By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.
Senators Ted Kaufman and Johnny Isakson said that the partial action taken by the SEC will neither provide investors with the same protections as the uptick rule nor address the enforcement issues surrounding the current naked short selling rule. The SEC voted 3-2 to require short sellers, if a company’s shares fall 10 percent in one day, to exceed the prevailing bid for the remainder of the trading day and the following day in short sales of that security.
While encouraged that the SEC took some action to protect investors from manipulative short selling, adding that the circuit-breaker/bid test rule is a step forward, the senators said it will be of limited use, helping only in the worst-case scenarios that could occur during a terrorist attack or financial crisis. The uptick rule worked for 70 years as a systemic check on predatory bear raids; they emphasized, and this approach will not provide investors with the same protections as an always-on bid test.
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