April 17, 2007
The Commission has taken the stance that this delay is for our own good. When new facts are to be made available the public must be informed of such new and critical information. In this case, data presented by the NYSE and NASD has been identified as critical to the proper analysis of this reform proposal.
Unfortunately the data presented is not clear cut.
In order to address the lack of clarity to the data presented, I wrote directly to Helen Moore of the NASD seeking better understanding on exactly what the NASD had found in their investigation. My memo stated:
From: Patch, David
Sent: Wednesday, April 04, 2007 12:05 PM
Subject: Regulation SHO Comment Memo
Recently the Securities and Exchange Commission re-opened the comment period on Regulation SHO based on the submission of new data supplied by the NASD and NYSE relative to SRO inspections of SHO during the first months of the regulation becoming law. I took a quick look at this data, and specifically your comment memo, and have a few questions if you do not mind. Without violating confidentiality issues, could you please respond to the following questions:
1. Use of the phrase "it appears that these positions may have been exempt from the close out provisions" was used several times in your memo. Can you tell me whether or not this is just word choice issues as to whether the NASD did in fact verify that the various issues were confirmed as fact and not simply rationalized as being most likely? My concerns is over the use of "it appears" and "may have been" relative to the cause of failures as these phrases lack the finality of direct knowledge.
2. When the NASD conducted the audits, were the actual fails investigated for compliance to standing federal securities laws? For example, 90 issuers that had been on the list for some period greater than 40 days had been on the list due to fails that "may have been exempt" under the grandfathering provisions. The SEC claimed at the release of SHO that the grandfather clause did not supercede existing trade settlement laws 3-day settlement as a new standard. For these 90 issuers, was the cause of the fails reviewed against the pre-existing laws to determine the legality of such positions as originally executed and subsequently failed? Does the NASD have a reasonable standard when a fail is no longer reasonable in duration and may be manipulative or illegal regardless of the grandfather provision?
3. The NYSE review of significant and persistent fails identified a pattern where the 5 issuers inspected were on the list due to options related exempt fails involving a single options BD. Did the NASD similarly look at patterns associated with certain BD's or "investors" to understand whether this was a global issue or an issue isolated to a few investors and a few firms representing such investors? Similarly, in the case of market making exemptions, was there patterns where a few small percentage population of the market makers held long persistent fails putting into question whether the market maker was executing a bona-fide market making activity or a proprietary trading strategy?
Any insight that you can provide into these questions or others that you see following this line of reasoning would be greatly appreciated. As your memo is part of the "empirical data" that has delayed a response to this issue, I would like to make sure that I have all the facts necessary to properly understand these issues. It may be a legitimate argument that making the rules too tight could have a negative impact on the market but the additional data, as presented, cannot lead to that conclusion or any other at this point in time.
Thank you for your time and I look forward to your response.
Now this April 4 Memo was followed up with a second request on April 9 but a read receipt was attached to the request this time.
Subject: Regulation SHO Comment Memo
was read on 4/9/2007 9:22 AM.
With a read receipt, Ms. Moore cannot deny that she received and opened the document.
So why has Ms. Moore failed to respond? Is there proprietary information contained in the global questions I asked for a response to? Is there a problem with the NASD coming clean on the difference between "may have been" and factual certainty?
As would be expected, I also contacted the American Bar Association and Ms. Grafton of Gibson Dunn specifically and requested insight on the ABA's stance now that new data was submitted. The ABA and Ms. Grafton failed to respond and failed to identify whether they would respond with a second comment memo now that this new data has been provided.
From: Patch, David
Sent: Thursday, March 29, 2007 11:47 AM
Subject: Regulation SHO
My name is David Patch and I take time on the side to draft a small online newsletter focused on the issues of securities fraud as it relates to the small public investor. Recently the SEC drafted a modification to the scheduled release of a proposal regarding Regulation SHO citing concerns the ABA and two others raised over the lack of strong empirical data to support the reform package. New information has been added to the SEC proposal for public comment and a second comment period has been created. Your name has come up as the representative responding to the ABA position in this matter. If you don't mind, I would like to ask you a few questions for a story I am compiling.
1. The ABA did not write a comment memo when SHO was first proposed in 2003. Can you comment on why the ABA sought out to comment on this revision only 2 years later. If you could elaborate on how the ABA even became involved in Regulation SHO issues as I have not seen any ABA comments regarding this issue prior to this one memo?
2. In responding to this recent proposal, the ABA addressed the lack of data that supports the elimination of the grandfather clause. Many have questioned whether the clause was legal to begin with based on the clause never being submitted for public comment and that the clause violates other guidelines in the '34 Act. Before taking on this position memo, did the ABA consider the legality of the grandfather clause as it was originally drafted in 2004?
3. The SEC has now posted what must be the remaining data to be used in making a conscious decision on whether a reform is necessary or not. Have you looked at this new "evidence" and can you opine as to whether this new data is enough to make a determination one way or another? Will the ABA be responding during this second comment session?
4. Has the ABA spoken to state regulators regarding this issue as background to understanding the potential magnitude of this issue? States across the nation appear to have found something of concern or they would not be proposing state level legislation to control this problem.
Again, thank you for your time and I look forward to any responses you may be capable and willing to respond to.
David E. Patch
I can only wonder how well this public comment process works when the SEC can sit on the opinions and needs of the majority of those who comment.
To make matters worse, when data is being provided to the public for educated responses the data is manipulated in a way that it is either rendered meaningless as the NASD data is as displayed or worse, agencies like the SEC fudge the data to support the opinions they seek. The data submitted by the SEC under FOIA directly refuting the analysis and conclusions of the OEA as presented in this reform. Without such raw data the public would have only had the SEC massaged data to rely on.
It is time to step up to the plate and stop this charade. End the illegal grandfather clause and create the necessary controls on market making exemptions to insure that public safety is once again put ahead of Wall Street profits.