SEC gets tougher on short selling

Times Staff Writers

After another day of plummeting stock prices, the Securities and Exchange Commission late Wednesday announced a new effort that could curb “short selling” -- bets on lower prices.

In a surprise, SEC Chairman Christopher Cox proposed that big investors, including hedge funds, begin publicly reporting their short positions daily.

The SEC may be hoping that some investors will be discouraged from shorting stocks if they have to let the world know what they’re doing.

Cox also announced that the SEC would be subpoenaing hedge funds and other traders as part of “enforcement measures against market manipulation.” He said the SEC would be looking at “past trading positions in specific securities” -- which could be a reference to financial-company stocks, many of which have collapsed this year amid heavy short selling.


In a short sale an investor borrows stock, usually from a brokerage’s inventory, and sells it, expecting the market price to decline. If the bet is correct, the investor can buy new shares later at a lower price to replace the borrowed stock. The profit would be the difference between the sale price and the repurchase price.

Short selling is legal as long as investors follow well-known rules. But as Wall Street’s bear market has worsened this year, short sellers have been vilified as market manipulators.

The SEC earlier on Wednesday announced new steps to curb so-called naked shorting, which involves selling stock without first borrowing it. Those steps were expected.

But the disclosure proposal released later in the day came out of the blue.


In a news release, Cox said he was “asking the commission to consider on an emergency basis a new disclosure rule that will require hedge funds and other large investors to disclose their short positions.”

The rule “will be designed to ensure transparency in short selling,” Cox said. “Managers with more than $100 million invested in securities would be required to promptly begin public reporting of their daily short positions. The managers currently report their long positions to the SEC.”

But investment managers now report their long positions at the end of each quarter. It was unclear whether they would be expected to report those positions daily now as well. An SEC spokesman said he couldn’t comment beyond the news release.

The five-member SEC panel would have to approve the rule.

Cox also said the SEC’s enforcement unit would “expand their ongoing investigations by undertaking a series of additional enforcement measures against market manipulation.”

Enforcement staff, he said, “will obtain disclosure from significant hedge funds and other institutional traders of their past trading positions in specific securities. Those institutions will also be required immediately to secure all of their communication records in anticipation of subpoenas for these records.”



Reynolds reported from Washington, Petruno from Los Angeles.