Hedge Funds

Hedge funds plead with U.S. SEC to let short ban expire

WASHINGTON (Reuters) - Lobbyists for the $2 trillion (1.2 trillion pounds) hedge fund industry made a last ditch effort on Wednesday to convince U.S. securities regulators to let an emergency order prohibiting short selling in more than 950 financial firms expire on Thursday.

“The orders have not prevented price declines of financial institutions, volatility in the securities of these firms, or the failure of a financial institution,” said Richard Baker, president of hedge fund lobby group Managed Funds Association.

Baker said the emergency orders have increased volatility, reduced liquidity and abruptly halted capital-raising, including through the issuance of convertible securities.

But a number of securities law experts expect the Securities and Exchange Commission to extend the ban beyond Thursday because of the current fragile state of the markets.

Under the SEC emergency measures, short selling in the U.S.-listed financial firms stocks has been prohibited for about two weeks.

Big money managers have also been required to disclose their short positions in other companies to the SEC. Those positions were submitted to the SEC on Monday and will be made public on October 13. The Managed Funds Association is urging the SEC to amend that rule so the short positions are kept secret.

The SEC’s measures were implemented to help restore equilibrium to markets rocked by bank failures and fears of economic uncertainty. But since the rules went into effect on September 19, markets have swung wildly on hopes for a $700 billion government bailout package for the U.S. financial system.

The measures underpinned concerns from regulators around the world that short selling, in which an investor sells borrowed stock in the anticipation the price will fall, has exacerbated the decline in financial stocks.

Regulators in the United Kingdom, Australia and Canada have imposed similar bans.

It is not known whether pleas from the MFA will be enough to persuade SEC commissioners, who were discussing further action on Wednesday afternoon. The short sale ban and disclosure rules expire at 11:59 p.m. EDT on Thursday (0359 GMT on Friday) and can only last a total of 30 days.

Another set of emergency rules designed to crack down on abusive short selling are set to expire at 11:59 p.m. EDT on Wednesday (0359 GMT on Thursday).

Those rules include one that makes it fraudulent for short sellers to deceive broker-dealers about their intention or ability to deliver securities in time for settlement.

Reporting by Rachelle Younglai; Editing by Andre Grenon