SEC DEPLOYS RESTRICTIONS ON SHORT-SELLERS
The Securities and Exchange Commission met last night in emergency session to consider requiring hedge funds to disclose their short positions and institutional traders to secure their records in anticipation of subpoenas.
Under the proposals, managers with more than $100 million invested in securities would have to issue reports of their daily short positions.
The meeting came after the SEC adopted two regulations that go into effect today that will force traders and brokers to actually borrow shares used in all short sales, amid concern that so-called “naked short sales” are driving down prices by flooding markets with sell orders.
An additional rule makes it a securities fraud when sellers deceive brokers about delivering borrowed shares to buyers.
The new rules were called “too little too late,” said Ed Herlihy and Ted Levine of venerable Wall Street law firm Wachtell Lipton Rosen & Katz, in a public memo.
The two lawyers have repeatedly urged regulators to re-impose the “Uptick Rule,” which prevents investors from shorting shares of stock when the price is declining. They also called for the SEC to place limitations on short selling for a period of time to restore a “fair and orderly market.”
“The measures adopted by the SEC fall far short of the type of bold measures needed to constrain the abusive short selling and rumor mongering taking place,” Herlihy and Levine said in their letter.
Short sellers were having a “field day” before the rules kicked in, said Larry Tabb, founder of financial consulting firm Tabb Group. “This will stop in a few days and funds are getting in their last licks.”
“It’s very clear to me – we’re in the midst of a market controlled by fear and rumors, and short sellers are driving our stock down,” Morgan Stanley boss John Mack said in an internal memo to employees yesterday.
Lawmakers including Senate Banking Committee Chairman Christopher Dodd and regulators say short sellers may have contributed to a crisis by spreading false information and using abusive tactics to attack companies.
Hedge funds and other investors argue that poor business strategies are to blame, not short sellers.
In traditional short sales, traders borrow shares that they then sell. If the price drops, they profit by buying back the stock, repaying the loan and pocketing the difference.
The rules just approved by the SEC target naked short-selling, in which traders never borrow shares from their brokers. The agency is concerned that such a strategy can free investors to manipulate prices by placing unlimited sell orders.