SEC Moves Slowly Toward Rule Change On OTCBB MM Shorting
By Jack Burney
Published by OTCNN.com
06/19/2000 09:10 AM CST
(This is the seventh in a series of articles about secret market maker manipulation of OTCBB stock prices, and the need for a rule to require full disclosure of short positions in OTCBB stocks. Click on the following links to read the other articles: Article 1, Article 2, Article 3, Article 4, Article 5, Article 6. If you know of such instances of MM suppression of stocks, please tell us the story at jburney@otcnn.com)
Why doesn?t somebody do something about the way Market Makers short OTC Bulletin Board stocks and drive down their price? In its ponderous way, the Secutities and Exchange Commission IS doing something.
SEC has proposed eight changes to the rules governing short sales of securities, and asked for public comments on them. Among the changes is a proposal to extend short sale regulation to ?non-exchange listed? securities, which includes OTCBB stocks. (The entire proposal is available in Release No. 34-42037online at www.sec.gov/rules/concept/34-42037.htm.)
The rule change would mean that Market Makers would have to disclose their short position in OTCBB stocks to public view, as they currently must with stocks on the NASDAQ, NYSE, and AMEX. The surmise is that the MMs aren?t likely to continue their manipulative practices under the glare of public scrutiny.
OTCBB investors are responding. SEC has received a record number of comments from individual investors, numbering in ?the hundreds.? They?re surprised, because they rarely receive many individual responses to such proposals, and the word is out that the issue of MMM is gaining their special attention.
The SEC action is encouraging to both individual and corporate victims of MM manipulation, but the truth is that, a slow, drawn-out, bureaucratic process lies ahead before anything happens.
A ?short sale? is defined by the SEC as any sale of a security that the seller does not own or that the seller owns but does not deliver. In order to deliver the security to the purchaser, the short seller will usually borrow the security, typically from a broker-dealer or an institutional investor, and later close out the short position by returning the security to the lender, typically by purchasing equivalent securities on the open market.
?Although short selling serves useful market purposes,? the SEC proposal says, ?it also may be used as a tool for manipulation. One example is the ?bear raid? where an equity security is sold short in an effort to drive down the price of the security by creating an imbalance of sell-side interest.
?Many people blamed ?bear raids? for the 1929 stock market crash and the market's prolonged inability to recover from the crash. Short selling was one of the central issues studied by Congress before enacting the Exchange Act, but Congress made no determinations about its permissibility. Instead, Congress gave the Commission broad authority to regulate short sales in order to stop short selling abuses.?
The proposed change would alter Rule 10a-1 of the Exchange Act to extend the disclosure rule to cover non-exchange stocks. Proponents of reform want the SEC to go a little further and place a limit of 10% on the amount of a given stock a Market maker can short.
Under the extension of Rule 10a-1, OTCBB stocks would be protected by the same rules the Commission applies now to exchange-listed stocks, rules intended to prevent ?short selling at successively lower prices, thus eliminating short selling as a tool for driving the market down; and short sellers from accelerating a declining market by exhausting all remaining bids at one price level, causing successively lower prices to be established by long sellers.
?These objectives continue to be the foundation for Rule 10a-1,? SEC said. ?They represent the Commission's goal to prevent short selling that could manipulate or depress the market for a security, irrespective of the intention of the short seller.?
Nice words. But the reality is that the process will take a year, two years, who knows?
According to one authority, a concept release proposal for a rule change is the first step in the SEC process to change an existing rule. If the SEC gets enough interest in the concept proposal, it then moves onto drafting the actual rule.
Once the rule is drafted, it is released for public comment. If enough comments agree with the proposed rule, then the SEC fine tunes the rule based on the comments it has received, then puts it out for more comment. At long last, the rule is adopted and applied.
(Tomorrow: What commenters are telling the SEC, and how you may get in your two cents in behalf of the rule change to make MMs fully disclose their short positions.)
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