March 27, 2007
Mr. Chairman,
Regulation SHO is clearly an issue that has created a war between Wall Street and the small public issuers and their investors. This war has been created because the SEC blatantly mishandled the situation. The public comments by various members of the Commission have become conflictive as the Chairman speaks of abuse and victims while other members of the Commission speak of creating a compromise for industry members and processes.
Very little of any dialogue is focused on the losses incurred by real victims with the primary focus being about protecting the industries revenue train.
This crisis was initiated many years prior to your tenure but has survived due to the agency's lack of respect for what the investing public has to offer. Naked shorting abuses wasn't on the SEC's radar when the abuse evolved, but it was on the radar of the public and small issuers.
It was because they were the ones being impacted.
The public sought out the aid of the Commission but was turned down without a second thought. Former SEC attorneys' have spoken out about how they were hustled off such investigations of abuse because it was not a commission priority to look at member trading practices, the Commission wanted to focus the enforcement efforts outside the "good old boys club".
When the Commission finally proposed Regulation SHO in October 2003 the investing public saw a light at the end of the tunnel. Or so they thought. Then the ill-advised grandfather clause suddenly put out that light as the public knew long ago SHO was merely a placebo for the cancer in market abuses and manipulation. The publics right to protection was being tested as the Commission delayed rule-making that would ultimately address the fraud.
In the months that followed the release of Regulation SHO the SEC presented memos into public record of the meetings held between the Market Reg. Staff and the Wall Street members. Minutes were not posted in these public documents but the subjects of the meetings were and most of the subject matters involved the cost to implement change.
This industry of millionaires and billionaires was worried about costs. Costs that would have a direct impact on future compensation packages.
Never once did the SEC seek out representatives of the public to better understand, beyond a memo drafted on a computer, what was on the minds of the investor or issuer. The SEC staff working this reform had predetermined that the public was not qualified to understand or address this issue and yet it was the public that raised the awareness of this fraud over a decade ago.
Today we are embroiled in yet another war as the Commission has resubmitted an amendment to Regulation SHO after 7 months have passed since the first comment period ended without a resolution. Why such a long delay to resubmit data that has been in the hands of the SEC for over a year is a concern somebody at the Commission should address. Afterall, it was you Chairman Cox that stated before an audience at the US Chamber Summit that SHO was not working and that people continued to be victimized.
The focal point of this reform, and this latest delay, has taken public appearances with the industry and has identified to the industry his mission. James Brigagliano intends to take a "carefully honed approach" in addressing this fraud similar to the cautious steps taken in 2004 when the grandfather clause was initiated. This approach must be taken, according to Mr. Brigagliano such that there are minimal impacts on liquidity despite what that means to investor protection.
Mr. Brigagliano later revealed that efforts will be made to insure that there is little impact on the prime broker agreements with the members and hedge funds.
I ask you Mr. Chairman why, with all this animosity between the SEC and the public issuers and their investors, has the SEC shown such minimal respect for the understanding this public has to such real market practices and the dispair they feel for being victimized by the members and then afgain by Federal regulators.
Why has it been that the Commission fails to hold meetings with the investing public or knowledgeable public executives to identify a solution that supports the interest of both parties? Are you so sure these individuals do not have better solutions than those that have allowed this abuse to escalate to such levels that it is at today? Levels requiring a tempered solution so as to not rattle the markets.
The SEC has shown their cards regarding the alliances created, the fireworks display was loud and clear when the grandfather clause was first publicized. Such an alliance with Wall Street has now raised concerns over Commission objectivity to levels that reach Congress, State Regulators, and State Legislature.
There are workable solutions here but while the public has responded with both disdain and solutions, the industry has repeatedly responded seeking little or no change because of what impact it may have on the corporations bottom line.
This process of public comment does not work if it is only window dressing where the real negotiations are held behind closed doors with the industry responsible for the fraud in the first place. Settlement abuses can only co-exist with a failing compliance system. Settlement abuses can not exist with a fully functional and process controlled compliance system. People have to ignore the red flags for abuses to persist for as long as they have. Unfortunately the SEC is speaking only to those who have ignored them.
You Mr. Chairman did not initiate this war you came in after it started. But like our President with Iraq, you are now the magnet this capital market war attracts to.
I urge you to deal with it soon and do so by taking this extended delay in action to create an environment where all parties involved feel as if they played a role in the negotiation process. Another mess like the grandfather clause will not be tolerated for long by state agencies or Congress. Too many promises have already been made and been broken. That story is gettting old.