April 8, 2007
The SEC must begin applying mandatory buy-ins to cases of failed deliveries whether or not they occur on the scale required for a stock to be designated a threshold security. This approach is used in Germany, Austria and Singapore, and the SEC could apply it initially in a pilot program limited, for example, to all stocks that were ever designated as threshold securities and all stocks with a market capitalization under $5 billion.
The SEC must remove financial incentives for market predators who continue to create and sell unregistered securities and in general abuse the settlement process. Don't let them have any of the cash, including any commissions, until they settle the trades. Don't let their clearing firms mark down the prices of shares the participants short as the prices are driven down, until they settle the trades.
The stocks listed as threshold securities have been a shopping list for strategic naked short sellers. The grandfather clause, market maker exception and lack of SEC scrutiny has allowed an unbridled economic Armageddon to destroy more than 6000 companies, put more than a million people out of work, and loot 99% of the investing public out of trillions of dollars.
The SEC must also investigate the extent to which substantial and persistent fails to deliver may occur outside the DTCCs normal clearance and settlement system, through ex clearing arrangements between private financial institutions. The potential harm to the efficiency of the markets and to individual stocks of large-scale, extended fails should be the same, whether they are transacted through the normal DTCC clearance process or through ex clearing arrangements. The critical difference is that fails occurring through ex clearing elude the requirements of Reg SHO, both in its current form and under the proposed amendments. The SEC must put into place additional regulation to ensure that all transactions are subject to the same scrutiny and investor protections.