It seems like September 2008 all over again for short sellers.

Short selling became so problematic in fall 2008 that the Securities and Exchange Commission, acting in concert with the United Kingdom's Financial Services Authority, placed a temporary ban on short selling in an effort to "protect the integrity and quality of the securities market and strengthen investor confidence." Its announcement came four days after the collapse of Lehman Brothers, and one day after New York Attorney General Andrew Cuomo announced his own investigation of the practice.

This week, in an effort to boost confidence in the market, the SEC ruled in a 3-2 vote to place restrictions on short-selling, the controversial trading practice of betting on a stock's decline. The decision comes as an entrenched Washington struggles to reform the broader financial system.

Short-selling has been a contentious issue since the onset of the financial crisis. Many on Wall Street and in Washington view the practice as fueling the decline of already pressured stocks, and in some cases leading to their eventual demise.

Much of the controversy isn't focused on short-selling itself, but the activity surrounding it, namely the spread of false rumors by short-sellers in the hopes of profitting when the stock sinks.

Hoping to learn from history, Wednesday's ruling was tailored to restrict betting on a stock's decline when it experiences "significant downward price pressure". Specifically, the SEC adopted an "alternative" uptick rule, prohibiting short-selling when a stock has fallen more than 10 points in a single trading session.

An uptick rule requires that every short transaction be entered at a price that was higher than the price of the previous trade. Developed in the wake of the Great Depression, the SEC tossed out the provision in 2007, just before the financial crisis took hold, on the belief it was no longer effective.

"The rule is designed to preserve investor confidence and promote market efficiency, recognizing short selling can potentially have both a beneficial and a harmful impact on the market," SEC Chairman Mary L. Schapiro said Wednesday. "It is important for the Commission and the markets to have in place a measure that creates certainty about how trading restrictions will operate during periods of stress and volatility."

The SEC's two dissenting votes came from its two Republican members, who argued against it on free-market grounds, adding that it would ultimately prove costly to investors. The new rule doesn't take effect for another 60 days, and exchanges have another six months before they have to comply.

Meanwhile, in a separate vote, the commissioners unanimously supported plans to create global accounting standards. The SEC hopes to see the convergence of the U.S. Generally Accepted Accounting Principals and the International Financial Reporting Standards.


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