SEC Proposes New Antifraud Rule to Combat "Abusive" Naked Short Selling
Client Newsflash

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At an open meeting on March 4, 2008, the Securities and Exchange Commission (the “Commission”) voted to propose a new antifraud rule intended to proscribe abusive naked short selling practices. If adopted, proposed Rule 10b-21 (the “Proposed Rule”) would prohibit short sellers from misrepresenting their ability or intent to deliver securities to cover short sales by the settlement date where that deception results in a failure to deliver. Examples of the types of prohibited activities would include: (i) misrepresenting ownership of securities; (ii) misrepresenting having obtained a “locate” before effecting the short sale; and (iii) marking a sale ticket “long” when the seller does not actually own the security. The Proposed Rule would cover broker-dealers acting for their own accounts, but market makers engaging in normal market-making activity would not be subject to the Proposed Rule.