Utah Division of Securities
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Short Selling


Short selling is the sale of a security or commodities futures contract that is not owned by the seller. In regular short-selling, a seller borrows stock, sells it, and waits, hoping for the price to drop before buying shares back to repay that loan and pocket the difference. As an example:

A seller, anticipating a decline in the price of Example Company shares, instructs his broker to sell short 100 Example Company shares when they are trading at $30. The broker then loans the seller 100 shares of Example Company, using either its own inventory, shares in the margin account of another customer, or shares borrowed from another broker. These shares are used to make settlement with the buying broker within three days of the short sale transaction, and the proceeds are used to secure the loan. The seller must now buy 100 shares of Example Company to repay the lending broker. If the price of Example Company went down to $20 as the seller anticipated, he can buy the shares at the lower price, replace the borrowed shares and realize a profit. If, however, the price of the shares went up, the seller will realize a loss.

In naked short-selling, the seller sells the shares without properly borrowing the stock, or a broker loans the same shares to more than one seller. At the time settlement should take place, the buyer at the other end of that short-sale doesn't get delivery of the shares within the mandated three-day window. The buyer also loses out on voting rights and tax-advantages until the short-seller closes out the position.

When a seller sells shares that he doesn’t own and has not properly borrowed or a broker loans the same shares to several sellers, it creates the illusion that there are more shares on the market than are actually there. This illusion, in turn, artificially reduces the price of the stock.

In response to requests from Utah companies believing the price of their shares was being driven down by naked short selling, the 2006 Special Session of the Utah Legislature enacted amendments to the Utah Uniform Securities Act in Senate Bill 3004, which, among other things, created record keeping and reporting requirements for Broker Dealers on their incidences of failures to deliver. The requirements became law on May 26, 2006 and had an effective date of October 1, 2006. These amendments can be viewed at:

2006 Amendments to the Utah Uniform Securities Act

On July 28, 2006, the Securities Industry Association (SIA) filed suit against R. Wayne Klein in his official capacity as Director of the Division of Securities, seeking to enjoin the Division of Securities from implementing the amendments. The Complaint can be viewed at:

Securities Industry Association Complaint

On August 11, 2006, the Division of Securities entered into a stipulated settlement on the SIA suit, agreeing to take no action to enforce the 2006 amendments until June 1, 2007, to allow the Securities and Exchange Commission (SEC) the opportunity to address the issue. The stipulated settlement can be viewed at:

Stipulated Motion for Preliminary Injunction

Preliminary Injunction Enjoining Implementation, Enforcement and Effectiveness of Utah Senate Bill No. 3004

On July 14, 2006, the SEC proposed amendments to Regulation SHO to address the issue of short sales. Comments were accepted until September 19, 2006. The proposed amendments can be viewed at:

Amendments to Regulation SHO

Utah’s comments on the proposed amendments can be viewed at:

Comments on Proposed Amendments to SEC Regulation SHO

All of the comments received by the SEC can be viewed at:

Comments on Proposed Rule: Amendments to Regulation SHO

The 2007 General Session of the Utah Legislature repealed the 2006 Amendments to the Utah Uniform Securities Act relating to the recordkeeping and reporting requirements with Senate Bill 277.

2007 Amendments to the Utah Uniform Securities Act



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