SEC Constrains Short Selling: Too Little Too Late

The SEC yesterday announced three actions addressing short selling. Its actions are too little too late.

First, the SEC adopted a rule requiring short sellers and their broker-dealers to deliver securities by the settlement date (three days after the transaction date) and imposing penalties for failure to do so. In addition, the SEC eliminated the option market-maker exception to the three day delivery requirement. Finally, the SEC adopted a new anti-fraud provision making it unlawful for sellers to deceive specified persons about their ability or intention to deliver securities by the settlement date. This last rule is not necessary and will not help eliminate abusive short selling practices.

The measures adopted by the SEC yesterday fall far short of the type of bold measures needed to constrain the abusive short selling and rumor mongering taking place. The securities markets continue to be in a crisis and there continues to be a significant disruption to their fair and orderly functioning.

As we have previously said, the SEC should immediately re-impose, under its emergency powers, the “Uptick Rule.” In addition, the SEC must now consider other very strong measures such as using its emergency powers to place limitations on short sales for a period of time to restore a fair and orderly market. Also, it is essential for the SEC to scrutinize short sellers and their related transactions, including options and credit default swaps to determine whether these strategies are contributing to the severe dislocations taking place in the marketplace.

Finally, the SEC should promptly make public the results of their examinations of the short selling activities and take immediate enforcement action against those who are engaging in this abusive manipulative conduct.

Time is of the essence and the SEC must act now.