SEC proposes tightening of short-selling rules

WASHINGTON — The Securities and Exchange Commission, responding to complaints that its rules on “naked” short-selling need to be tightened, on Wednesday took a step toward closing some gaps left open by short-sale rules adopted in 2004.

The commission unanimously voted to seek public comment on changes to its regulations. Among the most significant proposals: eliminating a “grandfather” exception for some hard-to-borrow stocks.

“There are still persistent failures to deliver in the marketplace, and some of that is undoubtedly attributable to loopholes in our rules,” SEC Chairman Christopher Cox told reporters after the meeting. “Today, what we’re moving to do is to close those loopholes. We’re going to take now the time to see what the marketplace thinks of this.”

Short-selling is a legitimate practice that involves selling borrowed shares in a bet that prices will fall. Traders profit by buying back the shares at a lower price and pocketing the difference.

Naked short-selling is generally forbidden and occurs when a trader doesn’t borrow or replace shares sold short. Regulation SHO sought to curb the practice by requiring brokers to locate shares to borrow before executing customer short sales.