Aug. 13, 2023
Dear SEC Representative, I'd first like to start by saying that I support this proposed rule, s7-32-10 & Prohibition Against Fraud, Manipulation, or Deception in Connection With Security-Based Swaps; Prohibition Against Undue Influence Over Chief Compliance Officers & as it is the responsible thing to do to help prevent systemic risk to the financial system. However, I do agree with Dr. Susanne Trimbath who previously commented that & securities loans are transactions that are vital to fair, orderly, and efficient markets. This is simply not true. Securities lending enables the multiplication of shares in circulation. When brokers lend the shares being held for retail investors, for example, it is equivalent to replacing the bought and paid for shares with an IOU. Securities lending ignores the investors right to vote in matters of corporate governance and to receive tax-qualified dividends. Further, a fail-to-deliver (FTD) that is closed with a borrowed share is not really closed it leaves open that IOU with the lender. Therefore, securities lending harms market efficiency by inflating the number of shares in circulation, which hampers true price discovery by artificially increasing supply. I can think of no other industry in which anything of value is lent without a due date for its return. Why is securities lending different? Of course, none of this would be an issue if broker-dealers and banks kept track of whose shares they were lending. I believe that this is the main topic that needs to be addressed and as Dr. Trimbath continues, & Nothing in this proposed rule fixes the problem that voting rights and payments in lieu of dividends continue to be allocated in processes that are completely opaque to investors. It seems likely that the Proposed Rule will increase the cost and reporting burden of borrowing securities, regardless of the reason for taking the loan (e.g., to cover short sales, to close a fail-to-deliver, to access voting rights, etc.). An unintended consequence could be to tilt the brokers cost/benefit analysis in favor of fails to deliver. The subject proposed rule enables and perpetuates on-going systemic problems. Real reform for securities lending must include: (1) Notifying the public about who is borrowing and lending shares (not just which companys shares are being borrowed or lent). (2) Notifying retail investors with street name shares that their shares are being lent, (because (a) they don't get to vote and (b) they don't get tax-qualified dividends). SEC must adopt a more consistent interest in regulating, monitoring, and enforcing rules that require brokers to keep accurate records of ownership. (3) Sharing any revenue earned from lending shares held for retail investors with those retail investors. (4) Eliminating Onward Lending completely (public companies and transfer agents have opposed this for decades, even pointing to it as a source of phantom shares and over- voting in matters of corporate governance). (5) Requiring every loan to have a due date (not just if applicable). When securities loans without due dates are tolerated, the loan may be allowed to remain unsettled indefinitely. The Dodd-Frank Act directed the SEC to seek transparency for brokers, dealers, and investors. But the retail investor has been given short shrift with this Proposed Rule. The disclosure of lending inventory and near-real-time position reporting will only make it possible for broker-dealers to discriminate against companies who are already bearing an onslaught of phantom shares in capital markets. I echo the sentiment of Dr. Susanne Trimbath who sums up the main issues with current market structure with regard to share lending, naked short selling, failure-to-delivers, and fails-to-receive. Like Dr. Trimbath, I also believe these are the main tactics used to commit fraud, manipulation, and deception in the capital markets. In this same vein, however, security-based swap positions also further enable the fraud by hiding swap positions (both onshore and offshore). The fact that the CFTC has actually allowed the reporting of swap positions to be delayed is very concerning, as it further reduces transparency and has the potential to create unknown levels of risk to the financial system as evidenced by the Archegos fiasco, which had a significant impact on the global financial system. It is only through transparency that similar events can be avoided in the future, and any action to remove transparency only enables another Achegos-type event in the future. Thus, even though s7-32-10 is a step in the right direction, it does not address the main issues with current market structure. On the other hand, I do agree that swap reporting should be same day, fully transparent, and public, as obviously fraud and manipulation should be illegal and carry severe consequences (and not just result in fines as the "cost of doing business" which only further incentivizes the fraud). I have to admit that one of the most baffling things to me is that a registered clearing agency may summarily suspend and close the accounts of a participant who (i) has been and is expelled or suspended from any self-regulatory organization, (ii) is in default of any deliver of funds or securities to the clearing agency [...]." I firmly believe that any participate who is in default of any deliver of funds or securities to the clearing agency should automatically have their account suspended until all securities have been delivered. The more I read into these rules, the harder it is to believe that the rules were created in good faith to protect individual investors, and instead have been written to enable fraud - in the rules it should read a registered clearing agency shall summarily suspend [...] to eliminate the fraud, instead of giving the clearing agency the ability to allow the fraud to continue. I sincerely hope that the you take these concerns from individual investors seriously, as I and many others are becoming more and more convinced that the current market structure is being used to extract wealth from individual investors. Sincerely, David Lincoln A concerned individual investor