To Director Donaldson, members of the office of Trading Practices and the Division of Market Regulation, please allow me to submit my personal comments as they pertain to the proposed SHO, or short selling rules as released by your members recently. My name is Crystal Sandoval and I am 22 years of age and am new to the investment arena, however I do understand the criticality and importance of this new proposed legislation. I will be confining my comments to the specific areas of "Naked Short Selling, (or the Selling of Counterfeit of Shares by Broker-Dealers & MMs), as I feel that it is the area that concerns me and affects most investors. I'll start by saying, I commend your group for finally stepping up to the plate to address, what I and other OTC Small Cap investors consider as one of the most egregious Securities Market problem out there today, and to thank you for the opportunity to comment.
I will start with the commission's proposal to implement a uniform "locate" rule, applicable to "all" securities, which should include the OTC-BB-Pinks/Grey. First, I find it quite disturbing that no such rule currently exists within the SEC today, considering the issue of naked short selling (or the Selling of Counterfeit Shares) was addressed as far back as 1934. Were not the recent SEC statements of (Manipulate, Abusive, Problem) in the meeting of 10/22/2003, regarding the selling of counterfeit shares applicable after 1934 and again in 1997 when it (the selling of counterfeit shares) was again identified as a major problem, yet nothing in the form of corrective legislation from the SEC was introduced. All the while rule #3370 NASD (Affirmative Determination), was on the books and apparently never enforced, why?. Who would be the appropriate entity to enforce rule #3370? Where is the loophole in rule #3370 that allows bypassing Affirmative Determination in any Market?
Now, five years later, and after billions of dollars have been bilked from the investment public in fraudulent practices, the SEC, again states, that the selling of counterfeit shares is "still" a problem. We also now know that the SEC considers the problem of selling counterfeit shares to be a pretty serious problem because they themselves used the terms Manipulative, Abusive & Problem, over & over during the discussion of this issue/subject, in the 10/22/2003 meeting. Those were powerful words uttered by the SEC that day, prompts one to ask though, who or what group were they directed at in the investment process, and the connotation of those powerful words would lead one to believe that the impact had to be negative. Well, that's partially correct. I would submit that the impact was both negative and positive, and primarily to three groups, i.e., Investors (long), Investors (Short) & Broker-Dealers/MMs. Let's deal with the long investor, impact (Negative) substantially negative in the form of losses. Investors (illegal shorters - through Canada & Off-Shore), impact (Positive) substantially positive in the form of Tax Free profits. Last but not least, the Broker-Dealer/MM, impact (Positive) again substantially positive in the form of profits through commissions as they facilitate all sales/transactions.
Does this give the appearance that the deck might be stacked against the long investor in the OTC-BB - Pink/Grey market. Why has the enforcement community chosen to turn the other way, when they themselves described this egregious problem as Manipulative, Abusive and a Problem. Why has the enforcement community turned the other way when they themselves admitted that ("Naked Short Selling-or The Selling of Counterfeit Shares" exists and that they have been investigating it for over five years? I think the "locate " rule could be a great addition to help combat the problem of naked short selling, however, neither The SEC's new rule, nor the existing rule at the NASD is of any use if neither rule is enforced, rigorously!
Next is the proposal to require broker-dealers to "locate" and "annotate" certificates, in writing, before effecting any short sale. The rule has merit and should be implemented, however, history warns us, that without an officer of the SEC standing over the shoulder of every broker-dealer's trader, this rule will be ignored, just like current rules have been ignored, creating massive fail to deliver(s), and fail to receive(s) that are still in the system. One shouldn't have to remind the commission that new regulation must cover "all" parties involved in the trade, i.e., seller, buyer, Market Maker and Broker.
Primarily, the Commission must remember that it is the Broker-Dealers, and Market Makers that allow the trades thus, facilitating the problem of "Naked Short Selling or The Selling of Counterfeit Shares, as "all" orders flow through their respective offices. These continuing problems only solidify the need for SEC oversight and enforcement, as history has proven that self policing (SRO) has failed miserably in their in their mandate to police themselves. What has really failed the small investor in this area is the reluctance of the SEC to enforce the rules, leaving a question of their of their value.
The only way to truly correct the current problem, is the SEC "must" create an environment where by "all" members are forced to abide by both the SEC's rules and those of the SROs, under threat of stiff sanctions. As such, why does the current "locate" proposal put the onus only on the seller, and/or the sellers' Broker-Dealer, when it is in this area that there is no trepidation for the SRO's to not police themselves. The annotate rule is a must for the seller's Broker, however, a good sale is a two way street, i.e., seller & buyer. Thus, I believe the rule to "locate" certificates should also mandate that an equal responsibility is inherited by the buying Broker-Dealer to receive "good delivery" from the selling Broker-Dealer..
In my opinion, the two-day settlement rule also lacks punch. My fear is, under the current SHO proposal, what would prevent the seller from "Naked Short Selling" aggressively, which in turn could cause a panic sell off by other holders of that security. Doesn't matter whether that seller was locked into a 90 day no sell period, they would still be able to buy back their short position, and lock in profits, all to the detriment of the company and its shareholders. A deterrent to that situation would be to add an additional step in that rule, which says that the selling Broker-Dealer is also locked out for 90 days from shorting that security. That way you prevent or deter the monetary incentive for a Broker-Dealer or a Market Maker to venture into this sort of manipulative endeavor.
Now, the proposal to include additional safeguards in areas where there is evidence of significant settlement failures is one of the best proposals your are considering, however, it must be all inclusive, i.e., it must include all current settlement failures as well as, and most important, it must be retroactive to include all current settlement failures that are piled up in the bottom drawers of Broker-Dealers all across this securities market.
This rule, among all of the others, in my opinion, reinforces the basic rule of supply and demand. Which, If I'm not mistaken, is the fundamental and underlying principal of the securities market. Additionally, by including this very important provision, it will send a very strong message to those who would seek to circumvent the system, that their illegal activities will no longer be tolerated. It would also be a very efficient way to return stolen monies to those investors who have seen their portfolios decimated by the egregious practice of Naked Short Selling, or the selling of Counterfeit shares. Clearly, current penalties and sanctions have no little or no effect as a deterrent to Broker-Dealers who not only continue to allow this activity to go on but also profit enormously from it, i.e., from the commissions alone.
The question is also being asked as to whether the bid tick test should also extend down to the OTC market? Why shouldn't it if we really serious about curtailing illegal Naked Shorting. I would further ask the commission this one basic question...Is the color of the money being wrongfully taken from investors and companies of lower cap securities any less green than that of higher cap securities? This current loophole, along with the lack of enforcement by any agency, are a few of the avenues that "Naked Sort Sellers" are currently utilizing to flood the market with unauthorized, counterfeit shares, at ongoing prices below the last trade. Additionally, Are the small caps not entitled to equal protection under the law? Who makes the decision to draw the line between markets, when it comes to enforcement of the rules.
The SHO proposal does not go nearly far enough in my opinion. We, the investing public are tired of reading daily about the abuses in the marketplace. We are tired of seeing slaps on the wrists and token fines paid without admitting or denying guilt, which has had the opposite affect as a deterrent. We are tired of seeing existing rules and regulations not enforced. There must be "zero tolerance for Affirmative Determination and Failed Deliveries" across all markets. You fail and you lose your license to do business period.
Too many have had too much stolen from them by too few, with no redress. I plead with you to have the courage and leadership to do what you know in your hearts needs to be done to restore integrity and confidence to the marketplace.