Oct. 31, 2022
31 Oct 2022 Comment Letter There is a clear misconception by the SEC and the investment community that securities loans are “transactions that are vital to fair, orderly, and efficient markets”. While at face value, someone might be inclined to agree that borrowing securities and selling said asset short is a viable market practice – especially if one’s background is from an investment firm. The truth is that security lending leads to catastrophic issues that permeate throughout the global market and directly impacts the livelihood of companies and citizens. Shares in circulation are constantly artificially inflated which favors price suppression through share lending. Augmenting the available float in the market automatically de-values the share price and obfuscates price discovery. Share lending is inherently negative to the value of a corporation trading on the market. Its primary use is to strip a company’s market value and funnel the profits to the shorting entity, while pressuring other investors to sell at a reduced price point or even worse at a loss. Share lending programs without clear transparency can therefore be thought of as blatant market manipulation. It is theft. Additionally, retail investors’ ability to maintain their investment’s fair value, ability to vote and ability to receive dividends may be impacted. Banks and Brokers, despite claiming responsibility towards retail investors, are too often caught lending their client’s securities behind their back. Therefore, clarity on the securities lending and short selling is inherently necessary. Whether the securities are only held by the retail investor in street name, that should not allow an entity to use said security for their own financial gain by misappropriating its ownership and lending said securities. It seems likely that the Proposed Rule will increase the cost and reporting burden of borrowing securities, regardless of the reason for taking the loan (e.g., to cover short sales, to close a fail-to-deliver, to access voting rights, etc.). An unintended consequence could be to tilt the broker’s cost/benefit analysis in favor of fails to deliver. The subject proposed rule enables and perpetuates on-going systemic problems. Real reform for securities lending must include: (1) Notifying the public about who is borrowing and lending shares (not just which company’s shares are being borrowed or lent). (2) Notifying retail investors with “street name” shares that their shares are being lent, (because (a) they don't get to vote and (b) they don't get tax-qualified dividends). SEC must adopt a more consistent interest in regulating, monitoring, and enforcing rules that require brokers to keep accurate records of ownership. (3) Sharing any revenue earned from lending shares held for retail investors with those retail investors. (4) Eliminating “Onward Lending” completely (public companies and transfer agents have opposed this for decades, even pointing to it as a source of phantom shares and over voting in matters of corporate governance). (5) Requiring every loan to have a due date (not just “if applicable”). When securities loans without due dates are tolerated, the loan may be allowed to remain unsettled indefinitely. (6) Penalties and fines that exceed any and all profits made by an institution that misappropriated or misused securities in any shape or form that does not align with the rules. Example: If an institution or shorting entity generated X amount of profits by naked shorting or failing to deliver; the fine should be 125% the earnings from said behavior. Additionally the entity must be forced to close their position in said security and forced to buy at market to remedy any impact they had on the price action of the security. No more light fines for criminal behavior. Price discovery, as it currently exists in the stock market, is not accurate unless all market elements are declared openly in a timely fashion. It is simply market manipulation shrouded in the SEC’s inability to enforce rules and transparency. Short sellers are given unlimited ability to manipulate their positions and in turn harm companies. If all the above is not enough of an advantage – FTDs are the next tool at their disposal. Allowing FTDs to occur is another element that augments their ability to skew the market. Shorts will harm the price action of a security, which will either fail to be delivered or fail to be received - which will once again hurt the price action. As it currently stands, short sellers are able to lower the price of securities indefinitely by looping share lending and FTDs in perpetuity. Shares can always be borrowed and created from ETFs or designated market makers designed to create unlimited liquidity. Share lending, lack of market transparency, misuse of option contracts, swaps, and abuse of FTDs will lead to investor disillusionment. Retail investment behavior will change from what we’ve experienced in the past 30 years. Retail traders will simply invest manually, through Direct Registration with transfer agents and avoid brokers. They will invest long term, refusing to sell no matter what the cost. This will cost cascading damage to the biggest banks and financial institutions, which are often skirting the rules and overleveraged. Financial meltdowns will become the norm due to the current abuse of short lending and FTDs. From Lehman brothers, MBS crises, or Archegos, or Credit Suisse, this is all behavior that will occur and reoccur if short selling and FTDs is not properly policed. Sincerely, Mathieu N. Bastien Software Quality Analyst