Federal regulators on Wednesday extended an unprecedented ban against all short-selling in the shares of more than 800 financial companies, keeping it in place at least until after Congress enacts a massive financial bailout plan.
The Securities and Exchange Commission (SEC) announced the extension of the ban, which was put in place on Sept. 18 in a bid to shore up investor confidence in the face of the spiraling market crisis.
The ban, which was due to expire yesterday, will now last until the third business day after the proposed enactment of the US$700 billion financial bailout plan now before Congress. It will end no later than Oct. 17.
Short-sellers bet against a stock. The practice, which is legal and widely used on Wall Street, involves borrowing a company’s shares, selling them and then buying them when the stock falls, returning them to the lender. The short-seller pockets the difference in price.
Although short-selling can make markets more efficient and bring in more capital, regulators have maintained that it has widened the scope of the financial crisis and contributed to the collapsing values of investment and commercial banking stocks in particular — and the demise of Lehman Brothers.
The SEC “has taken steps during recent weeks to address concerns regarding short sales in light of the ongoing credit crisis,” the agency said in a statement issued on Wednesday night. “The steps [the SEC] has taken are designed to ensure the continued smooth operation of orderly markets. Our actions have been taken in consultation with regulators of the major developed securities markets around the world, with whom we have coordinated in monitoring market reactions.”
But on Wall Street, professional short-sellers have said they were being unfairly targeted by the SEC’s prohibition. And some analysts have warned of possible negative consequences, maintaining that banning short-selling could actually distort — not stabilize — edgy markets.
The SEC also extended, in this case through Oct. 17, its easing of restrictions on the ability of companies to buy back their own shares — another move aimed at helping restore liquidity to the distressed and volatile market.
And the SEC extended its new requirement for investment managers to report to the agency their new short sales of stocks. The new mandate will continue beyond Oct. 17 as an interim rule, the SEC said, promising to seek public comment on it.
The SEC, however, made a modification that allows managers to report their short positions to the agency confidentially, rather than requiring public disclosure.
The private investment group said it was “deeply concerned about the disparate treatment” of reporting requirements for short stock positions compared with normal ones.