The Utah House on Wednesday joined the Senate by voting to squish a bill passed last spring designed to end stock trading abuse known as "naked short selling."
The House passed SB277 by a 67-7 vote. The Senate vote Friday was 27-1.
SB277 kills a bill passed last May that targeted illegal naked short selling through fines. Short sellers borrow shares hoping the share price declines so they can return shares to brokers and pocket the difference. In naked short selling, traders sell shares they haven't borrowed, using IOUs that brokers send through a stock clearinghouse. The brokers use IOUs until they can find shares to deliver, but the practice can lower a company's share price by artificially creating more sellers than buyers.
Senate Majority Leader Curt Bramble, R-Provo, said Friday that the special-session bill "was intended to get to the fraud that occurs and the damage to Utah publicly traded companies from the failure to deliver on illegal naked short selling."
But shortly after that bill's passage, the Securities Industry Association sued the state, saying federal law prohibited states from implementing recordkeeping requirements for brokers that are different from federal requirements. The state law required brokers to quickly and regularly disclose trades that fail to settle as scheduled. The association said that, while the bill supposedly targeted naked short selling, it also affected all short selling as well as other long-term investments that do not close as scheduled.
Bramble, the bill's sponsor, said Friday that advisers had told him Utah had little chance of winning the lawsuit. The House sponsor, Rep. Stephen Urquhart, R-St. George, echoed those comments Wednesday.
"The fact of the matter is, we have a law that probably will not stand judicial scrutiny because of federal pre-emption, and so we run the risk of not only would we lose that lawsuit, we would lose some of the state's other regulatory authorities and abilities to go with it," Urquhart said. He added, however, that the law has helped force the U.S. Securities and Exchange Commission to pay more attention to the issue.
But a few representatives wanted the new repealer bill delayed. Rep. Greg Hughes, R-Draper, moved to send it to the House Rules Committee and have it discussed in interim committee sessions.
"When we do heavy lifting, when we consider important policy, there's a process here. It might feel like drinking out of a fire hydrant, but it certainly is a deliberative one," he said. "Having a bill that is filed and brought to the (Senate) floor on the Friday before the end of the session and having a bill land on our laps on Day 43 has put many on an uphill battle in terms of trying to get their heads around this bill and this policy."
Rep. Michael Noel, R-Kanab, said the Legislature may have acted too quickly in passing the special session bill. "And I'm wondering if we're not acting hastily now. That concerns me. ... I just wonder if we're not just moving too rapidly on this," Noel said.
But Urquhart said the state is in "grave danger" of having a permanent injunction filed against it.
"If that were to happen, that could limit our ability as a legislative body to go back and deal with this in a comprehensive way, in any kind of way," he said. "We need to repeal this law. We need to go back to scratch. I agree, this was hastily passed, but the writing is on the wall. ... This is something from a legal standpoint, we have a law that is not defensible, and if we go forward, we could find ourselves in a very bad way on this."
Last year's bill was prompted by Salt Lake-based online closeout retailer Overstock.com, which has said it has been a target of persistent naked short selling. Overstock officials this week were reported saying they believe Utah would prevail in the lawsuit and that SB277 was a mistake.
Without referring to Overstock, Urquhart told the House that "one of our great Utah companies" did not want the special-session law repealed. "In no way do I intend this to be a poke at them. ... The bill we passed (in May) just goes too far. ... By pursuing with the lawsuit, we could get ourselves in really big trouble."
Bramble said Friday that if the SEC does not address the issue of illegal naked short selling, the Legislature could be back with another bill next year.
E-mail: bwallace@desnews.com