To Whom It May Concern,
It is now October 23, 2003. Fours years have now past since the SEC went out and sought comments on "Short Selling" problems in our securities markets. What the SEC received in 1999 was some 3000 comment letters with nearly two thirds (2000) of those letters with complaints of "Abusive Naked Short" selling.
Now, SEC officials expect proposed reforms will prove to be controversial with corporations and investors. (Comment): Certainly controversy will reign as the proponents of the status quo are in a win situation with the current rigged system and would prefer it stay that way, while Small Companies and Small Investor (specifically the OTC-Pinks) are looking only for a level playing field.
The buzz word they (the status quo use is Liquidity), the market needs liquidity, when in essence, Naked Shorting or the selling of Counterfeit Shares, not to be confused with shorting, allows the sellers "full Control of the Price Per Share". This creates heavy dilution, which causes a spiraling downward pressure on the PPS until most companies and shareholders give up. One would ask, How is someone(s) or somebody(s) Or system is allowed by law to sell to the public something which they do not own or have not borrowed?. How is someone(s) or somebody(s) or system is allowed by law to arbitrarily increase either the Authorized, Operating or Float or all of a company's stock by selling billions and billions of shares into the market to a unsuspecting public that currently has no recourse. Which leads to the ultimate question, where's the fiduciary responsibility of the SRO's (NASD - NAS) and the ultimate over-see'r the (SEC)???, as we see by the below paragraph, the SEC has been well aware of the issue of Naked Shorting for over five (5) years. It certainly would appear that they also support the Status Quo as opposed to the protecting small companies and small investors, BTW, which is their charter, as nothing has happened in the way of regulation during this five (5) year period.
Note in their own words: (Excerpts of SEC Meeting on 10/22/2003) SEC Commissioner Paul Atkins noted the agency got more than 3,000 letters when it floated reforms in 1999, and predicted an even bigger reaction to the latest plan, SHO. Fact: In the SEC's open public Meeting today, they, (The SEC) used the terms "Abusive", "Manipulate", and "Problem" many times as they once again identified the concerns of Investors and Companies over illegal "Naked Shorting".
"(Question? Abusive to who or what, Companies, Shareholders, Brokers, Market Makers, DTC, CEDE) (Answer - Companies & Shareholders)
"(Question? "Manipulate" Manipulate what),(Answer - Market & PPS for who's favor, The Status Quo)
"(Question "Problem" Problem for who, (Answer, I would like to think for the regulators this time, to include the SEC. The companies and Shareholders have already taken a beating, even though many still hold on hoping for change. Perhaps its time for the likes of the N.Y AG, Mr Spitzer to get to the solution
Once again, in that same meeting, The SEC highlighted the fact that the pile of "Unsettled Positions" were growing as short sellers were not locating shares to borrow in order to fulfill the obligations of the sale. All of this should be alarming news, with the SEC admitting that stock manipulation is in action. I ask, is it??
As a result of Tuesday's meeting, we would like to thank you Chairman Donaldson and your Commissioners' for coming out and stepping up to the plate on this. Thank you for voicing your concerns over what is going wrong in our markets. While your message was less than direct to those who continue with this abuse, at least the SEC has come forth with a proposal. I would throw out a full commendation to the group, as the SEC's recommendation still falls a bit short. Let me elaborate with a few comments. The SEC made a public statement that identified that not only has a "manipulative practice" been taking place regarding short selling, but that they have known about it since 1999, have done nothing to resolve it, and are seeking the help and advice of the commentary to propose reforms because the one they have on the table is still weak for the following.
One area of weakness that the SEC has totally avoided in this session was, "The illegal shares on the table today"? Today, much of the settlement issues date back to initial short positions, but since those shorts have had "settlement failures" that date back longer than the current president has held office, we now have other problems to deal with. The Short sold to a long and failed settlement, the long, tired of the beating he's taken with the stock because of illegal shorting and the downslide of the PPS, decides to sell his long share to another long buyer. He did not sell short, but since the originating trade never settled, that long trade "must/will" fail as well. Now the question becomes, who tracks these trades and the stockpile of them on the broker's books today? Today's Bookkeeping mess is a culmination of bad settlements that date back to the 1999 comment period and no longer trade as short settlement failures but now trade as long settlement failures.
Another area that the SEC stayed away from was the failures of our Broker Dealers in this settlement process. The Terms "Suspend the short seller" for 90 days is great but that order flow comes through a broker. "Today's problems are due to our Brokers lack of desire in trade settlement". Today's Long trades fail settlement because they failed to settle the previous short sales. "Reforms today need to be Trade Settlement reforms NOT Short sale reforms". Our Brokers need to be held accountable to fulfill the contract between themselves and their clients. No investor would allow their broker to fail settlement on a long trade because they would be signing up for self dilution. The SEC
needs to go after the brokers, who, like the short seller themselves, benefited from this "Abusive Trading". They were actually partners in the game as they fed off each other. In my opinion, the SEC took what has come to be expected out of them, Baby Steps. What we see in the current enforcement arena by comparison, The AG of NY walks like a grown up while the SEC continues to struggle at the baby step paces. So be it.
Lastly, the SEC's rule change as proposed, will only deal with a portion of the current problem, and in regards to this particular rule, only one side of the problem. It takes two brokers to complete a trade, buyer and seller. The buying broker cannot buy without a equal participant on the other side, and to penalize only one side because they are selling counterfeit shares, is only
going after half of the problem. What about the buying broker, who is supposed to make "Affirmative determination" that shares he just bought for his customer, are on the way.
Now, by tightening the rules for "BOTH" sides of the transaction, it would cause brokers to self police each other, as opposed to cooperatively looking the other way, on fail to delivers, as well as fail to receives, etc, etc. In my opinion, the SEC has not been proactive on this issue, but rather, reactive ( by about 4 years) and still fail in their mandate, as some back doors still appear to be swinging wide open, for the Status Quo.
I, as a small investor, am only marginally happy with the attempt so far. I was hoping by this time for a complete cure, not a halfhearted attempt to pacify some rather than all. With that said I'm still happy that we are now making forward progress, cause something is better nothing.
In conclusion, from my perspective the market lacks ETHICS, the Commissioners, responsible for oversight of the markets, should never cower to politics with someone else's money. Each Commissioner needs to be held responsible for their inaction over these past years and I would certainly not be waiting until these new reforms are put in place before I lashed out at the Wall Street Community that continues to sit on unsettled trades without the desire or ambition to settle them. I'm sorry, but in my opinion, our SEC has failed to hold any of the Wall Street Firms accountable for their actions at any appreciable level that makes it painful for them to continue. Delays cost, and the SEC is nothing but a huge delay. BTW... This was not ungrateful you just read. This was hostility at an inept, out of touch Governmental Agency, that hides behind immunity when it comes to accountability. Hostility you Mr. Chairman should have had with regards to our SRO's who have failed to take appropriate actions over these past years against their member firms
Arthur G. Seeney
WOW!!! Has our Financial securities regulators pulled a fast one here or what. Yesterday the SEC put out a release that contained this item:
3. Proposed Regulation SHO
The Commission will consider whether to propose for public comment new Regulation SHO regulating short sales under the Securities Exchange of 1934, which would replace current Rules 3b-3, 10a-1 and 10a-2. Among other things, Regulation SHO would institute a new uniform bid test, applicable to exchange-listed and Nasdaq National Market System securities, that would allow short sales to be effected at a price above the consolidated best bid. Regulation SHO would also suspend the operation of the proposed bid test for specified highly liquid securities on a two-year pilot basis. Regulation SHO would also require short sellers in all equity securities to locate securities to borrow before selling short, and add further requirements to address "naked" short selling.
The Commission will also consider simultaneously whether to propose for public comment amendments to Rule 105 of Regulation M, which addresses short sales prior to a public offering, to eliminate the shelf offering exception and to address transactions designed to evade the Rule.
To understand what the SEC has and is stating, all you need to do is understand a few key points.
While Short Selling is part of the Equity Markets, Securities laws require that the short sale be settled through proper borrowing of a security for delivery (Affirmative Determination). The ONLY exception to that rule in today's laws is with regards to the less liquid Penny stocks where Market Makers are allowed to short a stock without Affirmative Determination (Ability to borrow) to maintain an orderly liquid Market. That would infer that this Regulation SHO, in which the SEC wants to enforce the ability to borrow before executing the trade, is nothing more than re-stating present day law. Law that the SEC has failed to enforce and thus wants to re-state it to allow them the opportunity to cover up the fact that they have failed in prior enforcement.
Naked Short Selling. The SEC has now publicly come out several times and used the phrase and identified it's realities. The question is, is there any laws that allow Naked Short Selling to exist? Can the SEC provide us with the Chapter and verse in which it exists? How can the SEC allow "Naked short Selling" to exist if in fact it is illegal? The SEC is once again attempting to create Regulations to deter securities violations that exist today without regulation. That is like stating that since there is no law that specifically states that you cannot kill a person with a screwdriver, you can continue to do so until we change the laws that specifically mention the screwdriver. Naked Short Selling is Market Manipulation
Our Securities Laws are very clear when it comes to identifying Market Manipulation. The illegal selling of shares by which massive dilution takes place can only be Market Manipulation. The imbalance between Supply and Demand is excessive and it creates a depressed market that restricts any positive growth regardless of the Business developments. With regards to short selling, only those shorts that can meet Affirmative determination are allowed. If you are talking stocks where the Market Makers can sell without affirmative determination than all those shares must be in the Market Maker accounts as shorts. If that quantity is excessive than they were not keeping an orderly market but manipulating the market. If they are NOT in their accounts but were passed through to clients than they violated the affirmative determination laws.
Overall, I commend the SEC for taking these necessary steps. I wonder, however, why they need to delay immediate actions waiting for approval of a regulation that already exists today. We have Affirmative Determination Laws, we have Market Manipulation Laws, and we have no regulation that would allow Naked Short selling by anybody but a Market Maker. We also have trade settlement laws that would force any offshore sales that enter US Markets to meet US requirements at the Brokerage Houses. They may not have the same borrowing requirements as the US but when the trade enters the US, it is an obligation of the buying US broker to enforce settlement on the trade. All we need to do today is enforce today's laws and we would be much better off.
I'm as happy as the next person, about this upcoming *action* on the SEC's part, but I too have to admit, I will be watching with a wary eye, that our so called regulator is not about to pull a fast one, here.
Investor - PCBM
SEC Proposal (SHO)
The reason for these two shorting restrictions is to prevent the false appearance of a sell off where the sell off is induced by the short itself.
The manipulation and abuse is one of trade settlement failures. In the condition of a CD, the lender can sell shares based on future rights and those sales are tagged as Long Trades. Under proposal SHO these would not be accounted for in a failed delivery situation. In addition, and longs who presently hold unsettled shares and elect to sell them will be sold as Long Trades and those again would not be covered under the proposed SEC Rules. Lastly, the improper tagging of a trade (Monthly NASD Enforcement action) where a short is marked as a long would not be covered under this rule until the violation of improper tagging was uncovered.
If the Focus is on fair market settlement laws than we can shut down the "Cheating" the abusers will already have in place to circumvent to laws. If you go to the NASD and/or SEC they will tell you there is no timeframe to trade settlement. The market needs a timeframe on that and all else will fall in place.
NASD Rule 3370 says:
"No member or person associated with a member shall accept a "short" sale order for any customer in any security unless the member...makes an affirmative determination that the member will receive delivery of the security from the customer or that the member can borrow the security on behalf of the customer for delivery by settlement date."
Does the borrowing occur before ...or after the consummation of the sale? Is it the member firm and not the buyer that assumes the default risk?
In the "Wild Wild West"...as one NASD Regulator put it this last week, we have an "unstable market". I ask....why is that? Do we not have one set of rules that governs our markets? Maybe we need one law ..that has "NO loopholes" so that there IS NO QUESTION as to what should and should not be protected. Is it the fact that no one even has to carry out affirmative determination...do shares just "exist" without proof? How many can you produce...Hundreds? Thousands? Millions? Who IS ACCOUNTABLE for those who create counterfeit shares and sell what does NOT exist?
Three to five years of these complaints by the OTCBB/Pink marketplace have fallen on deaf ears. Thousands upon thousands of voices calling out the same fraud scheme is now being admitted to by the SEC. As I was told just last week to file yet another complaint. I could hear that "deaf ear" talking to me on the other end of the phone. My suggestion to Market Regulation/NASD, was that NASD needed to change their policy and begin TALKING to the investor they are to protect, and to ENFORCE what is already in place to protect investors.
No one would stand for buying a house they could never live in...no one would pay for a car they could never drive. Those selling would be prosecuted and thrown in jail by the buyer for failing to deliver what was owed to them. Why is it that brokers and dealers can sell securities that do not exist, pocket the money, and walk away unscathed?
Moreover, why are the Regulators not prosecuted for lack of enforcement? Do they just get to sit at their desks and then collect HUGE yearly salaries and bonuses?
It is time for those who say they regulate, to REGULATE. It is time for those who say they exist to Enforce laws to protect the investor to ENFORCE. What happens in the job force when someone doesn't DO THEIR JOB? They are removed....fired....let go. I see a huge double standard here.
I say it is time to "remove" those not doing their job of protecting investors who have lost billions in this market, and who have obviously been protecting someone OTHER than the investor!