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May 31, 2002

Nazareth and Short Selling Reform

By Gregory Bresiger

Once again, because of the recent tur moil in the markets, there is a renewed call to ban or change short selling. Annette Nazareth, director of the division of the SEC's Division Market Regulation, told the STA congressional conference in Washington in May. She said that, since the events of Sept. 11 some investors, angry about losses, are demanding that the practice being restricted or banned altogether.

"I don't know if you know this," she told the audience of traders, "but there actually was a fair amount of lobbying on Capitol Hill to get Congress to ban short selling."

She noted that there are also professionals who want the opposite: They believe that any impediments to short selling should be ended.

No Impediments

Noting that the short selling rule goes back to the Great Depression era, Nazareth said it is probably time to revisit the issue because of the dramatic changes in financial institutions.

"In particular, the staff of the SEC believes that the commission should consider a carefully targeted approach [on short sale rules] that would shift regulatory controls to the areas where they most need it while easing restrictions when they appear unnecessary," Nazareth said.

She said one possible reform might be to extend the rule to non-exchange listed securities while exempting from regulation the most highly liquid securities that are traded on markets with high levels of transparency.

Short sale rule reform may also be needed, she added, because regulatory rules will be less clear if Nasdaq is transformed into an exchange.