Advisers, investors call for reinstating uptick rule

Highlighting investor concern about the market effects of short selling, more than 3,000 comments have been filed with the Securities and Exchange Commission on proposed changes to the short-sale rule.

A majority of the comments appear to be from individual investors who want the SEC to restore the uptick rule. That rule was rescinded in 2007 when the SEC put new short-selling rules in place.

One of the proposals issued by the SEC in April would restore the uptick rule, requiring that short sales be allowed only at a price above the price of the last transaction. The rule is intended to prevent short-sellers from putting severe downward pressure on stock prices.

There is no timetable for acting on the proposal.

The comment period for the SEC’s short-sale proposal ended June 19. Although the commission received more comments than usual, the volume doesn’t compare with the more than 20,000 comments filed on proposals involving executive compensation and other topics, SEC spokesman John Nester wrote in an e-mail.

The SEC proposal asked for comments on whether the uptick rule should be reinstated, whether some form of “circuit breaker” should be put in place that would limit short selling in markets that are declining rapidly or whether some combination of those techniques should be employed.

Some financial advisers joined in the chorus of individuals calling for reinstatement of the uptick rule.

One of those who commented was Gloria Franz, a certified financial planner and president of Franz Wealth Management Inc. of Palm Desert, Calif., which manages $50 million.

“The rule should be intact,” she said.

“You could prevent people from being able to crush the price of a stock by having so many short sales,” Ms. Franz said. “They’re allowing way too much manipulation of the market.”

Another CFP who wrote a letter in favor of reinstating the rule was Kathy Ellis, a financial adviser in the Clarksville, Tenn., office of Raymond James Financial Services Inc. of St. Petersburg, Fla.

“The uptick rule should be reinstated permanently, and naked short selling should be eliminated,” she wrote in her June 16 comment letter. Abandoning the uptick rule “did more damage to investor confidence and net worth than just about anything else. In the midst of the crisis we faced last fall, there was manipulation of the markets and damage to some great companies,” Ms. Ellis wrote.

Not all advisers agree that the uptick rule should be brought back, however.

MORE EVALUATION

Noting that the SEC is taking action relatively soon after it issued its last rules involving short selling, Geoffrey Foisie, an investment manager at Shawbrook, a registered investment advisory firm in Alexandria, Va., that manages $5 million, said that more time is needed to evaluate the last rules issued.

He is chairman of the Industry Relations Committee of the National Association of Active Investment Managers, a Denver group representing about 130 members, who manage about $10 billion. Advisers in that group use short-selling techniques and funds that apply those techniques to try to reduce risk for clients.

The SEC proposal is so broad, it would impose barriers to short selling, Mr. Foisie said. “It threatens a lot of very standard risk-reduction techniques that many advisers use on behalf of individual clients around the country,” he said.

Groups that represent the mainstream brokerage industry and the hedge fund industry, which employs short-selling techniques, argued that the SEC proposal isn’t necessary. But they also hedged their bets by recommending modified versions of the proposal if the agency does move forward.

“We don’t think there is a need for these additional proposals,” said Stuart Kaswell, executive vice president, managing director and general counsel of the Managed Funds Association in Washington, which represents hedge funds.

The short-sale rules previously put in place by the SEC “have gone a long way to addressing concerns about improper naked short sales,” he said. Rather than instituting new rules, the SEC should vigorously enforce the rules already in place against illegal short selling, Mr. Kaswell said.

“We shouldn’t confuse short selling with market manipulation,” he said. “Short selling is a perfectly legitimate practice” that helps with hedging and price discovery, Mr. Kaswell said.

However, if the SEC decides to go further with short-selling restrictions, the MFA thinks that some combination of a modified uptick rule and circuit breaker “would be less problematic than others,” he said.

The Securities Industry and Financial Markets Association of New York and Washington said in its comment letter that the brokerage industry doesn’t think that reinstating the uptick rule is necessary. However, if the rule is reinstated, it should be narrowly tailored toward certain stocks that have tripped a circuit breakers, SIFMA said in its comment letter, which was signed by Ira Hammerman, the group’s general counsel.

DIFFERENT POSITION

In an unusual twist, NYSE Euronext of New York took a position differing from that of the brokerage industry. The company, which operates the New York Stock Exchange, said in its comment letter that the SEC should adopt the uptick rule. Doing so “could have a real impact on investors’ and issuers’ confidence in the equities market,” wrote Janet Kissane, its legal and corporate secretary.

But Patrick Byrne, chairman and chief executive of Overstock.com Inc., a Salt Lake City company that was on the SEC’s list for failure to deliver shorted stock from 2005 to 2007, said that the agency needs to adopt a requirement that shares actually be delivered before they can be shorted. Traders can find loopholes to get around the uptick rule, he said.

Adopting the uptick rule is “giving chicken soup to a cancer patient,” Mr. Byrne said. “It’s not going to help.”

E-mail Sara Hansard at [email protected].

Related Topics: Investment Company Institute (ICI), Securities and Exchange Commission, Securities Industry And Financial Markets Association (SIFMA), SIFMA