From: donspra@attglobal.net Sent: Wednesday, July 18, 2001 3:31 PM To: rule Subject: File No. S7-24-99 Short selling File No. S7-24-99 While I remain fully against any form of short selling, I recognize that market makers and hedge funds carry a lot weight and may get their way. The rule should include provisions that prevent short selling that is conducted simply to manipulate the market. Those provisions should include: time limits that are analogous to option time limits, volume limits, stronger upward movement limits before short selling is allowed, provide for separation of option trading and short selling activity, Notification to purchasers of short sold stock. Authorization by owner of stock to be loaned for short selling, Notification to owners of stock that shares in company has increased due to short selling, Limitations on loaning stock held in retirement programs for short selling, Limitations on short selling stock during a lockup period, Provision for paying dividends if a company declares dividends, Provisions for voting if a company issues a proxy, Notification to purchasers of short sold stock. Company reporting of fully diluted shares due to short selling, Analysts limitations, Market participant conditions, Strong fines and loss of trading privileges for violations of rules. TIME LIMITS, VOLUME LIMITS, AND UPWARD MOVEMENT LIMITS BEFORE SHORT SELLING IS ALLOWED To allow securities professionals to add to the trading supply of stock available to purchasers and reduce the risk that the price paid by investors is artificially high because of a temporary contraction of supply: A market maker may temporarily sell short for a limited number of says. After 5 consecutive upticks on the stock, a market maker may be allowed to sell up to 1/10 of 1% of the shares issued by the company, The market maker may continue selling short for no more than 5 consecutive days, The market maker must clear all short positions in a stock not more than 10 business days after the first short position was entered. All market makers of a stock may not sell short more than 2/10 of 1% of the shares issued by the company. To allow market participants who believe a stock is overvalued to engage in short sales in an attempt to profit from a perceived divergence of prices from true economic values and to allow such short sellers to add to stock pricing efficiency because their transactions inform the market of their evaluation of future stock price performance; A market participant may temporarily sell short for a limited number of day, After 3 consecutive up days of a stock, a market participant may sell short on the 4 day of upward price movement after 5 consecutive upticks on the stock, A market participant may sell up to 1/100 of 1% of the shares issued by the company, The market participant may continue selling short for no more than 2 days in 15 days, The market participant must clear all short positions in a stock not more than 15 business days after the first short position was entered. All market participants may not sell short more than 3/10 of 1% of the shares issued by the company. These time limits and volume limits allow the market makers to continue doing business but do not allow the market to artificially depress a stock price for an extended period of time. These time limits and volume limits allow market participants to bet on downward movement in a stock but limit their ability to force the price of a stock to an artificially depressed level. Longer time limits or higher volume limits allow easier manipulation of a stock price. Just as option bets have time limits, the time a stock is exposed to artificial down pressure by short selling is limited. These upward movement limits allow market makers to conduct business but do not allow market makers to artificially prevent normal upward movement of a stock price. These upward limits allow market participants to bet against investors analysis of a company. The limits do not allow market participants to depress a stock price regardless of a companies true value. SEPARATION OF OPTION TRADING AND SHORT SELLING ACTIVITY The separation of option trading and short selling activity is designed to reduce the potential of a conflict that could result in market manipulation of a stock price to be reflected in option value. An individual market maker of any stock may not trade options in the same stock or any other stock. A company or firm or any subsidiary that conducts market maker activity for any stock may not also be a market maker or deal in options in any stock. If a company or firm or subsidiary conducts market maker activity and currently is conducting option activity, the company has no more that 90 days to spin off or otherwise divest either the market maker activity or the option activity. A fund or firm or company or trading community in any form that sells short in any stock may not also trade options. in the same or any other stock. A individual market participant may not hold a short position and an option in the same stock at the same time. An individual must clear all short positions in a stock not less than 5 business days before entering an option position in the same stock. An individual must clear all options not less than 5 days before entering into a short position in the same stock. An individual may not simultaneously hold positions in funds that sell short and other funds that deal in options. NOTIFICATION TO PURCHASERS OF SHORT SOLD STOCK Since market participants who believe a stock is overvalued and engage in short sales in an attempt to profit from a perceived divergence of prices from true economic values and to allow such short sellers to add to stock pricing efficiency because their transactions inform the market of their evaluation of future stock price performance; the stock price may be driven down by such activity. To allow the purchaser of stock to be aware of such conditions in addition to normal company conditions, the purchaser of short sold stock must be made aware that the number of outstanding shares has increased due to short selling activity and that they are purchasing the said short sold stock The brokerage house that accommodates the short sellers transaction must inform the purchaser that the transaction is a short sale. This could be accomplished by adding a “SS” in front of or behind the stock symbol. For example: SS AOL or AOL SS. AUTHORIZATION BY OWNER OF STOCK TO BE LOANED FOR SHORT SELLING Since short selling will drive the price of a stock down, the owners of real shares being loaned should be made aware of such conditions in addition to normal company conditions. The owner of real shares to be loaned should be given the opportunity to approve or disapprove the loaning of their stock. The brokerage house that wishes to loan stock must gain approval from the owner of the real stock. The approval must be a signed statement. The statement must inform the owner of the stock that the stock will be loaned to other market participants. The owner of the real stock must be told that other market participants who believe a stock is overvalued may engage in short sales in an attempt to profit from a perceived divergence of prices from perceived economic values and that such short sellers add to stock pricing efficiency because their transactions inform the market of their evaluation of future stock price performance. As a result, the stock price may be driven down by such activity because the number of outstanding shares has increased due to short selling activity and that they now own a smaller percentage of the company. NOTIFICATION TO OWNERS OF STOCK THAT SHARES IN COMPANY HAS INCREASED DUE TO SHORT SELLING Since short selling will drive the price of a stock down, the owners of real shares not being loaned should be made aware of such conditions in addition to normal company conditions. If a brokerage house becomes involved in loaning a stock for short selling, the brokerage house must inform its customers that it participates in short selling activity for that stock. When a customer of a brokerage purchases a stock that the brokerage house loans for short selling, the brokerage house must inform the purchaser of the stock that the stock is being loaned for short selling. The brokerage house must inform the customer that the normal research related to company value is not complete. The owner or the purchaser of the real stock must be told that other market participants who believe a stock is overvalued may engage in short sales in an attempt to profit from a perceived divergence of prices from perceived economic values and that such short sellers add to stock pricing efficiency because their transactions inform the market of their evaluation of future stock price performance. As a result, the stock price may be driven down by such activity because the number of outstanding shares has increased due to short selling activity and that they now own a smaller percentage of the company. LIMITATIONS ON LOANING STOCK HELD IN RETIREMENT PROGRAMS FOR SHORT SELLING Any stock held in any form of retirement program may not be loaned for short selling. Since short selling dilutes the number of shares in a company and distorts the true economic conditions related to the stock price, the ability of the average company employee or retiree to evaluate the risk and value of the stock held in their retirement programs is limited. Since short selling is one of the highest forms of gambling, retirement programs must not be exposed to excess risk by allowing the loaning of stock for short selling. LIMITATIONS ON SHORT SELLING STOCK DURING A LOCKUP PERIOD Since stock that is held in a lockup period may not be short sold by the owners of the real stock, market participants may not sell the stock short during the lockup period. The stock shall be in a short sale lockup until one business day after the lockup period ends. Market makers sale of stock in a lockup period is modified. During a lockup period, to allow securities professionals to add to the trading supply of stock available to purchasers and reduce the risk that the price paid by investors is artificially high because of a temporary contraction of supply: A market maker may temporarily sell short for a limited number of says. After 5 consecutive upticks on the stock, a market maker may sell up to 1/25 of 1% of the shares issued by the company, The market maker may continue selling short for no more than 3 consecutive days, The market maker must clear all short positions in a stock not more than 6 business days after the first short position was entered. All market makers of a stock may not sell short more than 1/50 of 1% of the shares issued by the company. DIVIDENDS IF A COMPANY DECLARES DIVIDENDS If a company dividend date occurs while stock is sold short, the seller of the short must pay the dividend to the purchaser of the short sold stock. This includes market makers and other market participants. The purchaser of the short sold stock must be informed that they will not or did not receive a dividend but received an equivalent payment from the market maker or other market participant. The purchaser must be informed that the dividend equivalent is not a dividend for tax purposes. It can not be considered to be a dividend since the short seller made the payment to compensate the purchaser for the dividend they would have received from the company. VOTING IF A COMPANY ISSUES A PROXY When an investor purchases a short sold stock, they must be informed that they do not have voting rights since they purchased short sold stock. The purchaser must be informed that the short may be covered at a later date and they will then hold real stock with voting rights. COMPANY REPORTING OF FULLY DILUTED SHARES DUE TO SHORT SELLING, When a company reports earnings, they must include the number of short sold shares just as they report diluted shares as a result of outstanding employee options. This is required to allow the investing public to be better informed of the company true economic conditions. ANALYSTS LIMITATIONS Since analysts may believe a stock is overvalued, they may encourage the engagement in short sales in an attempt to allow some market participants to profit from a perceived divergence of prices from perceived economic values and that such short sellers add to stock pricing efficiency because their transactions inform the market of their evaluation of future stock price performance; the investing public must be fully aware of the analysts activity that may distort other normal research about a company. All analysts must publicly post their short positions at all times. They must publicly post their recommendations to sell short so the investing public may be fully informed of all market conditions related to a company when doing research about a company. The analysts may not enter a short position before publicly posting a recommendation about a short sale opportunity. Since reporters shape investor opinion, they should be covered by the same rules that apply to analysts. . MARKET PARTICIPANT CONDITIONS Market participants who plan to engage in short selling must be fully aware of the rules. They must sign a statement of understanding. The statement must inform the participant that they understand the limitations placed on simultaneous trading of shorts and options. They must state that they understand the potential dividend equivalent they may be required to pay. They must state that the understand that they would be in violation of the rule if they use more than one broker to conduct short selling and option trading activity. STRONG FINES AND LOSS OF TRADING PRIVILEGES FOR VIOLATIONS OF RULES. If a brokerage house loans stock without fully complying with the rules, the brokerage house should be fined 3 times the value of the short position allowed. If a brokerage house allows short sales and simultaneous option trading that is not authorized, the fine should be 3 times the value of the short sales and 3 times the value of the option positions. If the value of the violation exceeds $1,000,000, the brokerage house should loose short selling privileges for 1 business day for each $1,000,000. If the value of the violation exceeds $25,000,000, the brokerage house should loose ALL trading privileges for ALL securities for 1 business day for each $1,000,000 over $25,000,000. . If a fund or firm or company or trading community in any form a fund, fails to fully comply, with the rules, they should be fined 3 times the value of the short position entered. If they engage in short sales and simultaneous option trading that is not authorized, the fine should be 3 times the value of the short sales and 3 times the value of the option positions. If the value of the violation exceeds $1,000,000, they should loose short selling privileges for 1 business day for each $1,000,000. If the value of the violation exceeds $25,000,000, they should loose ALL trading privileges for ALL securities for 1 business day for each $1,000,000 over $25,000,000. . If a market participant fails to fully complying with the rules, they should be fined 3 times the value of the short position entered. If they engage in short sales and simultaneous option trading that is not authorized, the fine should be 3 times the value of the short sales and 3 times the value of the option positions. If the value of the violation exceeds $10,000, they should loose short selling privileges for 1 month for each $10,000. If the value of the violation exceeds $25,000, they should loose ALL trading privileges for ALL securities for 1 month for each $1,000 over $25,000. In conclusion; while market makers and hedge funds carry a lot of weight, the rule should be balanced so that it does not favor short sellers. It should also protect investors. I remain in opposition to allowing people to sell something they do not own. The stock market should stop being the only place in the world where you can sell something you do not own it. We need to get real and stop the criminal activity that for some reason has been legal up to now. The solution is simple, IF YOU DO NOT OWN IT, YOU CAN NOT SELL IT. Don E. Sprague 423-235-4663 3105 Gap Creek Rd Bulls Gap, TN 37711