This blog post originally appeared on RealMoney Silver on Sept. 23 at 8:09 a.m. EDT.

Last week's hastily crafted regulatory response to ban short selling must be immediately corrected or terminated.

While it is probably true that the recent fiscal RTC-like effort, which I call CRUD, or the central repository for underperforming debt, has its own set of problems but is probably a necessary jolt to a deeply challenged financial system, the series of poorly constructed and reactive regulations in a selected ban (and enforced disclosure) of short selling that the


has instituted will likely have unintended negative consequences.

My prediction is that the only naked short sellers that are caught and prosecuted in the SEC's hunt will be daytraders who have bypassed the current shorting regulations as they trade on their REDIs and other trading platforms -- that is, the same daytraders who took stocks up to ludicrous levels nine brief years ago in the Internet bubble and set the stage for the



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There are many risks associated with the SEC's plan. The principal risks include a liquidity drain, which could cause capital to exit the markets and serve to undermine the financial system as well as a loss in confidence that market participants are on an even playing field.

That being said, here are some of my suggestions for changing and enforcing last week's rules:

    1. First and foremost, reinstate the uptick rule. This is so fundamental and so obvious it is almost beyond my comprehension why a revision of this rule was not considered first and before the other recommendations were instituted. 2. A timeout on short selling of financial stocks and a brief cooling off period are reasonable, but it should have been focused only on our major financial institutions as contrasted to a broad sweeping policy and commentary that has essentially vilified short-selling. When a General Motors (GM) - Get Report is added to the SEC ban on short selling because it has a bank stuffed in it, the ban is preposterous. No doubt, if markets continue their descent, companies with captive financing arms -- that is, nearly every manufacturer and retailer -- will request to be exempt from short selling. 3. Remove short-selling disclosure rules. The unintended consequences are broadly negative and counter to the basic goal for all participants in our equity markets to play on a level field. 4. Make a strong comment that short-selling is a necessary practice and contributes to the efficiency and liquidity to our markets. 5. Focus on comprehensive disclosure and filing requirement rules for all activities in the credit default swap market, not just in equities. 6. Turn the SEC into a committee instead of a political appointee; include people that actually understand how short selling, the stock market and economy function as well as equal representation from those at short-only, quantitative and long/short hedge funds so that people who short stocks have representation. Remember the SEC also instituted this policy previously, probably because cronies asked for it, which is central to the problem. 7. Actively prosecute and severely penalize those convicted of wrongdoing (spreading rumors, naked short selling, touting stocks, etc.), and that includes the majority of the inappropriate activity taken by the long-biased world (arguably, at the root of many of our current problems). 8. Include the activities of proprietary brokerage trading desks and other business units of the brokerages themselves in any investigative activity about inappropriate trading in shorting of financial stocks or overall credit default trading. Request the tape of all trades and commit human resources to a thorough investigation of the role of these brokers shorting products of other brokers. 9. For those that package and sell long-dated risk, tie compensation to the long-dated risk turning out money good as opposed to the risk being sold -- and the same goes for the buyers. 10. Remove the rule that allows public companies to buy back their own stock in last 30 minutes of trading. To me, this was the most mystifying of all of last week's SEC initiatives and indicates that those making the rules must not have a clear understanding of the game. What's the point? Do the regulators want financials to mark up their own stocks into the close? (Encouraging banks to ply their needed capital to mark up their stocks is distasteful and poorly reasoned.) What kind of rule is put in place to deliberately encourage companies to manipulate their own stock prices? Even worse, the ones that do so will be the ones that have little to do with the larger problem in the financial system; they are likely smaller companies with less liquid stocks and typically promotional-style managements that could use shareholder dollars to mark up their own stocks into the close at the same time as insiders sell them. Besides having nothing to do with the primary problem, this rule will ultimately further burn individual investors and erode the confidence of institutional investors in fair markets. 11. Companies begging to be added to the "do not short" list should be ashamed of themselves, especially great companies like General Electric (GE) - Get Report. Indeed, I would like GE's chairman to "man up" and publicly say that the decision to put his company on the list is dumb. Exploiting and executing well in fair markets is what has made General Electric one of the best and most respected companies in the world. GE should act like it and be proactive.

Doug Kass writes daily for

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At the time of publication, Kass and/or his funds had no positions in the stocks mentioned, although holdings can change at any time.

Doug Kass is founder and president of Seabreeze Partners Management, Inc., and the general partner and investment manager of Seabreeze Partners Short LP and Seabreeze Partners Short Offshore Fund, Ltd.