ICI Supports Efforts to Curb Short-Selling Abuses, January 2004

Washington, DC, January 5, 2004 - The Institute supports recent SEC efforts designed to modernize rules governing "short sales" of equity securities.

Background
In general, short sale is the sale of a security that the seller does not own. In order to deliver the security to the purchaser, the short seller borrows the security, typically from a broker. Investors engage in short-selling if they believe the price of a security is going to decrease. A short-selling investor will profit by purchasing the borrowed security at a price below the price at which it was originally borrowed. If the price of the security does not drop as predicted, however, a short-selling investor may have to purchase the borrowed security at a higher price. "Naked" short selling occurs when an investor sells short without borrowing the necessary securities to make delivery, resulting in a "fail to deliver" securities to the buyer.

Proposed Regulation SHO would, among other things, require short sellers of equity securities to locate securities to borrow before selling, and would also impose strict delivery requirements on securities where many sellers have failed to deliver the securities. Proposed Regulation SHO would also institute a new uniform "bid test" allowing short sales to be effected at a price one cent above the consolidated best bid. This test would apply to all exchange-listed securities and Nasdaq National Market System Securities, wherever traded.

The SEC has also proposed a temporary rule that would suspend the operation of the uniform bid test for specified liquid securities during a two-year pilot period. The temporary suspension would allow the SEC to study the effects of relatively unrestricted short selling on market volatility, price efficiency, and liquidity.

ICI Position
The Institute supports the SEC's proposal and, in a recent comment letter, notes that although short selling has its benefits, such as adding market liquidity and pricing efficiency, it also can prove detrimental, particularly when used to manipulate stock prices.

supports the implementation of a uniform bid test and recommends that the test be extended to other less liquid securities not currently subject to short sale pricing restrictions (e.g., Nasdaq SmallCap securities);
supports the implementation of a pilot program suspending the proposed bid test for certain highly liquid securities;
recommends that the SEC expand its current limited exemptive relief for volume-weighted average price transactions from the short sale rule;
strongly supports the proposed uniform locate requirement to address problems associated with "naked short selling"; and
recommends that the requirements for a person to be considered "long" under proposed Rule 200 be modified to ensure that broker-dealers can continue to facilitate institutional investor block orders to sell at a volume-weighted average price or closing price.

Related Links
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