SEC Walking a Tightrope with Short Selling Rule Debate; the SEC Must Not Cross the Free Market Line

WASHINGTON (Dow Jones)--The U.S. Securities and Exchange Commission voted unanimously to seek public comments on all the proposed rules released Wednesday that seek to limit short selling. There are two types of proposals the SEC will consider possibly enacting after a 60-day comment period. One type aims to impose market-wide sales restrictions and another instead targets particular stocks that are in rapid decline. The two market-wide restrictions the SEC will consider include a rule similar to the old "uptick" rule and a modified uptick rule similar to Nasdaq's former bid test. In addition, the SEC also will solicit comments on three different types of "circuit-breaker" models, which would impose various restrictions on short sales for the remainder of a trading session if a particular security declines by 10%. If a circuit breaker is triggered, then traders could be subject to either an uptick restriction, a bid test restriction, or an outright short-selling ban on a particular security for the rest of the day. The Depression-era uptick rule, which the SEC abolished in 2007, prevented traders from short selling unless the price of the stock from the most recent trade was higher than the previous price. Short selling is the sale of borrowed shares by an investor hoping to profit by buying an equal number of shares later at a lower price to replace the borrowed stock. Also, Nasdaq used to have its own short-sale price restrictions known as a bid test, which prohibited short sales on many securities at a price lower than the highest national prevailing bid. All the short-sale price test restrictions were rescinded in 2007, however, after economic studies found they had little impact. All five of the SEC's commissioners indicated Wednesday they think there is value in exploring whether or not to impose additional short-selling restrictions given the current volatility in the markets. Both Republicans on the panel, however, appeared somewhat skeptical about whether or not bringing back some form of the old uptick rule would have the desired impact. "If the economic studies today prove out, that is if short-sale price tests do not effectively advance their stated purposes, we need to consider how investors might respond," Commissioner Troy Paredes said. -By Sarah N. Lynch, Dow Jones Newswires; 202-862-6634; sarah.lynch@dowjones.com Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/access/al?rnd=nTu4LxwcXyZ5kQj31xplfg%3D%3D. You can use this link on the day this article is published and the following day. (END) Dow Jones Newswires April 08, 2009 11:47 ET (15:47 GMT) Copyright (c) 2009 Dow Jones & Company, Inc.- - 11 47 AM EDT 04-08-09