March 25, 2008
Thank you for the ability to comment on the proposed Naked Short Selling Anti-Fraud Rule.
The SEC attitudes towards the extent of naked shorting within the markets has come a long way from when the former SEC director of market regulation, and Commissioner, Annette Nazareth, stated in a NY Times interview that naked shorting was no more than the cry from investors who wanted their "stocks to go up."
The implementation of Reg SHO with it's threshold list and Grandfather Clause, in part, evidenced a significant degree to which FTD's, including NSS, had occurred within the market. The creation of the Reg SHO Grandfather Clause effected the SEC's public unaccountability, on the threshold list, for all FTD's that had occurred prior to the 2005 Reg SHO implementation date.
Regarding this NSS Anti-Fraud Rule, the Commission keeps referring to "abusive naked shorting". Which begs the question, is their a form of naked shorting that is not abusive? Is there a form of Fails To Deliver that does not adversely corrupt the fulfilment of that trade?
(please see Merriam-Websters for a definition of "abusive", and "corrupt")
I point out that whenever an FTD occurs, that the securities seller is acting in an abusive manor regarding Fair and Honest market practice.
Please, Sirs, drop the word "abusive" , as it only creates a false interpretation that some FTD's do not abuse the buyers rights to prompt delivery, (and the Company's right to fair market pricing based upon true buys and sells. See below).
My second problem lies with the SEC's interpretation of background for this rule, in that the SEC takes the following position that "Those fails can have a
negative effect on shareholders, potentially depriving them of the benefits of ownership, such as voting and lending."
There is a much greater deleterious effect caused by FTDs.
In the above, the SEC appears to fail to recognize and acknowledge that ALL FTDs negate the upward pressure upon the security price that an actual buy-in and delivery would effect. This, in turn, creates a delusional effect upon that security's share structure as the "buy" side of the contract is not met with purchase into that security, but is replaced with a virtual IOU (unbeknown to the buyer). This dilution exists as long as the FTD exists, which may be weeks, months, and years, as seen within the threshold list.
This is the point that fairly equates FTDs with counterfeiting of stock securities, in many investors opinions. All FTD's create an extra account position in the market for that security. Albeit, one that is not a true company issued security, the FTD sits in an investors account looking just like an actual security, but it does not equate to a buy-in which should have put upward pressure on the price. Certainly, the FTD account position is not "legal tender". It electronically duplicates a security account position, no different than if a stock certificate where counterfeited and passed off with a hidden caveat that a real certificate is still owed, but may actually never be delivered.
My third problem is the SEC's reliance on Scienter as a necessary element for the violation of this proposed rule.
Do traffic violations occur based on Scienter? Of course not. And Scienter makes no sense in this rule accept to allow another loophole for FTD's to occur as a failed trade non-violation.
If a traffic officer had to determine Scienter for every red light violation, we would have much more dangerous intersections, I can assure you.
The proposal states, "Thus, at the time of
submitting an order to sell short, market
makers that have an exception from the
locate requirement of Regulation SHO
may know that they may not be able to
deliver securities on the date delivery is
Please eliminate market maker locate exceptions. You assume MMs engage in bonafide market making activity. What about manipulative market maker activity? You will have to prove Scienter?
This is a loophole rip for abuse. Fair and Honest Markets should not be comprimised for speed. MM's will take advantage of this. Dont you know that?
It is irresponsible for the SEC to consider any FTD, including all naked short sales, as non violations. Every FTD and NSS abuses fair trade practice, harms an investor, as well as the relative corporation who's security is sold, yet not bought into. In turn, all accounts containing that security, and all market index's are effected, .... economies, and arguably even national economic security is effected adversely by all FTD's, including all NSS.
Please, good Sirs, do your job to the fullest, now.
Thank you very much,