Regulators Want Short Leash For Short Selling
Source: National Journal
By Peter H. Stone
December 4, 2009
The American Bankers Association, General Electric, IBM, and others are pushing federal regulators or Congress to tighten rules on the short selling of stocks -- a practice that pummeled a number of large U.S. corporations in the wake of last year's Wall Street crash.
The lobbying drive has some strong bipartisan allies in the Senate, including Ted KAUFMAN, D-Del., and Johnny Isakson, R-Ga., both of whom have signed letters to the Securities and Exchange Commission calling for stricter rules and enforcement to curb short-selling abuses. Shorting is the practice of selling borrowed securities and later buying them back, with the hope that their value will have fallen in the interim.
A key argument for tighter rules is that some short-sellers create "phantom shares" by not delivering the securities at settlement to cover their bets. Others worry that rules against "naked" short selling, where sellers make no attempt to locate and buy back the shares, need to be tightened.
Roel Campos, a former SEC commissioner, is giving legal advice to the Coalition Against Market Manipulation, which is coordinating a small corporate-led lobbying drive for tighter rules. His group's prime goals are to get "effective rules that prevent naked short selling, and [to assure] effective enforcement of those rules." The coalition, the lawyer adds, is not against short selling as a general practice.
Last fall, the SEC issued a temporary rule requiring traders or broker dealers to finalize short sales within four days -- with no exceptions -- to prove that they actually borrowed or owned the shares. This year, the agency has taken some additional steps, including calling for more public disclosure of short sales. The SEC is now weighing several other new rules, one of which might be issued by year's end, including a requirement that short-sellers "pre-borrow" shares to reduce abuses.
The activity has caused an uptick in lobbying among supporters of short selling -- including hedge funds, broker dealers, and some banks -- who argue that the practice is a legitimate market tool to generate profit when target companies are overvalued or follow questionable business practices.
Lobbyist Andrew Lowenthal represents the Coalition of Private Investment Companies, a group of 20 hedge funds chaired by mogul James Chanos. "Our concern is that there's an effort to change the laws or the rules of the marketplace [that will] stifle legitimate skepticism about certain stocks and companies," he said. He added that his coalition members worry that "legislation or rules will be made based on fear or innuendo and not the facts."
The SEC has been deluged with letters on both sides of the issue. Those seeking to protect short sales from what they see as too much regulation include the Managed Funds Association as well as the Securities Industry and Financial Markets Association. Dave Franasiak, a lobbyist who represents several hedge funds, stresses that there are "legitimate strategies employed that use short selling to reduce investment risk."
Calls for tougher rules to check potential abuses have come from GE, IBM, International Bancshares, and other corporations. The American Bankers Association has also lobbied Capitol Hill and the SEC. Bank officials are "most concerned about [instances] when short selling has been used as a tactic to drive shares way below their real economic value," said Wayne Abernathy, a lobbyist for the association.
The Coalition Against Market Manipulation is led by Overstock.com, a Utah-based Internet retailer that has been hard-hit by short-sellers. The group has tapped Peter Mirijanian to handle press and is also working with two outside lawyers who have been retained by Overstock: Ken Solomon of Dow Lohnes is handling lobbying and Campos, who is now a partner at Cooley Godward Kronish, is providing legal counsel.
A modest number of other corporations, including the insurer Aflac, have given the coalition support on SEC comment letters. Campos says that engaging companies is tricky because some corporate leaders seem jittery about taking high-profile stances. "Many companies are concerned about going public on this issue for fear of being a target of short-sellers," he says.
