The Securities and Exchange Commission yesterday issued an emergency order against “naked” short selling of securities of mortgage lenders Fannie Mae of Washington, Freddie Mac of McLean, Va., as well as primary dealers at commercial and investment banks.
Naked short selling is the practice of selling a stock short and borrowing shares to cover the sale within the standard three-day settlement period, according to the SEC.
In the new system, anyone making a short sale in the 19 securities covered under the order must arrange beforehand to borrow the securities and deliver them at settlement.
The order will take effect at 12:01 a.m. Et on July 21 and will terminate July 29 at 11:59 p.m. ET.
The SEC said that it may extend the order if it deems it necessary to protect investors but that it will not continue the order for more than 30 days.
Additionally, the regulator will issue a rule proposal to address issues related to naked short selling in the entire market.
The SEC issued “Regulation SHO” in 2004 to curb abusive naked shorting.
“False rumors can lead to a loss of confidence in our markets,” the order said.
“Such loss of confidence can lead to panic selling, which may be further exacerbated by naked short selling” and can artificially deflate securities prices, it said.
“If significant financial institutions are involved, this chain of events can threaten disruption of our markets,” the order said.
The events preceding the sale of The Bear Stearns Cos. Inc. to JPMorgan Chase & Co., both of New York, illustrate the consequences of market rumors, the SEC said.
In addition to Fannie Mae and Freddie Mac, companies covered by the order are: BNP Paribas Securities Corp., Bank of America Corp., Barclays PLC, Citigroup Inc., Credit Suisse Group, Daiwa Securities Group Inc., Deutsche Bank Group AG, Allianz SE, The Goldman Sachs Group Inc., Royal Bank ADS, HSBC Holdings PLC ADS, JPMorgan Chase & Co., Lehman Brothers Holdings Inc., Merrill Lynch & Co. Inc., Mizuho Financial Group Inc., Morgan Stanley and UBS AG.
On Sunday, the SEC announced that it and other securities regulators would immediately act http://ciedit.sv.publicus.com/apps/pbcs.dll/article?AID=/20080714/REG/418997625&NoCache=1>conducting exams to prevent intentionally spreading false information to manipulate securities prices.
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