SEC Extends Short Selling Curb Through August 12

WASHINGTON(Reuters) – U.S. securities regulators have extended through August 12an emergency rule aimed at curbing abusive short selling in the stocksof 19 major financial firms, including mortgage giants Freddie Mac(FRE.N: Quote, Profile, Research, Stock Buzz) and Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz).

The Securities and Exchange Commission rule is part of an agencycrackdown on possible market manipulation that some blame for steepdeclines in the shares of financial companies.

The emergency measure, that first took effect July 21 and will notbe further extended, requires investors to borrow a stock beforeselling it short and to deliver the stock on the settlement date.

The SEC said it would use the additional time to collect more dataon the rule’s impact and then start a rule-making aimed at providingadditional protections against abusive naked short selling in thebroader market.

"The order is designed to protect legitimate short selling in thesesecurities, but helps prevent illegitimate naked short selling andpotential ‘distort and short’ manipulation," SEC Chairman ChristopherCox said in a statement.

Cox told a congressional hearing last week that the agency wouldsoon propose a rule extending the emergency short sale requirements tothe entire market.

Short sellers arrange to borrow shares they consider overvalued and sell them in hopes of making profit when the price drops.

When an investor does not pre-borrow the shares before shorting thestock, it’s called naked short selling, which is illegal if doneintentionally.

The temporary rule applies to Lehman Brothers (LEH.N: Quote, Profile, Research, Stock Buzz), Goldman Sachs (GS.N: Quote, Profile, Research, Stock Buzz), Merrill Lynch (MER.N: Quote, Profile, Research, Stock Buzz), Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz), JPMorgan Chase & Co (JPM.N: Quote, Profile, Research, Stock Buzz) and Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz), among others.

Henry Klehm, a securities lawyer at Jones Day representing financialcompanies, said it he believed it was important the SEC continue toenforce the rules against naked short selling.

"This orders seems to have dampened the volatility in many of the financial stocks," said Klehm.

The American Bankers Association has been lobbying the SEC toinclude all publicly traded banks and bank holding companies, such asWashington Mutual Inc (WM.N: Quote, Profile, Research, Stock Buzz) and Wachovia Corp (WB.N: Quote, Profile, Research, Stock Buzz), whose stocks have been under selling pressure.

Short sellers, meanwhile, have protested that they are beingunfairly scapegoated, although the SEC has said it is not looking tooutlaw short selling, a type of investing that can keep stocks frombecoming overvalued.

The Securities Industry and Financial Markets Association says a broad expansion of the rule would be burdensome.

"Expanding the requirement to pre-borrow for every one of thethousands and thousands of publicly traded companies would involveserious operational challenges, not to mention a likely impact onliquidity and market performance, all of which we are stillquantifying," said Ira Hammerman, SIFMA’s general counsel, in ane-mailed statement.

The SEC’s emergency rule has exempted market makers from thepre-borrow requirement so they can continue to facilitate trading incertain stocks. But market makers are still required to deliversecurities by the settlement date.

(Reporting by Kim Dixon; Editing by Tim Dobbyn)