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Senate Bill Would Order SEC to Reinstate Uptick Rule

By Jim Hamilton

A bi-partisan bill, S 605, ordering the SEC to reinstate the uptick rule has been introduced by Senators Ted Kaufman (D-DE) and Johnny Isakson (R-GA). Since the uptick rule?s repeal in July 2007, said the senators, the abuse of naked short-selling, which is the selling of stock that the trader does not own, has added fuel to the fire of distressed stocks and markets. Senator Kaufman said that abusive short selling was tantamount to fraud and market manipulation.

There is growing congressional sentiment for the SEC to reinstate the uptick rule. Earlier this year, Rep. Gary Ackerman introduced a bill, HR 302, that would order the SEC to reinstate the uptick rule within 90 days.

The uptick rule, Rule 10a-1, required all short sale stock transactions to be conducted at a price that was higher than the price of the previous trade. The SEC claims that they fully researched the regulation before it was repealed, but some commenters have noted that the research took place during one of the biggest bull markets in history

The uptick rule required that, when the price of a stock is falling, short sellers must wait for an increase in price before continuing to sell shares short. Under current rules, short sellers are allowed to sell stocks they haven?t actually borrowed in advance of their short sale. When settlement day arrives and the seller doesn?t have the necessary shares, said the sponsors, this harms the market and market participants, particularly when failures to deliver persist for substantial periods.

The legislation directs the SEC to write regulations within 60 days accomplishing five things to end abusive short selling. First, the SEC must reinstate the substance of the uptick rule prohibiting short sales that are not made on an increase in the price of the stock. This is designed to prevent short sellers from piling on a declining stock, driving prices down. Second, the SEC must require exchanges and other trading venues to execute the trades of long sellers ahead of short sellers, all other things being equal.

Third, with the concurrence of Treasury and the Federal Reserve Board, the SEC must prohibit short sales of the securities of any financial institution unless that trade is affected at a price (in minimum lots specified by the Commission) at least 5 cents higher than the immediately preceding transaction in such securities. Since the financial sector is in such a fragile state, if the Treasury and Fed believe they it needs additional protection, the legislation permits it.

Fourth, SEC rules must prohibit any person from selling securities short unless that person has at the time of the short sale a demonstrable legally enforceable right to deliver the securities at the required delivery date. Under current law, many short sellers fail to deliver. Fifth, the SEC will require that all short sales settle on the same time frame employed for long sales of the same securities. There is no reason, said the senators, that short sellers should have 13 days to deliver shares when long sellers have only three days.

On March 3, Senator Kaufman sent SEC Chair Mary Schapiro a letter asking the SEC to reinstate the uptick rule. He said that the issue is now bigger than just one rule, however influential that rule is. Markets all over the world continue to tumble because average investors have lost confidence that the markets work for them, he continued, and Congress must restore confidence in the markets. One important step in doing so is instituting sensible regulations, he emphasized, and the uptick rule is a sensible time-tested rule.

Full post as published by Jim Hamilton's World of Securities Regulation on March 17, 2009 (boomark / email).