Subject: File No. S7-24-99
Date:    12/08/2000 10:00 AM
     
     
Gentlemen:
     
I am writing as a private investor concerned with the regulation of 
short-selling activities. The following comments pertain to the SEC 
Concept Release on Short Sales, Release No. 34-42037; File No. S7-24-99, 
but address several relevant issues not included in the current Concept 
Release.
     
1. Daily summaries of short interest data should be made available to 
the market.
     
The current system of reporting short interest provides only monthly 
summaries, and these totals are not published until some time after a 
closing date. Public market participants are thus denied an accurate, 
up-to-date account of short-selling activity, and even this monthly 
snapshot becomes increasingly stale with passing time.
     
The mechanics of short-selling require that shares be borrowed from a 
brokerage institution, and these institutions must keep an internal 
accounting system to track the borrowed shares. This means that the 
brokerage institutions as a group have, at all times, much more accurate 
information on short-selling activity than that available to the public. 
This creates a structural imbalance of information and gives brokerage 
institutions a potentially significant edge in trading, by virtue of their 
more accurate and timely information.
     
For example, suppose that an institution holds a significant position in 
a certain security, and it observes that a short-selling hedge fund is 
aggressively borrowing shares for shorting. The institution might choose 
to dump its long position in anticipation of buying it back later. In 
contrast, the other market participants have no knowledge of the 
short-selling attack and see only a decline of the share price. Without 
knowledge of the true market mechanics at work, some private investors 
may fear a change of company fundamentals and sell at a loss, but if 
given information on the increased short-selling activity could choose 
between riding out the cycle or locking in profits before the price had 
declined too steeply.
     
The SEC has recently enacted other changes (e.g. regulation FD) intended 
to level the playing field by providing all market participants with 
equal access to material information. It is significant to note that the 
1991 House Committee report on short-selling recommended that daily 
short interest summaries be made available to the market, yet nearly 10 
years later no action has been taken. As this proposal fits well within 
the spirit of recent SEC actions, in my opinion a plan to provide daily 
short interest summaries should be added to the Concept Release.
     
     
2. Large individual short positions should require public disclosure, 
and institutions filing form 13F should be required to disclose both 
long and short positions.
     
Current regulations require public reporting only for material long 
positions, but since holders of a short position also have a vested 
interest (albeit a negative one) in the performance of a company, the 
disclosure of such short positions would be of interest to other market 
participants.
     
Due to the mechanics of short-selling, brokerage institutions generally 
already have significant information as to which entities hold large 
short positions for a given equity. If this information is not made 
available to the public, it may create a trading advantage favoring the 
brokerage institutions over the private investor, with an argument 
analogous to that made above for the case of daily short interest 
summaries.
     
As the SEC has indicated its interest in providing all market 
participants with equal access to material information, requiring 
disclosure of material short positions would be a positive step in this 
direction. Such disclosure was recommended in the 1991 House Committee 
report and was considered by the SEC in a 1991 Concept Release, and in 
my opinion should be considered for this Concept Release as well.
     
It is interesting to note that the 1991 House Committee report observed 
a "psychological misperception that short sellers possess much greater 
manipulative power than they really do." I would suggest that this 
perception derives from the fact that short-sellers have been allowed to 
hide their activities behind the delayed reports of short interest, and 
to work anonymously regardless of the size of their short positions. 
Once the SEC implements reporting requirements to give all market 
participants a transparent view of short-selling activities, the public 
will be in a much better position to assess the true impact of 
short-selling.
     
     
3. The SEC should regulate the issue of voting rights under 
short-selling in order to preserve a company's right to restrict each 
share to just one vote.
     
Currently the issue of voting rights for short-sold shares is not 
regulated by the SEC, and the common practice by brokerage institutions 
is to forward voting proxies to all shareholders of record, even if 
their shares have been (in all or part) loaned out and sold short. This 
practice leads to the situation in which more shares are eligible for a 
proxy vote than are currently outstanding for the company, due to the 
diluting effect of short-selling. The presence of these additional votes 
could possibly distort the results of shareholder voting.
     
It is my understanding that the SEC was asked by congress in 1991 to 
consider this issue, and decided that no action needed to be taken, for 
the apparent reason that in many cases only a small fraction of eligible 
shareholder votes are cast. In my opinion the rationale for this 
decision, while possibly true for many widely-held equities, is 
nevertheless flawed, as it fails to consider the potential effect of 
extra votes on smaller companies with thinly-held equities.
     
For example, the present practice of allowing all shares to vote could 
conceivably be employed in schemes to manipulate a vote by inflating the 
number of votes to be cast. Short-sellers could arrange for related 
parties to purchase shares in order to cast extra votes and possibly 
affect the outcome of the process. Such a changed outcome could be 
materially detrimental to the company, thereby aiding the cause of the 
short-sellers.
     
As another example, the present reporting regulations for large 
individual shareholders consider only the net (long minus short) 
position to trigger the reporting requirement. This would conceivably 
allow a shareholder to accumulate a large block of shares (5% or 
greater) for voting purposes, but to evade the reporting requirement by 
holding a short position offsetting all or part of the long position. 
The ability to hold such a large voting interest without the 
corresponding economic interest is certainly contrary to the intent of 
the reporting requirement.
     
In order to guard against such potential vote manipulation, I would 
suggest that the SEC adopt a regulation mandating that voting rights for 
shareholders whose shares have been loaned out for short-selling be 
proportionally reduced, possibly to zero, to reflect the fraction of 
shares loaned out. Brokerage institutions holding shares in street name 
would be responsible for administering the proportional allocation, and 
would also be required to notify the shareholders whose voting rights 
had been reduced. Such notification would allow those shareholders 
desiring to preserve their voting rights to take actions (such as moving 
the shares to a cash account) to ensure full voting rights in the 
future. Adopting such a proportional allocation scheme would ensure that 
the votes available to be cast would match the actual number of shares 
outstanding.
     
     
In closing, I hope that the SEC will consider these suggestions in its 
ongoing review of short-selling regulations.
     
Best Regards,
Bill Hawes