U.S. Securities & Exchange Commission
SEC Seal
Home | Previous Page
U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Opening Statement on Proposed Amendments to Rule 105 of Regulation M under the Exchange Act


Chairman Christopher Cox

U.S. Securities and Exchange Commission

Washington, D.C.
December 4, 2006

Today we'll consider two rulemaking proposals from the Division of Market Regulation that arise out of the Commission's continuing review of our existing short sale regulations. The reason we're conducting this ongoing review is that we're hoping to better tailor our short sale regulations to the realities of today's markets. Our purpose is to tighten up the rules where that's needed, and to change or eliminate them where they no longer provide a benefit to investors or the markets.

To this end, last July the Commission proposed a rule to reduce persistent failures to deliver stock within the standard settlement period. The proposed rule will eliminate potential loopholes that were created by the grandfathering and the options market maker exceptions to the delivery requirements of Regulation SHO.

The first of the two recommendations from the Division of Market Regulation we'll consider today is a proposed change to Rule 105 of Regulation M. That rule governs short selling in connection with public offerings.

There is no question that short selling within proper bounds has legitimate benefits -- not least of which is facilitating price discovery. But short selling can also be abusive. Rule 105 addresses abusive short selling just prior to the pricing of a public offering.

This rule, and the entirety of Regulation M, of which it is a part, fosters a fundamental goal of the federal securities laws - the prevention of manipulation in securities offerings. Rather obviously, manipulative conduct prevents the market from functioning as an independent pricing mechanism. It can diminish offering proceeds to issuers. It can injure stockholders. And it undermines the integrity and fairness of the capital-raising process.

In its current form, Rule 105 prohibits a person who sells short just before an offering from covering that short sale using securities that were purchased in the offering. The rule is designed to prevent manipulative activity that can artificially depress market prices, and reduce offering proceeds. But there's ample evidence that the rule doesn't always work.

The Commission is aware of a significant level of non-compliance with Rule 105. During the last couple of years, we've had to bring a large number of enforcement actions against a proliferation of strategies that manipulators have developed to conceal their violations of the rule.

To address these concerns, we are today considering an amendment to Rule 105 that will establish a bright-line test for compliance. Instead of prohibiting a person who's made a short sale just before an offering from covering his or her short position with securities from the offering, the amendment would simply prohibit any short seller during the Rule 105 restricted period from purchasing any securities in the offering. Period.

In other words, it would eliminate the rule's covering component.

The purpose of this amendment is once and for all to put an end to the progression of schemes that have been engineered to camouflage covering activity that's already outlawed by Rule 105. It's our intention that this amendment will also streamline compliance with the Rule, and at the same time, facilitate our enforcement efforts.

So now I will turn it over to the Director of the Division of Market Regulation, Erik Sirri, who will give us a more detailed description of the proposal. And as I do, I want to take the opportunity to formally welcome Dr. Sirri back to the Commission, as this is his first open meeting since he began serving as Director in September.


Modified: 12/05/2006