How SEC Restrictions Will Affect 'Short' and 'Ultrashort' ETFs

Kyle Hartman's picture

Tuesday, July 28, 2009 - 7:44pm

by Kyle Hartman

The Securities and Exchange Commission has issued new rules about short selling, a strategy investors employ when they think a security's price is going to fall.

The two new rules don't restrict short selling and won't affect individuals or "short" or "ultrashort" exchange traded funds, at least not yet. The SEC plans an industry roundtable in September to discuss other proposals that could limit the practice, which has come under scrutiny after criticism that it drives down stock prices.

Short and ultrashort (read: "leveraged") exchange-traded funds allow an investor to bet on a price drop. The funds are popular because they can be held in a typical brokerage account rather than transacted through a margin account, the vehicle through which short sales typically take place.
One new rule calls for more reporting of short sales to increase the amount of information available to the public. Wall Street's self-regulatory agencies will publish daily short-sale transaction reports that detail the total number of a company's shares were shorted. After a month, the data would be broken down so the public could see each individual trade, though not who carried them out.

The disclosures will begin in the coming weeks.

The second rule is meant to make it more difficult to engage in abusive or "naked" short selling. A naked short is a stock sale carried out by a seller who neither owns shares nor possesses borrowed shares. These speculators take advantage of the lag time between the date a stock is sold and the date the shares must be delivered. Under the new rule, a speculator who "fails to deliver" would be reported and be subject to penalties.

Kyle Hartman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.