SEC To Issue Emergency Rule To Limit Some Short Selling Of Major Financial Firms

July 16, 2008 (FinancialWire) The Securities and Exchange Commission will issue an emergency rule later to limit certain types of short selling in major financial firms, including Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) and is the latest move to clamp down on market manipulation.

The SEC said the rule is expected to go into effect on Monday and last 30 days and also applies to big financial firms such as Lehman Brothers (NYSE: LEH), Goldman Sachs (NYSE: GS), Merrill Lynch (NYSE: MER) and Morgan Stanley (NYSE: MS).

Short sellers arrange to borrow shares they consider overvalued and sell them in hopes of making profit when the price drops. With financial stocks dropping dramatically over the year, lawmakers have been calling on the SEC to investigate whether short sellers and speculators are behind the move.

The agency's rule change would prevent investors from making "naked" short sales of the biggest financial stocks. A "naked" short sale occurs when an investor sells stock that has not yet been borrowed.

Broker-dealers will sometimes accidentally fail to deliver stocks to investors who have arranged to borrow a stock, which if done intentionally, is illegal.

The emergency rule would require a short seller to borrow the securities before executing the sale. It would also require the investor to deliver the securities on the settlement date.

SEC chairman Christopher Cox told a Senate Banking Committee hearing that the emergency rule would be more effective than the so-called tick test rule, which was repealed June 2007. The tick test rule only allowed short sales when the last sale price was higher than the previous price. That meant a trader could not short a stock if the movement prior to the short sale is down.

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