Securities And Exchange Commission (SEC) Curbs "Naked" Short Selling.Securities and Exchange Commission (SEC) imposes temporary ban on "naked" short selling Short Selling The selling of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller. Short sellers assume that they will be able to buy the stock at a lower amount than the price at which they sold short. in 19 designated stocks; says measure aims to stop rumour-mongering SEC chairman attacks "short and distort" tactics; warns of new rules against short sellers in broader market US Hedge Fund hedge fund, in finance, a highly speculative, largely unregulated investment device. Originating in the 1950s, the funds "hedge" by offsetting "short" positions (borrowing a security and then selling it at a higher price before repaying the lender) against "long" Association slams SEC move while top US law firm calls for more aggressive action against short sellers One month after the FSA FSA Financial Services Authority FSA Food Standards Agency (UK) FSA Farm Service Agency (USDA) FSA Financial Services Agency (Japan) introduced restrictions on short selling of shares in the UK, the US SEC, announced a temporary ban on so-called "naked" short selling, a practice that involves traders selling stocks short without borrowing the stock beforehand. The ban was applied to stocks of 19 companies including major US investment banks The following is a list of investment banks Financial conglomerates Large financial-services conglomerates combine commercial banking and investment banking, and sometimes insurance. such as Goldman Sachs The Goldman Sachs Group, Inc., or simply Goldman Sachs (NYSE: GS) is one of the world's largest global investment banks. Goldman Sachs was founded in 1869, and is headquartered in the Lower Manhattan area of New York City at 85 Broad Street. and Merrill Lynch Merrill Lynch & Co., Inc. (NYSE: MER TYO: 8675 ), through its subsidiaries and affiliates, provides capital markets services, investment banking and advisory services, wealth management, asset management, insurance, banking and related products and services on a global basis. and the US mortgage companies Freddie Mac Freddie Mac: see Federal Home Loan Mortgage Corporation. and Fannie Mae Fannie Mae: see Federal National Mortgage Association. . In an emergency order on 15 July, the SEC described its action as an attempt to tackle the problem of false rumours and the threat of panic selling Panic Selling High volume selling brought about by sharp price declines. Notes: The main problem with panic selling is that investors are not evaluating fundamentals. Instead, they are selling on pure emotion. , which it said could be exacerbated by naked short selling Naked short selling, or naked shorting refers to the practice of selling a stock short without first borrowing the shares or making an "affirmative determination" that the shares can be borrowed. - because it enables traders to short the same stock multiple times and artificially and rapidly drive down the price of securities. In particular, the SEC cited the recent Bear Stearns collapse, which it said has shown how rumours could quickly erode confidence in a firm, and the case of a trader who was recently charged by the SEC with securities fraud for intentionally spreading a false rumour about Blackstone's acquisition of Alliance Data Systems Corp, which forced the price of its stock to plummet. According to the SEC, imposing the ban would provide "powerful disincentives to those who might otherwise engage in illegal market manipulation through the dissemination of false rumours" - what SEC chairman Christopher Cox described as "distort and short manipulation." The ban was applied from 19 July to 12 August during which time anyone shorting the designated stock had to "borrow or arrange to borrow" the security before shorting the stock. Extending the order on 29 July, Cox also warned the SEC would continue "exploring other remedies for the broader marketplace to further protect investors from 'distort and short' artists." Responding to the SEC's move, the Managed Funds Association (MFA See multifactor authentication. ) - the top US hedge fund association - and the Coalition of Private Investment Companies (CPIC CPIC Canadian Police Information Centre CPIC China Pacific Insurance (Group) Co. Ltd. CPIC Capital Planning & Investment Control CPIC Combined Press Information Center CPIC Coalition Press Information Center ), issued a strongly worded statement denouncing the SEC measure as a restriction that would "distort the fundamentals that drive fair market prices." The two bodies also rejected what they called a "mysterious conspiracy" to artificially drive down stock prices. In fact, the MFA / CPIC praised short sellers as being "often the first to uncover and reveal financial misdeeds....turning over the rocks that many in the market would prefer left untouched" and "pointing out, on occasion, that the emperor has no clothes." They also claimed criticism of short selling was an excuse used by corporate management teams to conceal "the impact of their own poor risk management and business and investment decisions", and that the SEC was artificially protecting certain stocks by introducing the measure. In other quarters, the SEC received support for its action, including strong backing from leading US law firm Wachtell, Lipton, Rosen & Katz. In a memo, the firm praised the measure as a first step but demanded that more aggressive action be taken against abuse short selling and rumour-mongering. In particular, it asked the SEC to undertake a 45 day study of the markets to determine the extent to which manipulative short selling was taking place and to "fashion appropriate regulatory and enforcement responses", and, where appropriate, should coordinate its enforcement efforts with the Department of Justice and US Attorneys. To read the SEC Emergency Order, click here. To read the MFA / CPIC public statement, click here. To read the statement from Wachtell Lipton, click here. The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Mr Philip Rubens Finers Stephens Innocent 179 Great Portland Street London W1W 5LS UNITED KINGDOM Click Here for related articles (c) Mondaq Ltd, 2008 - Tel. +44 (0)20 8544 8300 - http://www.mondaq.com |
|
||||||||||||||||||||
Printer friendly
Cite/link
Email
Feedback
Reader Opinion