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SEC To Propose Limits on Short Selling Today

There’s an open meeting of the SEC at 10 am today where the agenda is as follows: “The Commission will consider whether to propose rules restricting short sales under certain circumstances.” As we know, in a short sale, the investor bets that the stock will go down and profits if it does. It has been reported the SEC is considering reducing the impact of “death spiral” moments when short sales drive a stock price down, then there’s more short sales, driving it down even more. I hear that what they might propose is that after a stock has dropped a certain amount in a certain time, short sales would be stopped for some period. There is a belief that restricting short sales might have helped the market not drop as much as it did recently. I am not so sure that’s true, but some feel that shorts killed Bear Stearns, for example.

No question short selling has been a tool of bad guys to try to manipulate a stock even where there is nothing particularly wrong with the company. But short selling is also a tool of good guys legitimately concerned about the direction of a company, serving as a message to management when an investor feels things are not going right. It’s also a tool of investors and hedge funds simply wanting to hedge their investment to protect their downside. So the SEC needs to balance this. The best way is to use their enforcement dollars to nab the cheats on stock manipulation. But probably that’s not going to happen. So instead it looks like they are simply going to limit it to try to reduce the impact of the next bear market.

In the meantime, Ms. Schapiro, I hope you will appoint a new head of Corporation Finance soon, so the agenda of those of us working with public companies, in particular smaller ones, can move forward.