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Regulation of Naked Short Selling, October 30, 2008 1 (October 30, 2008)

handle is hein.tera/crser0234 and id is 1 raw text is: Order Code RS22099 Updated October 30, 2008 ACRS Report for Congress Regulation of Naked Short Selling Mark Jickling Specialist in Public Finance Government and Finance Division Summary Short sellers borrow stock, sell it, and hope to profit if they can buy back the same number of shares later at a lower price. A short sale is a bet that a stock's price will fall. A short sale is said to be naked if the broker does not in fact borrow shares to deliver to the buyer. When executed on a large scale, naked short sales can equal a large portion of total shares outstanding, and can put serious downward pressure on a stock's price. Critics of the practice characterize it as a form of illegal price manipulation. The Securities and Exchange Commission (SEC) in 2004 adopted Regulation SHO, a set of rules designed to control short selling abuses, focusing on small-capitalization stocks where the number of shares held by the public was relatively small. Until the current financial crisis, the SEC did not view short selling of large, blue-chip stocks as a problem. In July 2008, however, the SEC temporarily banned naked short sales of the stock of Fannie Mae, Freddie Mac, and 17 other large financial institutions. On September 18, 2008, the SEC banned all short selling of the shares of more than 700 financial companies in an emergency action that expired on October 8, 2008. On October 1, the SEC adopted a rule requiring short sellers' brokers to actually borrow shares to deliver to buyers, within the normal three-day settlement time frame. This report will be updated as events warrant. Short selling was best described by Daniel Drew, the Gilded Age speculator and robber baron: He that sells what isn't his'n, must buy it back or go to prison. Short sellers borrow shares from a broker, sell them, and make a profit if the share price subsequently drops, allowing them to buy back the same number of shares for less money. In other words, short selling is a bet that the price of a stock will fall. Short sellers have always been unpopular on Wall Street. Like skeletons at the feast, they seem to stand against rising share values, expanding wealth, and general prosperity. However, most market participants recognize that they provide a valuable service to the extent that they identify companies and industries that are overvalued by investors in the grip of irrational exuberance. By bringing such valuations down to earth, short selling can prevent economically wasteful over-allocation of resources to those firms and sectors. Congressional Research Service < The Library of Congress Prepared for Members and Committees of Congress

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