SEC Looks At Reinstating "Uptick Rule"

Dramatic changes in the global economy may merit restoring a federal rule aimed at preventing a massive plunge in a stock price caused by a rush of short sellers, the head of the Securities and Exchange Commission said Wednesday.

SEC Chairman Mary Schapiro said the agency "hopefully" will propose for public comment next month reinstatement of the so-called uptick rule.

On another crisis-related issue - an industry push to scrap the accounting rule that forces banks to value assets at current prices - Schapiro said the SEC wants revisions that would continue to provide the transparency investors need without excessively hurting banks.

The uptick rule, which the SEC eliminated in 2007, requires short sellers - those who try to profit from a stock's decline by selling borrowed shares - to sell at a price above a stock's most recent trading price.

"The world has changed rather dramatically in the past year," Schapiro told a House Appropriations subcommittee. "Hopefully we'll get our proposal out in April."

The SEC could reinstate the rule at some time after the public comment period. The SEC also will consider "other alternatives" related to short-selling, Schapiro said.

As the market has plunged, pressure has been building from some in Congress for the SEC to reinstate the uptick rule, which was established in 1938 during the Depression in the wake of the 1929 market crash.

Short-sellers bet against a stock. The practice, which is legal and widely used on Wall Street, involves borrowing a company's shares, selling them, and then buying them when the stock falls and returning them to the lender. The short-seller pockets the difference in price.

If a company stock was trading at $50 and a trader anticipated that it would decline, he could borrow shares but couldn't sell them until after the stock traded higher, or "ticked up," to at least $50.01.

On Tuesday, Steve Forbes, president and CEO of Forbes Inc., told CBS' The Early Show that reinstating the uptick rule is just one of the changes the Obama administration should seek as they try to stabilize the country's economy.

Schapiro said a multitude of investors, both large financial institutions and individuals, also have been pushing for the rule to be restored.

Schapiro appeared before the panel to make the case for the agency's budget request of $1.03 billion for the fiscal year starting in October, an increase of 9 percent from fiscal 2009.

She also was asked about the push by the banking industry and some lawmakers to scrap the mark-to-market accounting rule that forces banks to value assets at current prices, as relief for those institutions in the financial crisis.

"I have a lot of sympathy for" that view, Schapiro said, adding that "it is not our intention that these assets be written down to zero ... or to fire-sale prices."

Still, the SEC doesn't advocate suspending the rule. Schapiro said it is "pushing" the Financial Accounting Standards Board to come up with new guidance for companies that will provide "a better application" for determining what assets are worth.

On the issue of short-selling, proponents of restoring the uptick rule say its elimination helped fuel the volatility on Wall Street amid the financial crisis and the pounding of company stocks targeted by market speculators.

Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, on Tuesday said he was hopeful the rule "will be restored within a month." Senate Banking Committee Chairman Christopher Dodd, D-Conn., agreed that bringing back the rule was necessary.

Rep. Gary Ackerman, D-N.Y., has proposed legislation that would order the SEC to reinstate the rule.

The agency last fall adopted measures aimed at imposing protections against abusive "naked" short-selling. That occurs when sellers don't even borrow the shares before selling them, and then look to cover positions immediately after the sale.

A test by the SEC in 2007, removing the uptick rule for one-third of the stocks in the Russell 3000 index, found it could be eliminated without causing significant harm.

The analysis by the SEC provided "clear economic support for our recommendation today to remove all current short-sale price test restrictions," Erik Sirri, the head of the SEC's market regulation division, said at a public meeting of the commissioners in June 2007.