From: Sleik,Frank [jackal@chartermi.net] To: rule-comments@sec.gov Sent: Sat 03/20/2004 12:50 AM Subject: reference to File No. S7-24-99 (should be s7-23-03) Jonathan G. Katz Secretary, Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549-0609. rule-comments@sec.gov. reference to File No. S7-24-99 Greetings: I am submitting, for your review, the following comments in regards to extending short sales protections for the individual investor to NASD OTCBB quoted issues. In the past when there was very limited trading on the NASD OTCBB quotation service, market making firms making markets in OTCBB issues could act in unethical and morally wrong manners with impunity. Technology has changed the way we all trade and invest. No longer can it be tolerated for the NASD OTCBB to remain a bastion of immorality in the markets. Many Americans and citizens of other countries as well invest in and trade the micro-cap issues of the OTCBB. This increased participation compels the SEC to take action to fulfill its fiduciary duty to the Congress and the Public Trust of the United States of America. Some NASD member firms making markets in OTCBB traded securities while acting as "Bona Fide" market makers will naked short sell OTCBB securities under the provision of NASD rule 3370 (b)(2)(B). This allows them to make a short sale without having to make a "positive determination" that securities are available to borrow for delivery by settlement date. As a result of this, some OTCBB securities that are in high demand by the investing public have been excessively sold short by NASD member firms making markets in those OTCBB securities. This in turn often results in situations where many millions of shares of a particular OTCBB security that do not exist have been sold to the investing public. By the phrase, "shares of a particular OTCBB security that do not exist", I mean those shares of the security in question that NASD member market making firms have sold short under NASD rule 3370(b)(2)(B) which cannot be enumerated amongst the outstanding issued or registered shares of the security. For example, suppose 1,000,000 total outstanding shares of the securities of the XYZ Corp., XYZ, had been issued by the company and that those shares are traded on the OTCBB market. Then the total number of outstanding shares in existence would be 1,000,000 shares of XYZ. If the shares of XYZ are in high demand, and the NASD market making firms acting as "Bona Fide" market makers sell 10,000,000 shares of XYZ then under NASD rule 3370 (b)(2)(B), then there would have been 9,000,000 nonexistent shares sold to the investing public. Since OTCBB stocks are not marginable, (ie: cannot be used as collateral for a loan), a NASD member market making firm is not required to "cover" or "buy back" those "shares of a particular OTCBB security that do not exist" that it has sold short under NASD rule 3370 (b)(2)(B) if the price of the issue were to rise. This effectively means the market making firm can sell an infinite quantity of said OTCBB stock to the investing public. This robs the small company of the ability to raise capital and dilutes the investor's investment to near worthless. This is very unethical and morally wrong. The alleged notions that the OTCBB and NASD market are fair and freely trading markets create a standing contradiction as the conditions that prevail in the market maker industry are plainly apparent. This can and eventually will lead to a loss of investor confidence in these markets. A confidence the very existence of the self-regulatory organization, the NASD, was designed to promote is undermined by: (1) The existence of NASD rule 3370 (b)(2)(B) that allows market maker firms to sell millions of non-existent shares of OTCBB securities. (2) The limited scope of NASD rule 3350 "The Short Rule" which is supposed to prohibit the practice of "Bear Raiding " and "Piling On" but due the "Primary Market Maker" exemption is completely negated for NASDAQ stocks. Rule 3350 has not applicability to the OTCBB securities at all. (3) The limited scope of the Limit Order Display Rule which does not apply to OTCBB stocks. (4) The lack of Limit Order Protection for OTCBB stocks allows NASD member market making firms to trade against their customer's orders. These conditions create an environment where legalized and systemic constructive fraud flourish. The NASD, the SEC, and the Securities regulative bodies in our legislature have a fiduciary duty to protect the interest of the investing public. To carry out that duty faithfully, they must either accept responsibility for reform or make broad based public disclosure of the inherent unfair nature of the NASDAQ Small Cap and OTCBB markets. The later course would completely destroy whatever foundation of trust the NASD has garnered through its Self-Regulatory efforts. This in turn could be widely perceived as a case of the Fox guarding the Hen-House. The former course would be more in line with past regulatory administration and legislation. To correct the current wrongful situation regarding NASD member market making firms that make markets in OTCBB stocks the following changes must be put into effect. (1) OTCBB stocks must be made marginable so market makers would be required to cover short positions when the stock price rises above the maintenance requirement level. (2) Short interest in OTCBB stocks must be protected by allowing individual US investors to short sell this type of issue. Margin maintenance requirements suitable to economic conditions as determined for listed stocks should be put in place. (3) NASD rule 3370 (b)(2)(B) must be modified to prohibit NASD member market making firms from naked short selling OTCBB issues. (4) A Limit Order Display and Limit Order Protection rules must be implemented for OTCBB issues. (5) NASD rule 3350, "The Short Rule" must be modified to extend short sales protections to OTCBB issues by prohibiting short sales on a down tick and the practices of "Bear Raiding" and "Piling On". (6) Market making firms must not be allowed to arbitrarily set prices. Instead supply and demand must be allowed to work in a free and fair market. When majority buying or majority selling from the investing or trading public occurs, the issues price trend should reflect that condition. Creation of a suitable trading algorithm could be accomplished. The engineering expertise is readily available.