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wallymac
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3/4/08 | Dow Jones
By Judith Burns

DOW JONES NEWSWIRES

WASHINGTON (Dow Jones)--U.S. securities regulators voted 3-0 on Tuesday to propose a new rule intended to crack down on lingering abuses involving so-called "naked" short sales and failures to deliver shares that have been used in such sales.

The proposal is part of a continuing attack by the Securities and Exchange Commission on short-sales abuses, an effort begun four years ago with the adoption of rules known as Regulation SHO.

Short selling involves sales of borrowed shares, producing profits when prices decline, allowing the short seller to replace borrowed shares at a lower price. In contrast, "naked" short sellers do not borrow shares before engaging in short selling, and may have no intention of borrowing them. Regulation SHO sought to curb such practices by requiring short sellers to locate shares for borrowing before engaging in short sales, but didn't include any new mechanism to enforce the requirement.

Under the proposal, the Securities and Exchange Commission would create a new anti-fraud rule targeting those who knowingly deceive brokers about having located securities before engaging in short sales, and who fail to deliver the securities by the delivery date.

SEC Chairman Christopher Cox said the proposal would bring needed teeth to Regulation SHO and address concerns about short-selling abuses, particularly in the market for small-cap stocks.

"Reg SHO can't be effective without enforcement," said Cox.

Even with the regulation in place, the SEC received hundreds of complaints last year about alleged abuses involving short sales. While most trades settle within three days, as required, the SEC estimates about 1% of shares that change hands daily, or about $1 billion, are subject to delivery failures. The SEC's move last year to close off a controversial "grandfather" exception to Regulation SHO, has done little to reduce longstanding delivery failures, according to preliminary data analyzed by SEC staff.

Brokers who engage in short selling for customers would not face any new obligations under the proposed anti-fraud rule, and the SEC said it would not apply to market makers engaging in market-making activities.

Although the SEC already has authority to sue illegal short sellers, SEC officials said a new rule explicitly targeted to naked short sales might affect behavior. SEC commissioners Paul Atkins and Kathleen Casey expressed support for the crackdown on abusive sales but said they want to be sure that doesn't result in unintended consequences, such as driving legitimate short-sales offshore.


-By Judith Burns, Dow Jones Newswires; 202-862-6692; Judith.Burns*dowjones.com

Posts: 3255 | From: Los Angeles California | Registered: Jan 2006  |  IP: Logged | Report this post to a Moderator
wallymac
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Brokers who engage in short selling for customers would not face any new obligations under the proposed anti-fraud rule, and the SEC said it would not apply to market makers engaging in market-making activities.

There's always an out isn't there?

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T e x
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The questions are: 1) exactly what obligations do brokers have now? 2-a) How long do MMs have to cover , having performed said market-making activities? 2-b) What penalties/enforcement apply to MMs who abuse and never cover?

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Nashoba Holba Chepulechi
Adventures in microcapitalism...

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glassman
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"Reg SHO can't be effective without enforcement," said Cox.

the ONLY acceptable enforcement is a buy-in.


this MM liquidity issue should not last more than three days..

if they need to "fix" liquidity? they need to raise or lower the price. that will ALWAYS create liquidity. that's how the market is supposed to work.

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T e x
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not suspending buy-in requirements would definitely be on the spot enforcement, which is obviously the best kind...

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Nashoba Holba Chepulechi
Adventures in microcapitalism...

Posts: 21062 | From: Fort Worth | Registered: Apr 2005  |  IP: Logged | Report this post to a Moderator
   

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