Sent: Saturday, March 13, 2004 12:37 PM
To: rule-comments@sec.gov
Cc: Jonathan.Blackmer@mail.house.gov; Terry.Reicher@nasd.com;
ralph.lambiase@po.state.ct.us; Lawranne.Stewart@mail.house.gov;
lgoldzung@sia.com
Subject: RELEASE NO. 33-8398; 34-49405; IC-26384; FILE NO. S7-13-
04

March 13, 2004

RE:  RELEASE NO. 33-8398; 34-49405; IC-26384; FILE NO. S7-13-04

Subject:  Securities Transaction Settlement

Commissioners,

It is my intent by this writing to once again point out the
hypocrisy in which the Securities and Exchange Commission
operates.  The Commissioners are ultimately too focused on the
best interests of institutional buying and fail to act in a
manner adequate for the retail investor.  This concept release is
focused on a simplification of the trade settlement system and is
intended once again to support the institutional buyers while
leaving many retail investors in the dark.  While this concept
release is about the safety of investors, it fails to address the
existence of today's issues before undertaking new problems.

Let me start by using several excerpts from this Concept release
and show the contradictions to your regulation SHO proposal:

From this Concept release:

     (1)   The prompt and accurate clearance and settlement of
     securities transactions, including the transfer of record
     ownership and the safeguarding of securities and funds
     related thereto, are necessary for the protection of
     investors and persons facilitating transactions by and
     acting on behalf of investors.

From Regulation SHO:

     Naked short selling can have a number of negative effects on
     the market, particularly when the fails to deliver persist
     for an extended period of time and result in a significantly
     large unfulfilled delivery obligation at the clearing agency
     where trades are settled.28 At times, the amount of fails to
     deliver may be greater than the total public float.

To this, every retail investor asks, how can the SEC recognize
the impact of inefficient trade settlement has on the investor
and yet allow to exist settlement failures that exceed the entire
public float of a company?  The SEC must first determine the
proper regulations and course of actions to protect investors
under present day conditions before making matters worse.
Exactly what steps has the SEC taken to enforce trade settlement,
at any cost, when settlement failures persist beyond a DEFINED
reasonable amount of time?  This concept release does not address
failures appropriately if at all.

I believe that to maintain a fair market for all, and reduce the
unfair advantage provided to institutional buyers and sellers
that Trade Settlement in general should be clearly defined and
enforced in a manner adequate for all.  This includes but is not
limited to the Delivery vs. Payment (DVP) process of trade
settlement.

According to this concept release the delivery vs. payment (DVP)
process is generally a special privilege provided only to
institutional buyers.

Per this concept release;

This process is generally referred to as providing the customer
with receive-versus-payment ("RVP") or delivery-versus-payment
("DVP") privileges. Generally, broker-dealers provide RVP or DVP
privileges to institutional customers. The SRO confirmation rules
also require the broker-dealer to have obtained an agreement from
each customer with RVP/DVP privileges that the customer will
affirm each trade promptly upon receipt of the confirmation

This bias towards the institutional buyers and sellers dictates
the manner in which trades are settled and is part in parcel the
reason why the Small Cap, Penny, and Micro-Cap stocks are more
susceptible to trade settlement abuses.  These stocks have a
higher level of retail investors as the institutional buyers are
less willing to risk capital on the smaller up and coming
companies.  Institutional Buyers, under DVP, are not required to
pay up front for securities that are not available for settlement
and thus, the seller is more likely to locate and deliver
securities to receive their payment.  Until they do so, the
Institutional buyer has maintained their cash in hand.  On the
smaller stocks, where the SEC has admitted that settlement
failures exceed floats, the retail investor is not afforded the
luxury of paying only upon delivery so there is no sense of
urgency to settle this trade.  Broker dealers forgive settlement
failures and provide indefinite extensions on the settlement.
The North American Securities Administration Association (NASAA)
went so far as to comment to Regulation SHO by identifying that
the trade settlement failures have resulted in the victimization
of the retail investor and small companies.

I recommend that the Trade Settlement regulations, regardless of
the timeline identified to settle, be done on a DVP/RVP basis for
all.  Institutional investors should not be provided an advantage
over the Retail investor.  To make all markets efficient, all
sellers should be required to make available the item they are
selling to receive payment for that item.

I would further ask that the Commissioners fully explain to all
what is being done by this concept release and the Regulation SHO
Proposal to address the issue of the failure itself.  This
concept release is well written on the risks of inefficient
settlements and the systemic risks to prolonged failures but what
exactly does the SEC and the SRO's do when the failure has
happened?

Arguably, the most significant risk that must be addressed by any
clearance and settlement system is systemic risk. Systemic risk
is the risk that the inability of one market participant to meet
its obligations when due will cause others to fail to meet their
obligations.46 Systemic risk can result from other risks inherent
in clearance and settlement systems, such as credit, liquidity
and operational risks. A severe problem in one or more of these
areas can cause securities firms to fail and increase the
likelihood of systemic disruptions in the financial markets.
While the Commission believes that the threat of a serious
systemic disruption to the U.S. financial markets from a
settlement failure is small because of the risk management
controls that are in place, it is nevertheless a serious concern.
Thus, it is important that the U.S. securities industry continue
to improve its risk management procedures in order to maintain
safe and reliable clearance and settlement.

Again I refer back to regulation SHO where the SEC has admitted
settlement failures that exceed the entire public float of
companies.

I would further recommend that prior to moving past T+3 to T+2 or
T+1, that the SEC define strict guidelines on Settlement
Failures.

  1.. All trades Retail and/or Institutions will be processed on
a DVP/RVP basis.  All or nothing.
  2.. If a Trade Fails Normal settlement, plus 2 days, the broker
representing the Buyer is mandated to issue an automatic Buy-in
to the seller.
  3.. If the seller fails to deliver after the first Buy-In
period of 3 days, the broker representing the buyer is mandated
to purchase the shares for settlement and submit a due-bill to
the seller for the cost of the order.  The purchase shall be done
on a guaranteed delivery basis at whatever cost to obtain
guaranteed delivery.  No Buy-In should be taken on a trade that
is not guaranteed to settle.  Present excuses of - "there are no
guaranteed shares available at present market Price"- is only an
indication that the market is not being dictated by authenticated
shareholders and is the risk taken by a seller or firm that does
not have the shares available when they sold.
  4.. The Seller/Broker, in receipt of the Due Bill, has 2
business days to deliver the proceeds of the due bill.  (Due
Bills presently do not happen or happens rarely.  Brokers are
willing to maintain a settlement failure than to buy-in and back
bill another broker)


Failures by either party in this process of settlement will not
be tolerated by the SEC or SRO and any modifications to this
process will result in substantial fines for each occurrence.
Gratuitous extension in delivery by the broker representing the
Buyer is not in the best interests of the client and will not be
tolerated.

I believe that should the SEC and SRO's be able to first enforce
this set of clear guidelines, our issues with settlement
inefficiencies will be reduced significantly.  These must be
strictly enforced, however, before we can move away from paper
trading and evolve into full blown electronic trading of shares.
The ease of electronic `bookmarks" in client accounts, without
the settlement of a trade behind it is ultimately the risk that
the SEC continues to try to address.  It is a risk created by a
lack of exposure to the realities of unsettled trades to the
investor and the industry.  Unfortunately the SEC is trying to
address this with "smoke and mirrors" and segregated proposals
and concepts and is unable to see the correlations between their
efforts.   It has been the use of Physical Certificates that has
brought to the forefront the abuse of trade settlement failures
on the small companies and yet the SEC, in this concept, is
willing to remove this check and balance for an efficiency that
will only create bigger loopholes for securities fraud and
manipulation.  In the bowels of the DTC today the abuse taking
place through electronic tagging of shares into our accounts,
without a physical delivery to support them, is the check and
balance the SEC will cover-up by this concept.

Our Securities industry has been through rough times because of
the complacency of the SEC to enforce common standards for all
investors whether they be institutional or retail.  The SEC has
separated their enforcement of the laws based on the pedigree of
companies and presents in concept release like this the
efficiencies of the higher end of the market leaving the lower
class stocks and investors fending for themselves.  The SEC is
not allowed by Charter from Congress to be biased or prejudicial
to the Market Participants but this release would do just that.
Continued abuse of their powers in this manner will continue to
be the demise of the Markets and Investor confidence.

Liquidity in a market is the key to an efficient market for all.
Liquidity comes with a price, however.  The SEC must take the
steps to insure that the changes they make to our regulations
address not only today's issues but the issues we can foresee in
the future.  To date the SEC has lost that direction as they are
trying to move forward before they can even meet today's
standards.  This concept release, and the direction the SEC wants
to take the market will be yet another failure if they cannot
understand and resolve what we all know happens today.  Trade
Failures exist on the smaller capitalized companies and this
release will do NOTHING to address those failures.  It will only
make institutional trading easier.

Dave Patch

www.investigatethesec.com