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SEC to limit Fannie, Freddie short sales

Emergency order to bolster investor protection against short selling mortgage financiers without borrowing the stocks.

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By Aaron Smith, CNNMoney.com staff writer
Last Updated: July 16, 2008: 7:38 AM EDT

NEW YORK (CNNMoney.com) -- The Securities and Exchange Commission has issued an emergency order to bolster investor protections against so-called 'naked' short selling of mortgage financiers Fannie Mae and Freddie Mac.

'Naked' short selling occurs when traders sell stocks short without actually owning or borrowing them. The SEC said it will require traders to borrow Fannie and Freddie stocks before selling them short, and they will be required to deliver the stocks at settlement.

The requirement takes effect at 12:01 a.m. ET on July 21.

Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500) stocks have plunged 55% since a negative Lehman Brothers report came out July 7, followed by news reports later that week suggesting the government was considering a takeover of the mortgage giants.

On Sunday, Treasury Secretary Henry Paulson announced proposals aimed at making more funds available to the mortgage giants to keep them from failing. Together, Fannie and Freddie own or back $5 trillion worth of mortgage debt, or half the U.S. market.

The SEC order prevents the naked short selling of 19 firms in all. In addition to Fannie and Freddie, the order applies to BNP Paribas Securities Corp., (BNPQF) Bank of America Corp., (BAC, Fortune 500) Barclays PLC (BCS), Citigroup Inc., (C, Fortune 500) Credit Suisse Group (CS), Daiwa Securities Group (DSECY), Deutsche Bank Group AG (DB), Allianz SE (AZ), Goldman, Sachs Group (GS, Fortune 500), Royal Bank ADS (RBS), HSBC Holdings PLC ADS (HBC'), J.P. Morgan Chase (JPM, Fortune 500), Lehman Brothers Holdings (LEH, Fortune 500), Merrill Lynch & Co., (MER, Fortune 500) Mizuho Financial Group (MFG), Morgan Stanley (MS, Fortune 500) and UBS AG (UBS). To top of page

First Published: July 16, 2008: 7:10 AM EDT

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