From: je bay [jebay@yahoo.com] Sent: Monday, January 05, 2004 12:31 PM To: rule-comments@sec.gov Cc: info@gopulictoday.com Subject: Comment on Proposed SHO Rule: http://www.sec.gov/rules/proposed/34-48709.htm Jonathan G. Katz, Secretary U.S. Securities and Exchange Commission 450 Fifth Street, NW, Washington DC 20549-0609 Date: January 5, 2004 Submitted electronically to: rule-comments@sec.gov. File No. S7-23-03 Dear Secretary Katz: RE: Proposed SHO Rule: http://www.sec.gov/rules/proposed/34-48709.htm The current regulation(s) proposed before us has an important and far-reaching impact not only on the economy of our country but in many ways the very nature and methodology by which market position and stock liquidity are determined. The decision by the SEC to begin an investigation and concurrently a season of hearing opinions on the matter serves to underscore not only the seriousness but also the potential for severe market fluctuations and in the end small business devaluation. In response to the proposal before us I will attempt to address and minimally comment to the following queries as they are representative of the several suggested questions as presented in SEC Release No. 34-48709, File S7-23-03. It has always struck me as rather odd that those who see the most opportunity rarely desire burdensome regulation. As reminiscent of schoolyard kickball, those often most distraught and in need of modified rules are those whose concept of competition exist when restrictions inhibit any real or imagined advantage. A quick caveat must be interjected. By no means, is there implicit support or blanket approval for actions and trading behavior that breaks the law. Such brokerage firms and market professionals existing by such practices should be punished and the industry purged of their irresponsibility. I maintain that, we as traders and purchasers of high-risk stocks, allow those who legally exist within its framework to be allowed the fun and excitement of simply "playing ball". Q. What harms result from naked short selling? Conversely, what benefits accrue from naked short selling? The negative consequences of short selling. Essentially the practice of offsetting temporary imbalances in the trading of securities by predicting or hedging bets of potential profitability on borrowed shares creates high risk with little control. The risk of undercutting or misrepresenting "borrowed" shares can result in market downturns called "bear-raiding". This occurs when an equity security is sold short in an attempt to force down the price of the purchased security by creating an imbalance on the sell interest. Excessive short-selling can also intensify a declining market by increasing pressure from the selling side, removing bids, and thereby causing a continued appearance that the price of the security is falling for fundamental worth reasons when in fact this is not the case. Such tendencies are seen or perceived as illegally manipulating stock prices. The benefits: Naked short selling allows the market to experience increases in its liquidity by adding perceived value to the selling interest of stock(s) and consequently reducing the risk that the price(s) paid by the initial investor in the stock(s) is erroneously high because of a momentary contraction of selling interest. This activity also adds to the buying interest of stock available to all sellers. Bottom line: It creates assets that are seen as quick indicators of potential cash. Additionally, through the process of naked short selling future stock performance is enhanced as an indictor of future security value. Q. What is the appropriate manner by which short sellers can comply with the requirement to have "reasonable grounds" to believe that securities sold short could be borrowed? Should short sellers be permitted to rely on blanket assurances that stock is available for borrowing, i.e., "hard to borrow" or "easy to borrow" lists? Is the equity lending market transparent enough to allow an efficient means of creating these lists? Yes, the equity lending market is transparent enough to allow for efficient control of these lists and if not the market, under proposed regulation, will demand those who do not comply to produce such a list to cease or desist. Here our response lies in the burden of too much regulation. Reasonableness should be a factor of the established regulation naturally assumed through the adherence of all other proposed observances. For instance, the regulation as modified would allow for uniform methods by which securities should be located prior to borrowing, with appropriate exemptions for specialized market-makers who are conducting business within the fast market of the OTCBB. A level of control by transparent listing would over time over regulate an inherently volatile market. Competition and the resulting demand to legally and accurately respond to customers will allow for those brokerage firms and market agencies producing the most legitimate lists to be trusted and therefore remain in existence. Should a company be "caught" by utilizing available securities through bogus or unsubstantiated securities the natural "guilt by association" would serve to destroy credibility and naturally remove those seeking to abuse or misrepresent the system. It is imperative that within a free market that natural control mechanisms be the greatest deterrent to perceived abuses rather than continued control over every perceived "what-if?" Q. Are the proposed consequences for failing to deliver securities appropriate and effective measures to address the abuses in naked short selling? If not, why not? What other measures would be effective? Should broker-dealers buying on behalf of customers be obligated to affect a buy-in for aged fails? Again we must be careful to not alter the unique environment of the securities and investor relationship to the degree that we stifle and discourage investment and growth at all levels. In review of the proposed consequences to address the abuses, we are again concerning ourselves with a future yet to be realized. When determining behavior, we must first see if the behavior is modified under the new guidelines. My sense is that with appropriate and continued observation the guidelines as suggested for non-compliance will be deterrent enough. As professionals let us first see if through example, regulations are honored and therefore substantiated. There is no provision that will not allow for a review of acceptable disciplinary modifications should continued abuse or perceived abuses remain. In addressing the concept of a buy-in for aged fails, let us allow for the perceived increase in market overhead and thereby increased cost passed to the customer be the natural impetus for continued internal regulation here. Over time, an over priced product with like features to its competitors will not remain a marketable product for long. Q. Is the restriction preventing a broker-dealer, for a period of 90 calendar days, from executing short sales in the particular security for his own account or the account of the person for whose account the failure to deliver occurred without having pre-borrowed the securities an appropriate and effective measure to address the abuses in naked short selling? Should this restriction apply to all short sales by the broker-dealer in this particular security? Should the restriction also apply to all further short sales by the person for whose account the failure to deliver occurred, effected by any broker-dealer? Because the failure to deliver can be ultimately based on a number of interrelated factors, the ultimate goal of a 90-day restriction should be limited to the broker- dealer transaction period. After the initial 90-day restriction is lifted, an external audit should be randomly implemented to carefully monitor the ongoing practices of those associated as having been "listed" on the 90-day restrictive list. The external review assures that successful firms and therefore successful individuals are not being singled out for punishment and injects a level of industry accountable hereto unpracticed. The listing will serve as an SEC tool in examining reasons, trends, and opportunities for educational enrichment. For those firms (broker-dealers) continually listed over a pre-determined period of time, necessary and lasting legal and professional implications shoul d result. This matter deserves a careful and predetermined execution, as many will need a season of grace to adjust to understood or misunderstood nuisances as well as appreciation for the external audit that may result in more damaging implications. Q. Should short sales affected by a market maker in connection with bona-fide market making be exempted from the proposed delivery requirements targeted at securities in which there are significant failures to deliver? If so, what reasons support such an exemption, and how should bona-fide market making be identified? To discourage the "bona-fide" market maker of performing the necessary trades and associated activities in adherence with the market maker environment would be incredibly counter productive. The regulations as represented through the uniform requirement for locating securities do more to curtail and prevent the abusive practices perceived with short selling. To further orchestrate the trading process by a market maker engaged in substantial and arguably necessary economic activity would be to hamstring the professionalism and necessary fluidity in conducting such transactions. Reasons for exemption are again studies in time. There does not currently exist mass abuse or fraud on the part of these industry professionals in conducting the requirements inherent in securities selling. Through continued observation and by the reciprocal affects of standardizing the location of listing securities prior to borrowing, we in affect promote and enhance the legitimacy of the market transaction itself. An equally standardized process of delivery requirements has no direct bearing on the ability of borrowing and consequently short selling to be infringed upon. Legitimate market-making is the result of the SEC continuing to adhere and implicate those firms not operating under the current NASD Rule 3370 and its subsequent additions under NASD Rule 3210. In doing so, the more fluid market makers are left to perform, as there transactions naturally require that their securities be delivered within the already existing time periods. In other words, it serves no purpose to conduct business, considering oneself engaged in a market maker business transaction that extends beyond the already governed period of time. In conclusion, we cannot also discount the very history that has led us to the discussion now before us. Recent market developments (i.e. abusive naked short selling in the 90's, NASDAQ securities trading away from the NASDAQ market, the advent of futures trading impacting securities, and the technological decimalization within the market) have each served to considerably heighten and elevate the current level of concern. But Congress never intended by its establishment of the SEC's oversight, for short selling to be prohibited or significantly hindered. Rather by its administrative control, the SEC was charged with regulation in order to prevent selling abuses. With such abuses now present, minor modification as recommended are the natural function and reality of our capitalist economy. The proposed SHO regulation may be the truest opportunity for all involved to play equitably. Far from the laissez-faire "no regulation" viewpoint, and definitely not in the realm of restrictive and knee-jerk hyper legislation, the proposal introduces a healthy level of managed control. By reducing the devaluing effect of the naked short-seller by requiring "securities" to be located before they are "borrowed", the SEC is only asking that there exists a logical and unified method of seeking investor dollars and consistently delivering the securities listed. Sincerely, Stephen Brock President GoPublicToday.com, Inc. -------------------------------------------------------------------------------- Do you Yahoo!? Find out what made the Top Yahoo! Searches of 2003