August 16, 2006
From: Charles Patrick
Sent: August 16, 2006
To: rule-comments@sec.gov
Subject: File No. S7-12-06
Regulation SHO, in my opinion, has been a total failure. It should be looked at as a starting point, but now major changes need to be made. The market needs to be fixed and the playing field leveled for all investors both long and short. It appears that in the past, the SEC has been the protector of the market abusers rather than the individual investors. The SEC should not be the defense attorney for the market establishment, but the prosecutor representing the people and enforcing the market laws of the Securities Exchange Act of 1934. I recommend the following changes:
1. Eliminate the Grandfather Clause ASAP. There should be no protection for miscreants to continue to abuse the system.
2. All stock trades should settle in 3 days or less or be bought in at market open on the 4th day. In an age of computers, all trades should settle in seconds not days. All trades not settled within 4 days should have fines levied against the responsible broker.
3. No commissions of any kind should be paid until the trade settles. Too much money being paid ahead of settled or never settled trades.
4. Eliminate the Market Maker exception. No reason for naked short shares to exist. Naked shorting by OPTIONS MARKET MAKERS should not be allowed. There is no reason to allow the options MMs to shift 100% of their risk onto the backs of the stockholders without compensation.
5. Eliminate the use of IOUs or entitlements. Reg SHO as it exists allows a buyer to have his funds taken in exchange for nothing except electronic entry of numbers in his brokerage account in the words of DTCC, the buyer gets an "entitlement" for the funds paid, not actual shares. Entitlements are not what investors expect. They are assuming they have purchased real shares representing a percentage of ownership based on the known outstanding number of a companys shares.
6. Audit the stock loan program of the DTC/DTCC and all its subsidiaries and establish oversight to assure settlement accuracy -- and prevent the hiding of over-voting of proxy shares. One share, one vote not a partial share vote.
7. Pre-borrowing must be the rule. Shares MUST be borrowed, not just located. Make it mandatory for all short sales to first borrow real shares prior to executing a short sale.
8. Loaned shares must be restricted and not allowed from IRA and cash accounts. Presently there seems to be no way to be sure this is done correctly. There should also be a provision to allow investors to block their shares from being loaned and if they allow their shares to be loaned, they should know when they've been loaned and the investor should receive interest on those loaned shares. Also, the number of shares that may be loaned from margin accounts in debit should be limited to shares of value not exceeding 100% of the proportion of margin debit collateralized by those shares.
9. All trades must clear through the Depository Trust and Clearing Corporation. All ex-clearing activities between brokers and dealers must be outlawed. Only when all trades are made through the DTCC, with SEC enforcement, can oversight of trading be effective.
10. Eliminate any and all possibility that the same shares are available for borrowing to more than one broker/dealer, or short seller. Eliminate multiple sources for the same borrowed shares. Insure there can never be more shares in the system than the issuing company has issued. Eliminate multiple loaning of shares.
11. There should be registration of any position, long or short that is 5% or more of company-issued shares.
12. Make FTD data for all stocks on an individual basis available to the public.
13. Make the penalties for violating the law severe enough to make them more than a "cost of doing business". I believe their ill-gotten gains are so large that the fines are miniscule and not a detriment to future actions especially when they are dismissed with no admission of guilt. Enforce the rules with stiff fines, lifetime disbarment from the securities business and jail time for those who break the rules. My personal preference on guilty individuals cheating the investing public should fall under forfeiture laws and everything they own confiscated as punishment for the crime. Also, I am not sure where all the money from fines paid to the SEC goes, but since the investors and companies are the ones that are normally harmed, the money should be given to the investors if that can be determined or to the wronged company to enhance shareholder value. Rewards paid to Broker/Dealers, who notify the SEC concerning manipulation of stock price, either up or down, and the offenders are found to be guilty.
Thanks for the opportunity to voice my concerns on Reg SHO. Please do what needs to be done now to stop abusive manipulation. Normal supply and demand for a limited number of shares should make the market, not entitlement shares. It also doesnt help when SEC personnel deny that Naked Short Shares exist and blame the investors because they only want the share price to go up. People like this are either lying or too nave to be employed at the SEC.
Sincerely,
Charles Patrick
Tampa, Florida