Red Flag Rule Delay

Posted on October 24, 2008 by Jack J. Gravelle

The FTC has granted a six-month delay for enforcement of its Red Flag Rules, previously discussed here. Note that the other agencies responsible for the rules, including the National Credit Union Administration, the Federal Deposit Insurance Corporation, the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision did not issue a similar extension. Therefore, financial institutions must still comply by November 1, 2008.

The extension highlights that several entities potentially affected by the Red Flag Rules are not ready to comply. Affected entities include car dealers, mortgage brokers, utilities companies, and any entity that regularly extends credit for accounts used mostly for personal, family, or household purposes.

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Four New Short-Selling Rules

Posted on October 16, 2008 by Jack J. Gravelle

The SEC has had four new final rule releases in the last two days, all of which deal with short selling:

1. Release 34-58785 requires certain institutional investment managers to file their short sales and positions of certain securities on Form SH. The disclosures will not be available to the public, for competitive reasons, but will be used by the SEC to measure short sales and evaluate short-selling activities. The rule is effective until August 1, 2009.

2. Release 34-58773 adopts Rule 204T of Regulation SHO and is designed to discourage already-prohibited “naked” short-selling activities. When a “fail to deliver” occurs in a short-selling transaction, the new rule requires that shorted securities be purchased or borrowed to close out the fail to deliver position by the time trading begins on the day following the failure to deliver. The rule should discourage the same shares being lent to different short sellers resulting in shares being sold that do not exist. The rule is effective until July 31, 2009.

3. Release 34-58774 adopts Rule 10b-21, the naked short selling antifraud rule. It specifically targets short sellers who lie about (a) whether they possess the shares they will short or (b) their intention to deliver securities for settlement. The rule is designed to prevent short sellers from selling short when they know beforehand that they plan on failing to deliver the shorted securities.

4. Finally, Release 34-58775 is yet another rule designed to stop fails to deliver, this time in the context of certain hedging activities of options market makers. Apparently the SEC feels certain options market makers should no longer be excepted from rules designed to prevent fails to deliver.
 

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Ban on Short Selling Financial Institution Stock Set to Expire

Posted on October 6, 2008 by Jack J. Gravelle

Following the signing of the Emergency Economic Stabilization Act of 2008 on Friday, the SEC issued a statement that the ban on short selling financial institution stock will expire late on Wednesday night.  Some fear the lifting of the ban will cause financial institution stock to decline even more.  As evidence they point to the bankruptcy of Lehman Brothers following the lifting of a similar short-selling ban earlier this year.

If the ban is working to shore up prices, then presumably lifting the ban, absent other factors, will cause prices to drop.  One big factor to consider is the effect of the bailout.  The SEC has said all along that it would keep the ban in place until a bailout was in place, but the bailout has not garnered as much investor confidence as was expected (as evident by how the markets performed today).

The SEC may have to extend the ban until investors no longer fear a run on bank stock, whenever that may be.  Another factor that points toward extending the ban is that investors with cash are waiting to see if the lifting of the ban causes stocks to fall even more before they buy in.  Conversely, if the ban is not lifted, these same investors continue to wait.
 

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