Facing pressure from some members of Congress, securities regulators will consider reinstating a Depression-era rule aimed at preventing a massive plunge in a stock price caused by a rush of short sellers.
The Securities and Exchange Commission could propose restoring the so-called uptick rule, which it eliminated in July 2007, as early as next month. The rule requires short sellers — those who try to profit from a stock's decline by selling borrowed shares — to sell at a price above a stock's most recent trading price.
The SEC "may conduct a public meeting as early as next month to consider whether to formally propose reinstatement of the uptick rule, or consider other measures related to short sales," agency spokesman John Nester said Tuesday.
Short-sellers bet against a stock. The practice, which is legal and widely used on Wall Street, involves borrowing a company's shares, selling them, and then buying them when the stock falls and returning them to the lender. The short-seller pockets the difference in price.
If a company stock was trading at $40.75 and a trader anticipated that it would decline, he could borrow shares but couldn't sell them until after the stock traded higher, or "ticked up," to at least $40.76.
Proponents of restoring the uptick rule, which had been in effect since 1938, say its elimination helped fuel the volatility on Wall Street amid the financial crisis and the pounding of company stocks targeted by market speculators.
SEC Chairman Mary Schapiro said at her confirmation hearing in January that reinstatement of the rule was among the issues she wanted the agency to consider. Schapiro is scheduled to appear Wednesday before a House Appropriations subcommittee in her first congressional testimony since taking the helm of the agency.
Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, said he had spoken with Schapiro and she told him the agency would take up the issue soon.
"I'm hopeful that the uptick rule will be restored within a month," Frank told reporters Tuesday.
In the Senate, Banking Committee Chairman Christopher Dodd, D-Conn., agreed that bringing back the uptick rule was necessary.
Rep. Gary Ackerman, D-N.Y., has proposed legislation that would order the SEC to reinstate the rule, saying it was "essential to rein in these abuses and restore much-needed stability and confidence to our financial markets."
The SEC last fall adopted measures aimed at imposing protections against abusive "naked" short-selling. That occurs when sellers don't even borrow the shares before selling them, and then look to cover positions immediately after the sale.
A test by the SEC in 2007, removing the uptick rule for one-third of the stocks in the Russell 3000 index, found it could be eliminated without causing significant harm.
The analysis by the SEC provided "clear economic support for our recommendation today to remove all current short-sale price test restrictions," Erik Sirri, the head of the SEC's market regulation division, said at a public meeting of the commissioners in June 2007.
