SEC tightens rules on short sales

By Rachelle Younglai and Svea Herbst-Bayliss

WASHINGTON/GREENWICH, Connecticut (Reuters) - U.S. securities regulators tightened rules on traders who profit from stock declines as shares plummeted Wednesday on fears of a global credit crunch.

The U.S. Securities and Exchange Commission action follows a brief emergency rule this summer that was aimed at curbing abusive naked short selling in 19 major financial stocks.

Under a measure that takes effect Thursday, short sellers and their broker dealers must deliver securities by the close of business on the settlement date, three days after the sale.

But with stocks falling, lawmakers and banking executives kept up their pressure on the investor protection agency to further curb short selling.

SEC Chairman Christopher Cox issued a statement late on Wednesday saying he had additionally asked the commission to consider requiring hedge funds and large investors to disclose their short trade positions, as long positions already are.

He also said the SEC's enforcement division would obtain data from large hedge funds and other institutional traders on their past trading positions in specific securities.

Broker-dealers failing to comply with the new delivery requirement will be prohibited from further short sales in the same security unless the shares are pre-borrowed.

The SEC also adopted a rule that makes it fraudulent for customers to deceive broker-dealers about the intention or ability to deliver securities in time for settlement.

A third rule requires option market makers to deliver securities by the settlement date.

"These several actions today make it crystal clear that the SEC has zero tolerance for abusive naked short selling," Cox said in a statement.

The SEC action follows two turbulent days in which investment bank Lehman Brothers Holdings LEH.N filed for bankruptcy and U.S. authorities organized an $85 billion rescue plan for insurer American International Group (AIG.N).

LOBBYING FOR MORE

The SEC announcement of its rule changes, as trading opened Wednesday, appeared to have no immediate impact on share prices. Major U.S. stock indexes closed down more than 4 percent.

Morgan Stanley (MS.N) Chief Executive John Mack, whose saw his bank's shares lose 24 percent Wednesday, blamed the fall on short sellers and said he had talked with Cox.

"It's very clear to me -- we're in the midst of a market controlled by fear and rumors, and short sellers are driving our stock down," Mack said in a memo to employees obtained by Reuters.