Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Wednesday, June 3, 2009

GAO Releases Report on Regulation SHO

The GAO today released a report on naked short selling: REGULATION SHO Recent Actions Appear to Have Initially Reduced Failures to Deliver, but More Industry Guidance Is Needed.

The GAO explains why it did this study:

The Securities and Exchange Commission (SEC) adopted Regulation SHO to, among other things, curb the potential for manipulative naked short selling in equity securities. Selling a security short without borrowing the securities needed to settle the trade within the standard 3-day period, can result in failures to deliver (FTD), and can be used to manipulate (drive down) the price of a security. To further address this concern, SEC recently issued an order amending Regulation SHO. This report (1) provides an overview of Regulation SHO and related SEC actions, (2) discusses regulators’ and market participants’ views on the effectiveness of the rule, and (3) analyzes regulators’ efforts to enforce the rule.
To address these objectives, GAO reviewed SEC rules and draft industry guidance, analyzed FTD data, reviewed SEC and self-regulatory organization (SRO) examinations, and interviewed SEC and SRO officials and market participants.

The GAO recommends the following:

GAO recommends that the SEC Chairman expedite the review and approval of the draft guidance and develop a process to respond to implementation issues that arise from temporary rules. SEC stated that it would consider addressing the intent of the draft guidance in the temporary rule and evaluate how it can further address implementation concerns raised by the industry.

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