Former U.S. Securities and Exchange Commission Chairman Arthur Levitt says that the new SEC restrictions on short-selling are purely symbolic.
But, he cautions, now is not the time for small investors to overreact concerning the underlying condition of the world's financial markets.
Regulators are trying to rein in abusive short-selling in some large financial firms. The SEC's policy, described as an emergency measure, applies to stocks of 17 Wall Street firms, as well as U.S. government-sponsored housing finance companies Fannie Mae and Freddie Mac.
The emergency action may last up to 30 days.
The commission's move has drawn complaints, including some from the banking industry, which wants the protections extended to all banks.
The SEC has said it will consider rules to address short-selling issues across the entire stock market. No such rules have emerged yet, however.
Levitt, now a senior advisor to Caryle Group, says that covering shorts can, in theory, contribute to rising stock prices, but that this move by SEC is symbolic, he tells Bloomberg.
But other factors will actually impact the market more profoundly, he says.
"What's important is liquidity in the markets. The important thing for an investor now is not to panic," Levitt added.
"The chances are we're closer to the low than to a high. I would get rid of all margin accounts and, to the extent possible, I'd try to get rid of debt, particularly credit card debt, which is so expensive.
The small investor should be concerned with conservation of capital rather than speculation."
Levitt advises small investors against "buying derivatives or trading naked options."
But, he adds, smaller investors who do understand those tools "can use them as a means of controlling risk."
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