Banks, lawmaker push SEC to curb illegal shorting

WASHINGTON (Reuters) - A U.S. banking group is pressing securities regulators to clamp down on illegal short-selling after weeks of heavy selling pressure on shares of financial companies.

The American Bankers Association said many of its members have seen precipitous declines in their stock, high trading volumes and huge spikes in so-called failures to deliver, leading them to conclude that their stock is being manipulated.

The U.S. Securities and Exchange Commission expects to issue new rules against abusive short selling within 24 hours, an SEC spokesman said late Tuesday.

However, the banking association said it feared the steps would not be enough.

"We are concerned that the commission's forthcoming action will not go far enough to protect banks and bank holding companies from these abusive and manipulative practices," the ABA said in a letter to banking regulators.

The ABA letter, dated September 15 and released on Tuesday, was

addressed to the heads of the Federal Deposit Insurance Corp, the Comptroller of the Currency and the Office of Thrift Supervision.

"We would hope that the federal bank regulators would emphasize with SEC Chairman (Christopher) Cox the appropriate redress of this problem as an issue of safety and soundness to the nation's bank system," said the trade group, which represents banks of all sizes.

Christopher Dodd, the chairman of the Senate Banking Committee also said he wanted the SEC to get cracking on the abusive short selling issue.

"One of the things that's bothered me is this naked short selling that's going on. Where is the chairman of the Securities and Exchange Commission?" Dodd told reporters.

"We had Chris Cox before a hearing of the banking committee back more than a month-and-a-half ago when he talked about the naked short selling. Yet I haven't seen any actions being taken by the SEC."

The SEC spokesman said formal rulemaking requires several weeks under laws governing administrative procedures.

In mid July amid similar market turmoil, the SEC issued a temporary emergency rule to curb illegal naked short selling in 19 major finance stocks, including Lehman Brothers and mortgage finance giants Freddie Mac and Fannie Mae .

The rule ended mid-August and the ABA and others have been pressuring the SEC to reinstate and broaden the rule to include all companies. On the flip side, short sellers, hedge funds and the brokerage industry have warned against doing so.

The SEC is not planning on reinstating the temporary rule that required traders to pre-borrow stock in the 19 finance firms before executing a short sale.

The agency is expected to take action on a number of proposals to strengthen its short selling rule, including one that would shorten the time in which traders must buy back stock if they fail to deliver a security by settlement date.

A "naked" short sale occurs when an investor sells stock that has not yet been borrowed.

Broker-dealers will sometimes accidentally fail to deliver stock to investors who have arranged to borrow it. If this is done intentionally, it is illegal.

Lehman Brothers Holdings filed for bankruptcy and the mortgage giants were taken over by the government.

(Reporting by Rachelle Younglai with additional reporting by Kevin Drawbaugh; editing by Carol Bishopric and Tim Dobbyn)