From Deseret News archives:

House acts to put end to 'naked short selling' bill

Published: Thursday, March 1, 2007 12:46 a.m. MST
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The Utah House on Wednesday joined the Senate by voting to squish a bill passed last spring designed to end stock trading abuse known as "naked short selling."

The House passed SB277 by a 67-7 vote. The Senate vote Friday was 27-1.

SB277 kills a bill passed last May that targeted illegal naked short selling through fines. Short sellers borrow shares hoping the share price declines so they can return shares to brokers and pocket the difference. In naked short selling, traders sell shares they haven't borrowed, using IOUs that brokers send through a stock clearinghouse. The brokers use IOUs until they can find shares to deliver, but the practice can lower a company's share price by artificially creating more sellers than buyers.

Senate Majority Leader Curt Bramble, R-Provo, said Friday that the special-session bill "was intended to get to the fraud that occurs and the damage to Utah publicly traded companies from the failure to deliver on illegal naked short selling."

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But shortly after that bill's passage, the Securities Industry Association sued the state, saying federal law prohibited states from implementing recordkeeping requirements for brokers that are different from federal requirements. The state law required brokers to quickly and regularly disclose trades that fail to settle as scheduled. The association said that, while the bill supposedly targeted naked short selling, it also affected all short selling as well as other long-term investments that do not close as scheduled.

Bramble, the bill's sponsor, said Friday that advisers had told him Utah had little chance of winning the lawsuit. The House sponsor, Rep. Stephen Urquhart, R-St. George, echoed those comments Wednesday.

"The fact of the matter is, we have a law that probably will not stand judicial scrutiny because of federal pre-emption, and so we run the risk of not only would we lose that lawsuit, we would lose some of the state's other regulatory authorities and abilities to go with it," Urquhart said. He added, however, that the law has helped force the U.S. Securities and Exchange Commission to pay more attention to the issue.

But a few representatives wanted the new repealer bill delayed. Rep. Greg Hughes, R-Draper, moved to send it to the House Rules Committee and have it discussed in interim committee sessions.

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