SEC Extends Emergency Short-Sale Order Thru August 12

Jul.30, 2008 in Market Outlook

Last Update: 7/30/2008 7:40:20 AM

(This article was originally published Tuesday)

By Judith Burns
Of DOW JONES NEWSWIRES

WASHINGTON (Dow Jones)–Emergency restrictions on short-sales in 17 Wall Street
firms and housing-finance giants Fannie Mae (FNM) and Freddie Mac (FRE), due to
expire just before midnight Tuesday, have been extended through August 12, the
Securities and Exchange Commission announced.

The SEC said the additional 10-day extension will give its staff time to collect
and analyze data on the impact and effect of the order. It said it would move
“immediately” afterward to consider rules imposing short-sale restrictions on the
broader market.

The SEC issued the emergency order on July 15, citing concerns that
rumor-mongering could spark “sudden and excessive fluctuations” in stock prices
and disrupt the fair and orderly functioning of U.S. markets.

The SEC said once the order expires on August 12, it “will not be further
extended.”

If regulators want to continue the short-selling restrictions for the stocks,
they would need to do so through rulemaking. The lengthy federal rulemaking
process could be accelerated by issuing interim final rules that are effective
immediately but still subject to public comment and possible revisions in the
future.

Expanding the restrictions to other stocks could be next.

“That would be a natural follow-on to the emergency action that the commission
has already taken,” SEC Chairman Christopher Cox told reporters after a press
conference at the Labor Department on Tuesday.

According to Cox, “the general approach that the commission will take is to
commence notice and comment rulemaking at the earliest possible time to ensure
that appropriate protections against illegitimate naked short selling apply
generally across the entire market.”

The SEC emergency order, which took effect Monday, July 21, applies to Fannie
Mae, Freddie Mac, and to 17 publicly-traded Wall Street firms that are primary
dealers in U.S. Treasury securities. All 19 firms covered by the order have been
given access to borrowing from the Federal Reserve, once reserved for commercial
banks.

The order requires short-sellers to pre-borrow shares before engaging in short
sales of the targeted companies, which Cox has said is aimed at abusive “naked”
short sales. In a last-minute change, announced July 18, the SEC excluded market
makers in the stocks from the pre-borrowing requirement.

Short sellers sell borrowed shares in hopes of replacing the shares later at a
lower price. The practice is legal and produces profits when stock prices
decline. “Naked” short sellers don’t borrow shares in advance of short sales, and
may never intend to borrow them, which can have punishing effects on a stock’s
price. While the SEC has tightened rules in recent years to curb naked short
selling, it hasn’t previously insisted that shares be borrowed before they are
sold short.

Cox said the SEC is looking forward to analyzing data on the effect of the
temporary restrictions, and has heard that all of its recent actions have “helped
to control illegitimate rumor-mongering and other techniques of market
manipulation.”

In addition to Fannie Mae and Freddie Mac, the stocks covered by the order are:
BNP Paribas Securities Corp. (BNPQF, BNPQY), Bank of America Corp. (BAC),
Barclays PLC (BCS), Citigroup Inc. (C), Credit Suisse Group (CS), Daiwa
Securities Group, Inc. (DSECY), Deutsche Bank Group (DB), Allianz SE (AZ),
Goldman Sachs Group Inc. (GS), Lehman Brothers Holdings Inc. (LEH), Merrill Lynch
& Co. (MER), Morgan Stanley (MS), Royal Bank ADS (RBS), HSBC Holdings PLC (HBC),
JPMorganChase & Co. (JPM), Mizuho Financial Inc., (MFG), and UBS AG (UBS).

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