Hedge fund managers very much want to be involved in the debate over market reform, and they want to be viewed as part of the solution, not the problem. That the reinstatement of the uptick rule is one of the first proposals on the table, however, is not a good sign, especially on the back of how regulators around the globe moved to temporarily curb short-selling last year during the height of the banking crises (see “Caging the Shorts”).
The uptick rule requires a short-seller to trade a listed security at a higher price than its previous sale. Initially put in place in 1938, the rule was revoked in 2007 by the Securities and Exchange Commission. Now lawmakers want it back, and SEC chairman Mary Schapiro will open the reinstatement proposal to public comment this month.
“Reinstating the uptick rule is just a small token compared with the large wave of regulation that is on the way,” warns Michael Gray, partner and chair of the fund formation and investment management practice group at law firm Neal, Gerber & Eisenberg in Chicago.
But by reintroducing the uptick rule, the SEC has also put itself in something of a catch-22. If it’s true that getting rid of the restriction led to market abuse, then the commission presumably erred by removing it in the first place. If, however, there is no such evidence, then its revival may look more like politics than a sincere effort to solve market problems.
Schapiro appeared to acknowledge the conundrum in her testimony before Congress in March. “In many ways the commission engaged in model rule-making” by revoking the rule, she said. But since then, she added, “the world has changed.”
