SEC Makes ‘Naked’ Short-Selling Rule Permanent

The SEC made permanent an interim final temporary rule, established last September in order to boost investor confidence in the face of a market crisis by reducing the number of “naked” short sales in the market (see “SEC Bans Shorts of 799 Financial Stocks ”). Rule 204  requires broker/dealers to promptly purchase or borrow securities to deliver on a short sale.

The SEC said that short-selling can play an important role in the market; however, in some circumstances, it can be used as a tool to manipulate the market. In a “naked” short sale, the investor sells shares “short” without first having borrowed them. Such a transaction is permitted because there is no legal requirement that a short-seller actually borrow the shares before effecting a short sale, according to an SEC news release.

The SEC reported that since the inception of its temporary rule, the agency met its goal to reduce fails to deliver and addressing potentially abusive “naked” short-selling. Therefore, it made permanent the rule with “only limited modifications to address commenters’ operational concerns.”

Also last fall, the Commission adopted a short sale reporting interim rule, Rule 10a-3T, which requires certain market participants to provide short sale and short position information to the SEC. Instead of renewing the rule, the SEC said it is working with self-regulatory organizations (SRO) to substantially increase the public availability of short sale-related information.

“Today’s actions demonstrate the Commission’s determination to address short-selling abuses while at the same time increasing public disclosure of short-selling activities that affect our markets,” said SEC Chairman Mary Schapiro, in the news release.