Utah complies with court order, delays implementing securities law legislation
Utah has consented to the temporary postponement of recent amendments to the state's securities laws.
The amendments were adopted in the special session of the Utah Legislature in May.
Senate Bill 3004 requires brokerage firms to report all the transactions involving the stock of Utah companies that were not settled on a timely basis to the state division of securities.
The law was designed to provide more information to investors and Utah companies about trades which did not settle on time or which might indicate abusive short selling, pointed out the state attorney general's office.
Short selling is a practice of some traders who sell stock they do not own in an effort to drive down prices.
To the extent that abusive short selling occurs or to the extent that investors do not receive shares that they purchase, the markets are not operating efficiently.
The May legislation was an effort to provide more transparency and fairness to the markets.
Since the law was enacted in May, there have been several significant developments toward the same goal, indicated Utah officials.
The United States Senate has conducted two hearings into alleged hedge fund and short selling abuses.
On July 19, the U.S. Securities and Exchange Commission proposed changes to federal regulations governing short selling, according to the Utah Attorney General's Office.
If the proposals are adopted, Utah officials explained that the ability of traders to engage in abusive short selling will be severely constrained.
Regulators have brought an increasing number of enforcement actions against traders and brokers engaged in short selling violations.
On July 28, the Securities Industry Association filed a civil lawsuit in the federal court to halt implementation of Utah's legislation, explained the Utah Attorney General's Office.
In the federal lawsuit, the association argued that some of the specific terms included in the securities statute passed by the Utah Legislature in May were pre-empted by federal law.
Representatives of the securities industry have since met with state officials expressing a preference for a uniform national solution to any problem which may exist regarding settlement failures, continued Utah officials.
The representatives said Utah's requirements would be difficult and costly to implement, might work against the SEC's efforts to devise a national solution and might result in reduced trading in the stock of companies based in the state.
Utah has agreed to comply with a court order specifying that the implementation of the law be postponed from Oct. 1, 2006 to June 1, 2007.
The postponement will give more time for policy makers to determine whether the changes proposed by federal regulators make the Utah law unnecessary.
"We're satisfied to allow the SEC a window of opportunity to develop a comprehensive solution," commented John Valentine, president of the Utah Senate. "Their success will benefit companies and investors, not just in Utah, but throughout the nation. If acceptable solutions are not developed at the federal level, Utah stands ready to implement its statute after June 1, 2007."
The director of the state's securities division stressed the importance of protecting investors and the integrity of the markets.
"Individual investors and the integrity of the markets are at serious risk from high numbers of settlement failures. To the extent that abusive short selling increases the number of settlement failures or contributes to market manipulation, regulators have a duty to investigate and take action," noted Wayne Klein.
"We applaud the efforts of the SEC to reduce opportunities for short selling abuses through its current proposal to amend the federal regulation on this issue. The enforcement actions now being brought by federal regulators to prevent these abuses also will go a long way towards improving market transparency and fairness to investors," continued the director of Utah's securities division.
Klein indicated that he hoped the moves will result in a common effort by state and federal regulators.
"It makes irrefutable good sense for the state of Utah to defer and allow the federal regulatory authorities to fully engage the industry on these important issues before the state embarks upon protracted and costly litigation," indicated Scott Reed, lead counsel from the Utah Attorney General's office who is defending the lawsuit.
"But investors, large and small, need to be assured in every way possible of a level playing field," added the attorney general's office representative.
The agreement to place enforcement of the state statute on hold is likely to save the securities industry and the state millions of dollars. Postponing the implementation of the state's law should give the U.S. Securities and Exchange Commission an opportunity to re-define market practices in the area in question, concluded Reed.