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May 5, 2009

Uptick Redux

Industry Braces for Intrusive Short-Sale Regulation

By Peter Chapman

Something needs to be done.

That's the sentiment these days in Washington and on Wall Street when it comes to short selling. Last year's market rout scared the bejesus out of hardened traders and politicians alike.

Most accept that the plunge wasn't caused by conniving short sellers, but they still suspect piling on. They want the Securities and Exchange Commission to apply the brakes. The pols want the SEC to bring back the uptick rule. The traders would prefer a circuit breaker.

It's the politicians who are in the lead. Several legislators introduced bills this year to force the SEC to bring back the uptick rule it rescinded in 2007.

The politicians cited the need to "restore confidence in America's financial markets." Those are the words of Sen. Ted Kaufman, D-Del., who together with Sen. Johnny Isakson, R-Ga., introduced a bill in March to force the SEC to bring back the rule.

The Kaufman/ Isakson bill follows a similar one introduced by Gary Ackerman, a New York congressman and a senior member of the House Financial Services Committee, in January. Ackerman, a Democrat, hounded the SEC chairman at the time, Christopher Cox, for months last year to bring back the rule, claiming it had been discarded out of "deregulatory zeal."

Gary Ackerman, D-NY

  

Plummeted

In the wake of the elimination of the uptick rule," Ackerman said in a statement, "the value of many volatile stocks has plummeted due to an onslaught of manipulative short-sale practices. Reinstatement of the uptick rule is essential to rein in these abuses and restore much-needed stability and confidence to our financial markets."

The SEC's economists say that isn't true, but the SEC's commissioners contend that they must deal with political reality. Last month, the commissioners issued a proposal to amend Regulation SHO, the set of rules that govern short selling, to include new restrictions on the practice. "Due to the extreme market conditions that we are currently facing and the resulting deterioration in investor confidence, we believe it is appropriate at this time to re-examine and seek comment on whether to restore restrictions with respect to short selling," the SEC stated in its massive, 273-page proposal.

The move is the latest in the SEC's recent initiatives to rein in short sellers. Last year it banned short selling for three weeks in nearly 1,000 mostly financial stocks during the turbulent market conditions of the early fall.

It also enacted a tough new rule aimed at thwarting "naked" short selling. Cox said the decision to ban shorting was made under duress and called it "the biggest mistake" of his tenure in an interview with The Washington Post. He made the statement after reading a report from SEC economists in the Office of Economic Analysis who found that short selling had played no role in the plunging prices prior to the September ban.

Unworkable