SEC to consider new short sale curbs next week

WASHINGTON (Reuters) - Securities regulators will consider new short-sale restrictions on Wednesday, more than a year after the financial crisis provoked cries to rein in investors who bet on a stock’s decline.

Traders work on the floor of the New York Stock Exchange, February 19, 2010. REUTERS/Brendan McDermid

The Securities and Exchange Commission is expected to vote on rules that would restrict short selling in a company’s stock if that stock fell precipitously, a person familiar with the SEC plan said.

The rule being considered is seen as a compromise for traders who opposed further curbs and lawmakers and some companies who had been pushing the SEC to reinstate the so-called “uptick rule” which dates from the Depression.

First adopted after the 1929 market crash, the uptick rule only allowed shorting if the last sale price was higher than the previous price. But the SEC abolished it in 2007 after concluding that it was no longer effective in modern markets.

Short sales are used by investors who believe a stock’s price will fall. In a short sale, an investor borrows stock and sells it in the hope that its price will drop. When it does, seller profits by buying back the stock at the lower price and returning the borrowed shares.

Under pressure from Congress, the SEC proposed a number of measures last year to rein in short selling. Although the activity is a legitimate form of investing, lawmakers and bank executives blamed short selling for contributing to the downfall of now-defunct investment banks Lehman Brothers and Bear Stearns.

The SEC proposals include a version of the uptick rule and other restrictions that would apply across equity markets.

The regulator also proposed curbs that would only apply if a stock fell by a certain percentage.

The SEC is expected to consider a “circuit breaker” measure that would trigger a so-called passive bid test, which would only allow short selling above the national best bid, the source said.

The agency is considering a circuit breaker that would kick in if a stock’s price drops by more than a certain percentage such as 10 percent, said the source, who requested anonymity because the proposal is in flux and has not been made public.

The SEC had no immediate comment.

Any new rule needs the support of the majority of the five SEC commissioners. The two Republican commissioners are not expected to vote in favor of the short-sale restrictions.


At the same meeting, the SEC is expected to discuss a plan to allow U.S. companies to use international accounting standards instead of U.S. accounting rules.

Under former SEC Chairman Christopher Cox, the agency had mapped out a plan that would allow U.S. companies to use international standards by 2014 instead of U.S. rules known as Generally Accepted Accounting Principles or U.S. GAAP.

It is unclear whether current SEC chairman Mary Schapiro supports that timeline.

Policymakers generally agree that there should be one set of global accounting standards instead of two sets of rules, the international standards and U.S. GAAP.

But there is debate over how to achieve that goal and whether U.S. companies should be allowed to use the international standards, even though dozens of countries have already adopted them.

The SEC is also expected to reaffirm its support for a single set of high quality global accounting standards.

Reporting by Rachelle Younglai; Editing by Leslie Gevirtz, Bernard Orr