April 11, 2008
For the ease of regulation and enforcement, put the burden of delivery on the seller as it is in most business. If a person fails to deliver, the money is refunded and the buyer can go elsewhere, or can agree or not agree to wait for delivery. When a security is not delivered, the broker should receive no commission. This would be an incentive for the broker to see that real securities are delivered within the settlement period.
"It shall constitute a manipulative or deceptive device or
contrivance as used in section 10(b) of this Act for any person to submit an order to sell a security if such person (deceives a broker or dealer, a participant of a registered clearing agency, or a purchaser about its intention or ability to deliver the security on the date delivery is due, and such person)fails to deliver the security on or before the date delivery is due."
A simpler and more effective rule would be:
"It shall constitute a manipulative or deceptive device or contrivance as used in section 10(b) of this Act for any person or broker to submit an order to sell a security if such person or broker fails to deliver the security on or before the date delivery is due."
If a broker is arranging a borrow, he too, will be held responsible to provide real shares to borrow within the settlement period and any charges of manipulation would be shared with the broker who made claims that he could provide shares to deliver. If there are no shares to borrow, then the short sale would not be possible. The shares of a company should be finite and it is within the realm of possibility that none of the owners is willing to lend shares to short.
If a person is holding certificates, he would have to turn them into his broker BEFORE they can be sold to insure that the certificates are not "lost" and the seller could not fail. The broker would have to secure the certificates at latest before the date delivery is due.
Scenario: A person calls his broker and says, "I'm sending you shares via Fedex to sell. Please execute a sale as soon as they arrive. Please notify me upon their arrival."
If the shares are lost in transport, the burden lies with seller who must track them down. The buyer does not have fakes shares past the settlement date, as he was sold real shares by someone else who actually had his shares at his broker.
Having the security available for sale when the sale is executed makes it impossible to fail delivery. It puts manipulators and conspiring brokers in a situation they can't defraud investors. Isn't that the point?