Banks renew plea for expanded short sale rule

WASHINGTON (Reuters) - A banking group has renewed its plea to the Securities and Exchange Commission to broaden a rule aimed at curbing abusive short selling and market manipulation.

The American Bankers Association, a trade group which represents banks of all sizes, said on Thursday that distort-and-short campaigns push stock values below what market and bank conditions warrant.

"Bank customers frequently - and incorrectly - equate significant drops in bank stock prices with safety of bank deposits," Sarah Miller, an ABA senior vice president, said in a letter addressed to the SEC.

"At a time, when the economy is clearly under stress, the commission has a responsibility to assure that destructive practices such as abusive naked short selling are stopped," said the letter dated August 7.

Currently the stocks of mortgage finance giants Fannie Mae (FNM.N) and Freddie Mac (FRE.N) as well as 17 major Wall Street firms such as Lehman Brothers LEH.N are covered by an SEC emergency order.

That order, which expires August 12, requires investors to pre-borrow shares before executing a short sale and to deliver the securities by the settlement date.

The SEC has said it will consider crafting a rule to crackdown on abusive short selling across the broader market.

Short selling is a legitimate investment strategy that can keep stocks from becoming overvalued. Naked short selling occurs when an investor sells stock that has not yet been borrowed.

Market makers have been exempted from the pre-borrow requirement to ensure trading in the 19 stocks remains liquid.

When an investor fails to deliver the securities by the settlement date, some, such as the ABA, consider this indicative of abusive short selling.

ABA said it reviewed failure-to-deliver data through March 31 for a small sampling of super regional and community banks and found that the volume has grown.

The industry group said the same data showed that a spike in fails-to-deliver was accompanied by significant stock drops that were not all attributable to market or bank-specific conditions.

"Based on what we are hearing from our members... we suspect that the volume of (fails-to-deliver) has only continued to grow, perhaps dramatically," Miller said.

(Reporting by Rachelle Younglai, John Poirier; Editing by Tim Dobbyn)