Naked Short Selling Rules & Regulations

Naked Short Selling Rules & Regulations

SEC Rules on Naked Short Selling Regulations

The Securities and Exchange Commission (SEC) voted on Monday to make permanent a rule against "naked shorting." Naked short selling is a strategy of selling a stock short without ensuring that the security can be borrowed. Some politicians have said the regulation is insufficient to prevent the type of trading that may have accelerated the fall of Lehman Brothers and Bear Stearns.

The SEC established a rule in 2008 that required broker-dealers to "promptly" purchase or borrow a security that they would use for a short sale, but it was temporary and was about to expire at the end of this month. The Commission decided to make the rule permanent yesterday but lawmakers have criticized the regulation as ineffective. Instead, lawmakers suggest a pre-borrow requirement which would force traders to borrow a security prior to the short-sale. Previously, the SEC required hedge funds and other traders to pre-borrow but that rule expired.

The SEC proposed discussing a pre-borrow requirement and other short sale provisions at a public roundtable discussion it has scheduled for Sept. 30. Kaufman and other lawmakers want SEC to launch a pilot program to study whether a pre-borrow requirement would end the problem of naked short selling.

The SEC also said it would no longer require hedge funds and other institutional investors to provide short-sale position data to the agency on a weekly, confidential basis. That provision, which was adopted in October, is set to expire on Aug. 1.

Instead of collecting data on short-sales, the regulator said it was taking steps to increase the public availability of information related to short sales, including an effort that would make public short-sale volume and transaction data available publicly.


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