The U.S. Securities and Exchange Commission has voted unanimously to adopt amendments to strengthen its rule designed to prevent abusive short selling and market manipulation to ensure that offering prices are set by natural forces of supply and demand for the securities being offered rather than by manipulative activity.

When a trader expects to receive shares in an offering, there is an incentive to sell short prior to pricing an offering and then cover that short position with shares bought at the reduced offering price, the SEC explains. By doing so, the trader can cover the short sale with minimal risk, and generally lock in a guaranteed profit — to the detriment of the issuer and the other shareholders.

The amendments change the way its rules work to prevent this from happening. “They replace the rule’s current limitation on covering the short sales in the offering with a prohibition on purchasing in the offering after a short sale in the securities,” it explains. “This change was triggered by persistent non-compliance with the rule and a string of strategies to conceal the prohibited covering.”

Under the amended rule, if a person sells short during the restricted period prior to pricing, that person is prohibited from purchasing the offered security. Thus, the amended rule changes the prohibited activity from covering to purchasing the offered security.

In order to ensure that the rule does not unduly limit the pool of possible purchasers in follow on and secondary offerings, it includes a provision to allow a restricted period short seller to participate in an offering if the seller makes a bona fide purchase prior to pricing an offering, the SEC adds. The amended rule also includes exceptions concerning investment companies and certain other entities that make separate trading and investment decisions.

The amendments will be effective 60 days after publication in the Federal Register.