The U.S. Securities and Exchange Commission has laid out a couple of options for dealing with potentially abusive short selling.

On Wednesday, the SEC voted unanimously to seek public comment on whether short sale price restrictions or circuit breaker restrictions should be imposed, and whether such measures would help promote market stability and restore investor confidence, the commission said today.

In June 2007, the SEC voted to eliminate price restrictions, which some market players believe may have exacerbated certain aspects of the financial crisis. The commission said it has decided to re-evaluate the issue “due to extreme market conditions and the resulting deterioration in investor confidence”.

Canadian securities regulators were considering the removal of the uptick rule in Canada too, prior to the crisis, however they have since backed off from that move. Whatever the SEC decides to do will surely weigh heavily on the CSA’s future approach to short selling too.

On Wednesday, the SEC voted to propose two approaches to restrictions on short selling. One would apply on a permanent, market-wide basis, while the other would apply only to a particular security during severe market declines in that security. They include: a market-wide short sale price test based on the national best bid (a proposed modified uptick rule)’ and a market-wide short sale price test based on the last sale price or tick (a proposed uptick rule). For specific, stressed securities, it is considering a circuit breaker that would either ban short selling in that security, or impose a short sale price test.

In addition, the commission proposed amendments to existing rules to require that a broker-dealer mark a sell order “short exempt” if the seller is relying on an exception to a short sale price test restriction or a circuit breaker rule.

Public comments on the proposed amendments are due within 60 days. Following the announcement of its latest proposals, the Securities Industry and Financial Markets Association pledged to provide meaningful input on the issue. “The SEC today made clear it will take a thoughtful, flexible and open-minded approach to safeguarding markets and investors from potentially abusive short selling practices. The industry looks forward to providing the commission with constructive input on the different price tests and concepts offered, and perhaps even providing additional ideas. We agree that protecting investors and markets is crucial, and if the commission determines new rules are necessary, those new regulations should be designed to suit today’s markets,” said Tim Ryan, president and CEO, of SIFMA.

Similarly, the Financial Services Roundtable welcomed the proposals, saying that it supports maintaining the balance between fighting manipulative short selling while ensuring liquidity, innovation, and stability within the capital markets. “Curbing abusive short selling is a major step in addressing the systemic risk such actions would impose on the capital markets,” said Steve Bartlett, president and CEO of The Financial Services Roundtable. “We look forward to working with the SEC in exploring options to curtail this issue.”

“Clearly, the practice of short selling has both strong supporters and detractors,” said SEC chairman Mary Schapiro. “Today, we begin what will be a very deliberative process to determine what is in the best interests of investors.”

“Since the commission eliminated short sale price tests two years ago, we have seen market conditions and events that differ sharply from those of previous years,” said Erik Sirri, director of the SEC’s Division of Trading and Markets. “In that time, the commission has received many requests to reinstate short sale price test restrictions. The proposals we have recommended today are part of an overall effort to seek comment and input from all market participants, analyze and if necessary modify our previous actions, and boost investor confidence.”

IE