The Securities and Exchange Commission said the ban would expire three business days after a $700 billion federal bailout bill was enacted, but would not last beyond October 17.
The SEC emergency rules are part of a series of government measures designed to restore confidence in battered markets and the ailing financial system, which has been rocked by bank failures and fears of economic recession.
Congress is currently trying to hash out a plan to allow the Treasury Department to buy distressed assets from financial firms -- a move designed to thaw frozen credit markets. The first bailout bill failed, triggering a massive sell-off in markets around the world. The U.S. Senate was expected to vote on a new bill later on Wednesday.
The SEC rules, issued on September 19, include one that requires big money managers to publicly disclose their short positions. That temporary order will expire on October 17, but the SEC said it intends to make that rule permanent.
In a nod to the $2 trillion hedge fund industry, the SEC said the short positions will not be made public for the duration of the emergency rule. It is not clear, however, whether the information will be kept secret under a permanent rule.
The short sale ban has been deeply unpopular with the hedge fund community, which says it has not prevented price declines of financial institutions, volatility in the securities of these firms, or the failure of a financial institution.
Hedge funds have been pleading with the SEC to let the ban expire and keep their short positions private. The funds -- which often use short selling strategies, selling borrowed stock in anticipation the price will fall -- said publicly disclosing their positions would be disastrous to their business.
Regulators in the United Kingdom, Australia and Canada have also imposed similar short selling bans on concerns that the practice has been exacerbating the decline in financial stocks.
The SEC said efforts were focused on securities of financial institutions whose health may have an impact on financial stability.
The SEC also said it extended a curb on abusive short selling rules, including one that makes it fraudulent for short sellers to deceive broker-dealers about their intention or ability to deliver securities in time for settlement. The rules, which crackdown on naked short selling, are expected to be permanent by the time the emergency order expires October 17.
Equity and option market makers will continue to be exempt from the short sale ban on financial stocks, in order to ensure liquidity in the markets.