SEC Proposes Anti-Fraud Rule for Naked Short Selling
 
March 24, 2008
 

On March 17, 2008, the SEC issued a proposed rule release regarding proposed Exchange Act Rule 10b-21 aimed at addressing the failure to deliver securities that have been associated with “naked” short selling. “Naked” short selling generally refers to selling securities short without having the stock available for delivery and intentionally failing to deliver stock within the standard three-day settlement period.

Proposed Rule 10b-21 would specify that it is unlawful for any person to submit an order to sell a security if such person deceives a broker-dealer, registered clearing agency participant, or purchaser regarding its intention or ability to deliver the security on the due date and such person fails to deliver the security on or before the due date.

The proposed rule would cover situations where a short seller misrepresents its ability to locate the security in time for delivery by the due date and where the short seller causes the broker-dealer to mark its order to sell the security as “long” when the seller knows or recklessly disregards that it is not “deemed to own” the security being sold.

The SEC is seeking comment on proposed Rule 10b-21 on or before May 20, 2008.

http://www.sec.gov/rules/proposed/2008/34-57511.pdf