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Wednesday, September 17, 2008

SEC Announces New Short-Selling Rules

FOXBusiness

The Securities & Exchange Commission announced new trading rules Wednesday to curb the use of what's known as "naked" short selling.

This was first reported by FOX Business's Liz Claman.

Naked short selling is a Wall Street maneuver where a trader “shorts” a stock, or bets that a stock will go down in price, without borrowing the shares immediately first. Traditional short selling requires borrowing the shares before selling them. Naked shorts can usually push a stock's price lower than a traditional short can.

According to the rules instituted by the SEC, short sellers now must deliver the securities to the borrower by the end of business within three business days or face penalties that might included banning from further short sales of that same security.

The SEC issued a temporary ban on naked short selling on specific stocks that included Fannie Mae (FNM) and Freddie Mac(FRE) along with 17 investment banks. These rules now apply to all stocks and industries as of 12:01 a.m. ET on Thursday.

"These several actions today make it crystal clear that the SEC has zero tolerance for abusive naked short selling," said SEC Chairman Christopher Cox in a statement.

Naked short selling became much more common after the SEC eliminated a regulation known as the “uptick” rule on July 6 of last year.

Many companies, notably companies in the financial industry, have complained that without the “uptick” rule, their companies’ stocks can fall dramatically--commonly called a “bear run.”