SEC Curbs Shorting of GSE Stocks,
Considers Limits for Wider Market

WASHINGTON--The Securities and Exchange Commission announced an emergency action aimed at reducing short-selling aimed at Wall Street brokerage firms, Fannie Mae and Freddie Mac, and will immediately begin considering new rules to extend new requirements to the rest of the market.

SEC Chairman Christopher Cox said the SEC would institute an emergency order requiring any traders to pre-borrow stock before shorting Fannie Mae and Freddie Mac, the embattled government-sponsored entities that own more than half the nation's mortgages. It would also apply to the stocks of Lehman Brothers, Goldman Sachs, Merrill Lynch and Morgan Stanley. The order is a near-term fix and will expire in 30 days.

Mr. Cox said the SEC "will undertake a rulemaking to address the same issues" across the market.

The move will likely limit short-selling for the two mortgage entities, which have seen their stock prices fall sharply in recent weeks. Wall Street has been calling for the SEC to address short-selling, which some believe is contributing to market volatility and could be used to manipulate shares of financial stocks.

It comes as short-interest, or the amount of outstanding short positions, is at an all-time high for NYSE Euronext-listed stocks.

Short-selling, a legitimate trading strategy geared to profit from falling stock prices, has long been a lightning rod issue, so changes that cover the entire market will likely be hotly debated. Companies have complained that short-sellers target their stocks with the purpose of driving them down, while short-sellers have been credited with identifying a company's true market value.

Under current rules, a short-seller must locate shares to borrow, which are later replaced with stock bought at a lower price. Some market watchers have been concerned that traders were borrowing the same shares from the same lender over and over, and driving down stock prices.

Under the emergency order, traders will be required to borrow the stock and the lender would then take it out of the market and not allow other traders to use it to satisfy requirements that they've located stock.

Write to Kara Scannell at kara.scannell@wsj.com