Now that Fannie Mae and Freddie Mac shares have stabilized following a ban on certain kinds of short sellings of their stocks by the Securities Exchange Commission, the SEC plans to consider new rules to provide additional protections in the broader market of public companies.
The government order, which took effect July 21, was to expire at 11:59 p.m. EDT Tuesday. It applied not only to short selling of stocks at Fannie Mae and Freddie Mac but also at 17 large investment banks, including Charlotte-based Bank of America.
The SEC says its order helped prevent stock manipulation, and that regulators will be able to analyze data to gauge its effectiveness. But some experts say that may be difficult to determine.
The SEC instituted the emergency ban last month after a precipitous slide in the shares of Fannie and Freddie, the government-sponsored companies that together hold or guarantee more than $5 trillion in home mortgages – nearly half the U.S. total. The agency plans to consider new rules meant to provide additional safeguards against abusive “naked” short-selling in the broader market of public companies, while allowing legitimate short-selling. That prospect has raised concern among advocates for hedge funds and private investment companies, which protested the SEC's extension of its order.
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“What is … more significant is what long-term rules the SEC plans to propose,” Gary Distell, a partner in the financial services practice at law firm Katten Muchin Rosenman in New York, said in an e-mail message.
An expansion of the order into a marketwide rule “would force firms to spend money to automate their systems and would add costs to both brokers and customers in the form of increased borrowers' fees,” said Distell, formerly an attorney at the defunct investment firm Bear, Stearns & Co.
Short sellers bet that a stock's price will fall so that they can profit from it. They borrow shares of the stock and sell them. If the price drops, they buy cheaper actual shares to cover the borrowed ones, pocketing the difference.
SEC Chairman Christopher Cox has said the order helped prevent potential “distort and short” manipulation of stocks, which occurs when rumors and misinformation are used to drive down the price of a stock that has been sold short.
The shares of Fannie, Freddie and the 17 other financial companies generally have gained since the SEC's initial announcement on July 15.
But shares of regional banks and investment firms nationwide have continued to be targeted, industry advocates say.
Fannie Mae shares fell 26 cents, or 3.1 percent, to $8.14 in afternoon trading, while Freddie Mac dipped 3 cents to $5.57.
Shares of major investment banks covered by the SEC order also were lower. Bank of America Corp. shares fell $1.42, or 4.3 percent, to $31.96.