From: The International Association of Small Broker Dealers and Advisors
The International Association of Small Broker Dealers and Advisors
The International Association of Small Broker-Dealers and Advisors,www.iasbda.com submits the following comments on the above referenced proposal to ban short sales for those participating in a secondary offering 5 days before the offering. We believe that the proposal fails to discuss the broader underlying issues behind the problem: potential violations of the locate and tie-in rules.Participation in a secondary offering is voluntary and therefore participants should not have to short to protect themselves. Arguably they should wait until the price drops in secondary trading,that is unless there is a tie- in to future hot issues. In other words, hedge funds may be required to buy secondaries in order to get allocations in future more profitable IPO trades. If so, logically therefore they want to short to protect against an investment they do not make voluntarily. When the positions are immediately closed upon distribution its hard to understand another more substantive purpose. The NYSE staff recently stated that prime brokers should not be ignoring the obvious in such transactions.. But there may be another group of more willing investors, the long lost long term investor(LTI). The LTI will make a long term decision to buy at the offering discount and intend to hold the security. He may however want temporary protection and should be allowed to short and purchase if he holds both positions for a 30-60 day period. The PIPES investor is one example but others may include long term devotees of the company.This holding period would allow small issuers to raise capital in a secondary and allow their investors some protection while holding for the long term.Additionally, the Commission should seriously review the possibility that tie-ins are occurring and determine whether that is good for the capital markets.The Commission can also enforce its current rules more efficiently by insisting that the broker who takes the short sale order insure that a locate is made prior to the offering.These violations are occurring because the brokers handling the short sales are ignoring the fact that the same client is simultaneously shorting. The staff of the NYSE recently warned that it will not allow its prime broker members to turn their heads in such circumstances. These violations therefore occur not because of the lack of clarity but rather because of the lack of enforcement of the locate and tie in rules..
The proposing release also asks a question about aggregation even though it does not propose a change to the aggregation rules generally, which require registered BD'S to aggregate or implement trading units.
Should non-broker-dealers be provided an(trading unit) exception similar to that provided to broker-dealers under Rule 200(f) of Regulation SHO based on these aggregation principles, e.g., should there be a requirement that the non-broker dealer be a registered investment adviser, or be a client of a registered investment adviser for purposes of the excepted transaction? If so, what criteria would be appropriate?
The Commission should not limit its review of the aggregation rule to this limited instance, but review it for all short selling.It is a rule more honored in the breech than in compliance.The staff is aware that real time aggregation is very difficult for most entities and end of day aggregation is even difficult for multi office international firms. End of day aggregation for all entities should be sufficient absent an intentional attempt to manipulate or evade Reg SHO.Rules honored in the breech and rules that every one knows are impossible to follow, degrade the overall regulatory structure.The Commission and the staff should adopt a more realistic approach to this problem and allow end of day aggregation for all short sellers that would be the standard for the following day's trading.
Most importantly the Commission must assess the effect which these rules will have on small company capital raising.The recent Paulsen committee report suggests a more robust cost benefit- analysis and this proposal is an excellent place to start.
Peter J. Chepucavage
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