More Muscle Behind Regulation SHO? Short Selling and the Regulation of Stock Borrowing Programs

Recent amendments to SEC Regulation SHO (originally adopted in 2004) have implemented hard close requirements for fails to deliver which often follow the naked short selling of stock (selling short without having borrowed the shares). Naked short selling is frequently a central plank in a program designed to manipulate (illegally) securities prices. Hard close requirements have cut the fails to deliver by 50 percent, or more, from considerably over 1 billion shares per day. Those requirements have also created, however, before the fact, added impetus for the borrowing of stock. Recently, a middleman for a stock borrowing agency was convicted of securities fraud in the Eastern District of New York. By and large, though, regulation of stock borrowing and stock borrowing programs are unregulated, with the result that individual investors who lend shares of stock receive little or no disclosure and are often pigeons waiting to be plucked by short sellers and others. This article advocates regulation by the SEC of stock borrowing programs. Alternatively, the article argues that under existing law, stock borrowing programs and participation in them are investment contracts, and therefore securities. The ramification is that as a matter of common law stock lenders are entitled to full and fair disclosure by those who offer to borrow, or do borrow, shares