December 29, 1999
Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington D.C. 20549-0609
RE: File No. S7-24-99: Short Sales, Release No. 34-42037
Dear Mr. Katz:
I am writing on behalf of the Board of Directors of the Association of Publicly Traded Companies ("the Association" or "APTC").
APTC is made up of small cap and mid cap companies. The Association and many of its members have been active engaged over a number of years in the effort to eliminate manipulative schemes involving short sales. Indeed, over the past decade, many of the efforts to address manipulative short sales through regulation, disclosure and enforcement have enjoyed the active support of the Association. In particular, a 1991 SEC concept release on short sales disclosure, No. 34-29278 (the 1991 Release"), was based on a petition for rulemaking filed by APTC.
The issuers' perspective on short sales is similar to the traditional view of the Commission. We see potential impairment of both investor confidence and capital formation from manipulative schemes based on short sales. APTC does not oppose short sales per se. Although issuers may be skeptical of the many benefits that short selling is reported to deliver, the Association opposes only the manipulative use of short selling. Therefore, we welcome this review of the issue by the Commission and we are pleased to comment on the present concept release ("the 1999 Release".)
Additional History of Reviews of Short Selling
The 1999 Release gives only passing note to the 1991 Concept Release based on a proposal by APTC for mandatory disclosure of significant short positions. 1999 Release, footnote 45. APTC believes it is unfortunate that the 1999 Release does not elaborate on the results of the 1991 Release.
The 1991 Release, based on the APTC disclosure proposal, elicited seventy-two comment letters, forty-seven of which supported the disclosure concept. See Summary of Comments, Public Disclosure of Material Short Security Positions, Release No. 34-29278, S7-20-91, June 30, 1992. Moreover, the totality of comments represented a diversity of views and a thorough review of the issue of manipulative short selling and its consequences. Comment letters were submitted by, inter alia, the NASD, the American Society of Corporate Secretaries, the American Bar Association, the Securities Traders Association of New York, the Securities Industry Association, and many issuers, market makers and hedge funds. Therefore, we hope that future review of these issues will include a more thorough review of the disclosure options considered under the 1991 Release.
Short sales are not the hot topic among issuers that they were in the late 1980s and early 1990s. This may be, in part due to some improvements in the regulation of short sales (which APTC supported). However, the overall upward trend of the market has had a profound impact on the willingness of hedge funds to sell short stocks. Therefore, if there has been a relative paucity of "bear raids" over the past several years, this may be more the result of fewer bears, than of any change in their basic nature. When the environment for bears improves, their numbers will return and with them the threat they once presented.
It is well known that manipulative short selling occurs despite the rules in place. Therefore, the goals of rule 10a-1 have yet to be achieved. "Allowing relatively unrestricted short selling in an advancing market; preventing short selling at successively lower prices, thus eliminating short selling as a tool for driving the market down; and preventing short sellers from accelerating a declining market by exhausting all remaining bids at one price level, causing successively lower prices to be established by long sellers," 1999 Release p.4, should remain the guiding principals of the market regulation side of short sale regulation.
The Association has supported nearly every regulation that applies to short sales. However, we do not consider the current regulatory scheme to be effective against sophisticated short sale manipulators. Therefore, while we do not support elimination of short sale market regulation, we are hopeful that this Commission review will result in actions that better protect investors and issues from abusive short sales.
On the larger subject of manipulative schemes involving short sales, APTC believes that an approach to short sales that looks exclusively to market regulation misses two elements of what should be a three-prong effort. We continue to believe that greater disclosure of short positions and more enforcement, public and private, against manipulative schemes involving short sales are also necessary components of effective short sale regulation.
The Association sees no justification for eliminating market rules that restrict opportunities for manipulative short selling. Therefore, we oppose elimination of Rules 10a-1 unless significant new safeguards are demonstrated to work better. We recognize that the markets and market surveillance are much different than when the Commission last reviewed short sale regulation. We also see the challenges that narrowing spreads and decimalization present. Therefore, we are anxious to learn from the comments of market makers and other market participants as to means whereby market efficiency can be enhanced without creating new opportunities for abusive short selling.
In addition, this review of the regulation of short sales should serve as an opportunity to re-examine the disclosure-based approach to limiting the ability of persons with large short positions to manipulate the market for a stock downward.
While the 1991 APTC proposal was fairly criticized for setting too high a threshold for reporting (5% of issued securities), the basic notion of disclosure as a means of preventing abuse was supported by a majority of the comments. Therefore, as the Commission examines alternatives the current regulation of short sales, prompt disclosure of significant short positions should be considered.
In addition, surveillance and enforcement should be pay greater attention to short sale manipulation. The difficulty of proving such cases should not be an excuse for a lack of efforts to uncover and investigate these schemes. After all, investors suffer most from these schemes. While issuers are the typical complainant against short sale abuse, investors, who are manipulated into selling as the stock price drops suffer the immediate financial consequences.
The Association also supports the requirements that borrowable shares be identified prior to the execution of a short sale.
On a separate issue, it is a fact that thinly traded stocks are most vulnerable to manipulation. Therefore, APTC supports the extension of short sale rules to the Nasdaq Small Cap, Bulletin Board and Pink Sheet markets.
The Association commends the Commission for considering the question of whether it can devise a more effective means of preventing manipulative short selling. It believes that consideration of means other than regulation of short sales such as disclosure and enforcements should be part of a more comprehensive approach to short sale regulation. We stand ready to work with the Commission in efforts to improve the regulation of short sales to focus on the elimination of manipulative schemes involving short sales.
For the Board,
Brian T. Borders /s/