Chapter 4 - Regulating Short Sales in the 21st Century

Abstract

This chapter provides an overview of how the short selling of securities is regulated by the US Securities and Exchange Commission (SEC). Short selling is regulated under the SEC's authority to prohibit fraud and insider trading and requires disclosures of positions in publicly traded securities by institutional investment managers. Short sale regulation is also a product of rules that have the goal of preventing market manipulation that artificially depresses stock prices or results in or exacerbates significant price declines. Existing regulation of short sales prohibits any party from short selling stocks that display significant price declines and, consistent with the SEC's approach toward self-regulation, requires private “trading centers” to implement and enforce the regulation. Several transactions are exempt from the regulation, and the SEC has reserved the authority to make additional exemptions. Current short sale regulation is a result of the Dodd–Frank Act of 2010 and a flurry of temporary and experimental SEC rule making during the financial crisis of 2008. These changes had its roots in the June 2007 repeal of short sale price restrictions, which were the first significant change to short sale regulations since their inception in 1938. However, market developments, differences in opinion among commissioners, an extended period of share price volatility or stability, and continued governmental and academic research into the impact of short selling and its regulation are all likely to cause changes to any particular short sale regime.