Tuesday, September 23, 2008

The mother of all short squeezes (3)

Broc Romanek's TheCorporateCounsel.net blog was the first to point out the importance of companies' Standard Industrial Classification (SIC) codes in determining which stocks were and were not subject to the SEC's emergency order. His post is well worth reading for a sense of the contingencies involved in this kind of emergency, ad hoc action.
I received a number of emails from panicky members whose financial service companies were not part on the SEC's list. Some of these companies have SIC codes covered by the SEC's emergency order, but they were not listed by name in the SEC's order. For example, this situation applies to AllianceBernstein Holding, Invesco and Legg Mason. They've all filed Form 8-Ks stating that they believe they should be on the list since they were covered by the SIC code used by the SEC...

Others believe their companies are financial services companies and should be on the list, but their companies don't have SIC codes - at least, as they show up in the SEC's database (however, EDGAR shows their SIC code) - that correspond to the range of SIC codes covered by the SEC's "No Short List." To illustrate, CNBC reported that several companies - like General Electric - may be added to the list because their financial services businesses are substantial. GE's SIC code in the EDGAR database shows up as "SIC: 3600 - Electronic & Other Electrical Equipment (No Computer Equip)."
The SEC has since formally recognized the inadequacy of its first "best efforts" and has assigned responsibility for preparing an appropriate list to the exchanges. From yesterday's revised order:
In light of the familiarity of the exchanges listing financial institutions with the nature of their respective businesses, the Commission has determined to amend this Order to provide that the listing markets shall select the individual financial institutions with securities covered by the Order. The Commission expects each national securities exchange listing financial institutions to immediately publish a list, on its internet Web site, of individual listed companies with common equity that will be covered by the Order’s prohibition on short sales. The Commission expects these lists to cover banks, savings associations, broker-dealers, investment advisers, and insurance companies, whether domestic or foreign, and the owners of any of these entities.

To the extent an issuer chooses not to be covered by the Order’s prohibition on short sales, we have authorized the applicable national securities exchange to exclude that issuer from its list of covered financial firms.
Will this voluntary opt-out position separate the wheat from the chaff? If enough companies opt out of the SEC's protection, the ones left will be the obvious targets for speculative attacks.

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