Please consider the following petition to be second in motion by me:
Armando M.Lopez 16325 Sw 26 Street Miramar,Florida 33027
Small Private investor.
January 3, 2005
Mr. Jonathan Katz
United States Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549
Subject: Petition for Commission Action to Require Short interest Reporting
for all Over-the-Counter Equity Securities
Dear Mr. Katz:
Pink Sheets is the leading provider of pricing and financial information for the over-thecounter
(OTC) securities markets and, among other things, operates an Internet-based,
electronic quotation and trade negotiation service for OTC equities and bonds for
market makers and other broker-dealers registered under the Exchange Act.
The Proposed Amendment to Rule 3360
The amendment to existing Rule 3360 that we propose, with inserted language in italics
and deleted language in brackets, is as follows:
3360. Short interest Reporting
(a) Each member shall maintain a record of total "short" positions in all
customer and proprietary firm accounts in [securities included in The
Nasdaq Stock Market and in each other security listed on a registered
national securities exchange] all Nasdaq National Market and Nasdaq
SmallCap securities, all Consolidated Quotation Service (CQS) securities
traded in the over-the-counter market, and all OTC Equity Securities as
defined in Rule 6600 that are [and] not otherwise reported to another selfregulatory
organization and shall regularly report such information to
NASD in such a manner as may be prescribed by NASD.
The remainder of the Rule would not be changed.
History of Short interest Reporting Rules
The NASD originally adopted the predecessor to Rule 3360 in 1986 in response to an
extensive study of short sale practices in the over-the-counter market.2 By that time,
national securities exchanges had required short interest disclosure by their members
for many years. The purpose of the study was to determine the need for additional
regulation of short sale practices. The NASD adopted two of the study’s proposals:
First, to require NASD members to report aggregate short positions in NASDAQ
securities in all customer and proprietary firm accounts on a monthly basis. Second, to
make the data on aggregate short positions publicly available.
In its 1986 rule-making proposal, the NASD provided two reasons for the reporting and
dissemination of aggregate short positions: First, the reports would improve the
NASD’s ability to surveil short-sale practices in the over-the-counter market. Second,
the dissemination of the reports to the public would provide market participants with
complete information on which to base their trading and investment decisions.
2 Proposed Rule Change by National Association of Securities Dealers, Inc. Relating to the Reporting of
Aggregate Short Positions in NASDAQ Securities, SR-NASD-86-30, Release No. 34-23730 (October 20,
In 1991, the Commission published for comment a rulemaking request submitted by the
Association of Publicly Traded Companies (“APTC”).3 This petition asked the
Commission to impose a reporting requirement on individuals or groups holding short
positions of five percent or more of any publicly traded issuer’s securities and was
intended to parallel the current requirement of Rule 13d-1 under the Securities
Exchange Act of 1934 (the “Exchange Act”) to report long positions. The Commission
has not taken any further action on this proposal.
The Commission has approved other amendments to NASD Rule 3360, which are not
relevant to this rule-making petition.
Reasons for this Rule-Making Petition
Section 15A(a) of the Exchange Act states that the Commission may, by rule, prescribe
rules for the NASD “as necessary or appropriate in the public interest or for the
protection of investors.” Section 15A(b)(6) further requires that the rules of the NASD
must be designed to “prevent fraudulent and manipulative acts and practices, promote
just and equitable principles of trade, . . . and, in general, to protect investors and the
public interest.” The Commission therefore has the authority under Section 15A to
require the NASD to create rules providing for short interest reporting with respect to all
publicly traded equity securities by NASD members, provided the Commission finds that
such reporting is required to prevent fraudulent and manipulative acts and practices,
promote just and equitable principles of trade, or protect investors and the public
Investors Lack Required Information
At the present time, there is no short interest disclosure for stocks traded on the OTC
Bulletin Board® or the Pink Sheets. The lack of short position transparency leaves
investors unable to adequately understand the reasons for selling pressure in an OTC
equity security. Short interest disclosure is required to enable proper surveillance by
the NASD and to provide market participants with complete information on which to
base their trading and investment decisions in these important markets.
A properly functioning market will reflect the expectations of investors regarding an
issuer’s business and prospects. When investors are pessimistic about an issuer, the
market for the issuer’s securities should show a downward trend. When disaster strikes
an issuer’s business, the market should decline rapidly in response to this adverse
event. However, selling pressure may result from market activity unrelated to the
3 Public Disclosure of Material Short Security Positions, Release No. 34-29278 (June 7, 1991). issuer’s business and prospects, in which case the market fails in its essential pricesetting
Required for Proper Regulatory Oversight
A market fails to function properly when rapid downward movements in price result from
manipulative activities. In a recent decision, NASD Regulation found that in 1995, John
Fiero and a group of professional traders at several NASD member firms collectively
engaged in a “bear raid” to drive down the prices of certain securities underwritten by
Hanover Sterling and Company. See, Department Of Enforcement v. Carlson, Fiero and
Fiero Brothers, Inc., NASD Regulation Disciplinary Proceeding No. CAF980002
(December 6, 2000), affirmed, NASD National Adjudicatory Council (October 28, 2002).
In a bear raid, short sellers attempt to drive down the price of the security by artificially
creating an imbalance of sell-side interest. In this case, massive naked short selling by
Mr. Fiero and other professional traders ultimately caused the failure of Hanover
Sterling and its clearing firm, Adler Coleman and substantial losses by hundreds of
Manipulative naked short selling by broker-dealers operates as a fraud on the market
causing investors to lose confidence in the fairness and legitimacy of OTC markets.
The NASD needs the reports provided under Rule 3360 extended to all OTC equity
securities to properly police such actions.
Allows the True Sellers to Hide
On the other hand, we believe that issuers and investors often blame naked short sales
for market declines when other activities are responsible. For example, the selling of
control or restricted securities may cause a market decline, and such sales may have a
manipulative purpose. In addition, sales of control or restricted securities raise
regulatory concerns about improper public distributions of unregistered securities. The
lack of short interest reporting in OTC equity securities causes confusion on the part of
investors and issuers, and inhibits proper regulatory oversight.
It is our experience that downward stock price movements are usually blamed on
manipulative naked short selling by market makers. At the present time, legal actions
are frequently brought against market makers in the OTC markets charging them with
manipulative short selling activity. 4 We believe these legal actions reflect confusion on
the part of investors indicating a critical need for better market information than is
currently available to the marketplace. More disturbing, legal actions against market
participants indicate a lack of confidence in the important market for OTC equity
4 Investors and issuers have frequently brought legal actions against market makers alleging
manipulative short selling and during discovery found the market makers did not have any material short
positions or were actually net long the stock over the period of alleged short selling.
securities. Short interest disclosure would help investors and issuers to determine the
source of selling pressure, which often has nothing to do with short sales.
Facilitates Pump and Dumps
The lack of short interest disclosure creates an opportunity for nefarious individuals and
promoters to use the public’s perception that OTC selling pressure is due to widespread
naked short selling to facilitate unlawful pump and dump manipulations. These
unscrupulous manipulators fraudulently persuade investors to buy a stock on the theory
that short sellers will eventually need to cover their short sales and thus be “squeezed”
into paying higher prices for a limited supply of stock. This fraud relies on the absence
of adequate short interest disclosure, which would enable investors to determine the
true source of selling pressure. The NASD’s current failure to extend the transparency
of Rule 3360 to all OTC equity securities leaves investors blind to the true extent of
short interests, thus allowing and facilitating the “naked short squeeze” type of
fraudulent pump and dump scheme.
Better Market Information Makes Better Markets
Many publicly traded securities are not registered under Section 12(g) of the Exchange
Act. Investors in such stocks often must make investment and trading decisions without
good information regarding the number of outstanding shares and the amount of insider
ownership. These conditions increase the need for short interest disclosure in such
OTC equity securities.
For example, section 16(c) of the Exchange Act forbids short selling by corporate
insiders. This salutary rule does not apply to issuers that do not have a class of
securities registered under Section 12(g) of the Exchange Act (“non-reporting issuers”).
As a result, the market for a non-reporting issuer’s securities may be manipulated
downward by corporate insiders who sell short to take advantage of their superior
access to information.
Finally, selling pressure may be introduced into a market when unregistered securities
initially offered in a private placement first become available for sale in the market. In
principle, these sales of formerly unregistered securities should not provoke a strong
market reaction. The issuer’s prospects have not changed, and there has not been any
increase in the amount of outstanding securities. We believe investors often confuse
legitimate long sales of formerly restricted securities with manipulative short selling.
Sharp declines in the market following such sales suggest that the market has failed to
price the security properly due to a lack of information among investors as to the
reasons for the selling pressure.
Adequate disclosure is essential for the operation of efficient, well-organized markets.
In particular, short interest disclosure defeats efforts to disrupt markets; it is a truism
that “sunlight is the best disinfectant.” Manipulation and other fraudulent activities fail
when investors can properly identify the reasons for selling pressure and react
When investors can identify selling pressure as originating from short sales, that
information can be taken into account in making trading and investment decisions.
Short interest disclosure would enable investors to identify “bear raids” and insider short
sales and react accordingly. Long sales of formerly restricted stock would not be
confused with naked short selling. On the other hand, when selling pressure results
from investor pessimism over an issuer’s prospects, short interest disclosure would
enable the market to adjust properly to such negative expectations. Pink Sheet’s most
common request from investors and the public is for short interest disclosure in
OTC equity securities.
We are puzzled that the NASD has not reacted favorably to repeated requests to extend
the short interest disclosure rule to cover all OTC equity securities. In its 1986 proposal,
the NASD did not explain its reasons for limiting short interest reporting and
dissemination to NASDAQ securities. Then, as now, there are many more publicly
traded OTC non-NASDAQ equity securities than there are NASDAQ securities. The
need for surveillance of short sale practices in the non-NASDAQ OTC markets is, if
anything, greater because there is less information otherwise available to protect
investors in these markets. Moreover, there is generally less liquidity in the trading of
these securities, so that investors have a greater need to know whether selling pressure
is the result of short sale activities or long sales that reflect investor pessimism.
We therefore respectfully submit that short interest reporting for all publicly traded equity
securities is required to prevent fraudulent and manipulative acts and practices,
promote just and equitable principles of trade, and protect investors and the public
interest. The Commission should therefore insist that the NASD amend Rule 3360 to
require such reports by its members.
Investors in recent years have shown increasing interest in the securities of less wellknown
and smaller issuers. In part, this enthusiasm reflects the torrent of information
available through the Internet regarding investment strategies. As many experienced
investors have known for decades, great opportunities exist in the market for emerging
companies for those investors with sufficient patience and insight to discover successful
new enterprises. This trend of increasing investor interest can be expected to continue
as more investors become familiar with the markets for emerging issuers.
Investments in emerging issuers will always be risky; smaller companies have fewer
resources to withstand economic shocks than their larger counterparts. Nevertheless,
there is no good reason to subject investors to the fear that they will be cheated by
manipulative short selling activities when good disclosure to alleviate confusion and
protect against such activities is readily available and inexpensive to provide.
In its 1986 proposal, the NASD stated that short interest disclosure was necessary to
prevent fraudulent and manipulative acts and practices, promote just and equitable
principles of trade, and protect investors and the public interest. We heartily agree, and
only ask that the protections offered by this salutary rule be extended to those investors
who commit capital to publicly traded non-NASDAQ equity securities.
We urge the Commission to require the NASD to take immediate action to extend short
interest reporting to ALL publicly traded equity securities.
R. Cromwell Coulson
Chief Executive Officer
Small Private Investor