On September 17, 2008, the SEC announced new rules effective immediately, to protect investors against “naked” short selling abuses. According to the SEC press release, the new rules require:
that short sellers and their broker-dealers deliver securities by the close of business on the settlement date (three days after the sale transaction date, or T+3) and imposing penalties for failure to do so.
If a short sale violates this close-out requirement, then any broker-dealer acting on the short seller's behalf will be prohibited from further short sales in the same security unless the shares are not only located but also pre-borrowed. The prohibition on the broker-dealer's activity applies not only to short sales for the particular naked short seller, but to all short sales for any customer.
Even though the new rules are effective immediately, the SEC is seeking comments for a period of 30 days. As correctly noted in a fellow blog, the SEC sudden action looks like a panic without “justifications for avoiding the requirements of the Administrative Procedures Act” which “requires agencies to propose rules, provide an opportunity for comment, and wait at least 30 days before they become effective.” Moreover, the SEC did not invoke the APA’s “good cause” exception to immediately adopt these rules.
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