July 23, 2009 / 12:19 AM / 10 years ago

7 senators endorse ID scheme to limit short sales

WASHINGTON, July 22 (Reuters) - U.S. securities regulators should ban short selling unless a broker first obtains a unique identification number for specified shares, possibly from a centralized system planned by the Depository Trust and Clearing Corp, a bipartisan group of seven senators said on Wednesday.

The SEC has been considering new restrictions on short selling, in which an investor bets on a stock’s decline. Some lawmakers and investors contend that short sellers worsened the financial crisis by driving down stock prices but short sellers argue that their trading helps keep markets liquid and prevents stocks from becoming overvalued.

In a letter to Mary Schapiro, chairman of the Securities and Exchange Commission, the senators said their proposal would be “a substantial improvement” on current short-selling market practices.

Existing SEC rules allow any short seller to review a list of stocks available to borrow, then sell short. But the list can turn out to be inaccurate or the shares are unavailable in time for settlement, often because the same shares have been claimed by other sellers for potential short sale executions.

“The Depository Trust and Clearing Corp proposal could standardize requirements across the industry, can be configured in a way that will not disrupt markets, would streamline locate documentation requirements, and can be overseen directly by the SEC to ensure regulatory compliance,” the senators’ letter said.

Democrats Ted Kaufman of Delaware, Carl Levin of Michigan, Jon Tester of Montana, Sherrod Brown of Ohio and Robert Menendez of New Jersey signed the letter, along with two Republicans, Johnny Isakson of Georgia and Orrin Hatch of Utah.

An SEC spokesman declined to comment directly on the letter’s proposal. “ We share the senators’ interest in effective protection against abusive short sales,” the spokesman said.

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.

RELATED NEWS:

* SEC eyes short sale curbs, traders irked [ID:nN08529569]

* SEC asks if options undermine short curbs[ID:nN10549060] (Reporting by Julie Vorman; Editing by Gary Hill))

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