Good Morning. This is an open meeting of the U.S. Securities and Exchange Commission on April 8, 2009.
Today, we are considering a recommendation from the Division of Trading and Markets that the Commission issue a release proposing several alternative rules concerning short selling.
In my short tenure as Chairman, the issue of short selling has undoubtedly resulted in more letters from investors, brokerage firms and exchanges, more inquiries from members of Congress, and more questions from reporters than any other topic. Even before I arrived at the SEC, I heard from hundreds of investors concerned about short selling. Clearly, the practice of short selling has both strong supporters and detractors. Today, we begin what will be a thoughtful, deliberative process to determine what is in the best interests of investors.
Short selling is generally defined as selling securities that you do not own or that you have borrowed, and attempting to purchase replacements at a lower price. Short selling is used to profit from an expected downward price movement, to provide liquidity in response to unanticipated demand, or to hedge the risk of an economic long position in the same security or in a related security.
The Commission has long held the view that short selling provides the market with important benefits, including market liquidity and pricing efficiency. But, short selling may also be used to illegally manipulate stock prices. One example is the "bear raid" where an equity security is sold short in an effort to drive down the price of the security by creating an imbalance of sell-side interest. In addition, unrestricted short selling can exacerbate a declining market in a security by increasing pressure from the sell-side, eliminating bids, and causing a further reduction in the price of a security by creating an appearance that the security price is falling for fundamental reasons, when the decline, or the speed of the decline, is in fact being driven by other factors.
In the past 18 months, we have seen every major stock market around the world experience steep declines and extreme volatility in securities prices. Although we are not aware of specific empirical evidence that the 2007 elimination of short sale price tests contributed to this volatility in the U.S. markets, many members of the public have come to associate short selling with that volatility, and with a loss of investor confidence.
The Commission is keenly aware of the need to balance the potential benefits of its proposed rules against the costs. This balance is particularly complex in the matter before us today. On the one hand, we have economic studies performed by our own Office of Economic Analysis, and others, which suggest that price test limitations on short selling do not — at least under the market conditions that were examined — drive prices downward or contribute to daily volatility. On the other hand, the condition of our market today is very different than the conditions studied during the Commission's May 2005 to August 2007 pilot period. Moreover, investors themselves are saying that they feel less confident in putting their capital into the markets without additional restrictions on short selling. These perceptions are difficult to quantify, yet we must endeavor to do so.
I believe that all arguments, both for and against the various forms of short sale restrictions that Erik Sirri (Director of the Division of Trading and Markets) will discuss in a few moments, should be considered and addressed in light of current market conditions and recent experience. It is important that we obtain informed public comment before determining whether or not to impose any short sale restrictions, and, if so, what those restrictions should be. Should the Commission approve the release of these proposals, public comment will be sought through the release. We also will hold a Commission Roundtable that we have tentatively scheduled for May 5. I urge all those within the sound of my voice to actively participate in the rulemaking process.
I would like to thank the staff of the Division of Trading and Markets for their extraordinary work on this matter, specifically Director Erik Sirri, Deputy Director James Brigagliano, Jo Anne Swindler, Josephine Tao, Victoria Crane, Joan Collopy, Christina Adams, Dan Gray, Stephen Williams, and Matthew Sparkes. I would also like to thank my colleagues in the Office of the General Counsel, specifically Meredith Mitchell, Jeffrey Singdahlsen, Janice Mitnick, Lori Price, and Debra Flynn, as well as in the Office of Economic Analysis, Stewart Mayhew, Amy Edwards, Tim McCormick and Chuck Dale, for their contributions and collaborative efforts. Finally, I would like to thank the other Commissioners and all of our counsels for their work and comments on the proposed rule.
Now I'll turn the meeting over to Erik Sirri, Director of the Division of Trading and Markets, to hear more about the Division's recommendation.
Before I turn the meeting over to Erik Sirri to hear more about the Division's recommendation, I want to take a moment to note that this is Erik's last Commission meeting. In several weeks, Erik will be leaving the Commission to return to Boston.
Erik, we all want to thank you for your service during an extraordinary time in our nation's economic history and for the sacrifices you have made to be here — most particularly over the past year. Your towering intellect, your calm stewardship during tumultuous times, your loyalty to the SEC and America's investors, and your extraordinary work ethic and good humor will be greatly missed by us all. Thank you for all you have done.