For a little while, at least, advisers who were fretting over the Securities and Exchange Commission’s focus on compliance issues such as soundness of portfolio valuations, possible access to non-public information and treatment of elderly clients can take a break.
“Given what’s happened in the last few weeks,’’ ACA Compliance Group co-founder Gary Watkins told independent advisers attending Charles Schwab & Co. Inc.’s annual Impact conference in Atlanta today, “the SEC is going to be focusing advisers that are short selling.’’
Mr. Watkins, whose consulting firm is based in Washington, said the SEC’s emergency order on Sept. 19 to prohibit short selling of financial stocks is likely to monopolize the regulator’s agenda for the next 18 months.
The heads of several large New York-based investment banks — including the soon-to-be-sold Merrill Lynch & Co. Inc. and Lehman Brothers Holdings Inc., which has filed for Chapter 11 bankruptcy protection — have publicly decried short-sellers for their tribulations.
Short selling refers to sales of stocks that traders borrow (or plan to borrow) but don’t own, in hopes that they will be able to buy them back at cheaper prices.
The practice has long been viewed as a free-market asset that legitimately conveys a bearish view, but the financial companies have complained that some short-sellers were illegally spreading false rumors to drive down prices and also selling stocks they had no intention of actually borrowing.
As the financial system tumbled in the last two weeks, the SEC came in with its temporary ban, which has been expanded from an initial universe of 799 financial stocks that cannot be shorted until Oct. 2, to close to 1,000. (They include some giant industrials, such as General Electric Co., that own small banks.)
The date also may be extended.
The ban has also raised questions for investors in mutual funds that allow shorting in stocks, including some such as the Laudus Rosenberg Long/Short Equity Fund and The Prudent Bear Fund, which have thrived on short selling this year. Fund companies have been advising their investors that the SEC mandate doesn’t require them to close out existing short positions but rather to curtail adding to the positions or creating new shorts.
“Since we will be able to maintain our existing short positions in the financial sector and adjust our short positions in the other nine sectors, we do not currently anticipate that these restrictions will impair our ability to pursue the fund's investment objective,’’ Schwab told advisers on an internal website with regard to its Schwab Hedged Equity Fund and the Laudus Rosenberg equity fund.
The Schwab Hedged Equity Fund held in its short portfolio six stocks that are on the ban list, representing about 2.7% of the fund’s entire portfolio.
The Laudus fund, based on public filings as of June 30, held 34 of the newly banned stocks, representing 9.3% of its short portfolio.
Schwab is based in San Francisco.
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