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Hedge Fund Groups Urge SEC to Let `Naked\' Short-Sale Ban Expire

Date: Tuesday, July 22, 2008
Author: Edgar Ortega, Bloomberg

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Two hedge fund groups are urging U.S. regulators to refrain from renewing beyond next week an emergency rule to curb certain short sales in shares of Fannie Mae, Freddie Mac and 17 investment banks.

The Securities and Exchange Commission should avoid extending the rule past its expiration July 29 or expanding the order to include additional companies, the Managed Funds Association and the Coalition of Private Investment Companies wrote yesterday to the Washington-based agency.

The SEC last week imposed extra limits on ``naked'' short sales of stock in 19 companies. Commission Chairman Christopher Cox said the action was aimed at bolstering confidence in companies that underpin the mortgage-lending market and preventing manipulation of their stock. The rule may be extended for a total of 30 calendar days beyond next week's expiration.

``We urge the commission to allow the emergency order to expire and to fully study and explore all the potential and unintended consequences,'' James Chanos, president of Kynikos Associates Ltd., and Richard Baker, head of the Managed Funds Association, wrote in the letter. ``Before attributing the steep declines in the stock in the financial sector to deficiencies in the short-selling rules, the commission should consult with fundamental financial analysts.''

SEC spokesman John Heine declined to comment on the letter. The American Bankers Association last week asked the SEC to include additional companies in the emergency order.

Under the new rule, investors must borrow stock that they plan to sell short as a bet on a decline in prices. Prior to the order, investors were only required to locate shares that they had reason to believe were available for borrowing.

The Washington-based Managed Funds Association was founded in 1991 and represents hedge funds, which oversee about $2 trillion. Chanos is chairman of the Coalition of Private Investment Companies, which represents more than 20 companies with $120 billion in assets.

To contact the reporter on this story: Edgar Ortega in New York at ebarrales@bloomberg.net.