SEC Makes Naked Short Selling Rule Permanent
The SEC has made a temporary rule designed to reign in naked short sales permanent. The rule does not go far enough, but at least it is a start.
From the SEC
Washington, D.C., July 27, 2009 — The Securities and Exchange Commission today announced several actions that would protect against abusive short sales and make more short sale information available to the public.
“Today’s actions demonstrate the Commission’s determination to address short selling abuses while at the same time increasing public disclosure of short selling activities that affect our markets,” said SEC Chairman Mary Schapiro.
First, the Commission made permanent an interim final temporary rule, Rule 204T, that seeks to reduce the potential for abusive “naked” short selling in the securities market. The new rule, Rule 204, requires broker-dealers to promptly purchase or borrow securities to deliver on a short sale. The temporary rule, approved by the SEC in the fall of 2008, was set to expire on July 31.
Second, the Commission and its staff are working together with several self-regulatory organizations (SRO) to make short sale volume and transaction data available through the SRO Web sites. This effort will result in a substantial increase over the amount of information presently required by another temporary rule, known as Temporary 10a-3T. That rule, which will expire on August 1, applies only to certain institutional money managers and does not require public disclosure.
Apart from these measures, the Commission is continuing to actively consider proposals on a short sale price test and circuit breaker restrictions.
Third, the Commission intends to hold a public roundtable on September 30 to discuss securities lending, pre-borrowing, and possible additional short sale disclosures. The roundtable will consider, among other topics, the potential impact of a program requiring short sellers to pre-borrow their securities, possibly on a pilot basis, and adding a short sale indicator to the tapes to which transactions are reported for exchange-listed securities.
Overview:
Short selling often can play an important role in the market for a variety of reasons, including contributing to efficient price discovery, mitigating market bubbles, increasing market liquidity, promoting capital formation, facilitating hedging and other risk management activities, and importantly, limiting upward market manipulations. There are, however, circumstances in which short selling can be used as a tool to manipulate the market.
“Naked” Short Sales: In a “naked” short sale the investor sells shares “short” without first having borrowed them. Such a transaction is permitted because there is no legal requirement that a short seller actually borrow the shares before effecting a short sale.
But, before effecting a short sale, Rule 204T requires that the broker-dealer, as opposed to the seller, “locate” an entity that the broker reasonably believes can deliver the shares within three days after the trade — what’s known as T+3. Also, if reasonable, a broker-dealer may rely on a short seller’s assurance that the short seller has located his or her own lender that can deliver shares in time for settlement.
“Fails-to-deliver”: If an investor or its broker-dealer does not deliver shares by T+3, a “failure to deliver” occurs. Where an investor or its broker-dealer neither locates nor delivers shares, a “naked” short sale has occurred.
A “fail to deliver” can occur for legitimate reasons, such as mechanical errors or processing delays. Further, a “fail to deliver” could occur as a result of a long sale — that is the typical buy-sell transaction — as well as a short sale.
“Fails to deliver”, such as fails resulting from potentially abusive “naked” short selling, may have a negative effect on shareholders, potentially depriving them of the benefits of ownership such as voting and lending. They also may create a misleading impression of the market for an issuer’s securities.
Adopting Regulation SHO: Due to its concerns regarding persistent “fails to deliver” and potentially abusive “naked” short selling, the Commission adopted Regulation SHO, which became effective in early 2005. This regulation imposes, among other things, the requirement that broker-dealers locate a source of borrowable shares prior to selling short.
In addition, it requires that firms that clear and settle trades must purchase shares to close out these “fails to deliver” within a certain time frame, 13 days. This “close-out” requirement only applies to certain equity securities with large and persistent “fails to deliver,” known as threshold securities.
The requirement included two major exceptions: the so-called “grandfather” and “options market maker” exceptions. Both of these exceptions provided that certain “fails to deliver” in threshold securities never had to be closed out. The Commission eliminated both exceptions in August 2007 and September 2008, respectively.
Making Permanent A Rule to Curtail Naked Short Selling
Adopting Rule 204: The Commission has made permanent a temporary rule that was approved in 2008 in response to continuing concerns regarding “fails to deliver” and potentially abusive “naked” short selling. In particular, temporary Rule 204T made it a violation of Regulation SHO and imposes penalties if a clearing firm:
does not purchase or borrow shares to close-out a “fail to deliver”
resulting from a short sale in any equity security
by no later than the beginning of trading on the day after the fail first occurs (T+4).
Cutting Down Failures to Deliver: An analysis conducted by the SEC’s Office of Economic Analysis, which followed the adoption of the close-out requirement of Rule 204T and the elimination of the “options market maker” exception, showed the number of “fails” declined significantly.
For example, since the fall of 2008, fails to deliver in all equity securities has decreased by approximately 57 percent and the average daily number of threshold list securities has declined from a high of approximately 582 securities in July 2008 to 63 in March 2009.
Due to the success of these measures in furthering the Commission’s goals of reducing fails to deliver and addressing potentially abusive “naked” short selling, the Commission has made permanent the requirements of Rule 204T with only limited modifications to address commenters’ operational concerns.
Increasing Transparency Around Short Sales
In the fall of 2008, the Commission also adopted a short sale reporting interim rule, Rule 10a-3T. The rule requires certain market participants to provide short sale and short position information to the Commission.
The Commission made the rule temporary so that it could evaluate whether the benefits from the data justified the costs associated with the rule.
Instead of renewing the rule, the Commission and its staff, together with SROs, are working to substantially increase the public availability of short sale-related information through a series of other actions. These actions should provide a wealth of information to the Commission, other regulators, investors, analysts, academics, and the media.
Specifically, the Commission and its staff are working together with several SROs in the following areas:
Daily Publication of Short Sale Volume Information. It is expected in the next few weeks that the SROs will begin publishing on their Web sites the aggregate short selling volume in each individual equity security for that day.
Disclosure of Short Sale Transaction Information. It is expected in the next few weeks that the SROs will begin publishing on their Web sites on a one-month delayed basis information regarding individual short sale transactions in all exchange-listed equity securities.
Twice Monthly Disclosure of Fails Data. It is expected in the next few weeks that the Commission will enhance the publication on its Web site of fails to deliver data so that fails to deliver information is provided twice per month and for all equity securities, regardless of the fails level. For current fails to deliver information, see http://www.sec.gov/foia/docs/failsdata.htm.
Hosting a Roundtable
Finally, the Commission also is examining whether additional measures are needed to further enhance market quality and transparency, as well as address short selling abuses.
As part of its examination, the Commission intends to hold a public roundtable on Sept. 30, 2009, to solicit the views of investors, issuers, financial services firms, self-regulatory organizations and the academic community regarding a variety of trading and market related practices. The roundtable will focus on issues related to securities lending, pre-borrowing, and possible additional short sale disclosures.
The roundtable panelists will consider, among other things, additional means to foster transparency, such as adding a short sale indicator to the tapes to which transactions are reported for exchange-listed securities, and requiring public disclosure of individual large short positions. Panelists will also consider whether it would be appropriate to impose a pre-borrow or enhanced “locate” requirement on short sellers, potentially on a pilot basis. Additionally, panelists will discuss issues related to securities lending such as compensation arrangements, disclosure practices, and methods of collateral and cash-reinvestment.
By the time the feckless SEC gets around to implementing a regulatory framework with real teeth (cuz right now they’re just doing the old curly-shuffle moving papers around and sending out no bid consulting contracts to their buddies under the guise of roundtable forums) . . the government sanctioned “bookmaking” operation known as Goldman Sachs and its coterie of Ivy League “numbers runners” whom they employ will have already figured out how to regame the system . . imo
YOU helped this to happen, Tyler Savery!
We are so pleased with the reaction by the SEC today. THANK YOU to the great SIRI investors that have, and are sending your DVD’s in to the SEC. We have been working closely with many in the SEC and we KNOW you made a difference!
Stock Shock has spent every extra penny that has come in for sales to promote the idea that SIRI investors (and the American people) are being fleeced by Wall Street criminals. We deserve protection! This is our money.
We have purchased several national releases, sent hundreds of DVD’s to legislators and media, and appreciate your continued orders…because it is not over yet!
It seems like a long time since the movie came out, but Hollywood movies ramp up slowly and we are right on schedule. Next goal: get mainstream media to recognize Sirius XM as a viable, respectable, and important media entity.
As Relmor says in the movie: the big guys don’t want to make room for another media company and won’t go away easily. Every major social change has started just like this: a few people changing the minds of many.
Please consider supporting our continued effort. It will go to good use.
Sandra Mohr, Director of “Stock Shock-The Movie.”
It sounds great. But being a long suffering long, Sirius has turned this once “glass half full” kinda guy with a sunny disposition into a dark brooding paranoid conspiracy nut….and I can’t help but entertain the kooky idea that perhaps Sandra Mohr and the makers of this movie KNEW they had a goldmine tapping into our suffering and exploit it for their own monetary gain.
I know. I know. But it’s hard not to have thoughts like that cross your mind when you have been beaten down and lied to for so long with this stock. It’s hard to trust ANYONE regardless of their intentions.
And yet the ever hopeful side of me that got me into trouble with this stock in the first place can’t help but saying WOO HOO! as well.
…..this has been going on too long. We need some relief. Either destroy us or take off already Sirius!!!
Not sure if you’re releasing this information, but how many copies have been sold? Trying to gauge the interest.
I do not know. I simply appeared in the movie.
I meant to reply to Sandra on the post above.
Another small victory. The positives keep mounting up. The stock even closed at $.42 today. Where’s Boo Boo and his sidekick today? Someone must have peed in their Cheerious this morning. I think it was the SEC. 🙂
Boo Boo is in his mommies basement, he is grounded again (he stayed out to late after his positive thinking class at the local JC)
Give it rest Krypto and at least TRY to come up with something original.
Don’t worry, the bottom will still fall out for SIRI.
The company can’t get out of it’s own way.
The slide WILL happen.
SIRI is still a shorts’ paradise.
Boo Boo… you telling ANYONE to give it a rest is comedy & it is hard to come up with original insults, there are about 20 people here that have covered most of what could be said about your unique attributes…. About that slide you keep driveling about, short this bitch and take the ride. Throw you whole 2k at it and make the idea a reality. Walk it Boo Boo, take advantage of all this mismanagement and line your pockets… but you won’t will you? Nope, you will just whine and whine. One more thing, please do not read my posts if they in any way offend your cheerful, positive nature. Say hi to mommy.
Homo says what? 😛
Come on. Did “Stock Shock” the movie REALLY play a “major” role in the SEC FINALLY taking action? Or did The SEC like the FCC only do what we all KNEW they’d do after dragging their heals for far too long in making a decision?
– and when they finally DID…it’s too little too late.
I’m sorry. Don’t get TOO excited people. We Sirius shareholders have fallen for the “GREAT TURNAROUND” far too many times. The “THIS IS IT!” moment only to be suckered into false hope again and again.
Again, I’m not saying the movie isn’t good or raise certain issues close to our hearts. I’m just playing devil’s advocate here. We’ve been burned so many times in the past, I just wanted to temper the enthusiasm. Lowering one’s expectations, especially when it comes to Sirius can protect us from being sucker punched again.
The truth is many of Sirius investors got into the stock because they are passionate about the product. Many of them were not even investors before. All I am saying is that there is A LOT of emotion in this stock. And there is no room for emotion when it comes to investing. The shorts and bashers have used this emotion to their advantage by scaring us when they want, and building us up when they want….knowing that like a woman in an abusive relationship, we’ll keep coming back for more.
Again, I am as passionate as the next guy(or gal). I think I’ve proven that with my posts. I’m just saying to add a pinch of skepticism with your hope to create a healthier balance.
Not saying that Miss Mohr’s intentions aren’t noble. She is obviously passionate. But remember after all that she is selling a product for money. And when money is involved the line between good intentions and greed can be blurred.
Sirius investors get labeled “ignorant” which is unfair. But our emotions HAVE blinded us in the past. I’m just saying to keep one’s eyes open and feet firmly planted on the ground. Saviors are for religion. Lets not get too carried away here looking for another knight in shinning armor that is going to save us.
I am glad Stock Shock the movie is out there. But level heads must prevail. k?
Peace out.
That’s why I’d like to know how many copies have been sold. Is it twenty people that surf around the two Sirius blogs, or 500,000 copies around the country? The number will provide clarity on the impact of this documentary.
Hey Friggin!!!
Well…if reasonable, a broker-dealer may rely on a short seller’s assurance that the short seller has located his or her own lender that can deliver shares in time for settlement.
Well… Yeah right..and who is going to make sure this happens and enforces it? The same people that have not prosecuted one case in the last year out of all of the thousands of complaints filed with them? The SEC
I just want to “Assure” everyone I have located the shares…Yeah that’s good enough for the SEC!!!!
In other words…It is still the same game, and I will continue to believe that until the first case is prosecuted. Then I will be very happy to
admit I am wrong.
imho
vaporgold
Great, next time I hold stock in two companies who are trying to merge while the FCC stails the merger until the bond market erupts so that Goldman can buy the bonds in a last minute funding that the CEO is forced to agree to and etc…… I’ll know that I am protected. I will sleep well at night knowing my “good friend” the SEC is protecting me.
I’m too unsophisticated to know what impact this will have on the pps of Sirius… especially so, as I firmly believe what MAY benefit shareholders may NOT be what Mel has in mind for this Company.
tald of naked shorts- check this guys legs out-look at the “ads “around his article for “sirius guru short selling” JIM Cramer ……….odd isnt it?
http://www.thestreet.com/story.....nturn.html
does this mean that the nakes shorts have to come clean in the next three days and pay for their shorts?