The SEC's action to address short-selling abuses may help expose the impact of the problem, but it might not get to the heart of the issue, according to some critics.
The regulator is putting off one possible reform and discussing it at a September round table — a requirement that short-sellers pre-borrow stock prior to a short sale rather than simply locate it.
According to some observers, a strict pre-borrowing requirement is needed to stem so-called naked shorting, which occurs when someone sells securities they don't own and intentionally fails to deliver the shares to the buyer.
“A round table can be used constructively or for delay. I am afraid this is for delay,” said Peter Chepucavage, general counsel at Plexus Consulting Group LLC in Washington and a former SEC staff member who has been critical of naked shorting.
Last month, Sens. Carl Levin, D-Mich., Charles Grassley, R-Iowa, and Arlen Specter, D-Penn., called on the SEC to enforce a pre-borrow requirement.
The SEC said in a statement yesterday that the round-table meeting would consider a “pre-borrow or enhanced ‘locate' requirement on short-sellers, potentially on a pilot basis.”
SEC spokesman John Nester declined to comment further.
Also yesterday, the commission made permanent a temporary rule requiring brokerage firms to make good on failed deliveries on T+4 — the day after a fail.
That rule should help stop the “unlimited short selling which up until now had dire consequences” for targets of short-sellers, said Tom Ronk, chief executive of Buyins.net LLC, a Corona Del Mar, Calif., advisory service that produces research based on short-sale data. In a statement, the SEC said the rule and other reforms have resulted in a 57% decline in the delivery failures since last fall.
The SEC has also taken steps to improve the transparency of short sales.
In the next few weeks, self-regulatory organizations will begin publishing daily aggregate short-selling volume for individual stocks as well as one-month delayed transaction data on short sales.
Mr. Ronk expects that short sales will be identified by symbols on the trade ticker.
“It will be good to know daily if short-sellers are coming in to attack a stock,” he said.