From: Donald J. Stoecklein [djs@slgseclaw.com] Sent: Monday, January 05, 2004 4:51 PM To: rule-comments@sec.gov Cc: Debbie Amigone Subject: S7-23-03: Stoecklein Law Group, a Professional Corporation Practice Limited to Federal Securities Emerald Plaza Telephone: (619) 595-4882 402 West Broadway Facsimile: (619) 595-4883 Suite 400 email: djs@slgseclaw.com San Diego, California 92101 web: www.slgseclaw.com January 5, 2004 VIA EMAIL: rule-comments@sec.gov Mr. Jonathan G. Katz Secretary U.S. Securities and Exchange Commission 450 Fifth Street NW, Washington, DC 20549-0609 RE: FILE NO. S7-23-03 Dear Mr. Katz: This letter is submitted in response to the SEC's request for comments in Release No. 34-48709, dated October 29, 2003, regarding proposed new Regulation SHO, under the Securities Exchange Act of 1934 (Exchange Act), which, as proposed, would replace Rules 3b-3, 10a-1, and 10a-2. Proposed Regulation SHO would, among other things, require short sellers in all equity securities to locate securities to borrow before selling and would also impose strict delivery requirements on securities where many sellers have failed to deliver the securities. As we understand the proposed Regulation SHO, the proposal is designed to address the problem of "naked" short selling. Our response is directed to the impact of the proposed Regulation SHO on "naked" short selling, especially in thinly-capitalized securities trading over-the-counter. As referenced in your release, a short sale is the sale of a security that the seller does not own or any sale that is consummated by the delivery of a security borrowed by, or for the account of, the seller. Naked short selling is selling short without borrowing the necessary securities to make delivery, thus potentially causing a "fail to deliver" result to the buyer purchasing the securities. Your Staff has drawn attention to the negative impact of the naked short. In effect the naked short seller unilaterally converts a securities contract (which should settle in three days after the trade date) into an undated futures-type contract, which the buyer might not have agreed to or that would have been priced differently. Amongst other negatives, the seller's failure to deliver securities may also adversely affect certain rights of the buyer, such as the right to vote. However, we believe most importantly, naked short sellers enjoy greater leverage than if they were required to borrow securities and deliver within a reasonable time period, and they use this additional leverage to engage in trading activities that deliberately depress the price of a security. The Commission has stated that it believes that the SRO requirements have not fully addressed the problems of naked short selling and extended "fails to deliver" and that the commission believes it would be beneficial to establish a uniform standard specifying the procedures for all short sellers to locate securities for borrowing. Proposed Regulation SHO, Rule 201 would apply to securities not currently covered under Rule 10a-1. Proposed Regulation SHO's marking requirement would apply to all sell orders of equity securities registered under Section 12(g) of the Exchange Act, including, exchange-listed, Nasdaq NMS and Small Cap, OTC:BB, Pink Sheets and any other securities registered under 12(g). We are aware that in some instances, issuers have taken actions to attempt to make transfer of their securities "custody only," thus preventing transfer of their stock to or from securities intermediaries such as the Depository Trust Company (DTC) or broker-dealers. Additionally, in some instances we have been made aware of issuers requesting that we attempt to withdraw their issued securities on deposit at DTC, which makes the securities ineligible for book-entry transfer at a securities depository. Further, in one case an issuer went so far as to request that we have a new cusip number issued in conjunction with a withdraw from DTC. We recognize that the withdraw of the securities from DTC or requiring custody-only transfers undermines the goal of a national clearance and settlement system, which is designed to reduce the physical movement of certificates in the trading markets. The custody-only transfers generally results in significant delays and expenses in processing securities transactions and can raise safety concerns associated with lost, stolen and/or forged certificates. We concur with the Staff's opinion that securities with lower market capitalization may be more susceptible to abuse and therefore believe that the proposed additional delivery requirements should be extended to all equity securities registered under Section 12 of the Exchange Act. Additionally, we believe that the proposed standard specifying the procedures for all short sellers should apply to any securities registered under the Securities Act of 1933 (the Act), which are filing reports under the Exchange Act and traded over a quotation system. In the case of the OTC:BB and the Pink Sheets there are companies which have registered their securities under the Act, which are not registered under Section 12 of the Exchange Act, but do need the protection of the proposed rule. In general, we believe the proposed requirements, in addition to the application to filers under the Act, would assist the Commission in preventing abuses and promote the prompt and accurate clearance and settlement of securities transactions. We appreciate the opportunity to submit the foregoing to the Commission. We remain ready to discuss our comments with the Commission staff. Yours truly, Stoecklein Law Group The information contained in this electronic mail message is confidential information that may be covered by the Electronic Communications Privacy Act, 18 U.S.C. Sections 2510-2521, intended only for the use of the individual or entity named above, and may be privileged, confidential or otherwise protected disclosure. If the reader of this message is not the intended recipient, you are hereby notified that any dissemination, distribution, or copying of this communication is strictly prohibited. Any further distribution of this message is strictly prohibited without the written consent of the sender. If you have received this communication in error, please immediately notify us by telephone (619-595-4882), and delete the original message. Thank you.