“Shorting the stocks of some of the largest companies in the United States is about to become easier. But shorting the stocks that some investors view as the most overvalued will become more difficult,” writes Floyd Norris in today’s New York Times.

“The Securities and Exchange Commission approved a new rule on short selling yesterday that for the first time in decades will allow some stocks to be sold short even though the price is falling. The original rule, which let investors sell most stocks short only when share prices were rising, was adopted during the Depression at a time when short sellers were blamed by some for the 1929 crash.”

“The short selling rule was adopted unanimously at the same meeting at which the commission, as expected, voted to require that chairmen of mutual fund boards be independent directors, rather than the head of the management company, as is now often the case.”

” ‘The leadership of an independent chairman will be the critical pivot point for avoiding potential conflicts of interest that can in the future lead to new forms of mismanagement, noncompliance and even fraud,’ said William H. Donaldson, the chairman of the S.E.C.”

“He was joined by the two Democratic members in voting for the measure, while the two other Republicans, Cynthia Glassman and Paul Atkins, opposed it, saying there was little evidence that investors would benefit from the changes.”

“Short selling is the practice of borrowing shares and then selling them. It is usually done to bet that the stock price will decline, which allows the seller to buy the shares back at a lower price and pocket the difference after returning them. But it can also be done as part of hedging strategies.”

“To many economists, short selling helps create efficient markets for stocks by allowing prices to be influenced by everyone who has an opinion on a stock, and restrictions on the practice, therefore, impede market efficiency.”

“But many companies bitterly complain that traders use it to drive down prices in what are called bear raids. They are especially angry about so-called naked shorting, in which stocks are sold short even though the seller has not borrowed shares.”

“The S.E.C. agreed yesterday that for a year, beginning on Jan. 3, one-third of the stocks in the Russell 3000 – basically the 3,000 largest companies traded on American markets – would have the basic limitation on short selling removed.”

“On the New York and American Stock Exchanges, that limitation bars a short sale of any stock except at a price higher than the last different price. On the Nasdaq stock market, there is a somewhat similar rule based on the bid price of the stock.”

“For the stocks chosen to be part of the trial – every third one based on average volume – that rule would be suspended. During the year, the S.E.C. would study the trading in those stocks to determine differences in liquidity, volatility and the speed with which the stocks adjusted to changes in fundamental conditions. Of the stocks to be in the trial, 50 percent trade on the Big Board, 48 percent on Nasdaq and the remainder on the American Stock Exchange. The names will be announced next week.”