The SEC today made permanent an emergency rule to ban abusive “naked” short-selling, according to an SEC statement.
The temporary rule, adopted in October during a steep drop in the equity market, was set to expire Friday.
The new Rule 204 requires broker-dealers to purchase or borrow securities promptly to deliver on a short sale, the statement said.
Naked short sales, when an investor sells shares without first having borrowed them, “is permitted because there is no legal requirement that a short seller actually borrow the shares before effecting a short sale,” according to the SEC statement. But the rule “requires that the broker-dealer, as opposed to the seller, ‘locate’ an entity that the broker reasonably believes can deliver the shares” in time for settlement.
The SEC was concerned with abuses on failing to cover short sales, which “may have a negative effect on shareholders, potentially depriving them of the benefits of ownership such as voting and lending. They also may create a misleading impression of the market for an issuer's securities,” the statement said.
