September 18, 2006
Ms. Nancy Morris September 18, 2006
Secretary
Securities and Exchange Commission
100 F Street, NE
Washington DC 20549-9303
Regarding Release No. 34-54154 file No S7-12-06
Subject: Reg. SHO needs a balanced short vs margined long structure.
I am a long-term investor in a heavily naked shorted stock, NFI, and a signer of the NCANS letter Reg SHO comment letter describing our recommended revisions. I have one additional item I believe the SEC needs to implement which the NCANS letter falls short of mentioning.
By SEC regulation firms which purchase a financially significant portion of a company are required to report to the SEC their concentration in that particular companys stock within a very short period of time after hitting a trigger point. I believe firms longs in a stock have to report significant changes in ownership beyond 5%. This is done to inform the market place of a significant change in ownership of a company. Yet a firm shorting a company to this same percentage is not required to disclose that same level of financial impact from their short position. The lack of financially significant short position report in a company is an inequity in the securities market place, in my opinion.
It is unfair competition how a short or a market maker is permitted to take a 5% or more short position in just a single day without informing the market place of the impact they have on the company and the market place. We have seen single day short volume changes of 11-66% of in NFI outstanding shares, which is many times what the long would have had to report.
In the case of a REIT when shorting exceeds 10% that is more leverage than any single owner is allowed to own by IRS law, the excess above 10% gives the short an unbalanced leverage advantage. Lacking a comparable upper percentage limit the short will always be able to over sell REIT maximum permitted ownership, and no single owner could even offset that much selling. If the long tried he would have to file an SEC significant event report, for every large increment over 5% that he bought. Why should not the short be required to self report the same negatively significant economic event?
The short position is intended to offset the margined long position. Margin accounts have barriers set for the long shareholder whereby he cannot take on more risk than as high as 60% and usually lower if done in any one stock. However, it has been seen in many heavily shorted companies the short positions have at times exceeded 100% of the outstanding shares available to purchase. To maintain the original intended balance between the margined long position and the shorted position these two parameters should never be permitted to overwhelm the others offsetting position. Naked shorting of any kind further endangers that intended balance.
Our retirements more each day depend upon a fair and orderly securities market place, yet these naked shorts are currently able to put retirees in economic peril, or failure. This must be changed.
As the naked shorters gain economic leverage, strength and/or develop better conspiracy plans they will grow to be able to take on the very largest in the US securities industry. Their growth into a dominating size by using illegal means has to be stopped NOW before it becomes too late
Thank you for you kind attention to this comment.
Donald Miller