SEC Still Examining Short Selling, Hedge Fund Report Reveals

by Philip Morton, Investors Offshore.com

08 October 2003

Although the US Securities and Exchange Commission is focusing its attention on other aspects of hedge fund behaviour at the moment, a long-running probe into short selling is still ongoing, according to a Dow Jones Newswires report.

The news service revealed that "tucked away in footnote 269" of the recently released hedge fund report is a statement to the effect that the SEC is currently considering introducing new rules that would target "areas of abuse", as well as easing restrictions "where they are unnecessary or inhibit beneficial short selling".

Although short selling by hedge funds serves several useful purposes, including improving market liquidity and helping to expose corporate fraud via the search for overvalued stocks, the SEC is also concerned that it can be used as a tool to excessively manipulate the market.

One example of this given by the regulator is a 'bear raid', where a stock is sold short in an effort to drive down the price of the security by creating an imbalance of sell-side interest.

Speaking to Dow Jones with regard to the possibility of moves on short selling separate from the current hedge fund probe, president of the Managed Funds Association, John G. Gaine announced that: "The short selling issue has a life of its own," and observed that the two examinations are being conducted by different staff within the SEC.

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