Short Sale Regulations Adopted by SEC

Washington, DC, August 9, 2004 - The Institute supports the SEC’s efforts to curb short-selling abuses by recently adopting Regulation SHO, which includes several provisions designed to modernize the rules governing "short sales" of equity securities.

Background
A 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.

The SEC proposed Regulation SHO in January 2004 in order to require short sellers of equity securities to locate securities to borrow before selling, and to impose strict delivery requirements on securities where many sellers have failed to deliver the securities.

Among other things, Regulation SHO, as adopted:

• amends the definition of a “short sale”;
• implements a uniform “locate” requirement to address the problem of “naked” short selling; and
• includes a temporary rule that establishes procedures for the SEC to suspend the current “tick” test and any short sale price test of any exchange or national securities association for specified securities.

ICI Position
The Institute supports the goal of Regulation SHO, noting in a January comment letter 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.

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