June 16, 2004
Mr. Chairman, Commissioners,
While we all have our personal agendas with regards to this issue, the responsibility of the Securities and Exchange Commission is mandated by Congress under the Securities Act of 1934. That Securities Act specifically identifies the responsibilities to create laws that serve in the best interests of the Investors. As you read through the comments presented, and the concept proposed, the Commission must maintain that focus ABOVE all.
Will the dematerialization of our securities protect or harm the retail investor? The answer to that is complicated.
1. In highly liquid stocks of well operating businesses the answer would be no. These companies have enough shares and enough controls within the industry that the daily trade volumes and settlements of securities become less of a risk to the investor. The manipulation of these securities based on settlement failures and stock dilution is less likely to take place and thus the Book Entry process presently in place is probably better than 90 accurate.
2. In less liquid securities, where Market Makers can sell without delivery for Bona-Fide Marking Making or where prevalent abuses in shorting take place, dematerialization can be damaging to the investors. These investors rely on the accuracy of Book Entries into their account to determine stock ownership when in fact shares never settled. The settlement failure diluting the investment and diminshing the investors opportunity for profitability on the stock ownership. The Book Entry becomes the catalyst to the abuse.
The decision the SEC must make is whether they have solutions in place to address not only Category 1 securities and their investors but also the Category 2 securities and their investors. Presently the SEC does not and has ultimately ignored the rights of the Category 2 Investor and company in direct violation of the securities act.
The Securities Act of 1934 requires that a PROMPT and accurate clearance and settlement system be put in place. This presently does not exist across the board for all securities and all investors. We know it does not exist because the SEC and NASD have admitted as much in their recent short selling reform packages. Both state Settlement Failures can exceed the entire float of public companies. But, To reach this magnitude of failures cannot happen overnight. It takes time. Time that violates the definition of prompt.
The present Book Entry system within Securities Settlement is flawed. It allows brokers to falsely identify to shareholders that they are in posession of a security they really do not own based on settlement failures. If these failures were rectified quickly it would be accepted but, for settlement failures to exceed public floats, the duration of time spent as a failure is excessive months or longer. Requiring physical certificates is the ONLY present venue for shareholders to use to force the hand of the brokers to go out and obtain those shares. Otherwise, how will shareholders be able to audit the broker-dealers to insure they are meeting their contractual obligations. Broker-Dealers already riddled in numerous scandals over defrauding the investing public.
I can onlt reiterate the responsibilities of the SEC to focus on Investor protection first and foremost. The DTCC Clearance and Settlement System, while non-profit, generates tremendous wealth that ultimately is returned to the firms by way of rebates. Rebates that are never put back into the hands of investors. Our Comissions never go down. The costs to the industry to retain physical shares can be financed, simply based on the volume trading this way, by the rebates generated by the DTCC to the member firms. There would be no addional fees passed on to investors and investors would retain a methodology to check the accuracy of their accounts. Accuracy presently made up of unfulfilled book entry positions that affects the shareholder due to the dilution it creates.