The emergency measure meant to protect shares of 19 financial companies from abusive short-selling is set to expire tomorrow. The SEC has said that it will not extend the rule. Instead, it plans to propose a new rules on short-selling that will apply across all US equities markets. But that rule could be months in the offing.
It’s not clear what effect the emergency rule had. Some market participants say the requirement that short sellers manually locate and pre-borrow shares slowed down short trading. Others say that shares in every one of the 19 protected companies–including mortgage giants Fannie Mae and Freddie Mac and Lehman Brothers–were widely available for borrowing, and that any slow down was minimal.
The new rules could take a variety of forms. A reintroduction of the old uptick rule, which required short sellers to wait for stocks to move higher before they added a short position, is unlikely. But some say a modified uptick rule, essentially a circuit breaker that would prohibit shorts if a stock was rapidly declining, may be introduced. Other possibilities include mandatory disclosure of short positions and the application of some version of the emergency rule to all shares traded on US exchanges.
One dark-horse possibility emerged recently in Pakistan, where some investors recently urged that a ban on all stock declines be adopted. Freddie Mac chief executive Richard Syron could not be reached for comment.
Is The SEC Staff Out Of Control?
By John Carney
Universal Healthcare Proxy Rulings May Indicate The Lunatics Are Running The Asylum
Is the staff of the Securities and Exchange Commission pursuing its own activist agenda without adequate supervision by agency heads?
Many SEC observers were caught off guard yesterday when the New York Times broke the news that the SEC has been requiring major US corporations to include shareholder proposals supporting universal healthcare in official proxy materials. This seemed to be a departure from many recent decisions by the SEC’s commissioners restraining or rejecting innovative regulations favored by special interest shareholder groups. Why had the SEC suddenly embraced this radical rule favoring proposals on political issues only indirectly tied to corporate governance?
The answer may lie in the disarray at the top ranks of the SEC.
More on the SEC staff’s activist lark after the jump.
President Bush nominated Washington University Law School professor Troy Paredes to the Securities and Exchange Commission yesterday. If confirmed by the Senate, Paredes would replace DealBreaker’s favorite SEC commissioner Paul Atkins. We’d feared that the loss of Atkins, who’s been a consistent critic excessive financial regulation, would be a blow to the SEC. But Paredes looks like a strong successor to Atkins.
Paredes, who is 37 years old, teaches classes on corporations, securities regulation, corporate finance, and the theory of the firm at the St. Louis school. His published work has focused on the political and psychological causes of excessive financial market regulation, as well as the psychology of corporate decision making. The choice has been endorsed by Larry Ribstein, a professor at the University of Illinois College of Law and the author of the Ideoblog.
Paredes has written that the SEC’s decision to require hedge fund managers to register with the commission—a policy which was later struck down by the federal courts—may have been a reaction to the accounting scandals of the late nineties. The commission “did not want to get caught flat-footed and criticized again” after taking a beating from following the collapse of Enron and WorldCom. In an era when everyone seems to have their own pet plan of new regulations following the subprime disaster, this sounds like exactly the kind of approach we need on the SEC.
We fully expect that Paredes will come into criticism from people whose tacit assumption is that only enthusiasts for regulatory growth should be placed in positions of power at regulatory agencies. Bush is right to ignore this question begging approach by appointing an insightful critic.
Bush Nominates Law Professor Troy Paredes To SEC [Dow Jones Newswires]
The Securities and Exchange Commission is on a three case losing streak in its attempts to sue hedge-fund managers who close out short positions with stock bought through private placements.
Since October, judges in three cases rejected the U.S. Securities and Exchange Commission’s argument that closing out short positions with shares bought in private offerings is illegal. The SEC sued hedge-fund managers that engaged in the transactions.
“If the SEC losses are ultimately upheld, they’re going to result in funds’ being able to short more easily,” said Steven Siesser, a partner at law firm Lowenstein Sandler in New York who counsels placement agents and investors in sales of “private investment in public equity,” or PIPEs.
The federal agency also argues in the three cases that the managers violated insider-trading laws by shorting stock before a private sale was announced. Prosecutors make a similar claim in a criminal case.
It’s vaguely reassuring to see courts discovering that there may actually be limits to insider trading laws.
SEC Struggles to Pin Insider Trading on Fund Sales [Bloomberg]
Implementing the “internal controls” provisions of Sarbanes-Oxley has been immensely costly for publicly held businesses in the United States while the concrete evidence of it’s benefits has been scant. By some estimates, the direct costs of implementation are as high as $35 billion each year. And the real costs might be even higher. Nonetheless, because non-compliance with Section 404 can be disastrous for a public company due to regulatory sanctions and massive stock declines, companies continue to spend and spend to implement Section 404.
It’s clear the regulation is broken but we’re unlikely to be rid of it any time soon. The regulation’s defenders insist the regulation is helping us avoid the kind of accounting scandals we saw in the late nineties, and that government enforcement of the regulation is necessary because the market can’t be trusted to regulate itself. There’s some truth in this argument: the market won’t necessarily price internal controls over financial accounting at the price regulators think is appropriate, much less at some level that optimizes efficiency over the long term.
But it’s a half truth because it rests on a double standard. It insists we focus on the reality of imperfect markets but not notice the reality of imperfect government. There’s no evidence that the government has arrived at the right level of internal controls, or that it can efficiently police this regulation.
Yesterday we got a reminder of the reality of imperfect government when the General Accounting Office declared that the Securities and Exchange Commission had a material weakness in the internal controls over its own financial reporting. This is a serious blow to the SEC’s credibility, which avoided getting tagged with the “material weakness” finding last year only by promising to improve things. But things haven’t improved. Indeed, they may now be worse.
Fortunately for the SEC, there is no market accountability for government agencies. You can’t short the SEC, and lawmakers are unlikely to penalize the commission by denying it authority or funds. Indeed, we expect that this GAO finding will somehow become an argument for the SEC to get more funding. That’s the way it works in our nation’s capital: failure is only evidence of the need to get more of the people’s treasure.
And for those of you who miss the irony of this we’ll make it clear: the SEC is the agency charged with enforcing Section 404 on public companies. Of course, no government agency has ever let the glass facades of its own house prevent it from throwing stones.
SEC Flunks Internal Controls Audit [CFO.com]
The myth of shareholder democracy holds a powerful sway over public opinion. The comments we’ve received on our two articles on the proxy access rules now up for comment at the Securities and Exchange Commission demonstrate that people continue to be bedeviled by the misguided analogy with democratic political regimes.
One of the mental levers the mythologists of shareholder democracy use to make their case is a kind of demonology of corporate managers. Although corporate insiders, especially chief executives, have demonstrably lost power in recent years to shareholders and independent directors while the risks of running a public company have increased, the continued climb of executive pay seems to have convinced many that executives are somehow fleecing shareholders. The evidence for this is underwhelming, however. While bad characters exist in executive suites and board rooms, they hardly justify enacting wide-ranging corporate governance reforms. Bad CEOs make bad law.
It’s important to remember that our system of corporate governance has generated enormous wealth for shareholders and workers over the years, bringing us unprecedented prosperity. We should exercise caution when seeking major reforms, especially when the costs of those reforms will be difficult to measure and the reforms will be next to impossible to reverse. By creating a uniform, national rule for proxy access, the proposed reforms would shut off jurisdictional competition and experimentation between the states. Worse, the proxy access reform is clearly viewed by many of its proponents as a first step in what they view as a revolution in corporate governance. There will be more to come. The proxy access reforms are precedent not a final resting place.
Some of the most thoughtful criticism of our first essay came from Beth Young, who I believe is the author of the Shareholder Proposal Handbook and a senior research associate at the Corporate Library.
We rough up Young’s objections to our articles after the jump.