SEC puts 'naked' short sellers on notice

Regulator enacts new ruling banning 'naked' short selling on all public companies.

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By David Ellis, CNNMoney.com staff writer

Do you agree with the government's decision to bail out AIG?
  • Yes
  • No

NEW YORK (CNNMoney.com) -- The Securities and Exchange Commission adopted a set of new rules Wednesday which would ultimately ban the practice of so-called "naked" short selling, possibly providing some much-needed comfort for financial markets.

But instead of just shielding the embattled financial services industry this time around, the nation's securities regulator said the prohibition would cover all publicly traded companies.

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

Traditional short sellers borrow stock with the aim of selling it, then buying it back at a lower price, hoping to pocket the difference. In a "naked" short sale, however, investors short the stock without actually borrowing it, making it much easier to drive down the share price of a company.

Dramatic swings

Some market observers have blamed the recent wild swings in financial markets and steep decline in financial stocks on the practice of "naked" short selling. Hoping to stem the sharp selloff that the industry endured back in early July, the SEC enacted a temporary ban on the practice for 17 domestic and international securities firms, along with the twin mortgage giants Freddie Mac (FRE, Fortune 500) and Fannie Mae (FNM, Fortune 500).

The move helped, but financial stocks have come under pressure once again following the dramatic events over the last three days, including the collapse of Lehman Brothers (LEH, Fortune 500), the purchase of Merrill Lynch (MER, Fortune 500) by Bank of America (BAC, Fortune 500) and a government rescue of insurer AIG (AIG, Fortune 500).

Prior to Wednesday's announcement, industry groups like the American Bankers Association feared that the yet-to-be-announced rules may not go far enough to protect the stock price of banks.

Other groups, like the Managed Funds Association and the Coalition of Private Investment Companies, which represent hedge funds and other asset managers, have opposed any permanent changes, fearing that a rule would not only limit legitimate short selling but also give an inaccurate representation of the real price of a stock. To top of page

Features
They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
More Galleries
15 top executives with $1 salaries Some CEOs and founders agree to salaries of just $1 a year. But once goodies like bonuses and stock options are added in, some of those executives end up taking home many millions of dollars a year. More
Mercedes SL65 AMG: 621 horses of topless power Turn heads as you blow by traffic in this roadster convertible from Mercedes. More
Where the middle class is most unequal CNNMoney looks at the five states with the biggest differences in middle class incomes. More

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.