SEC proposals on short-selling \'catastrophic\'

US equity markets would suffer "catastrophic damage" if the Securities and Exchange Commission's emergency rules on short-selling were extended as proposed, said the two main hedge fund industry groups.

In their first big push against the SEC measures introduced last week, the Managed Funds Association and the Coalition of Private Investment Companies yesterday wrote to Christopher Cox, chairman of the SEC, outlining their case against the measures, which come into effect today.

That sets them against the American Bankers Association, which last week called for an extension of the rules aimed at stopping abusive short-selling in financial stocks. Short-sellers, most of which are hedge funds, are being blamed for widespread share price falls. The ABA wrote to the SEC asking that the rules, which apply to 19 financial stocks, be extended to all publicly traded banks.

The hedge fund groups said in their letter: "Expansion of the emergency order to a broader list of stocks . . . will inflict catastrophic damage on the US equity markets. This damage would threaten the status of the US equity markets as the world's equity markets of choice." The expansion of the rule would "undermine critical market activities . . . [and] make it more difficult, expensive and risky to sell short".

"Restrictions on short sales distort the fundamentals that drive market prices and are . . . counter-productive because they remove liquidity and healthy scepticism from the marketplace," the groups said.

They questioned the "basis and motivation" of the SEC rules, saying the emergency order had "provided none of the expected facts or evidence to support the particular action in restraint of short selling activity."

The emergency order might itself cause a loss of confidence in the market, as investors would fear more government intervention to support the stock price of other market sectors under stress, they said.

The letter was signed by Richard Baker, MFA president, and James Chanos, CPIC chairman. Mr Chanos is a well-known short-seller.

The ABA agreed the emergency order might have exacerbated a loss of confidence in the safety of the banking industry. However, its solution was to extend the order to all banks.