January 22, 2007
Mr. Chairman, Commissioners,
Today is January 22, 2007. It is exactly two years and 18 days since you first enacted the grandfather clause of regulation SHO violating pre-existing Federal Securities and Federal Constitutional laws.
Over the past two years We the People have seen the spoils of your actions as our markets continue to be manipulated by the special exemptions and privilege you provide to these billion dollar corporate operations we call the financial services industry. As Wall Street finances their own, with annual bonuses far exceeding $20 Billion, the money the industry uses to do so is based on the SECs unwillingness to hold these firms accountable to the securities laws put in place to protect the investing public. We the People pay the sacrifice for your failures as our losses become the ill-gotten gains that make up these bonus pools.
But has the SEC gone too far in their actions to protect Wall Street from the accountability of their actions?
Last year the State of Utah passed legislation that merely forced broker-dealers within the state to register the information pertaining to excessive settlement failures in the system. Failing to do this would result in a fine to the firm responsible to report. The State requested such information to begin the process of investigation and enforcement when clear abuses become evident. The States also took such action because the Securities and Exchange Commission, while a proponent of full transparency, has allowed Wall Street to remain opaque to such valuable regulatory information.
While the Utah law was passed, the law has not yet been incorporated due to threats from both the Industry (SIFMA) and the Commission. In response, Utah postponed their law for one year to provide the SEC time to introduce federal policies to correct past mistakes.
Instead of responding expeditiously, the SEC continues to delay the incorporation of new legislation even though it has been nearly 5 months since the 60-day comment period has expired (7 months since proposal date). This continued delay only runs the risk that there will be little opportunity to weigh any significance in the changes incorporated if change is incorporated at all.
Since the SEC has dragged their feet on protecting investors, additional states have stepped up to propose similar legislation to that of Utah.
Recently Arizona and Virginia dropped bills into Legislature for consideration. As these states and others continue to take such steps, their actions become clearer and clearer as the voice of no confidence in the SEC continues to grow.
Recall, it has been the State regulators that have been the leaders in the exposure and closure of all of the most recent securities fraud related matters. The SEC denied abuse existed, and then admitted the agency was simply monitoring the situation while investors continued to be victimized. A process states are no longer willing to accept.
And for all the positive actions that the States have taken to protect our nations investors from the fraud the SEC has denied exists, the SEC has dragged their feet again as more and more at the State level cry foul.
The public should be made aware that the Virginia and Arizona bills have been stricken (Virginia) and halted (Arizona) based on a contact the SEC had with the proposing member of these states legislature and threatened taking possible action against should they proceed citing the lack of state authority to preempt federal laws. Except that is not what the state legislation would be doing.
The SEC bullied the states to stay away from opening the can or worms the SEC continues to try to cover-up.
What about the rights of state government to protect their constituents?
Under the Uniform Commercial Code Section 8 Chapter 25, the securities intermediary is obligated to properly handle the transfer of a financial asset. They also have an obligation of good faith that the securities intermediary will enforce the contracts and duties of the securities transaction. Under Rules 15c3-3 and Rules 15c6-1 of the Securities Act of 1934, that contract is 3-days.
When the financial intermediaries fail to enforce contracts in good faith, and settlement failures persist to such levels that the SEC has to grandfather them, than this provides the State legislation with the right to pass laws that aid each state with the opportunity to acknowledge and investigate abusers.
The SEC makes the claim that the Commission is not in the business to enforce contracts. If not you, than who will force those intermediaries to meet the intent of rules the Commission promulgated?
Under this UCC the state can insure that contracts are being enforced and can most definitely take steps to insure the UCC is being adhered to. Requiring the transparency of settlement failure data is part of the investigative arm to that enforcement process.
As has also been pointed out in previous comment memos, our Constitution provides for the right to protection from the government seizing our property without due compensation.
Today, property is being purchased by investors who have every expectation that such property will be delivered on time as identified under contract. When such a decision is made that the property (financial asset) is not delivered, the recipient has a right to just compensation for any delays or has the right to enforce delivery. Or finally, the recipient has the right to cancel such an order if delivery is beyond reasonable expectation.
Today the SEC has allowed the deliverer to delay such delivery without pre-agreement from the recipient buyer and without just compensation. The SEC, in doing so, is violating the Constitutional rights of every investor who remains unaware that delivery has failed through the creation of a smoke and mirrors process.
Before the SEC makes note of book entry in a recipient account as acceptance of delivery, the book entry process was a temporary stopgap to settlement delays in an increasing liquid market and was not intended to be a multi week, multi month delay in settlement process. Book entry was an evolution of the liquidity the SEC sought and the liquidity the hedge funds create. But liquidity should not be an excuse to destroy the investment itself.
Book entry is not the delivery of a financial asset but an IOU and thus that IOU does not hold all of the terms and conditions that comes from the true financial asset.
In conclusion, based on pre-existing state and federal laws, the clause presented in Regulation SHO is in violation of the rights of the people thus giving right to states to take action if the SEC is unwilling to do so on their own or expeditiously.
Despite the assertions of this agency, We the People have rights and none of you have demonstrated a modicum of respect for those rights over the rights of the criminal enterprise you protect so handedly. I only hope the GAO, already investigating this agency for conflicts with Wall Street, takes a closer look at the possibility of threat the SEC imposed on those states seeking to protect their constituents from the crimes of Wall Street.
I request that the SEC get off the dime and put in place laws that clearly define the settlement process and the process of securing settlement under terms of failure. Guaranteed delivery and close-outs must be spelled out in such terms that those under the honor system of self regulation can no longer fail to settle these trades because of the financial liability it imposes on them for under performing their duties.
The SEC has long claimed that they are in fear of the market volatility that would be associated with forcing the immediate close out of trade failures. Unfortunately the SEC has never responded to the argument that this condition would not exist had those member firms had conducted business in a fair and safe manner in these past years.
Short squeezes due to closing out long pre-existing failed trades can only take place if there are excessive failed trades in a stock. It is a circular argument whose foundation is based on the settlement failure for which Congress directed this Commission, under the securities Act of 1934, to eradicate for the safety of these markets. It now appears the SEC ignored these directives and created that market liability Congress was concerned about.
This Commission must adress this issue and do it for the safty of the public. All the public.
Dave Patch