The Securities and Exchange Commission adopted two regulations Wednesday aimed at strengthening investor protections against "naked" short selling. The move by the SEC was in reaction to concerns that many financial stocks were losing value at an alarming rate due to aggressive bets by short-sellers who profit when prices fall.

Critics, however, say that the SEC has not gone far enough to prevent stock manipulation, and some short-sellers said the rules will do little to stem the market's decline.

In an ordinary short sale, the short seller borrows a stock and sells it, with the understanding that the loan must be repaid by buying the stock in the market (hopefully at a lower price). But in an abusive naked short transaction, the seller doesn't actually borrow the stock, and fails to deliver it to the buyer. For this reason, naked shorting can allow manipulators to force prices down far lower than would be possible in legitimate short-selling conditions.

The agency said on Wednesday it required short sellers and their broker-dealers to deliver securities by the close of business on the settlement date, and said broker-dealers who violate the requirement will be prohibited from short sales in the same security unless certain conditions are met.

According to the SEC, those who lie about their intention or ability to deliver securities in time are breaking the law when they fail to deliver.

"These several actions today make it crystal clear that the SEC has zero tolerance for abusive naked short- selling," SEC Chairman Christopher Cox said. The agency's divisions, including enforcement attorneys and market inspectors, "will now have these weapons in their arsenal in their continuing battle to stop unlawful manipulation," he said.

The prohibition on the broker-dealer's activity applies not only to short sales for the particular naked short seller, but to all short sales for any customer.

Critics, however, say  the SEC already has been putting a tighter leash on short sellers, making a greater effort to enforce rules that already existed. TheStreet.com on Wednesday said portfolio managers that oversee funds with short positions believes the SEC's changes won't have a major effect on the share prices of firms getting hit hardest.

"It's very hard to manipulate in the current environment because, first, we know we're being observed," Vivienne Hsu, senior portfolio manager of the Schwab Hedged Equity Fund, told The Street. "And, second, the market would squeeze out those types of buyers."

Overstock.com chairman and CEO Patrick M. Byrne questioned the value of the SEC's move on Wednesday asking, among other things:

1. How will the SEC determine whether an institution is in compliance with this rule? The only way to determine compliance is through an SEC audit, something that could only occur months after the fact. In the case of a bear raid, that will be too late.

2. Where is the 'buy-in' requirement? Under the new SEC rules a crooked hedge fund can still naked short sell without settlement and keep that short open indefinitely. It appears that only future naked short sales will require a pre-borrow and that there is still no closeout requirement for failed trades.

3. Where are the penalties? Without meaningful penalties, these rules have no bite. The SEC needs to make sure that the rules are strictly and aggressively enforced -- both for failures to deliver that occur within the CNS system and outside the CNS system in ex-clearing trades, where, I suspect, there is naked shorting that makes the object of current SEC concerns look like small potatoes.

This summer, an emergency ban on naked short selling applied to just 19 major financial stocks, such as Fannie Mae, Freddie Mac and 17 large investment banks.

The New SEC Rules

One SEC regulation eliminates an exemption for options market-makers to deliver shares of companies placed on so-called threshold lists. Companies are listed when they have a high number of borrowed shares that haven't been delivered.

The rule will make it harder for options market-makers to hedge trades when they sell put contracts, Stephen J. Nelson, a securities lawyer in White Plains, New York, told Bloomberg News on Wednesday.

"If you want to short the stock you're going to have to deliver it, and the only way to really do that is to pre- borrow,'' Nelson told Bloomberg. "Professional traders are not in the business of taking that kind of risk.''

A second SEC rule imposes penalties on brokers if their clients haven't delivered shares to buyers three days after a short sale. For the specific security that hasn't been delivered, the mandate restricts brokers from conducting additional short sales on behalf of all their customers.