The SEC and Naked Short Selling: The Continued Circumvention of the APA

The SEC has again used its emergency authority under Section 12(k)(2) to extend the ban on practices designed to restrict naked short selling.  Specifically, the order extended the requirement that short sellers deliver securities on the settlement date and the prohibition on false statements by short sellers about their broker-dealers deliver securities by the settlement date.   The justification for the emergency authority?

• 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 that could threaten fair and orderly markets. We intend the enhanced delivery requirements (temporary Rule 204T and elimination of the options market maker exception) imposed by the Order and the “naked” short selling antifraud rule to provide powerful disincentives to those who might otherwise exacerbate artificial price movements through “naked” short selling. Thus, we have determined in this environment that the standards under Section 12(k)(2) for extending the Order have been met. Accordingly, we have determined that extending the Order is in the public interest and necessary to maintain fair and orderly securities markets and for the protection of investors.
  

In other words, there was no real emergency, only a general concern about sudden fluctuations.  The SEC is, therefore, using its authority in Section 12(k)(2) to circumvent the Administrative Procedures Act.  The APA would require notice and comment before promulgation or, in the absence of notice and comment, a statement of good cause for avoiding the requirements.  The authority in Section 12(k)(2) was intended to allow intervention in the case of a genuine emergency, not sidestep the requirements of the APA.

Comments

[James Dexcente]

The order was implemented on a day when credit spreads were widening to unrecorded levels and at a pace so shocking that the numbers did not seem real and a day before downward market pressure would have put Morgan Stanley out of business, which would not have lowered those spreads. If that does not meet your standard of an emergency, I can't imagine what would. The original order was issued on September 19 and will expire on October 8, so it will have been in place for a mere 14 trading days. Hurry up and file a lawsuit challenging this outrageous usurpation of authority before it goes away less than three weeks after it was so cavalierly imposed.