Update on the SEC’s emergency order prohibiting the naked short-selling of a limited group of stocks. By Greg Newton, at NakedShorts.
Short Shoot first, ask questions later
The end game for the emergency order
The end game for the US Securities and Exchange Commission’s emergency order, which currently prohibits the short selling of Phoney, Fraudy and the US-listed Fed primary dealers, will be an interim final rule — likely extending the emergency order’s “protections” to the entire market — that would be effective immediately, while being simultaneously published for public notice and comment.
The biggest uncertainty is when the rule will be published, although SEC chairman Christopher Cox told the House Finance Committee last week that he expected the rule to be ready “very soon.” The commission has announced that it will hold an open meeting tomorrow, Jul. 30, but has yet to release the agenda.
The current emergency order, effective since Jul. 21, is set to expire 11:59 pm today (Jul. 29). Under the agency’s emergency powers, it can be extended to a maximum of 30 days from its inception. Whether or not the “final interim rule” is on Wednesday’s agenda, the SEC is expected to announce today that will extend the emergency order, and may expand it to include other sectors. (The Wall Street Journal yesterday reported that insurance, housing and a broader range of financial stocks may be added to the list).
The enactment of an interim final rule that becomes immediately effective is certainly unusual, but within the commission’s authority. Normally, rulemaking is spread over months, and sometimes more than a year, in a process that involves the release of a proposed rule, public comments and, eventually, adoption of a final rule.
In four completed short selling-related rulemakings since 2004, including the original Reg SHO, the process from rule proposal to adoption averaged 10 months; it took 15 months to kill the original ‘grandfather’ exception. And that doesn’t include a current proposal, already open for nearly a year, to eliminate an exception that currently allows options market makers to sell stock short without having to ‘locate’ it for borrowing.
The accelerated process is, like the original emergency order, a shoot first-ask questions afterward approach. Markets would have to function under the provisions of the rule as announced, while the SEC goes through the comment process and considers changes.
