New rules due this week as opponents lobby for influence
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(WASHINGTON) Responding to the slump in markets, US regulators for the second time in less than a week are preparing to take steps that could have the effect of temporarily shoring up stock prices.
But in the process, some critics say, the measures could undermine the integrity of the markets.
Tomorrow, the Securities and Exchange Commission (SEC) plans to announce several proposals to permanently restrict traders from making bets that stock prices will decline when those prices are already dropping.
The proposed restrictions on short-sales follows a lobbying campaign by financial institutions and other companies, which have seen sharp falls in their stock prices, and their allies in Congress.
Some companies and Wall Street executives have blamed short-selling for needlessly accelerating falls in stock prices and contributing to the demise of companies like Bear Stearns and Lehman.
Others disagree. They say short-sellers are the market's whistle-blowers, and their stock trades and sceptical analyses are essential to the efficient functioning of the markets. Many large investors also use short-selling techniques as a hedge to protect themselves against losses in declining markets.
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Officials are now working to draft several possible rule changes, including a tougher variation of a former rule that prohibited short-sales while a stock price was declining. That rule, known as the uptick rule, was put in place in 1938 in response to the market turbulence of the Great Depression. It was repealed two years ago.
The uptick rule was more restrictive for short-sellers trading stocks listed on the New York Stock Exchange (NYSE) than those trading on Nasdaq. But one of the new proposals could change that and make it more onerous for short-sellers on all exchanges.
The SEC also plans to announce that it is considering a proposal by the major US exchanges that would impose restrictions on short-selling only after a stock suffers a daily drop by a specified percentage.
Last year, the commission imposed a series of temporary and ad hoc restraints on short-sales after heavy pressure from Wall Street and the Treasury secretary at the time, Henry Paulson.
The move this week follows the decision last Thursday by the Financial Accounting Standards Board (FASB) to give banks greater discretion in putting a value on their sharply declining mortgage securities.
The standards board had initially resisted making changes to the so-called mark-to-market rules, but quickly relented after its chairman came under withering attack by lawmakers.
Examining short-selling practices has been a high priority for the SEC's new chairwoman, Mary Schapiro.
'This is a tough issue and that's why we're going to be very deliberative,' she said. 'You won't see emergency orders or midnight proclamations. We want to go through the regular rulemaking process and understand whether there is a nexus between removing the earlier restrictions and undermining investor confidence.' - NYT
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