Former SEC head wants broader short-selling rules

Former Securities and Exchange Commission chairman Harvey Pitt participates in a roundtable discussion with other prior chairmen at the Council on Foreign Relations in New York, February 22, 2006. (REUTERS/Seth Wenig)

NEW YORK (Reuters) - Emergency action by regulators to rein in abusive short-selling in some large financial firms should be expanded to include the stocks of all public companies, a former top markets watchdog said on Monday.

Former Securities and Exchange Chairman Harvey Pitt said the SEC's emergency order that went into effect on Monday would help in "restoring legitimacy" to short-selling activity but should go even further.

"It's something that is very good of the SEC to have done," he told Reuters in an interview. "They can't do it across the board without going through formal rule making, but I do believe that they need to expedite that."

The SEC last week announced an emergency measure applying to stocks of 17 Wall Street firms, as well as U.S. housing finance companies Fannie Mae <FNM.N> and Freddie Mac <FRE.N> as a way to curb manipulative short selling. The emergency action can last up to 30 days.

The commission's move has drawn complaints, including from the banking industry, which wants the protections extended to all banking companies. The SEC has said it will consider rules to address short-selling issues across the entire stock market.

"Any cut less than the whole is going to be perceived ultimately as arbitrary," said Pitt, now head of financial consultant Kalorama Partners in Washington. "My own view is they couldn't do all of the public companies in one fell swoop. They made what appears to me to be a reasonable cut, and hopefully they will expand it across the board just as quickly as they are able to do it."

Short sellers borrow shares they think are poised to drop in price and then sell them, hoping the stock will fall and can be repurchased at a profit. A "naked" short occurs when an investor sells stock that has not yet been borrowed.

Under the emergency rule, a short seller must borrow the securities before executing the short sale. It also requires the investor to deliver the securities on the settlement date.

Pitt, who was SEC chairman from 2001 to 2003, said that after the September 11, 2001 attacks roiled financial markets, many companies urged the commission to outlaw short selling entirely. But he said the practice is ultimately helpful to ensuring markets run properly.

"Short selling provides extra liquidity in the market," he said. "The goal isn't to prevent short selling. The goal is to make sure that people who sell short will have the means to settle their trades when they are supposed to be settled."

(Editing by Brian Moss)