October 9, 2009
The U.S. stock markets face a crisis, due to the failure of market participants (brokers and hedge funds) to deliver shares of stock theyve sold. Because of the structure of the market system, sellers can process transactions, get paid, and then fail to deliver stock to the buyer, essentially refusing to make good on their sale. This creates an environment where investors pay money for their buys and yet dont get their stock – and their brokers dont alert them when it happens, as they would then have to break the trade, and refund the commissions. Instead, the broker places a marker in investor accounts, an IOU, which is represented to the investor as the genuine article. This is fraudulent, and badly skews the supply/demand equation investors rely on for fair valuation of their holdings. There are rules against all this, but they are rarely enforced, and there are numerous loopholes, with virtually no penalties for violations.
The undersigned hereby support the proposals and changes described in the NCANS comment letter to the SEC on proposed amendments to Regulation SHO, and demand immediate implementation of the market reforms outlined therein.
The letter can be viewed here:
Outline of the Issue
The current regulatory scheme allows market participants to advertise for sale, and sell, shares of stock which they dont have, and may have no intentions of delivering. This creates an environment where investors and companies are at a disadvantage, as supply can be created virtually at will, overwhelming any demand, and leaving buyers without the property they paid for: genuine shares of stock. Delivery failure deprives investors of the rights of the genuine article: the right to vote, the right to preferential dividend treatment, the right to legal recourse against the issuer, and basic property rights. Additionally, it allows those failing to deliver to depress the price of targeted stocks, depriving investors of fair valuation for the property they paid for, but never received.
Failing to deliver is a significant problem, which we know from Freedom of Information Act (FOIA) requests at www.TheSanityCheck.com, revealing hundreds of millions of failed deliveries per day. The industrys continued excuses that these massive numbers can be largely attributed to innocent explanations defy all logic and reason.
It is time to end the abuse of investors and issuers at the hands of larcenous participants who refuse to deliver what they were paid for. The retirement savings of a generation are at risk, as is the presumption of the integrity of the markets essential function namely, an auction system where money is exchanged for genuine shares of stock, which are promptly delivered, and are priced according to legitimate supply and demand.
That is not how the markets currently operate, which places the entire system in jeopardy. The U.S. equities markets require immediate reform if investors are to have any faith in the markets integrity. There is already a marked slowdown in U.S. IPOs, and a troubling reduction in world capital moving into the U.S. markets. The trend is clear, and is not promising – issuers are migrating to safer and more hospitable markets, and investor dollars are following them. This is the inevitable result of widespread awareness of the U.S. markets inequities.
This petition is intended to demonstrate the concern and commitment of investors who believe that the current status quo favors the interests of Wall Street over theirs, and that the SEC has little or no regard for the public interest, or for investor protection – in violation of their mandate in the Securities Exchange Act of 1934.
Delivery Requirement of Sellers to Purchasers
The SEC has refused to implement and enforce Section 17A of the 1934 Securities Exchange Act – which requires prompt clearing and settlement of trades, including transfer of record ownership, as well as a linked clearing and settlement system – even though investors are harmed by the current de-linked scheme, as well as the pandemic delivery failures evidenced in the FOIA data. This flies in the face of investor protection and the notion of fair and safe markets.
Section 17A of the Securities Exchange Act of 1934 states that, The prompt and accurate clearance and settlement of securities transactions, including the transfer of record ownership...are necessary for the protection of investors and Section 36 of the same Act states clearly that SEC exemptions are only allowed, to the extent that such exemption is necessary or appropriate in the public interest, and is consistent with the protection of investors.
In plain English, prompt delivery (settlement) is required, and the only exemptions allowed are those that protect investors.
The SEC has provided securities and options market makers exemptions from reasonable delivery, enabling them to fail to deliver securities they sell, without limit, and without any requirement to eventually deliver.
The logic behind this SEC rule is to allow market makers to create liquidity – ignoring that bona fide market making doesnt entail selling without delivering for days, weeks or months at a time.
The options market maker exemption enables options market makers to hedge their risk exposure and provide liquidity in the options markets. However, left unsaid is that the market makers cost to hedge their sale of put options is transferred from those speculating in options, and imposed upon unsuspecting equity investors. This directly harms equity investors, and sacrifices the integrity of the equities market for liquidity in the options market. This is the antithesis of investor protection – and is something the SEC is not empowered to do. Market makers enjoy more profitable trading, but equity investors pay for it, with uncontrolled dilution and delivery failures, resulting in lower share prices. There is no reason for this exemption other than to support options trading at the expense of equities investors – and that flies in the face of Sections 36 and 17A of the 1934 Securities Exchange Act.
The NCANS letter describes in detail the deficiencies of the current regulatory scheme as it relates to exemptions for certain classes of participants from reasonable delivery rules. It also highlights the damage caused by the ongoing unregulated creation of securities entitlements, as well as the SECs failure to observe the requirement that clearance and settlement be linked the inequity created by a lack of any transparency for short interest and delivery failures the lack of any meaningful penalties for violation of prompt delivery requirements and a general refusal by the SEC to uphold Section 17As requirement for prompt clearance and settlement of all trades, including transfer of record ownership.
Also alarming is that the SEC has engaged in a campaign of deception, wherein it obfuscates the true extent of the naked shorting/failure to deliver problem by using misleading or incomplete data. This sort of dishonesty from a regulator chartered with protecting investors is unforgivable, and must end. Investors in the US markets deserve accurate and timely reporting of material information, including short interest, and failure to delivers, in the companies they invest in. Monthly short interest reporting, two weeks out of date, is inadequate. Zero reporting of delivery failures is inadequate. The markets must have transparency so that investors are not dependant upon a regulators assurances that all is well, when FOIA data conclusively demonstrates those assurances are false and misleading.
This petition seeks the following clear, achievable actions by the SEC:
1. Enforcement of all provisions of Section 17A of the 1934 Securities Exchange Act
2. The elimination of any exemptions the SEC has granted that harm investors and that violate Section 36 of the 1934 Securities Exchange Act - including exemptions for market makers that allow delivery failures
3. An end to grandfathering delivery failures. Immediate revocation of the grandfather exemption and a buy in of all grandfathered delivery failures
4. Universal delivery requirements for all, without exception
5. Universal buy-in requirements for clearing agents when delivery failures do occur
6. Universal pre-borrow requirement for all short sales
7. Regulation of security entitlements, requiring prompt delivery of all underlying securities, on a one-for-one basis
8. Issuance of a serial number for each share, for verification of delivery and borrow
9. Transparent and accurate reporting of market data, including complete daily short interest and delivery failures
10. Implementation and enforcement of meaningful penalties for violations, including revocation of licensure for recidivist violators
These simple steps would correct 90+% of the deficiencies in the current regulatory scheme, and would go a long way to restoring investor confidence in the integrity of the markets. Buyers have a right to receive what they paid for, and it is not within the power of a regulator to allow Wall Street to scam the public by failing to deliver. It's time to end the abuse.
The SEC must fulfill its role to police Wall Street and protect investors. Settle the trades, every time. Punish those who refuse to do so. Without exception. Buy-in transactions that have failed delivery. Report accurately and in a timely manner. Require a pre-borrow. Comply with the 1934 Act in its entirety. This is all very basic, common sense and is already mandated by Congress.
The undersigned hereby support the NCANS letter as well as the ten fundamental requirements articulated in the numbered points above.
(and over 9500 other constituents at http://www.petitiononline.com/mrktrfrm/petition.html)