SEC makes rule banning 'naked' short selling permanent

[JURIST] The US Securities and Exchange Commission (SEC) [official website] on Monday made permanent [rule, PDF; press release] a temporary ban on the so-called 'naked' short selling of stocks. In a normal short sale, a trader borrows and sells a stock, promising to buy it back at a certain price in the future, but in a "naked" short sale, the trader doesn't actually borrow the stock before selling it. In its release announcing the retention of the rule, the SEC said that allowing the practice often left traders in a position where they could not deliver the stock, which would artificially drive down its value. It said that these so-called "failures to deliver" were down over 75 percent since the implementation of the temporary rule [SEC backgrounder]. The SEC also said that it would seek to increase transparency concerning the legitimate short selling of stocks in an effort to bolster investor confidence.

The announcement comes as the US considers a number of new measures to stabilize markets in light of the recent downturn. Last week, the Obama administration sent Congress draft legislation [materials; JURIST report] that would put the Federal Reserve [official website] in charge of regulating the largest financial firms [text, PDF], having proposed similar changes [JURIST report] in June. In March, US Treasury Secretary Timothy Geithner [official profile] indicated that the Department of the Treasury would propose stronger rules [JURIST report] in response to the current economic crisis. Geithner suggested that the Reserve and Treasury be given broader powers. In February, Geithner emphasized increasing restrictions on financial institutions [JURIST report] receiving government assistance.

 

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