September 19, 2006
Re: File No. S7-12-06
Proposed Amendments to Regulation SHO
To Whom It May Concern,
Thank you for providing interested parties with the opportunity to comment on the proposed changes to Regulation SHO. Our firm is registered as Investment Counsel/ Portfolio Manager and Limited Market Dealer under the Ontario Securities Act. We manage two investment funds on behalf of accredited investors. In that capacity we have both purchased securities long as well as sold securities short. Additionally, we have maintained a long position in a sceurity that has been on the threshold list for virtually all of the period since the adoption of Regulation SHO on January 3, 2005. We also have investment experience both buying and writing options.
We believe that the proposed changes to Regulation SHO are an improvement upon the existing regulation and as such we support its adoption. However, we also believe that additional changes are required to eliminate the chronic fail to deliver problems currently in U.S. capital markets. We support the principle that short sales should only be allowed when bona fide arrangements to properly borrow the shares have been established. We think that this governing principle is the one upon which the regulatory framework pertaining to ALL short selling activity should be based without exception. While we accept that appropriate regulation must allow for the normal human or mechnical errors that occur from time to time, effective regulation must also eliminate any abusive or manipulative practices that result in chronic fails to deliver in the U.S. capital markets clearing system.
With this in mind, we would advocate for a regulatory framework that eliminates the threshold list entirely. We believe that ALL trades should settle on a timely basis and that a mandatory closeout should occur after a reasonable time period for persistent fails to deliver. Our notion of what constitues a reasonable time period is seven settlement days after the normal T+3 settlement cycle. This additional seven day period should be more than ample to correct any human or mechnical trade errors as well as providing an appropriate time frame for any participant to properly locate shares in connection with any short sale for which the original borrowing arrangement was somehow mishandled. We also favour stiff fines or other regulatory sanctions against participants that are chronic abusers of timely trade settlement. Such fines or other regulatory sanctions should target not only the investor (or investment manager) but also the executing brokers who faciliate such trades. It is our view that the substantive portion of the fails to deliver on the threshold list are not the result of routine mechnical errors but rather the result of deliberate manipulative (ie.naked) short sales for which the participant has no intention of properly locating the shares to facilitate timely delivery. We believe that the use of a mandatory closeout system after a reasonable time period has elapsed after the normal T+3 settlement cycle would substantively eliminate the chronic fails to deliver currently plaguing the U.S. clearing system and would improve the overall effectiveness of capital markets.
Once again, thank you for the opportunity to comment on the proposed changes to Regulation SHO.
Jeffrey D. Stacey
Jeffrey D. Stacey & Associates Ltd.