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Uptick Rule

Bernanke Says There May Be Benefit to Uptick Rule

Federal Reserve Chairman Ben S. Bernanke said there may be a benefit in resurrecting a rule that restricts short-selling stocks when share prices are falling amid the current bear market.

“In the kind of environment we have seen more recently” the so-called uptick rule “might have had some benefit,” Bernanke said in testimony before the House Financial Services Committee today. The rule, scrapped by the U.S. Securities and Exchange Commission in 2007, barred investors from betting against a stock until it sells at a higher price than the preceding trade.

Bernanke’s comments may give credence to lawmakers such as U.S. Representative Gary Ackerman, a New York Democrat, who blamed the rule’s elimination for triggering attacks on financial stocks. The Standard & Poor’s 500 Index has tumbled 50 percent since the SEC dropped the uptick rule 16 months ago. New SEC Chairman Mary Schapiro said in January she may resurrect the provision.

The SEC approved the rule in 1938 to prevent bear raids on companies. The agency eliminated the regulation after studying its effect on share prices and determining it was no longer relevant in markets dominated by fast-paced electronic trading.

Executives at UBS AG, Deutsche Bank AG and Knight Capital Group Inc. said in December that bringing back the rule wouldn’t reduce volatility in stock prices.

Studies by the SEC’s division of Trading and Markets also concluded that operational issues at brokerages would make it “impossible” to reinstate the rule, according to a Jan. 20 letter that former SEC Chairman Christopher Cox sent to Ackerman.

Cox’s Effort

Cox, in the letter, said he tried to introduce a modified provision that would allow traders to short a company only at a price that was a few cents higher than the best bid for the stock. Cox said he lacked a majority of votes among his fellow SEC commissioners in “proposing some modernized variant” of the uptick rule.

Regulators from Washington to London last year cracked down on short selling, in which traders borrow shares and then sell them in the hope of profiting by buying the stock back later for a lower price.

The SEC temporarily banned all bets that financial stocks would fall and is forcing hedge funds to reveal to the agency stocks they’ve sold short. In London, a Financial Services Authority prohibition on shorting 34 U.K. financial companies lapsed last month.

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