[Congressional Record Volume 155, Number 45 (Monday, March 16, 2009)]
[Senate]
[Pages S3120-S3121]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. KAUFMAN (for himself, Mr. Isakson, and Mr. Tester):
  S. 605. A bill to require the Securities and Exchange Commission to 
reinstate the uptick rule and effectively regulate abusive short 
selling activities; to the Committee on Banking, Housing, and Urban 
Affairs.
  Mr. KAUFMAN. Mr. President, the American people have lost literally 
trillions of dollars as a result of the meltdown of our financial 
markets. This is a disaster of monumental and unprecedented 
proportions.
  Think of the retirees who have lost more than half their savings and 
who lie awake at night worrying about how they are going to make it. 
Think of the parents who can no longer afford to send their children to 
the college of their choice or even to college at all. Think of the 
business men and women who will cancel investments or lay off workers 
because they cannot raise capital--hopes crushed, dreams denied, plans 
canceled, opportunities lost.
  We need to restore the strength of the financial markets. We need to 
rebuild the confidence in our economy and in our markets so we can 
restore those losses. We all look forward to the day when wealth and 
employment in America are growing again. There are many things we must 
do to make that happen.
  Foremost, we must rescue, reform, and recapitalize our banking 
system. In the Judiciary Committee, we moved on March 5 to restore 
investor confidence by reporting S. 386, the Fraud and Enforcement 
Recovery Act. Chairman Leahy, Senator Grassley, Senator Schumer, 
Senator Klobuchar, and I pressed this legislation forward because we 
needed to ensure that the Justice Department, the FBI, and other law 
enforcement agencies have the resources they need to find, prosecute, 
and jail those who have committed financial fraud.
  Our markets will flourish again only when investors are confident 
that the market will be held accountable to the law. This is one step 
we must take.
  I am here today to talk about another urgently needed piece of the 
much larger project of restoring confidence in our capital markets: We 
must stop the artificial manipulation of stock prices. We must stop the 
abusive short selling of securities.
  I am convinced that the SEC must restore the uptick rule and issue 
regulations that effectively ban abusive short selling. Abusive short 
selling is tantamount to fraud and market manipulation and must be 
stopped. The uptick rule must be restored now.
  There is a growing consensus that the SEC must move quickly to 
reinstate the uptick rule. Everyone is talking about it. Everyone seems 
to support it. Everyone believes the SEC needs to put on the brakes and 
stop those who dump millions of shares they don't own to drive prices 
down. Abusive short selling amounts to gasoline on the fire for 
distressed stocks and distressed markets. Abusive short selling happens 
when traders and hedge funds sell stock shares they don't have and 
won't be able to deliver.
  Let me make myself clear: The problem isn't short selling itself. 
Short selling can actually enhance market efficiency and provide the 
market with information it needs to set prices at appropriate levels. 
The problem is that under current rules, short sellers are allowed to 
sell stocks they haven't actually borrowed in advance of their short 
sale and with no uptick rule in place as a circuit breaker. This in 
turn frequently means they all too often simply fail to deliver the 
stocks they have supposedly sold. Abusive short sales expose sellers 
and those linked to their short sales to the risk that when settlement 
day arrives, the short seller won't have the necessary shares 
available. That harms the market and market participants, particularly 
when failure to deliver persists for substantial periods as statistics 
show they clearly have.
  We have the opportunity to have the SEC become a can-do agency once 
more. Under the leadership of Chairwoman Shapiro, the SEC needs to move 
at a pace to protect investors and restore investor confidence.
  I believe the SEC must impose at least two important changes. It must 
reestablish the uptick rule and it must establish a mandatory, 
marketwide, pre-borrow requirement to sell shares short.
  As for the uptick rule, that rule held us in good stead for 70 years. 
It was first established in 1938 and the SEC eliminated it in July 
2007. In my view--and I am not alone--it should never have been 
repealed. The uptick rule is especially helpful when the market is 
falling. It simply requires short sellers to take a breath and wait for 
an increase in price before continuing to sell shares short. 
Establishing a mandatory, marketwide pre-borrow requirement would 
simply require short sellers to demonstrate at the time of the sale 
that they have a legally enforceable right to deliver the shares of 
stock at the required delivery date. To permit short sellers to sell 
shares they

[[Page S3121]]

don't have turns our capital markets into gambling casinos where these 
``naked'' short sellers profit if the price goes down and fail to 
deliver if the price doesn't. The time has come for that practice to 
stop.
  I wrote to the SEC Chair Mary Shapiro on March 3 making these same 
points. I understand she testified before the Banking Committee in 
February and that she intends, as quickly as possible, to engage in a 
full review of the SEC's actions with respect to short selling, 
including an evaluation of why the uptick rule should be reinstated. I 
also understand the SEC is scheduled to meet soon to discuss ways to 
reform short selling practices.
  We need quick action to restore investor confidence. That is why I, 
along with Senator Isakson of Georgia, am introducing a bill today that 
would direct the SEC to write regulations addressing abusive short 
sales. We believe that restoring the uptick rule is necessary, but not 
sufficient, to end abusive short selling.
  Our bipartisan bill would direct the SEC to write regulations within 
60 days that accomplish five things to end the abusive short selling. 
One: Reinstate the substance of that portion of its prior regulations 
that prohibited short sales that are not made on an increase in the 
price of the stock. This prevents short sellers from piling on 
declining stock, driving prices down.
  Two: Require trades by short sellers of securities to yield priority 
and preference to transactions effected by long sellers of securities. 
This would require exchanges and other trading venues to execute the 
trades of long sellers instead of short sellers, all other things being 
equal.
  Third: With the concurrence of the Secretary of the Treasury and the 
Chairman of the Board of Governors of the Federal Reserve System, 
prohibit short sales of the securities of any financial institution 
unless the trade is effected at a price, in minimum lots specified by 
the Commission, at least 5 cents higher than the immediately preceding 
transaction in such securities. Our financial sector and financial 
stocks are in a fragile state and our taxpayers now hold substantial 
shares in many institutions. If the Treasury and the Fed believe they 
need additional protection in these times, this legislation permits it.
  Four: Prohibit any person from selling securities short unless that 
person has at the time of the short sale a demonstrable legally 
enforceable right to deliver the securities at the required delivery 
date. Under current law, many short sellers fail to deliver. We must 
tighten up the rules.
  Five: Require that all short sales settle in the same timeframe 
employed for long sales of the same securities. There is no reason 
short sellers should have 13 days to deliver shares when long sellers 
have only 3 days.
  I look forward to hearing from Chair Shapiro soon about the 
conclusions of her review and the actions the SEC intends to take to 
stop these harmful activities that are preventing our markets from 
returning to a sound footing. In the meantime, Senator Isakson and I 
believe the Senate should move forward with this legislation directing 
the SEC to take action now. In the end, I hope the SEC will move 
quickly on its own to take these actions urgently, and now.
  Mr. President, I yield the floor.
  The PRESIDING OFFICER. The Senator from Georgia.
  Mr. ISAKSON. Mr. President, I rise first to commend the distinguished 
Senator from Delaware, Mr. Kaufman, on a very appropriate bill at a 
very appropriate time in our country. I am proud to be an original 
cosponsor of this legislation.
  History teaches us good lessons and, as the Senator said, for 70 
years, until July of 2007, the uptick rule served the American 
investor, the American banking industry, and the traders of America 
well, because it protected it from a very dangerous thing happening 
which happened beginning in September of last year. Everybody in this 
room will remember the markets of last fall. What happened is we hit 
some unsettling times. We in fact passed the TARP stabilization bill. 
The markets began to climb. I e-mailed Chris Cox, who was the then-
Chair of the SEC, the position Mrs. Shapiro now holds. I sent him an e-
mail begging him to please reinstate the uptick rule. They took a brief 
look at it, suspended it for a few days, and then let it stay. What 
happened was hedge funds and other traders coming in to cash in were 
taking the downward spiral of stocks and banks and financial 
institutions in the country and making money off the demise and the 
decline of those stocks, all because there was no protection so that 
they couldn't feed off a downward spiral. The uptick rule, as well 
explained by the Senator from Delaware, simply provides a cushion to 
discourage those who would exploit a dangerous and difficult market and 
make money at the expense of the American people.
  Senator Kaufman has introduced a piece of legislation that is right 
for America, it is right for America's investors, and it is right for 
our stock market as it still languishes today somewhere down near what 
we hope is the bottom. One way to ensure that bottom exists is to stop 
rewarding those who would feed off of it and instead reinstate good 
discipline that ensures good practices and allows the market to restore 
itself back to a good equilibrium.
  I commend Senator Kaufman on the introduction of the legislation. I 
am honored that he asked me to cosponsor it and I am proud to do so. I 
hope the Senate will expeditiously deal with it, not in the interests 
of Senator Kaufman or myself, but in the interests of the American 
people who are looking to us for answers in difficult times.
  Mr. KAUFMAN. Mr. President, I am honored to have the Senator from 
Georgia join me. The uptick rule and short selling is not a partisan 
issue; it is a bipartisan issue. We can work together to get this 
right.
  It is time to send a clear message to investors, to people who want 
to invest in our markets, that the markets are fair and they have an 
opportunity and they are going to get a chance at a level playing 
field.
  Mr. President, I ask unanimous consent that the text of the bill be 
printed in the Record.
  There being no objection, the text of the bill was ordered to be 
printed in the Record, as follows:

                                 S. 605

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. REINSTATEMENT REQUIRED.

       Not later than 60 days after the date of enactment of this 
     Act, the Securities and Exchange Commission (in this Act 
     referred to as the ``Commission'') shall--
       (1) reinstate the substance of that portion of the 
     regulations in effect on July 5, 2007, that prohibited short 
     sales not effected on a plus tick;
       (2) rescind rule 201 of regulation SHO, at section 242.201 
     of title 17, Code of Federal Regulations, as in effect on the 
     date of enactment of this Act;
       (3) require trades by short sellers of securities to yield 
     priority and preference to transactions effected by long 
     sellers of securities;
       (4) with the concurrence of the Secretary of the Treasury 
     and the Chairman of the Board of Governors of the Federal 
     Reserve System, prohibit short sales of the securities of any 
     financial institution, unless that trade is effected at a 
     price (in minimum lots, as specified by the Commission) that 
     is at least 5 cents higher than the immediately preceding 
     transaction in such securities;
       (5) adopt such rules and regulations, consistent with 
     paragraphs (1) through (4), as necessary to prohibit any 
     person from engaging in any conduct that artificially would 
     create a plus tick or satisfy the price requirements set 
     forth in the short sales regulations of the Commission; and
       (6) take such other actions as may be necessary or 
     appropriate to make the regulation of short sales by the 
     Commission consistent with the requirements of this Act.

     SEC. 2. MANDATORY SETTLEMENT PREPAREDNESS REQUIREMENT.

       Not later than 60 days after the date of enactment of this 
     Act, the Commission shall issue regulations prohibiting any 
     person from selling securities short, unless that person 
     demonstrates, at the time of the sale, that such person 
     possesses, at the time of the sale, a demonstrable, legally 
     enforceable right to deliver the securities at the required 
     delivery date.

     SEC. 3. MANDATORY SETTLEMENT TIMES FOR SHORT SALES.

       Not later than 60 days after the date of enactment of this 
     Act, the Commission shall issue regulations to require that 
     all short sales settle on the same time frame employed for 
     long sales of the same securities.

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