The Securities and Exchange Commission unveiled a series of proposals Wednesday that they plan to consider to regulate the practice of short selling in financial markets.

Prompted by intense interest in the practice, which involves borrowing shares to sell hoping to recoup them later at a lower price and has attracted some of the blame for the recent stock market collapse, the commissioners are hoping that academics, financial professionals and others will weigh in on the proposals before the commission decides what, if any, additional regulations should be implemented.

Clearly the process of short selling has both strong supporters and detractors, said SEC Chairwoman Mary Schapiro, speaking at a meeting of the Commission. Today we begin what will be a thoughtful, deliberative process to determine what is in the best interest of investors.

Schapiro noted that although some types of short selling may have been abused, the practice does fundamentally have benefits to the markets.

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, she said. The commission has long held the view that short selling provides the market with important benefits, including market liquidity and pricing efficiency.

She added, But short selling can also be used to illegally manipulate stock prices. . 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 or a security.

Moving forward, Schapiro said the commission is keenly aware of the need to balance the potential benefits of any new regulations with the costs to implement them.

Schapiro emphasized that that Wednesday's proposals should serve as a starting point for further discussion, noting that she plans to hold a roundtable discussion of the issue in early May.

Director of the SEC Division of Trading and Markets, Eric Sirri said the commission was considering a number of potential methods to regulate short selling, including several variations to modify the uptick rule that was suspended in 2007, as well as the concept of implementing a circuit breaker approach to suspend short selling of a security if it drops too precipitously.

Sirri added that the commission was seeking comments on many facets of the proposals, including whether to use a national bid average or some form of price test to trigger the uptick rule and whether, under the circuit breaker approach, a threshold of a 10 percent drop was appropriate as a trigger.

The commission, which voted unanimously to put the proposals out for public comment, did have a number of skeptics who questioned whether the costs of implementing the proposals might outweigh any potential benefits for the regulations.

Commissioner Kathleen Casey noted that the commission had only removed the price test regulations on short selling in 2007 after an eight-year study of the economics of the practice.

The study found no indication at the time that removing the price test was associated with increased market manipulation, she said. Over the course of the past two years, of course, market conditions have deteriorated dramatically with the onset of the global financial crisis. . The coincident timing of the commission's action has led some to draw a causal link between a repeal of the uptick rule and the extreme market volatility.

She added, I will be supporting the proposal being released today but will be guided by certain fundamental regulatory principles when deciding whether to support adoption of any type of short sell price test or circuit breaker. . Empirical evidence must guide regulatory decisions.

Another commissioner, Luis Aguilar, noted that even if the SEC is successful in developing regulations that truly stop the abuses of short selling, there would still be holes in the regulatory framework.

Without action by Congress, even if we were to adopt a rule restricting short sales, that rule would be at best only a partial solution, he said. For comprehensive short sell regulation to occur, the commission's authority must be expanded to cover all financial products that are economic substitutes for securities or for interest in security.

He added, Other products that are excluded from financial products regulation, such as reverse equity swaps and credit default swaps provide economically similar opportunities.

Such broadened authority is essential for the commission to provide consistent regulation across the capital markets, Aguilar said.

I urge the Congress to move with all deliberate speed to close the gaping holes in the commission's jurisdiction, he said.

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