In response to the SEC’s emergency rule, issued Tuesday evening, barring short sales of stock in Fannie Mae, Freddy Mac and seventeen primary dealers, my colleagues Theodore A. Levine, Caitlin S. Hall and I have issued a memorandum entitled “SEC Bars Naked Short Sales of Major Financial Firms; More is Needed.” The emergency rule, which takes force July 21 and will be in effect for thirty days, comes on the heels of a week in which Fannie Mae and Freddie Mac stocks were battered by unsubstantiated rumors. In the memorandum, available here, we urge the SEC to take immediate strong action, including expanding the temporary rule beyond its initial thirty-day period and extending its coverage to all publicly traded securities.

The emergency rule follows the unusual statement on Sunday evening by the SEC that it, FINRA and NYSE Regulation would immediately begin examinations of broker-dealer and investment adviser supervisory and compliance controls, with the goal of stemming the spread of false rumors intended to manipulate security prices. Our memorandum on this development, entitled “SEC Takes First Step to Address Manipulative Rumor-Mongering; More Aggressive Action Still Needed,” is available here.

Although these regulatory developments are commendable, we believe that the SEC should immediately re-impose the “Uptick” Rule, a 70-year-old regulation that constrained short selling in declining markets by requiring that listed securities be sold short only at a price above their last different sale price. In a memorandum on July 1, available here, we discussed the rationale for the Uptick Rule, the Commission’s reasons for abolishing it, and the limitations of the pilot program undertaken by the Commission prior to its decision to abandon the rule. On an urgent basis, we urged the SEC to consider re-imposing the Uptick Rule, or to take alternative measures, in these extraordinary times to dampen volatility and address abusive and manipulative short selling.