To Director Donaldson, members of the office of Trading Practices and the Division of Market Regulation, please allow me to submit my personal comments as they pertain to the proposed SHO, or short selling rules as released by your members recently. I will be confining my comments to the specific areas of naked short selling, as I feel that it is this area that most affects, and concerns me. Let me start off first by saying, I commend your group for finally addressing, what I and other investors consider one of the most egregious Securities Market problem out there today, and to thank you for the opportunity to comment on same.
Let me start with the commission's proposal to implement a uniform "locate" rule, applicable to all securities. First I find it quite disturbing than no such rule currently exists within the SEC today, considering the issue of short selling was addressed as far back as 1934. Secondly, if I'm not mistaken a similar rule # 3370 NASD (affirmative determination), is already in place. I think that the "locate " rule is a great addition to help combat the problem of naked short selling, however, neither The SEC's new rule, nor the existing rule at the NASD is of any use if neither rule is enforced, rigorously !
Is it not the Commission that stated in it's own words that SRO's have failed to address the problems of naked short selling, and failed to deliver(s)?
Next is the proposal to require broker-dealers to "locate" and "annotate" certificates, in writing, before effecting any short sale. The rule has merit and should be implemented, however, history warns us, that without an officer of the SEC standing over the shoulder of every broker-dealer's trader, this rule will be ignored, just like current rules have been ignored, creating massive fail to deliver(s), and fail to receive(s).
One shouldn't have to remind the commission that new regulation must cover "all" parties involved in the trade, i.e., seller, buyer, Market Maker and Broker. Primarily, they must remember that it is the Broker-Dealers, and Market Makers that allow the trades thus facilitating the problem of Naked Short Selling, as "all" orders flow through their respective offices. History also tells us that self policing has failed miserably, as these same Broker-Dealers, and Market Makers are members of an SRO. These same groups have already failed in their mandate to police themselves.
The only way to truly correct the current problem, is for the SEC to create an environment where by all members are forced to abide by both the SEC's rules and the of the SROs, under threat of stiff sanctions. Your current "locate" proposal puts the onus only on the seller, and/or the sellers' broker-dealer, and it is in this area that there is no enticement for the SRO's to police themselves. The annotate rule is a must for the seller's broker, but I think that the rule to "locate" certificates should also be fine tuned so that some responsibility is taken by the buying broker-dealer to receive "good delivery" from the selling broker-dealer..
In my opinion, the two-day settlement rule also lacks punch in that a seller could naked short sell aggressively and cause a panic sell off by other holders of that security. And even though that seller was locked into a 90 day no sell period, they would still be able to buy back their short position, lock in profits, all to the detriment of the company and its shareholders. A deterrent to that situation would be to add one more step in that rule that says that the selling broker-dealer is also locked out for 90 days from shorting that security. That way you remove most of the monetary incentive for a broker-dealer or a market maker to partake in this sort of manipulative endeavor.
Now, your proposal to include additional safeguards in areas where there is evidence of significant settlement failures is one of the best proposals your are considering, as long as you also make it retroactive to include all current settlement failures that are piled up in the bottom drawers of broker-dealers all across this securities market.
The question is also being asked as to whether the bid tick test should also extend down to the OTC market? Why shouldn't it if we really want to curtail illegal Naked Shorting. I would ask the commission this one basic question...Is the color of the money being wrongfully taken from investors and companies of lower cap securities any less green than that of higher cap securities? This current loophole is one of the avenues that Naked Sort sellers are currently utilizing to flood the market with unauthorized, counterfeit shares, at ongoing prices below the last trade. Additionally, Are we not entitled to equal protection under the law?
This proposal does not go nearly far enough in my opinion. We the people are tired of reading daily about the abuses in the marketplace. We are tired of seeing slaps on the wrists and token fines paid without admitting or denying guilt. We are tired of seeing existing rules and regulations not enforced and so are your honest employees. There should be zero tolerance for affirmative determination in my opinion. You fail and you lose your license to do business period. The onus should be on the brokerage firms. They fail to practice affirmative determination and that firm is history with accounts taken over by another firm in the same way regulators intervene with a failing bank. Too many have had too much stolen from them by too few.
I plead with you to have the courage and leadership to do what you know in your hearts needs to be done to restore integrity and confidence to the marketplace and pride to your employees.