SEC's Cox wants big investors to disclose stock 'short' sales

From Times staff writer Maura Reynolds:

After another day of plummeting stock prices, the Securities and Exchange Commission late Wednesday announced a new effort that could curb "short selling" -- bets on lower prices.

In a surprise, SEC Chairman Christopher Cox proposed that big investors, including hedge funds, begin publicly reporting their short positions daily.

The SEC may be hoping that some investors will be discouraged from shorting stocks if they have to let the world know what they’re doing.

Cox also announced that the SEC would be subpoenaing hedge funds and other traders as part of "enforcement measures against market manipulation." He said the SEC would be looking at "past trading positions in specific securities" — which sounded like a reference to financial-company stocks, many of which have collapsed this year amid heavy short selling.

In a short sale an investor borrows stock, usually from a brokerage’s inventory, and sells it, expecting the market price to decline. If the bet is correct the investor can buy new shares later at a lower price to replace the borrowed stock. The profit would be the difference between the sale price and the repurchase price.

Short selling is perfectly legal as long as investors follow well-known rules. But as Wall Street’s bear market has worsened this year, short sellers have been vilified as market manipulators.

The SEC earlier Wednesday announced new steps to curb so-called naked shorting, which involves selling stock without actually borrowing it. Those steps had been expected.

But the disclosure proposal released later in the day came out of the blue.

In a press release, Cox said he was "asking the Commission to consider on an emergency basis a new disclosure rule that will require hedge funds and other large investors to disclose their short positions.

"Prepared by the staffs of the Division of Investment Management and the Division of Corporation Finance, the new rule will be designed to ensure transparency in short selling," Cox said. "Managers with more than $100 million invested in securities would be required to promptly begin public reporting of their daily short positions. The managers currently report their long positions to the SEC."

But investment managers now report their long positions at the end of each quarter. It wasn’t clear whether they would be expected to report those positions daily now, as well. An SEC spokesman said he couldn’t comment beyond the press release.

The rule would have to be approved by the five-member commission.

More from Cox, per the release, explaining his rationale for the disclosure proposal:

Millions of investors entrust their savings to our securities markets because they can be confident that our markets are orderly, liquid, efficient, and rational.  The turmoil in today’s markets, particularly in the financial sector, is challenging that assumption for ordinary Americans.  Markets are the best tool a free society has to price and allocate assets across a complex economy, but as is well known from experience, sometimes the wisdom of crowds is supplanted by crowd behavior.  We need well-functioning markets to help us draw the line between reasonable miscalculation and error or something worse involving the failure of due diligence, self-dealing, and conflicts of interest.  It is thus vitally important that the market mechanism continue to inspire investor confidence.

Cox also said the SEC’s enforcement unit would "expand their ongoing investigations by undertaking a series of additional enforcement measures against market manipulation. The [unit] will obtain disclosure from significant hedge funds and other institutional traders of their past trading positions in specific securities. Those institutions will also be required immediately to secure all of their communication records in anticipation of subpoenas for these records."

Photo: SEC Chairman Christopher Cox. Alex Wong / Getty Images

Comments

[Tim]

Fire Cox, then reinstate the 70+ year Uptick Rule! Cox and the SEC must be in bed with the Shorts and Hedgies.

[Aakif Ahmad]

this is an important, albiet very late, decision to impose greater transparency in financial markets where it currently least exists. markets function most efficiently when information is available to all parties; what we confront today is in many ways the consequence of years of asymmetries in information exchange - driven by the creation complex financial instruments that "mask" actual realities and asset values, and completely opaque trading activities that are the modern day equivalent of back room deals. this decision is weeks if not months late, but perhaps it will create a momentary pause for everyone to collective breath and move forward a bit more thoughtfully. the next step is imposing a set of regulatory and disclosure requirements on hedge fund managers such that they can no longer operate above the rules.

[Harper Lathrop]

Never allow disclosure of daily short positions. It's an answer to the wrong question. Things will be brutal but the market, in it's wisdom, will right itself.

[Tim]

The shorts use is a 3 prong strategic military-like attack assisted by the Media and Rating Agencies:

First the shorts determine who to go after and who they could have the most effect on within the financials. They then spread false rumors which are picked up by the Media which quote unnamed sources that inturn scares people. Shorts then follow up with a massive bear raid (using naked short selling), which leads to a downgrade by the Rating Agencies stating that the companies share price are now too low for future capital raises, which lead to further downward pressure...then onto their next victim to destroy and so on.

[Keith]

Cox made a grave mistake repealing the uptick rule in July 2007. He now is choking on this fact and refuses to reinstate it dispite the pleading of Senators, Congressmen, CEO's, ABA, the media and any reasonably intelligent person (even Obama for God's sake)
This can only mean, Cox is paid off or being blackmailed. There is no reason to not have this important rule. The Bear Raids have gone on too long and we are now facing a real material meltdown. Madness

[Robert NO longer in LA]

How MANY CEOs, CFOs etc were shorting their firm's stock, Cox? A bit LATE in your enquiries, aren't you? Your SEC, like the Justice Dept is a huge, vulgar JOKE, if not an outright OBSCENITY to the American people! You're doin a Hellova of a Job, Chris!!!