Subject: File No. SR-NASD-2004-044
From: David Patch

November 14, 2005

Mr. Jonathan G. Katz
Secretary
U.S. Securities and Exchange Commission
100 F Street, NE
Washington, D.C. 20549-6561

RE: File No. SR-NASD-2004-044

Mr. Katz,

I welcome this opportunity to comment on this most recent Short Selling Rule Change being proposed by the NASD.

In March of 2004 the NASD first submitted this rule to the SEC to be sent out for public comment. Their proposal was sent during a period in time in which the Securities and Exchange Commission was evaluating public comments pertaining to their own short selling changes under Regulation SHO. As was the case in 1999 when the SEC went out for public comment on a short selling concept release, and again regarding the 2003 proposal pertaining to Regulation SHO, investors and issuers alike voiced serious concern over the Industries disregard for the settlement of our securities.

Under guidelines set forth by the Exchange Act of 1934 the SEC was mandated by Congress to create a National System to insure the prompt and accurate settlement of all trades. Settlement, as defined in Section 17A of the 34 Act concluded with the transfer of custody of securities sold. The SEC further identified under Rules 15c3-3 and Rule 15c6-1 guidelines and responsibilities pertaining to contracts for trade and trade settlement. These contracts all stem from a standard basis of 3-day trade settlement.

It is my position at this time that Regulation SHO and the most recent proposed Rule 3210 by the NASD are in direct conflict with the guidelines set forth under the Exchange Act of 1934. In fact, everything outside of the original proposal submitted to the SEC under SR-NASD-2004-044 in March of 2003 are in violation of those guidelines. A proposed rule the SEC never put out for public comment due to the internal conflicts of interest coming out of the SECs Division of Market Regulation.

Under this proposed rule the NASD has softened their demands on the Industry and restricts the proper settlement of securities to those settlement failures that exceed minimum threshold levels for a particular issuer. The NASD further restricts the requirements to fails exceeding 50,000 in net value. The NASD is making such proposals based on the language of Regulation SHO. The fact that the NASD is adding in this 50,000 criterion is an attempt at further differentiation based on the trading values of the stocks. This latest being criterion adding for a greater allowance of failures pertaining to penny stock securities; stocks that trade below 5.00/share.

I request guidance on where it is stated in the Exchange Act of 1934 a differentiation to trade settlement requirements based on quantities of fails in the system or dollar values.

In March of 2003 the NASD first proposed rule changes to 3210 that included no such restriction to mandatory closeouts for fails above a certain threshold. The NASD citing that a fail in the system was to be an anomaly and not the standard practice as is clearly cited in the Exchange Act guidelines. The NASD further proposed that provisions could be made to allow for additional time to settle the trade but that each exemption for settlement must be done so under NASD permission and not by standard default permission as it is today. The standard default becoming more the standard practice.

The NASD suggested in March 2003 that in todays marketplace fails in the system are left to persist due to the financial liabilities of the Institutions to cover such an executed trade. When a fail must be covered above the initial cost of the trade, that cost liability is not one passed to the client but one whose responsibility is bore by the Institution that allowed the fail to persist. The Institution therefore having no incentive to close out the fail. The SEC validated this concept in one of the SECs own studies conducted by visiting scholar Professor Lelie Boni.

The NASD stated clearly that the cost to buy-in a failure would not be accepted as an excuse to have that fail persist as if that is the reason the fails exist today. Today that rationalization can still stand tall.

It is this liability that the Exchange Act of 34 was attempting to address under Section 17A. The liability of the Institution could grow detrimental to their ability to operate and the liability of excess supplies in the market place can be used for manipulation against the interests of the investor.

The SEC overstepped their legal authority when the grandfather clause was implemented into SHO. Not only was this concept never open to public comment for fear of response, it was never suggested in any comment letters submitted to the SEC. The SEC, it is believed, had this concept in mind all along and instead threw it in at the last minute like a rider in Congress. The difference in this case is that this rider is in fact a violation of Congressional Law as only a President can authorize a pardon.

But more than simple securities laws, the grandfather clause and threshold lists proposed in SHO and here again in NASD Rule 3210 are in violation of Constitutional Law.

Under the 5th Amendment of the US Constitution, the people shall not be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.

Under the guidelines of the grandfather clause created in SHO and further reiterated here, the property rights shares owned by the investor are being taken away and used for a non-public purpose and is being done without just compensation to the investor as required by law. The fact that any fail, regardless of standing on a threshold list, is allowed to persist for any period of time beyond reason defined as 10 days beyond normal settlement is not in the best interest of the public and therefore any allowances thereafter are further violations of 5th Amendment responsibilities.

Ironically, the NASD and SEC continue to use bona-fide market making as an example for cause as to why fails persist for extended periods of time and yet for those securities that have been published on the Regulation SHO list to date, most have seen declining market values while on this listing. Under those standards of trade, market makers should be carrying flat or long positions in these stocks to flatten out the downside volatility of a sell-side market. For market makers to be selling short without delivery on a sell-side security would be doing so for trading strategy and not market making and would thus be exempted from using the bona-fide market making exemption.

It is my conclusion in this issue that the most simplistic means in which to insure market integrity associated with trading practices that eth NASD re-institute their initial proposal which allows for a maximum of 13 days settlement on all trades with exceptions requiring specific approvals by the NASD.

Today all trade reports out of the DTCC come with an identifier that includes the number of days in a fail status. Regulators can thus take that report and investigate every trade that is above the 10-day threshold of failure instead of evaluating whether it was pre or post threshold list levels. This report will thus be more useful in tracking patterns of abuse and will provide for expedited corrections in problem areas and problem securities.

Neither the SEC nor the NASD have the authority to differ from the laws presented to the investing public under the Exchange Act of 1934 with regard to the securities they purchase. Neither has the authority to make a decision for the investor on whether they pay in full for a legitimate stock pays in full for an IOU. Finally, neither has the right to take away the Proxy Voting rights of an Investor in order to protect the financial prosperity and growth of a Wall Street Institution that fails to settle for financial reasons.

On Friday November 11, 2005 Chairman Cox vowed that he would ensure that the SEC was focused on protecting the rights of the investing public. The SEC should start by insuring that the properties purchased by the investing public are being delivered as defined by Congressional Laws Promptly and Accurately.

Thank you for this opportunity to Comment,

David Patch