SEC may take aim at short sellers again
The agency is considering reinstating the uptick rule, which prohibits shorts from selling when stocks are falling, in order to stem the bleeding in the markets.
NEW YORK (Fortune) -- Policymakers are reaching deep into their toolbox in search of a fix for the troubled financial markets. And once again, they are targeting short sellers, investors who profit when a stock price falls.
Rep. Barney Frank, D.-Mass., told reporters Tuesday that regulators are preparing to reintroduce a rule that would limit the conditions under which investors could bet against stocks through so-called short sales.
Frank, the influential chairman of the House Financial Services Committee, said the Securities and Exchange Commission will reimpose the uptick rule, which prevents short-sellers from selling shares when a stock's price is declining.
The SEC confirmed this to CNN later Tuesday. "The Commission may conduct a public meeting as early as next month to consider whether to formally propose reinstatement of the uptick rule, or consider other measures related to short sales," said SEC spokesman John Nester.
Under the uptick rule, which the SEC repealed in 2007 in a bid to simplify regulation of short sales, short sellers must wait for the stock's price to rise before making a sale.
The move comes as regulators are considering sweeping actions well beyond the realm of short-selling to support financial companies in the wake of the steepest economic downturn in decades.
Federal Reserve chairman Ben Bernanke said in a speech earlier Tuesday that the government and groups in charge of accounting standards might need to review valuation and loss provision rules.
Those comments were interpreted by investors as support for a possible easing of so-called mark-to-market accounting rules, which force companies to record the value of assets at their current - and, in the current context, depressed -market price. The Dow surged nearly 6% Tuesday while the Nasdaq gained more than 7%.
Critics of mark-to-market accounting blame it for adding to the problems at financial institutions. They claim that the rule has led to huge losses for firms with large exposure to soured assets that have little or no value today, but might largely pay off if held to maturity.
Big banks, including Citigroup (C, Fortune 500), Bank of America (BAC, Fortune 500) and Wells Fargo (WFC, Fortune 500), have been forced to raise tens of billions of dollars of new capital at a time of deepening economic distress, partly because of the losses they have incurred in the past few quarters.
The House Financial Services Committee is scheduled to hold a hearing on accounting issues Thursday, with an eye toward tweaking them to lessen the burden on financial firms.
"I want to find a way -- within the existing independent standard-setting structure -- to still provide investors with the information needed to make effective decisions without continuing to impose undue burdens on financial institutions," said Rep. Paul Kanjorski, D-Pa., chairman of the House Financial Services Subcommittee on Capital Markets in a statement about the hearing.
The restoration of the uptick rule would come just months after regulators, confronting the near collapse of the financial system last fall, briefly placed an emergency ban on short sales on financial institutions.
That ban, which was later lifted, didn't stop the prices of bank and brokerage stocks from declining sharply. Christopher Cox, then the chairman of the SEC, later said he regretted the decision.
"While the actual effects of this temporary action will not be fully understood for many more months, if not years, knowing what we know now, I believe on balance the commission would not do it again," Cox said in an interview with Reuters earlier this year.
Frank, noting that some market participants have been skeptical of the usefulness of the uptick rule, suggested in comments Tuesday that regulators are willing to err on the side of safety.
"Mary is moving toward the uptick rule," he said, referring to current SEC chair Mary Schapiro, "which some people think is very important, some people think it's not important, nobody thinks it does any harm."