U.S. Securities & Exchange Commission
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U.S. Securities and Exchange Commission

Short Sales

[Release No. 34-48709; File No. S7-23-03]

The following comment on Letter Type C,
or variations thereof, was submitted by
19 individuals or entities on S7-23-03.

Letter Type C:


Sec Regulators - Is it Really Regulation

& Who Does It Really Benefit????

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


Modified: 01/16/2004