By Cydney Posner

This morning, the SEC adopted new rules related to naked short selling. The actions will apply to the securities of all public companies (as opposed to just selected financial firms under the previous emergency order) and will become effective at on September 18, 2008.

Naked short selling can be abusive when the seller doesn't actually borrow the stock and then fails to deliver it to the buyer, allowing nefarious manipulative folks to force stock prices down.

The new T+3 rule, adopted on an interim final basis, requires that short sellers and their broker-dealers deliver securities by the close of business on the T+3 settlement date. If a short sale violates this close-out requirement, then any broker-dealer acting on the short seller’s behalf will be prohibited from further short sales in the same security unless the shares are not only located but also pre-borrowed. The prohibition on the broker-dealer’s activity applies not only to short sales for the particular naked short seller, but to all short sales for any customer. There is a 30-day comment period, after which the SEC expects further rulemaking.

The SEC also repealed the exception from the close-out requirement in Reg SHO for options market makers, with the result that options market makers will be subject to the same hard T+3 closeout requirements as all other market participants. This rule change will become effective five days after publication in the Federal Register.

The SEC also adopted Rule 10b-21, intended to address fraudulent short-selling transactions by making clear that those who deceive broker-dealers or any other market participants about their intention or ability to deliver securities in time for settlement are violating the law when they fail to deliver. This new rule is effective immediately.

Following is a link to the SEC's emergency order, which includes the new short sale rules.

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