WASHINGTON -- With stocks tumbling, the Securities and Exchange Commission launched an effort aimed at making it harder for traders to improperly drive down stock prices and announced plans to require hedge funds to share more information about their trading.
Christopher Cox
The SEC announced three trading rules, which go into effect Thursday at 12:01 a.m., following a weekend of tense negotiations with Wall Street firms, which have asked SEC Chairman Christopher Cox to stop a tide of short selling. After additional talks with Wall Street executives and New York Democratic Sens. Charles Schumer and Hillary Clinton late Wednesday, Mr. Cox announced two new moves to shed light on short selling.
Mr. Cox is seeking commission approval for an emergency rule to require hedge funds and other large investors to publicly disclose their short positions daily. Currently those investors disclose their stock holdings only on a periodic basis.
In addition, Mr. Cox said the agencies' enforcement investigations are expanding. The SEC staff has already sent subpoenas to more than 50 hedge funds, looking at market manipulation in financial stocks. Mr. Cox said the staff would be seeking historical trading positions in "specific securities" from "significant" hedge funds and advised them to begin collecting data and communications to turn over to the staff once subpoenaed. He didn't identify the stocks or funds.
The combination of the trading and disclosure rules are responses to growing concerns that short sellers are driving financial stocks lower and an effort to send a message to the market that the SEC is watching. Hedge funds will likely object to more disclosure, saying it will lower their competitive trading advantage; already many funds complain about the cost to comply with examinations and investigations.
Falling stock prices have made it harder for banks to raise money to shore up their funding, and manipulative trading may have contributed to the fall of Bear Stearns Cos. and Lehman Brothers Holdings Inc. In a short sale, a trader sells borrowed stock, hoping it will fall in price and can be repurchased later at a profit. The trader has to deliver the stock to the buyer within three business days.
Corporations and others have complained that loopholes in the existing rules made it easier for traders to manipulate the market by shorting stock without actually borrowing the stock and then failing to deliver it within three days. Under the new provisions, the SEC will penalize anyone who doesn't deliver shares on time. For violating that rule, the SEC will bar the broker executing the trade from engaging in any short sale without actually borrowing the shares before selling them.
The SEC also is tightening requirements on market makers that trade options and making it illegal for a customer to mislead a broker about having located stocks and then failing to deliver them.
The new curbs apply to the entire market, not just the 19 financial firms covered by emergency short-selling rules that took effect earlier this summer but have since expired. Much of Wednesday's move bypassed the usual public-comment process, reflecting the urgency with which the agency views the situation.
Edward Yingling, president of the American Bankers Association, said he was pleased with the trading rules, but added: "This needed to be done yesterday, frankly." He added, "We're in a very dangerous situation."
Other traders, while approving of the SEC's new short-sale rules, suggest the rush to blame short sellers is misguided. "There's no reason loopholes should exist," said Rick Schottenfeld, who runs New York trading firm Schottenfeld Group, which buys and shorts stocks. "But...we're placing the blame in the wrong place. Short sellers are seeing how leveraged financial companies are and are reacting to that."
Richard Baker, head of the Managed Funds Association, a hedge-fund lobbying group, has said the trading rules will go a long way toward rooting out manipulation. But he expressed concern about the "extremely short time to implement" the rule. He couldn't be reached to comment on the moves late Wednesday.
Some traders, lawyers and others were frustrated that the SEC didn't reinstate a Depression-era rule that put speed bumps in place to slow the pace of short sales. The so-called "uptick" rule, which the SEC repealed in July 2007, prohibited traders from selling short unless there was an uptick, or higher bid, in the stock. Traders say that tamped down volatility.
No comments:
Post a Comment