SEC extends short sale ban to give Congress time on rescue

NEW YORK -- FINANCIAL/SEC-EXTENSION (UPDATE 1):UPDATE 1-SEC extends short sale ban to give Congress time

The Securities and Exchange Commission approved up to a two-week extension of its ban on short sales of stocks in more than 900 financial firms to "allow time for completion of work" on legislation to revive the battered U.S. financial system.

"We have carefully reevaluated the current state of the markets and we remain concerned about the potential of sudden and excessive fluctuations of securities prices generally and disruption in the functioning of the securities markets," the SEC said Wednesday night, as the Senate approved a revised $700 billion financial bailout bill.

The agency said the ban, issued Sept. 19 and originally scheduled to expire Thursday night, would now expire three trading days after final approval of the bailout legislation, but no later than Oct. 17.

A second rule in which the SEC ordered hedge funds and other institutional money managers to disclose their stock-shorting positions to the agency will also expire Oct. 17. However, the SEC said it intends to make that rule permanent.

The agency said its previously announced plan to publicly disclose those short positions — a move opposed by hedge funds and other big money managers — would not be enacted for at least the duration of the extension.

It is legal for a trader to sell short by borrowing shares and selling them in the hope of profiting by replacing the borrowed shares with equivalents bought later in the market at a lower price. But it is illegal to spread misinformation about a company to try to drive down a firm's share price while short-selling the company's stock.

It is also illegal to short-sell stock without actually borrowing shares, a practice known as naked shorting.

While stressing that short selling often contributes to proper valuation of stocks and mitigates market bubbles, the SEC warned that the tactic "can be used in a downward manipulation whereby a manipulator sells the shares of a company short and then spreads lies about a company's negative prospects."