A Bit Late, Ain't It?

19 September 2008



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SEC Cracks Down on Short Sales

Short selling has received the blame for much of Wall Street’s current mess. To clamp down on the more aggressive practitioners of this stratagem, the Securities and Exchange Commission has proposed that funds will have to tell the SEC of its short positions daily and that naked short selling cease.

Maura Reynolds of the Los Angeles Times explained, “In a short sale an investor borrows stock, usually from a brokerage's inventory, and sells it, expecting the market price to decline. If the bet is correct, the investor can buy new shares later at a lower price to replace the borrowed stock. The profit would be the difference between the sale price and the repurchase price.” She added, “so-called naked shorting, which involves selling stock without first borrowing it.” One can see how this could put excessive pressure on a troubled company’s stock.

SEC Chairman Christopher Cox put out a news release that said he was “asking the commission to consider on an emergency basis a new disclosure rule that will require hedge funds and other large investors to disclose their short positions” to make things more transparent. He added, “Managers with more than $100 million invested in securities would be required to promptly begin public reporting of their daily short positions. The managers currently report their long positions to the SEC.” They report the longs on a quarterly basis, though.

He added that the SEC’s already overworked enforcement staff will “expand their ongoing investigations by undertaking a series of additional enforcement measures against market manipulation." They “will obtain disclosure from significant hedge funds and other institutional traders of their past trading positions in specific securities. Those institutions will also be required immediately to secure all of their communication records in anticipation of subpoenas for these records.”

This journal welcomes the added regulation of the market, but one should not cheer about the daily disclosures just yet. After all, the 5-member commission still has to approve of the rule. In the meantime, enforcing the rules that do exist sounds like a good idea – one that should have been tried a couple of years ago.

© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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