From: David Patch [mailto:idpatch@comcast.net] Sent: Saturday, May 29, 2004 9:53 AM To: (Edward.Knight@nasdaq.com); (enforcement@sec.gov); (FilouR@SEC.GOV); (gkramer@sia.com); (heinej@sec.gov); (jconsidine@dtcc.com); (jpiccarillo@sia.com); (jspellman@sia.com); Lawranne.Stewart@mail.house.gov; (lthompson@dtcc.com); (marketreg@sec.gov); (Mary.Schapiro@nasd.com); (MCCREERYJ@SEC.GOV); (mudoff@sia.com); (mvercruysse@dtcc.com) Cc: (eliot.spitzer@oag.state.ny.us); Gary Connor (Gary.Connor@oag.state.ny.us); Herbert. Hadad@Usdoj. Gov (herbert.hadad@usdoj.gov); Reed, Jack (Senator); Bunning, Jim (Senator); (jkehoe@ida.ca); (John_McCain@McCain.senate.gov); Jonathan.Blackmer@mail.house.gov; (leah_shimp@grassley.senate.gov) Subject: SEC's Congressional Mandates - What are they really? Congressional Mandates. We hear this phrase used repeatedly by the Commissioners of the Securities and Exchange Commission as they pump out one reform after another. Congressional Mandates. To me, congressional mandates start and finish with one simple understanding, The market must be maintained in such a manner that it is safe and fair for the investing public. Last week we heard in an SEC Open Meeting the SEC once again used “Congressional Mandates” as a rationalization to propose the new Transfer Agent restrictions which would restrict transfer agents from clearing securities with certain restrictions attached to the settlements. Restrictions that require the name of the beneficial holder on the stock share. The SEC states that Congressional Mandates force them to take appropriate actions against any process that would slow down or hinder the quick and accurate trade settlement process. 3. TRANSFER AGENT RULE PROPOSAL The Commission approved publication for comment of proposed new Rule 17Ad-20 that would prohibit registered transfer agents from transferring any equity security registered under Section 12 of the Securities Exchange Act of 1934 or any equity security of an issuer reporting under Section 15(d) of the Securities Exchange Act of 1934 where the transfer of such security to or from a securities intermediary is limited or prohibited. A securities intermediary is an entity that in the ordinary course of its business maintains securities accounts for others. They include entities such as registered clearing agencies acting as securities depositories (for example, The Depository Trust Company), broker-dealers, and banks. The Commission also decided to propose that the rule take effect 90 days after the date of Commission adoption in order to allow issuers whose securities are restricted in a manner prohibited by the rule sufficient time to obtain any necessary changes to their bylaws or charters to remove the restrictions. Comments concerning the rule proposal should be submitted to the Commission within 30 days of its publication in the Federal Register. (Press Rel. 2004-71) What the SEC failed to understand in this proposal, yet clearly voiced in the open meeting, is that these small issuers were taking these “Self-Help” measures to protect themselves from the settlement failures that the SEC has failed to respond to for the past decade or more. To take a deeper look, let’s step back into the actual issues at hand. The ROOT of the problem so to speak. Small issuers are pulling out of the electronic settlement system because they contend that their stocks are being abused by naked short selling and that this abuse is affecting their investor values as well as their ability to build their business. The SEC has all but admitted this is a reality within the transcripts of several open sessions and at least 2 reform packages. The SEC and NASD go so far as to state that Settlement failures exceed the entire float of some public companies. So, who is responsible for the settlement of our securities? Ultimately it is the Industry. The issuer, nor the investor, has any control over trade settlements. It is the industry. So now, how does this proposal resolve the root issue? It doesn’t. This reform package allows the Industry to hide heir flaws and reap the financial benefits at the detriment to the investing public. A process that is in violation of the Congressional mandates. Today, firms like Charles Schwab, Morgan Stanley, AG Edwards, Ameritrade, Etrade, etc…. have all taken their own “Self-Help” measures to protect their financial status. These firms, and many more like them, have put trading restrictions on many small publicly traded companies that clear through the Depository Trust Clearance and Settlement system. The reason they give is that they have a liability exposed due to the problems in the settlement of these securities. Problems in settlement using the SEC’s “Efficient” process. How can that be? For several years now Issuers and investors have complained to the SEC stating that these firms are putting trading restrictions on their investments where they are “Sell-Only” securities. Investors can no longer buy these securities at these firms but you can sell them if you presently carry a long position. Is this good for the safety of the industry? Is this part of the Congressional Mandates? No. This is the allowed “Self-Help” measures the Industry is allowed to take when the Industry itself fails. How do trade settlements fail? Outside of temporary delays due to those who hold their shares in paper certificate form, how do trade settlements fail? Certainly it can not be the delays in paper certificates that account for settlement failures exceeding the entire public floats of companies. Trade settlements fail because the Selling firm is selling for a client or a house account that cannot make delivery on the trade because they do not own, nor can they borrow to make delivery. The Receiving firm, instead of forcing delivery, ignores their responsibilities and simply provides the opportunity of extended time. Because they have failed to call in the debt, the receiving firms liabilities continue to grow and they now decide it is time to make the issuer and shareholders take the burdens of their failures. They restrict buying to minimize additional settlement failure liabilities. They “Self-Help” themselves. Has the SEC addressed this issue? Has the SEC forced these firms to clean up their books but forcing the settlement of these securities where the settlement failures have reached abusive and manipulative levels? No. Instead the SEC has continues to harass the Investors and the Issuers. If these “Self-Help” measures being undertaken by these small issuers is against congressional mandates than stop the process. But, do not stop it simply because the Industry has lobbied the SEC for relief where the small business has limited access to these same levels of respect and consideration. If the Present Clearance and settlement process, the National system, is so great, why are our Industry firms allowed to single out companies for restrictions on trading due to their inability to settle the trades? Why can the Industry take matters into their own hands for protection - when they are at fault - and yet the small companies cannot when they have no controls otherwise? The SEC has many times been called prejudiced and conflicted. This latest reform package is a clear example of that perception. The lobbying power of the main stream Wall Street Institutions seeks and obtains every affordable opportunity to rig the game for their own self interests. If our Congressional mandates require a national settlement system that works for all companies, than stop the abuse by the industry who selectively decide who they will settle and who they will abuse. Finally, I believe that a recent job posting for an SEC psychologist puts our understanding of their operations into total perspective. Not all within the SEDC or other SRO operations are bad. It is generally a top down environment and those who work with a good conscience are conflicted and burned out as they have to fight their own administration for the definitions of right vs. wrong. Presently the SEC Chairman and it’s Commissioners are close to aiding and abetting fraud as they continue to define ways to harass and abuse the small business and their investors. The steps being undertaken to stop every effort of these companies to seek and gain protection for the viability of their business is met with indifference or even abuse. From a well respected CEO, Jack Welch, we learned at GE to seek out and kill the root and in doing so the weed will never grow again. We need to seek out and kill the root here. The root to the small business problems is not the small business or its investors; it is the blatant disregard to the basic principles of equal rights. The SEC needs to be held accountable for their actions and needs to take control of Wall Street by addressing the issues that remain at its core. The Wall Street Institutions operate off greed and not ethics. Before any considerations for a reform package that shuts down this self help measure is taken, there should be an equal reform package mandated that restricted any Broker-Dealer or firm from restricting the trading of any security that trades through the national clearance and settlement system. If the system works there are no issues. If it doesn’t FIX IT! Dave Patch Topsfield, Ma. www.Investigatethesec.com