NEWS
SEC Lacks Empirical Data To Back Substantial Limits Proposed for Short Selling;
Market Quality Would Be Undermined to Investors’ Disadvantage
Washington, D.C., September 21 – The Coalition of Private Investment Companies (CPIC) today said a new proposal by the Securities and Exchange Commission (SEC) to limit short selling through an “alternative uptick rule” would lead to overstated prices and a deterioration in price discovery, transaction efficiencies, and liquidity — all to the disadvantage of investors.
“We believe that the ‘alternative uptick’ rule . . . represents one of the more detrimental options for investors in terms of the adverse impact on efficient pricing of securities,” said James S. Chanos, chairman of CPIC, in the comment letter filed today with the SEC in response to its proposed amendments to regulations governing short sale transactions. “If the rule is adopted, a heavy government ‘thumb on the scale’ of securities prices inevitably will increase the chances that investors will overpay for securities.”
The “alternative uptick rule,” CPIC said, would prevent short selling at the market, thus preventing short sale orders from receiving immediate execution. That is because short sales would have to be entered as orders set above market prices and could only be filled when those orders’ bids exceed the current national best bid.
In its comment letter, CPIC criticized the SEC proposal for failing to adequately explain how this uptick rule would work since the latest proposal does not include any rule text.
Second, the bid test would disrupt market functions even more than the other alternatives the SEC proposed on April 10, 2009. “The rule would restrict short sales even when current bids are higher than preceding ones. This requirement would delay executions and would impose a substantial and unwarranted burden on short sale transactions,” the letter said.
Third, CPIC questioned the absence of empirical data from the SEC to justify limits on short sales, noting that the Commission’s own research shows that “short selling was not the cause of declines in share prices surrounding the time period of the Emergency Orders” implemented between summer and fall last year.
CPIC’s letter also pointed out that the SEC, in its own release, admits that the proposed alternative uptick rule “would restrict short selling to a greater extent” than the proposals in the Original Release and could “potentially lessen some of the benefits of legitimate short selling, including market liquidity and pricing efficiency to a greater extent.”
According to the SEC, “there may be potential costs associated with the alternative uptick rule in terms of potential impact of such a price test on quote depths, spread widths, market liquidity, execution and pricing inefficiencies.” CPIC argues in its letter that the purposed ease of implementation does not justify a rule that is more harmful to investors and markets.
“CPIC supports the Commission’s goal of protecting investors with sound policies that will foster open markets, fair competition, and transparent standards,” the letter said. “The [SEC proposal] will not serve those goals.”
CPIC is a coalition of private investment companies who are diverse in size and in the investment strategies they pursue. Established in 2005, CPIC informs policy-makers, the media, and the public about private fund industry and its role in capital markets. Learn more through: www.hedgefundfacts.org
CONTACT: Matt Well, The Herald Group
Phone: (202) 347-7941
Mobile: (202) 460-9711
mwell@theheraldgroup.com
