SEC Proposes New Anti-Fraud Rule for Short Sales
March 26, 2008
The Securities and Exchange Commission ("SEC") voted unanimously on March 4, 2008, to further expand its anti-fraud enforcement powers by proposing new Rule 10b-21 under the Securities Exchange Act of 1934 (the "Proposed Anti-Fraud Rule"). The Proposed Anti-Fraud Rule would specifically target "naked" short sales where the seller does not borrow or arrange to borrow shares of the securities being sold, and thus "fails to deliver" the securities to the buyer within the standard three-day settlement period.
Sellers may intentionally fail to deliver securities to manipulate the price of a security or to avoid borrowing costs associated with short sales. The Proposed Anti-Fraud Rule would make it a securities violation for a seller to intentionally and falsely assert that he or she has either borrowed or located shares of a stock that he or she plans to sell short without actually having done so.
Other deceptive practices that would be prohibited by the Proposed Anti-Fraud Rule include misrepresenting the number of shares the seller owns or can deliver, deceiving broker-dealers about the source of shares to be borrowed for purposes of complying with Regulation SHO's "locate" requirement, and claiming to hold the shares in a long position when the seller knows that he or she can not deliver the shares. The Proposed Anti-Fraud Rule also would apply to broker-dealers who sell in a principal capacity.
The Proposed Anti-Fraud Rule is part of a long-running effort to curb fraudulent short sales in general and naked short sales in particular.
The Proposed Anti-Fraud Rule "will help protect and enhance the operation, integrity and stability of the markets in the clearance and settlement system, and also puts market participants on notice that the SEC will continue targeting abuses in this area," said Erik Sirri, Director of the SEC's Division of Trading and Markets.
The SEC stated that over 400 investor complaints regarding naked short selling were made in 2007. In order to provide the public with more information on failures to deliver, the SEC has begun to publish failure-to-deliver data on its web site at http://www.sec.gov. The information will be updated quarterly.
The comment period for the Proposed Anti-Fraud Rule ends on May 20, 2008.
For more information about this e-Alert, please contact Anthony L. Perricone, Chair, Fund Services Group (212.398.5290 or aperricone@sonnenschein.com), or your regular Sonnenschein attorney.
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