Naked short-selling ban nixed in S. Dakota

Nov 5, 2008 @ 2:13 pm

By Aaron Siegel

The citizens of South Dakota have voted down a measure that would have banned all naked short selling in the state.

The resolution, known as Measure No. 9, or “The South Dakota Small Investor Protection Act,” was voted down by 56.6% of the 338,000 citizens of that state who voted in yesterday's election.

If the law had been passed, financial services companies that operate in South Dakota would be required to have a contract to purchase a stock before they shorted it.

In order to profit from an expected decline in share prices, short-sellers borrow shares, sell them and then buy the shares back later, in hopes of purchasing the security at a lower price.

Naked short selling is based on the same principle, except that the seller does not borrow the necessary shares or even ensure that they can be borrowed.

The Securities Industry and Financial Markets Association of Washington and New York, which had vowed to take legal action if the measure had passed, thanked the citizens of South Dakota.

SIFMA called the measure “an attempt by non-state residents to manipulate the local political process for purposes largely unrelated to the state.”

“South Dakotans clearly saw through this ploy, and they should be congratulated for their insightfulness,” T. Timothy Ryan, president and chief executive of SIFMA, said in a statement.

In 2006, the Utah legislature repealed a law that would have imposed severe penalties on brokerage firms that failed to deliver stock in short sales after SIFMA won a preliminary injunction in federal court against the state law.

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