its temporaryprohibition of the short selling of financial stocks until O
The Securities and Exchange Commission has announced that it is extending its temporaryprohibition of the short selling of financial stocks until October 17,
by which time the US legislation making up to USD700bn available for
the government’s purchase of toxic real estate securities is expected
to be in place. The original orders issued by the SEC were due to
expire at midnight on Thursday.
The US financial
regulator has also said that it plans to replace its temporary
requirement that institutional money managers report new short sales of
certain publicly-traded securities to the SEC with a permanent measure,
and it will also make permanent the rule requiring that short sellers
and their broker-dealers deliver securities by the settlement date
(three days after the sale transaction date) or face penalties.
The
SEC says that its measures to address concerns regarding short sales
have focused particularly on the securities of financial institutions
whose health may have an impact on financial stability, and that the
measures it has taken have been designed to ensure the continued smooth
operation of orderly markets.
In extending the measures for up
to a further 15 days, the SEC ignored the appeals of the hedge fund
industry body Managed Funds Association, which had written to the
regulator urging it to let the emergency orders barring short selling
of financial stocks and requiring the public disclosure of other short
positions to expire on schedule at midnight on Thursday.
“The
MFA shares the commission’s deep concerns about the crisis in the
global financial markets and strongly supports efforts to prevent,
detect and punish manipulative conduct,” says the association’s
president and chief executive, Richard H. Baker.
“As witnessed
this past week, however, the orders have not prevented price declines
of financial institutions, volatility in the securities of these firms,
or the failure of a financial institution. The orders have, however,
increased volatility, reduced liquidity, and abruptly halted
capital-raising including through the issuance of convertible
securities.
“We believe the orders may have run counter to their
intended objectives by having exacerbated fluctuations in the affected
securities’ prices and disrupted the functioning of fair, orderly
markets.”
Perhaps recognising the futility of the MFA’s appeal
to the SEC, Baker adds: “In the interim, we ask the commission to amend
the disclosure order to require non-public reporting of detailed short
positions.
“Should the commission choose to extend the order,
while opposed to such action, we request that the commission amend the
prohibition order to include an exemption for bona fide hedging
transactions and a materiality standard in determining whether a
company is a ‘financial firm’ for purposes of the order. We believe
such actions will help mitigate the adverse consequences of the orders.”
The
regulator insists that its actions to bar short selling and financial
stock and to require disclosure of other shorting transactions have
been taken in concert with its counterparts in other developed
securities markets around the world.
“Short selling plays an
important role in the market for a variety of reasons, including
contributing to efficient price discovery, mitigating market bubbles,
increasing market liquidity, promoting capital formation, facilitating
hedging and other risk management activities, and importantly, limiting
upward market manipulations,” the SEC acknowledges.
However, it
adds: “There are circumstances in which short selling can be used as a
tool to mislead the market. For example, short selling can be used in a
downward manipulation whereby a manipulator sells the shares of a
company short and then spreads lies about a company’s negative
prospects. This harms issuers and investors as well as the integrity of
the market.
“This kind of manipulative activity is particularly
problematic in the midst of a loss in market confidence. For example,
in the context of a credit crisis where financial institutions face
liquidity challenges, but are otherwise solvent, a decrease in their
share price induced by short selling may lead to further credit
tightening for these entities, possibly resulting in loss of confidence
in these institutions.”
The SEC argues that its measures to
restrict short selling are designed to provide temporary protection
against abusive short selling while the US Congress works to agree a
“comprehensive plan to stabilise credit markets and the financial
system”.
The US House of Representatives is due to vote again on
a revised bill on Friday, four days after it threw markets into a
renewed tailspin by rejecting the first legislation sent to Congress by
Treasury Secretary Hank Paulson.
The commission’s authority
limits the duration of emergency temporary measures to 30 calendar
days, beyond which they may not be extended. The SEC says its temporary
prohibition of short selling in financial companies, extended to allow
time for completion of work on the anticipated legislation, will expire
at 11:59 p.m. ET on the third business day after enactment of the
legislation, and at the latest on October 17. ?
The temporary
requirement on institutional money managers to report short sales will
also be extended until October 17, but the SEC says it intends the
order to continue in effect beyond that date without interruption in
the form of an interim final rule. It will seek comments on all aspects
of the proposed rulemaking. The temporary easing of restrictions on the
ability of securities issuers to repurchase their securities will also
be extended until October 17.
The regulator says its measures
designed to strengthen the existing ban on so-called naked short
selling and to increase the applicable penalties will also continue in
force following the expiry of its emergency orders.
The
Commission has adopted, on an emergency basis, a rule requiring that
short sellers and their broker-dealers deliver securities by the
settlement date. If a short sale violates this close-out requirement,
any broker-dealer acting on the short seller’s behalf will be
prohibited from further short sales in the same security, for any
customer, unless the shares are not only located but also pre-borrowed.
This rule will also continue beyond October 17 as the SEC prepares a
permanent measure.
The SEC has also implemented a naked short
selling anti-fraud rule, covering short sellers who deceive
broker-dealers or any other market participants about their intention
or ability to deliver securities in time for settlement. The rule makes
clear that such persons are violating the law when they fail to deliver.
