May 7, 2008
The proposed rule should put the burden of proof squarely on the person, who subsequently fails delivery, as to his or her intention at the time the person placed the order to sell, rather than on others to prove such person's scienter or motive. I therefore suggest the proposed rule would be improved if it read along the lines of the following: "It shall presumptively 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 fails to deliver the security on or before the date delivery is due, unless such person demonstrates that the broker, dealer, participant of a registered clearing agency, or purchaser, as applicable in the circumstance of such person's order to sell, was not deceived as to such person's ability to deliver the security on the date delivery is due." Such a rule would not be unduly burdensome to anyone with a valid excuse for failing to deliver but would put more "teeth" behind the delivery requirement.
Broadly speaking, however, highlighting delivery-failure as Rule 10b-5 fraud will, unfortunately, do little to change the present situation of persistent delivery failures in certain stocks or, for that matter, the creation of new "strategic" delivery failures in other stocks. Bad actors will always attempt to circumvent the letter and spirit of society's rules and law, and the necessity of the proposed rule was completely foreseeable when Regulation SHO's reasonable-grounds-to-believe standard was being considered as part of the locate requirement in Section 203. As for existing delivery failures, enforcing forced buy-ins, over a reasonable time period and for as long as it takes, is the only way to clean up the present "grandfathered" delivery-failure mess. But preventing the creation of new strategic delivery failure positions from this point forward should be one of the SEC's highest priorities.