Short sellers borrow shares from a broker, sell them, and make a profit if the share price subsequently drops, allowing them to buy back the same number of shares for less money. In other words, short selling is a bet that the price of a stock will fall. In the 1930s, the Securities and Exchange Commission (SEC) adopted a regulation to prevent bear raiding. The "uptick rule" stated that a short sale may occur only if the last price movement in a stock's price was upward. With smaller corporations, however, the number of shares in circulation may be limited, and brokers may find it difficult to locate shares to deliver to the buyer in a short sale transaction. If it occurs sporadically and on a small scale, naked short selling does not raise serious manipulation concerns. Regulation SHO

After several years of deliberation, the SEC in 2004 adopted rules designed to control abusive naked short selling. On July 15, the SEC issued an emergency order banning naked short sales of the shares of Fannie, Freddie, and 17 other large financial institutions. All short selling (naked or not) of the shares of more than 700 financial firms was banned. The emergency order expired October 8, 2008. On October 1, 2008, in addition to extending the short sale ban announced on September 18, the SEC adopted a "interim final" rule that in effect banned naked short selling in all stocks. This order, in the form of an interim final rule, requires that when a failure to deliver shares within the normal three-day settlement period occurs, the seller's broker must immediately purchase or borrow securities and close out the fail to deliver position by no later than the beginning of trading on the next business day. On July 27, 2009, the SEC made the interim rule permanent.
Short sellers borrow stock, sell it, and hope to profit if they can buy back the same number of shares later at a lower price. A short sale is a bet that a stock's price will fall. A short sale is said to be "naked" if the broker does not in fact borrow shares to deliver to the buyer. When executed on a large scale, naked short sales can constitute a large portion of total shares outstanding, and can put serious downward pressure on a stock's price. Critics of the practice characterize it as a form of illegal price manipulation. The Securities and Exchange Commission (SEC) in 2004 adopted Regulation SHO, a set of rules designed to control short selling abuses, focusing on small-capitalization stocks where the number of shares held by the public was relatively small.
Until the current financial crisis, the SEC did not view short selling of large, blue-chip stocks as a problem. In July 2008, however, the SEC temporarily banned naked short sales of the stock of Fannie Mae, Freddie Mac, and 17 other large financial institutions. On September 18, 2008, the SEC banned all short selling of the shares of more than 700 financial companies in an emergency action that expired on October 8, 2008. On October 1, 2008, the SEC adopted an interim rule requiring short sellers' brokers to actually borrow shares to deliver to buyers, within one day after the expiration the normal three-day settlement time frame. The rule was made permanent on July 27, 2009, and it applies to all stocks. This report will be updated as events warrant.