SEC Gets Tough on ‘Naked’ Short Sales

The Securities and Exchange Commission (SEC) on Monday made permanent a rule against so-called “naked” short sales in the securities market and detailed some short sale reporting initiatives it said will increase transparency of the practice. In a “naked” short sale, the investor short sells shares it has yet to borrow. The practice, although blamed for pushing down stock prices through speculation alone, was permitted as long as no legal requirement forced short sellers to borrow the shares before selling them short. The new rule requires broker-dealers — as opposed to sellers — locate an entity that can deliver the shares within three days of the trade, essentially borrowing them in order to conduct the short sale. The temporary version of the rule was set to expire on July 31st, but the SEC’s action makes the rule a permanent fixture. “Short selling often can play an important role in the market for a variety of reasons,” the SEC said in an announcement, “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 also said it is pushing for greater transparency around short sales. Instead of renewing a temporary short sale reporting rule set up in fall of 2008, the SEC is looking into daily publication of short sale volume information, disclosure of short sale transactions and twice-monthly disclosures of instances where investors fail to deliver shares within three days of trade. Write to Diana Golobay.