Post by Sapphire Capital on Jul 25, 2008 4:36:06 GMT 4
WASHINGTON, July 24 (Reuters) - The top U.S. securities regulator remains steadfast in a plan to broaden an emergency rule to curb abusive short selling despite opposition from the hedge fund industry and other short sellers.
U.S. Securities and Exchange Commission Chairman Christopher Cox told lawmakers on Thursday the agency would soon propose expanding the rule covering the shares of 19 major financial firms to the entire market.
"We have immediately pivoted to a broader rule making ... so we can extend this kind of procedural protection to the entire market," SEC Chairman Christopher Cox told a House Financial Services Committee hearing.
"I think very soon we will be in a position to issue a proposal on that," he said. The SEC could consider its next steps at the end of July or beginning of August.
The SEC is also considering other remedies to short selling abuses, such as requiring the reporting of substantial short positions, Cox told reporters after the hearing.
Britain's financial watchdog, the Financial Services Authority, has also unveiled plans to deal with short sellers and introduced rules in June that would force investors to reveal significant short positions in companies selling new shares.
Cox said the public disclosure of significant short interests could be similar to, but not the same as, the SEC's current disclosure requirements for long positions.
"The concern on the short side is related in part to our ability to conduct enforcement," he said.
Cox said it would be "premature to provide specific contours of what reporting would look like" for short positions.
The temporary rule requires investors to borrow stock before executing a short sale in 17 major Wall Street firms such as Citigroup and Lehman Brothers as well as mortgage finance giants Freddie Mac and Fannie Mae.
The emergency rule, which started on Monday, can only last a total of 30 days but the American Bankers Association and former SEC officials have been urging the investor protection agency to extend and expand the rule.
Alabama Rep. Spencer Bachus, the top Republican on the House Financial Services panel, has sent a letter to Cox urging him to expand the order to include financial firms with a market capitalization of at least $750 million or those that have at least a 5 percent short interest.
Groups representing short sellers have urged the SEC not to extend the emergency order past July 29, nor beyond the current list of companies.
The SEC has said it is not looking to outlaw short selling, a legitimate form of investing that can keep stocks from becoming overvalued.
Short sellers arrange to borrow shares and sell them in hopes of making a profit when the price drops. When an investor does not pre-borrow the shares before shorting the stock, it's called naked short selling, which is illegal if done intentionally.
The SEC's emergency rule has exempted market makers from the pre-borrow requirement so they can continue to facilitate trading in certain stocks. But market makers are still required to deliver securities by the settlement date.
At the hearing, lawmakers asked Cox why the agency did not reinstate the so-called tick-test rule on short sales, which was implemented after the 1929 stock market crash. Cox reiterated that studies have shown that the tick test is no longer effective.
In June 2007, the SEC repealed the rule, which only allowed short sales when the last sale price was higher than the previous price.
Cox said the idea of using a price test or some sort of circuit breaker to regulate manipulative short selling is a "subject currently under consideration by the commission staff."
U.S. Securities and Exchange Commission Chairman Christopher Cox told lawmakers on Thursday the agency would soon propose expanding the rule covering the shares of 19 major financial firms to the entire market.
"We have immediately pivoted to a broader rule making ... so we can extend this kind of procedural protection to the entire market," SEC Chairman Christopher Cox told a House Financial Services Committee hearing.
"I think very soon we will be in a position to issue a proposal on that," he said. The SEC could consider its next steps at the end of July or beginning of August.
The SEC is also considering other remedies to short selling abuses, such as requiring the reporting of substantial short positions, Cox told reporters after the hearing.
Britain's financial watchdog, the Financial Services Authority, has also unveiled plans to deal with short sellers and introduced rules in June that would force investors to reveal significant short positions in companies selling new shares.
Cox said the public disclosure of significant short interests could be similar to, but not the same as, the SEC's current disclosure requirements for long positions.
"The concern on the short side is related in part to our ability to conduct enforcement," he said.
Cox said it would be "premature to provide specific contours of what reporting would look like" for short positions.
The temporary rule requires investors to borrow stock before executing a short sale in 17 major Wall Street firms such as Citigroup and Lehman Brothers as well as mortgage finance giants Freddie Mac and Fannie Mae.
The emergency rule, which started on Monday, can only last a total of 30 days but the American Bankers Association and former SEC officials have been urging the investor protection agency to extend and expand the rule.
Alabama Rep. Spencer Bachus, the top Republican on the House Financial Services panel, has sent a letter to Cox urging him to expand the order to include financial firms with a market capitalization of at least $750 million or those that have at least a 5 percent short interest.
Groups representing short sellers have urged the SEC not to extend the emergency order past July 29, nor beyond the current list of companies.
The SEC has said it is not looking to outlaw short selling, a legitimate form of investing that can keep stocks from becoming overvalued.
Short sellers arrange to borrow shares and sell them in hopes of making a profit when the price drops. When an investor does not pre-borrow the shares before shorting the stock, it's called naked short selling, which is illegal if done intentionally.
The SEC's emergency rule has exempted market makers from the pre-borrow requirement so they can continue to facilitate trading in certain stocks. But market makers are still required to deliver securities by the settlement date.
At the hearing, lawmakers asked Cox why the agency did not reinstate the so-called tick-test rule on short sales, which was implemented after the 1929 stock market crash. Cox reiterated that studies have shown that the tick test is no longer effective.
In June 2007, the SEC repealed the rule, which only allowed short sales when the last sale price was higher than the previous price.
Cox said the idea of using a price test or some sort of circuit breaker to regulate manipulative short selling is a "subject currently under consideration by the commission staff."