The US Securities and Exchange Commission stiffened rules against manipulative short-selling after a market rout pushed American International Group. to the brink of collapse and triggered Lehman's bankruptcy.
The SEC adopted two regulations today forcing traders and brokers to close out short sales, amid concern investors are driving down share prices by flooding markets with sell orders.
A third rule makes it a securities fraud when short sellers deceive brokers about delivering borrowed shares to buyers.
"These several actions today make it crystal clear that the SEC has zero tolerance for abusive" short-selling, SEC Chairman Christopher Cox said in a statement.
Lawmakers and regulators are questioning whether short sellers have contributed to a crisis by spreading false information and using abusive tactics to attack companies. Hedge funds and other investors argue that poor business strategies are to blame, not short sellers.
In traditional short sales, traders borrow shares that they then sell. If the price drops, they profit by buying back the stock, repaying the loan and pocketing the difference.
The SEC rules approved today target so-called naked short- selling, in which traders never borrow shares from their brokers. The agency is concerned that such a strategy can free investors to manipulate prices by placing unlimited sell orders.
One SEC regulation eliminates an exemption for options market-makers to deliver shares of companies placed on so-called threshold lists. Companies are listed when they have a high number of borrowed shares that haven't been delivered.
The rule will make it harder for options market-makers to hedge trades when they sell put contracts, said Stephen J. Nelson, a securities lawyer in White Plains, New York.
The SEC also approved a rule drafted in March that would make it a fraud for investors to lie to their broker about locating shares to sell short.
Currently, brokers are able to rely on their customers' assurance that they had located shares that could be used to cover a short sale.
The SEC rules don't reinstitute an "emergency" order that expired last month, which placed restrictions on short-selling in Lehman, Fannie Mae, Freddie Mac and 16 securities firms.
The order required investors betting on a decline in stock prices to arrange to borrow the shares before completing a sale.
Bloomberg