From: Shichtm@aol.com Sent: Monday, January 05, 2004 4:59 PM To: rule-comments@sec.gov Subject: File No. S7-23-03 - Reg SHO To: Securities and Exchange Commission Rule-comments@sec.gov From: Marshal Shichtman shichtm@aol.com RE: Comments on regulation S. H. O. File No. S7-23-03 Dear Sirs, Comments to selected questions regarding regulation S. H. O. are as follows: C: proposed amendments, 1 short sales Question One What harms result from naked shortselling? Conversely, what benefits accrue from naked shortselling? The harms resulting from naked shortselling are numerous. The initial effect of naked shortselling is to depreciate the market capitalization of the issue, thus negatively affecting market participants, either justly or unjustly. However there are also some secondary effects which are less well-known. Once the market Has decreased in the issue the issuer has less leverage to make acquisitions. Furthermore, the decreased market capitalization of the issue, the issuer’s credit rating usually goes down. This is because the company has less assets to securitized any financial arrangements and market capitalization is usually indicative of the companies valuation. Therefore, the credit rating going down causes in increase in debt service. This increase in debt service puts strains on cash flow. Among other less known harms of naked shortselling is the adverse effects this has upon employee stock ownership plans, current financial arrangements involving options, and puts the issuer at risk for a hostile takeover. The benefits accrued from naked shortselling, are most simply put, market efficiency. The benefit of market efficiency should not be underrated. This gives, or can give, the investing public a more indicative valuation of the issue, and can give the astute investors more tools in their toolbox with which to create a more dynamic capital market system in the American marketplace. Question three. What is the appropriate manner by which short sellers can comply with the requirement to have "reasonable grounds" to believe that security sold short could be borrowed? Should short sellers be permitted to rely on blanket assurances that stock is available or borrowing, i.e., "hard to borrow" or "easy to borrow" lists? Is the equity lending market transparent enough to allow inefficient means of creating these lists? The requirement should not be "reasonable grounds" to believe that security sold short could be borrowed. The requirement should be actual possession (not necessarily physical possession of certificates, but book entry will suffice), or a letter of intent assuring that the underlying security sold short can in fact be covered. Such lists as "hard to borrow" or "easy to borrow" may or may not be indicative of the actual situation. The environment of the issue can change within minutes on concerted shortselling activity. Moreover, the term "reasonable grounds" is somewhat empherical. A defined criteria for what constitutes "reasonable grounds" should indeed be considered. Question four. should short sales effected by a marketmaker in connection with bona fide market making be excepted from the proposed "locate" requirements? Should the exception be tied to certain qualifications or conditions? If so what should these qualifications or conditions be? Although market makers should be given somewhat more leniency to facilitate efficient markets, there have been more than a few bad market makers. What I mean by bad market makers is market makers who either break, bend or find loopholes to clearly frustrate the intended result of any rules. These bad market makers, although in the minority, constitute a very real threat with dangerous consequences. In allowing softer requirements for market makers, which eases administrative burdens and increases market efficiency, these allowances give a very real intangible weapon for bad market makers to disembowel the vulnerable companies. Therefore, I suggest that no exception be placed for market makers, due to the potential abuse by bad market makers. Question five. Should the proposed additional deliver requirements be limited to securities in which they are significant failures to deliver, if so, is the proposed her shoulder and accurate indication of securities with excessive fails to deliver? Should be higher or lower? Should additional criteria be used? The proposed additional requirements to deliver should not be limited to securities in which there are significant failures to deliver. The securities with significant failures to deliver, will become relatively in active once those additional requirements are imposed. Naked shortselling activity will then move on to a more viable and easier target; thus making a rolling list. The naked shortselling activity will begin on securities that do not have additional requirements, and once the additional requirements are imposed the activity will move on to another security that do not have the additional requirements, thereby perpetuating a vicious circle. It is very important to remember that the people and are parties committing shortselling and naked shortselling have no lack of intelligence, and there is no want of any vulnerable companies. Question six. Are the proposed consequences for failing to deliver securities appropriate and affective measures to address the abuse is a naked shortselling? If not, why not, what other measures would be effective? Should broker-dealers buying on behalf of customers be obligated affect the buy-in for aged fails? Broker-dealers buying on behalf of customers should be obligated to affect the buy-in for aged fails. If broker-dealers are obligated to affect a buy-in they are essentially acting as a safety net and incurring possible negative financial ramifications. This is putting broker-dealers in a position where they are incentivized to police the marketplace by making them responsible for buy-in's on aged fails. Moreover, this is putting the broker-dealers own wallet on the line which will hopefully make them very particular in these situations. Question seven. Is the restriction preventing a broker-dealer, for. 90 calendar days, from executing short sales in the particular security for his own account or the account of the person whose account the failure to deliver occurred without having three borrowed the securities in appropriate and affective measure to address the abuse is a naked shortselling? 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 per whose account the failure to deliver occurred, effected by any broker-dealer? I believe that the 90 day restriction preventing broker-dealers from executing short sales is a positive step. Moreover the restriction on the person per whose account the failure to deliver occurred is a better step. This leaves the potential party completely open to market forces. However, just because the party had a failed to deliver does not mean that they are a naked shortseller, and thus would comparably leave them completely open and vulnerable to market forces. Question eight. Should short sales effected by a marketmaker in connection with bona fide market making be exempted from the proposed deliver 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? I believe no exemption should be available for market makers, as there are bad market makers. Question nine. Under what circumstances by the marketmaker need to maintain a failed to deliver on a short sale longer than two days past settlement date in the course of bona fide market making? Is today's the appropriate time. He used? Market makers often are put into a bind when securities are chilled, frozen, or under a judicial temporary restraining order, or preliminary injunction. Also, when provisions of rule 144 are concerned, occasionally market makers get caught in the middle during contests of eligibility and applicability. This is been especially prevalent in death spiral financing/toxic financing. Operation of the uniform bid test. Question one. Should short sales continued to be limited by a price test? If the commission did not adopt a price test under regulation S. H. O., should also preclude the ability of the SROs to have a price test? The price test with current uptick rule are imperative to market operations. This prohibits any given security from being shorted to death. Granted, the dedicated naked short seller, and or short seller, with a little patience, can produce similar results by allowing interposing buys. Question two. Would there be any benefits in eliminating a short sale price test? With elimination of a price test benefit the markets by allowing investors to more freely short cell potentially overvalued securities so that their price more actually reflects their fundamental value? Are there other benefits the removal of their price test, such as elimination of systems and surveillance cost? I cannot for see any benefit in eliminating a short sale price test. As already stated, the short sale price test, or uptick rule, prohibits and serves as a substantial bar that securities do not free fall downward because of concerted shortselling activity. Question seven. The proposed bid test likely would inhibit short sales in a declining market because there would be few execution opportunities above the bid test. Is this appropriate? Yes. Please see the response to question two (above). Question eight. Is a one cent increment in appropriate standard for allowing short sales above the best consolidated bid? If not, was in appropriate increment? A one cent increment is the smallest increment that can be gauged. However, this might not be the most effective uptick rule, as normal market activity will most certainly trigger buy above the one cent increment. Moreover, the one cent increment would not be indicative of any given volume. That is to say to predominate in line share of the activity could be shorts, and one round lot could bypass the system. Also of consideration, a consolidated bid requires a super montage system, or something akin to it. This is more or less absent in pink sheets and bulletin boards. Question nine. With the proposed bid test operate effectively in the current decimal environment, i.e., would bid flickering inhibit the operation of the test? Yes, it flickering would inhibit the operation of the test. Please see response to question number eight (above). Question 10. With the proposed bid test to fill the fundamental goals of short sale regulation? No, the proposed bid test would not to fill all the fundamental goals of short sale regulation. However, this is an important and crucial first step. B. Scope of the uniform bid test. Question one. Should a proposed uniform bid test be extended to NASDAQ small-cap and OTC BB securities? Do the securities need the protection of the proposed uniform bid test? Absolutely! The NASDAQ small-cap and the OTC BB securities are the securities most vulnerable and most usually preyed upon by short-sellers, with the least amount of resources to combat situation. These are the issuers who need it the most. Question two. To the proposed uniform bid test be extended to other OTC BB securities, e.g. those quoted in pink sheets? If so, are quotes in the securities disseminated in a manner that would allow for the use of the proposed uniform bid test? In addition with the proposed bid test be workable due to the fact that the best bid in the securities could be outstanding for long periods of time? If not could a last sale test or some other test be applied to the securities? The bid test should most certainly be extended to the pink sheets for the reasons delineated above in question one (those are the most vulnerable and most preyed upon securities with the least amount of resources to combat the situation). Even though pink sheet quotes may be extensively lagged and/or stale, instituting this test would be an extremely positive start by providing protection that does not currently exist. International arbitrage Question one. Should the international arbitrage exception be retained for purposes of the proposed rule two a one? If not sit specific reasons why the exception should be removed from the rule. There should be no international arbitrage exception. All this does is encourage sister firms and joint partners overseas to place orders in lieu of domestic broker- dealers. By allowing this loophole to exist it is simply encouraging international arbitrage. Marshal Shichtman & Associates, P.C. ATTORNEY AT LAW 1 Old Country Road, Suite 120 Carle Place, New York 11514 Phone (516) 741-5222 Fax (516) 741-5212 www.lawmsa.com This email may contain confidential information that may be protected under attorney-client privilege, copyright, trademark, trade secret or other various intellectual property laws. Furthermore, any financial information contained herein is advice of a secondary nature to the practice of law, and any advice so given upon future events is pro forma and not certain. IF YOU RECEIVE THIS INFORMATION IN ERROR, PLEASE NOTIFY THE SENDER IMMEDIATELY AND DELETE THIS MESSAGE AS YOU MIGHT BE SUBJECT TO CIVIL PENALTIES. "That State which separates it's scholars from it's warriors will have it's thinking done by cowards, and it's fighting done by fools." - Thucydides, from The Pelopnnesian Wars.