The SEC, the Ban on Short Sales, and A Vote of No Confidence in the Efficient Market: An Unprecedented and Possibly Unauthorized Action (Part 2)

We have wondered whether the SEC had the authority under Section 12(k)(2) of the Exchange Act to take the extraordinary step of banning short sales for ten days in 799 companies. The authority was given to the SEC back in the Market Reform Act of 1990. The Act was passed in the aftermath of the substantial drop in share prices that occurred in October 1987. In considering the Commission's authority, we took a look at some of the legislative history on the provision. The Senate Report noted that emergency actions by the Commission:

• might include, but would not be limited to, the ability to alter, supplement, suspend or impose requirements or restrictions with respect to hours of trading, position limits, and clearance and settlement.

 THE MARKET REFORM ACT OF 1990,REPORT OF THE COMMITTEE ON BANKING, HOUSING,AND URBAN AFFAIRS, UNITED STATES SENATE TO ACCOMPANY S. 648,101ST CONGRESS, 2d Session 101-300 (1990). While the list wasn't exclusive, it contained nothing like the broad authority to stop all short selling. Moreover, the legislative history suggested that the broader the exercise of the authority, the shorter the duration of the restrictions.

• the actions should be tailored to the specifics of a particular market event. For example, some emergency measures would be necessary only for very short periods, perhaps hours or minutes. However, other matters, such as those relating to hours of business and clearance and settlement, might be put in place for longer periods in order to be effective.

The current ban on short selling was put in place for ten days, with the agency holding out the prospect of an even longer period. In other words, it is much longer and much wider in scope than what the legislative history seemed to suggest.