Hedge fund managers and other short sellers will have to continue to work around an emergency SEC rule that prohibits short selling of more than 800 banks and related financial companies — but the prospect of a permanent ban has the industry up in arms.
Hedge fund managers and other short sellers will have to continue to work around an emergency SEC rule that prohibits short selling of more than 800 banks and related financial companies — but the prospect of a permanent ban has the industry up in arms.
The short-selling ban — which was imposed Sept. 19 and was originally scheduled to expire last Thursday — was extended to last at least three business days after Friday's passage of the $700 billion federal bailout plan.
According to a Securities and Exchange Commission report released late last Wednesday, the ban could be extended to Oct. 17.
Meanwhile, the SEC has revised its ruling on the new Form SH, requiring money managers to file weekly reports of their short positions.
While that rule is likely to stay in place indefinitely, the SEC has abandoned its plans to make the respective short positions available to the public two weeks after each filing.
That public disclosure would have been akin to "making Colonel Sanders give Popeye's their chicken recipe," said Richard Baker, president and chief executive of the Managed Funds Association in Washington.
The first filing deadline since both short-selling rules were introduced on Sept. 19 was last Tuesday, at which time 1,700 money managers reported their short positions, according to the SEC.
The $2 trillion hedge fund industry, as represented by the MFA, has taken serious umbrage at what it sees as a knee-jerk reaction and a direct assault on the short-selling strategy, which is defined as the process of borrowing stocks to be sold and repurchased at a lower price, for a profit.
"There are lots of reasons for shorts to be in place and banning shorts is [taking] liquidity out of the market," Mr. Baker said.
The hedge fund industry has cried foul and pointed out flaws in the regulatory strategy.
"We believe the [SEC] orders may run counter to their intended objectives by exacerbating fluctuations in the affected securities' prices and disrupting the functioning of fair, orderly markets," Mr. Baker said.
The rationale behind the ban has also been lost on some financial advisers.
"If the short-selling ban was so helpful, then what the hell happened [last] Monday [when the Dow Jones Industrial Average lost a record 777 points]?" asked Thomas Orecchio, principal at Greenbaum and Orecchio Inc. in Old Tappan, N.J., which manages $500 million in assets.
The industrials rebounded the next day with a 485-point gain.
"I have less of a problem with a temporary ban on short selling than I do with making the ban a [longer-term] part of the bailout," Mr. Orecchio added.
"Right now, people withdrawing their money are doing more damage to banks than short selling," he said.
Even though making short-position information available to the public has been taken off the table, the hedge fund industry is still likely to fight Form SH, if for no other reason than the arduous nature of the weekly filings.
Hedge fund manager Larry Eiben, chief operating officer of TFS Capital LLC in Richmond, Va., described the Form SH filing requirements as "very onerous and a massive undertaking."
Mr. Eiben, whose firm manages $420 million in assets, is not subject to the Form SH requirements because its short positions don't meet the parameters of being equal to $1 million worth of a single stock or 0.25% of the total market capitalization of a single company.
"Basically, it's another way for the government to say 'cut down on the short selling for a while,'" he said.
E-mail Jeff Benjamin at jbenjamin@investmentnews.com.
