In the interest of cracking down on activities that often involve hedge funds, the Securities and Exchange Commission has attacked the issues in short-selling and insider trading with a new rule and a new database. At a meeting Dec. 4 -- which did not feature earlier promised proposed hedge fund rules for discussion -- the SEC unanimously agreed to issue for public comment a proposal that would ban short sales for five days before a secondary offering, if the purchaser plans to use shares obtained in the offering to cover the short position. The practice is already off limits, but SEC Commissioner Roel Campos said, the rule hasn’t worked and has resulted in "a progression of schemes devised to conceal prohibited covering." The commission also has proposed to eliminate the so-called "tick test," adopted 68 years ago, whereby the SEC allows short sales only when the price for exchange-listed stocks goes up; the test is now obsolete, thanks to modern trading and pricing systems.

As for insider trading, Linda Thomsen, the SEC’s director of enforcement, says the agency is working on a database set to debut next year that will track the illegal activity. "The SEC presently does not have an electronic system to aggregate referrals based on the identities of the specific traders involved." Thomsen stated in prepared statements to be delivered before the Senate Judiciary Committee. "We anticipate implementing a new case tracking system by mid-2007." Speaking of databases, Robert Marchman, head of the New York Stock Exchange’s market surveillance group, told Bloomberg News that the NYSE is going to beef up its information of hedge funds as well in an effort to keep closer tabs on illegal trading activity