July 15, 2008
It is my opinion that naked short selling and abuse of failure-to-deliver provisions pose a threat to the integrity of U.S. equities markets on a par with, and possibly exceeding, the threat posed by the credit crisis currently being weathered.
In my view, meaningful changes to regulation SHO and vigorous enforcement are the only remedies available to properly address the egregious practice of naked short selling and manipulation of FTD loopholes in existing SEC regulations. It is paramount that transparency and a level playing field for all investors be rigorously maintained. Toward that end, I strongly urge you to incorporate the following changes into regulation SHO:
elimination of the Market Makers exemption, as data show that fails are being produced by invoking that exemption
complete elimination of the close out exemption for option market makers as proposed (amendment of rule 203(b)(3)(iii) as proposed, not alternative 1 or 2)
changes to rule 200(g)(1) to require a "locate" on short sales securities and proper marking of sales as "long" or "short".
amendment to rule 200(g)(1) proposed in the second round in release 34-56213 File No. S7-19-07 to preclude mismarking of NAKED short (essentially illegal counterfeit) shares as "long" sales
In the event of failure to amend rule 200(g) (1), implementation of a requirement for an analysis of costs incurred by equity investors.
Finally, it is essential that the SEC protect investors by rigorously enforcing rules, regulations and laws currently in place, and providing for harsh penalties for violations. It is unconscionable to think that the SEC continues to allow potentially huge number of what are basically "virtual shares" to be held in accounts of honest investors owing to the commission's lax enforcement of existing rules against short selling, and allowing FTD's to remain open for extended periods.
The existing environment invites abuse and must be changed to avoid potentially irreparable damage to the integrity of the U.S. equities market.