The Securities and Exchange Commission took action on rules aimed at curbing abusive short selling, making final two rules it had adopted temporarily and publishing an interim final rule for comment.The SEC had used its emergency authority to adopt temporary rules banning short-selling at all companies in mid-September in an attempt to shore up investor confidence.

As promised, the SEC made final the amendments to Regulation SHO that eliminate the options market maker exception to the rule’s close-out requirement.

The 59-page final rule, which takes effect Oct. 17, aims to further reduce the number of persistent fails to deliver in certain equity securities. The Commission is also providing guidance regarding bona fide market-making activities for purposes of the market maker exception to Regulation SHO’s locate requirement.

The SEC also made final Exchange Act Rule 10b-21, the antifraud rule to address fails to deliver securities associated with “naked” short selling. The 41-page final rule, also effective Oct. 17, makes it clear that short sellers who lie about their intention or ability to deliver securities in time for settlement are violating the law when they fail to deliver.

The Commission adopted an interim final temporary rule, Rule 204T, to address abusive “naked” short selling in all equity securities.

Regulators and companies have blamed short sellers for contributing to the financial crisis by spreading false rumors and selling stock short to profit. Short sellers, betting that a company’s stock price will fall, borrow shares and sell them and profit by buying cheaper shares to cover the borrowed ones, pocketing the difference. In a naked short transaction, the seller doesn’t actually borrow the stock, driving prices down lower than legitimate short selling.

Rule 240T requires participants of a clearing agency registered with the SEC to deliver securities by settlement date, or to immediately purchase or borrow securities to close out the fail-to-deliver position no later than the beginning of regular trading hours on the settlement day following the day the fail-to-deliver occurred.

Participants that don’t comply with the close-out requirement, and any broker-dealer from which they receive trades for clearance and settlement, won't be able to short sell the security, either for themselves or for the account of another, unless they have previously arranged to borrow or borrowed the security, until the fail-to-deliver position is closed out.

The SEC noted that latest version of Rule 204T includes some modifications to address operational and technical concerns resulting from the requirements of the temporary rule as adopted in the September Emergency Order.

The rule is effective Oct. 17, 2008, until July 31, 2009. Comments on the 93-page proposing release are due 60 days after publication in the Federal Register. The SEC said it intends to respond to comments received in a subsequent release.

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