SEC to Act on Abusive Short Selling: Source

WASHINGTON(Reuters) – U.S. securities regulators plan to take action on abusiveshort selling of stock before the end of the week, a source briefed onthe matter said on Monday.

The measures came as Lehman Brothers Holdings Inc (LEH.N: Quote, Profile, Research, Stock Buzz) filed for bankruptcy protection, intensifying concerns that other major financial stocks would accelerate their losses.

The Securities and Exchange Commission will likely adopt proposalsto strengthen its short-selling rule, including one that deems itfraudulent for customers to deceive broker-dealers about theirintention or ability to deliver securities in time for settlement.

The SEC will also move forward with a plan that would shorten thetime in which traders must buy back stock if they fail to deliver asecurity by the settlement date.

But the SEC will not reinstate and broaden a temporary emergencyrule that required traders to preborrow stock before executing a shortsale.

Two months ago, regulators were faced with similar market turmoilwhen IndyMac bank was seized by regulators and investors were concernedthat Lehman and mortgage finance giants Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) were veering towards insolvency.

At the time, the SEC announced plans to crack down onrumor-mongering and issued an emergency rule aimed at curbing illegalnaked short selling in 19 major finance stocks, including Lehman,Freddie and Fannie.

A "naked" short sale occurs when an investor sells stock that has not yet been borrowed.

Broker-dealers will sometimes accidentally fail to deliver stock toinvestors who have arranged to borrow it. If this is doneintentionally, it is illegal.

That rule proved to be controversial, however. Broker-dealers saidthe requirement was onerous, companies whose stock was not on the SEC’slist wanted the same protections, and short sellers complained aboutbeing targeted.

When the emergency order ended in mid-August, the SEC set aboutcrafting rules — which it had been expected to adopt late in September– to be applied to all stocks.

Mortgage giants Fannie and Freddie have since been taken over by thegovernment. Lehman has been forced to file for bankruptcy after failingto find a buyer.

(Editing by Quentin Bryar)