It is a pleasure to be part of “The SEC Speaks in 2009.” This marks the first time I have participated in “SEC Speaks,” and I am honored to be with some of the nation’s finest securities lawyers — both inside the SEC and among the private bar. Before I begin, I must give you the standard disclaimer that the views I express here today are my own and do not necessarily reflect those of the U.S. Securities and Exchange Commission or my fellow Commissioners.

* * * *

Today, we are persevering through a tumultuous economy that recalls the challenges giving rise to the SEC and the laws it administers as part of the New Deal. During the past year, we have witnessed the demise of investment banks that were considered permanent fixtures on Wall Street. The notion that these institutions could fail had been unthinkable. We also have read about fraudsters whose Ponzi schemes preyed on investors and have heard allegations of market manipulation. We have seen the housing market collapse, credit freeze, IPOs stall, and unemployment rise, all while the government has taken unprecedented steps to stem the troubles. It is no surprise that investor confidence has suffered.

During the midst of the economic crisis last year, the SEC itself took a particularly extraordinary step: temporarily banning short selling.

Although perhaps not readily apparent, short selling can advance important economic goals. It can result in more liquidity, more capital formation, and more efficiently allocated risk. Short selling can buttress buying by allowing investors that go long — in other words, that purchase shares to hold as investments — to hedge their positions; and short selling can encourage market participation by leading to improved price discovery. Investors may be more reluctant to buy if the more pessimistic views of short sellers are not fully reflected in securities prices.

Short selling also is tied to investor confidence. Investor confidence depends on investors’ faith in the integrity of markets. Investors expect that securities prices are meaningful in that they reflect the market’s overall assessment of what a company is “worth” by aggregating into a single number the different views of market participants. Accordingly, in promoting market efficiency, short selling can foster investor confidence, as investors can be confident that securities prices reflect both optimistic and contrarian views.

(more…)