U.S. SEC to consider about 4 short sale proposals

WASHINGTON Mon Apr 6, 2009 9:03pm EDT

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WASHINGTON (Reuters) - U.S. securities regulators will consider about 4 proposals to restrict short selling, a type of investing blamed for accelerating the severe downturn in financial services stocks.

Proposals the SEC will consider at its Wednesday meeting include the restoration of the "uptick rule," which allowed short sales -- a bet that a stock's price will fall -- only when the last sale price was higher than the previous price, the chief of the Securities and Exchange Commission said on Monday.

"We are going to put forward about four different proposals, and one of them does include the original (uptick rule)," SEC Chairwoman Mary Schapiro told reporters on the sidelines of the Council of Institutional Investors conference. "There are different modified versions because the markets have changed a lot, even since 2007."

Schapiro said other proposals on the table include a so-called "bid test" and a "circuit breaker."

Schapiro did not provide details on how the bid test or circuit breaker could work and did not elaborate on the fourth proposal.

One source familiar with the matter said the SEC bid test proposal would only allow shorting at a price above the highest available bid. The source wished to remain anonymous because the proposals are still being drafted.

The proposal for the updated version of the uptick rule would apply to all stocks, said the source who wished to remain anonymous because the proposals are still being drafted.

The SEC also is crafting two circuit breaker proposals: One would temporarily halt short sales of a stock if the stock has already fallen by a certain percentage, the source said.

The other would trigger the application of an uptick rule or bid test after the price of a stock experienced a decline by a certain percentage, such as 10 percent, the source said. This version of the circuit breaker is similar to a suggestion put forth by the operators of the top U.S. exchanges, the New York Stock Exchange, the Nasdaq Stock Market and BATS exchange.

SEC staff are still drafting proposals, the source and a second source familiar with the proposal said. The second source cautioned that the current draft could go through several more adjustments before Wednesday's meeting.

In a short sale, an investor borrows stock and sells it in the hope that its price will fall. If the price does drop, the seller profits by buying the stock back at the lower price and returning the borrowed shares.

In 2007 the SEC abolished the uptick rule after studies concluded that advances in trading strategies had rendered it ineffective.

At the time, the SEC's action did not trigger cries from investors and lawmakers. However, as stocks of big investment and commercial banks sank over the past year, some members of Congress started pressuring the SEC to restore the rule.

Some short sellers have questioned the need for the reinstatement of the rule, saying they are being unfairly targeted.

Two bills to reinstate the uptick rule have been introduced in the U.S. House of Representatives and a similar bill has been introduced in the U.S. Senate.

"Abusive short selling has gone unaddressed for too long and simply must end if the SEC is to restore investor confidence in the markets," six Senators including Democrats Carl Levin and Edward Kaufman and Republican Arlen Specter, said in a recent letter to Schapiro.

"In the absence of a strong message from the SEC, we believe Congress will need to consider legislation that directs the SEC to do so," the Senators said in a letter dated April 1.

Billionaire investor George Soros said on Monday that he favored a reintroduction of some kind of rule to restrict short selling. "You do need to provide some protection against effectively the bear raids," Soros told Reuters Financial Television in an interview.

A final rule will not be adopted at this week's SEC meeting. The agency will still need to solicit public comment on its proposals and hold another meeting to decide on final short sale restrictions as part of its normal rulemaking process.

When asked if she favored restoring the uptick rule, Schapiro said she was anxious to read the comments.

Earlier in a speech to institutional investors, Schapiro said the SEC would convene a roundtable later to discuss the proposals and potentially some broader issues on short selling.

(Reporting by Rachelle Younglai with additional reporting by Jennifer Ablan and Daniel Burns in New York; editing by John Wallace and Carol Bishopric)

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