NASD Rule 3370 here's some interesting commentary:
sec.gov
Date: 06/23/2000 7:23 PM
Subject: File No. S7-24-99 (Comments re: extending short sales protec
Robert Bumbalough
2461 Lindale Ln.
Mesquite Texas, USA
Postal Code: 75149
Jonathan G. Katz
Secretary, Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C.
20549-0609.
rule-comments@sec.gov.
reference to File No. S7-24-99
Greetings:
I am submitting, for your review, the following comments in regards to
extending short sales protections for the individual investor to NASD
OTCBB quoted issues. In the past when there was very limited trading on
the NASD OTCBB quotation service, market making firms making markets in
OTCBB issues could act in unethical and morally wrong manners with
impunity. Technology has changed the way we all trade and invest. No
longer can it be tolerated for the NASD OTCBB to remain a bastion of
immorality in the markets. Many Americans and citizens of other
countries as well invest in and trade the micro-cap issues of the
OTCBB. This increased participation compels the SEC to take action to
fulfill its fiduciary duty to the Congress and the Public Trust of the
United States of America.
Some NASD member firms making markets in OTCBB traded securities while
acting as "Bona Fide" market makers will naked short sell OTCBB
securities under the provision of NASD rule 3370 (b)(2)(B). This allows
them to make a short sale without having to make a "positive
determination" that securities are available to borrow for delivery by
settlement date. As a result of this, some OTCBB securities that are in
high demand by the investing public have been excessively sold short by
NASD member firms making markets in those OTCBB securities. This in turn
often results in situations where many millions of shares of a particular
OTCBB security that do not exist have been sold to the investing public.
By the phrase, "shares of a particular OTCBB security that do not
exist", I mean those shares of the security in question that NASD member
market making firms have sold short under NASD rule 3370(b)(2)(B) which
cannot be enumerated amongst the outstanding issued or registered shares
of the security. For example, suppose 1,000,000 total outstanding
shares of the securities of the XYZ Corp., XYZ, had been issued by the
company and that those shares are traded on the OTCBB market. Then the
total number of outstanding shares in existence would be 1,000,000
shares of XYZ. If the shares of XYZ are in high demand, and the NASD
market making firms acting as "Bona Fide" market makers sell 10,000,000
shares of XYZ then under NASD rule 3370 (b)(2)(B), then there would have
been 9,000,000 nonexistent shares sold to the investing public.
Since OTCBB stocks are not marginable, (ie: cannot be used as collateral
for a loan), a NASD member market making firm is not required to "cover"
or "buy back" those "shares of a particular OTCBB security that do not
exist" that it has sold short under NASD rule 3370 (b)(2)(B) if the
price of the issue were to rise. This effectively means the market
making firm can sell an infinite quantity of said OTCBB stock to the
investing public. This robs the small company of the ability to raise
capital and dilutes the investor's investment to near worthless. This
is very unethical and morally wrong.
The alleged notions that the OTCBB and NASD market are fair and freely
trading markets create a standing contradiction as the conditions that
prevail in the market maker industry are plainly apparent. This can and
eventually will lead to a loss of investor confidence in these markets.
A confidence the very existence of the self-regulatory organization, the
NASD, was designed to promote is undermined by:
(1) The existence of NASD rule 3370 (b)(2)(B) that allows market maker
firms to sell millions of non-existent shares of OTCBB securities.
(2) The limited scope of NASD rule 3350 "The Short Rule" which is
supposed to prohibit the practice of "Bear Raiding " and "Piling On" but
due the "Primary Market Maker" exemption is completely negated for
NASDAQ stocks. Rule 3350 has not applicability to the OTCBB securities
at all.
(3) The limited scope of the Limit Order Display Rule which does not
apply to OTCBB stocks.
(4) The lack of Limit Order Protection for OTCBB stocks allows NASD
member market making firms to trade against their customer's orders.
These conditions create an environment where legalized and systemic
constructive fraud flourish. The NASD, the SEC, and the Securities
regulative bodies in our legislature have a fiduciary duty to protect
the interest of the investing public. To carry out that duty
faithfully, they must either accept responsibility for reform or make
broad based public disclosure of the inherent unfair nature of the
NASDAQ Small Cap and OTCBB markets. The later course would completely
destroy whatever foundation of trust the NASD has garnered through its
Self-Regulatory efforts. This in turn could be widely perceived as a
case of the Fox guarding the Hen-House. The former course would be more
in line with past regulatory administration and legislation.
To correct the current wrongful situation regarding NASD member market
making firms that make markets in OTCBB stocks the following changes
must be put into effect.
1) OTCBB stocks must be made marginable so market makers would be
required to cover short positions when the stock price rises above the
maintenance requirement level.
2) Short interest in OTCBB stocks must be protected by allowing
individual US investors to short sell this type of issue. Margin
maintenance requirements suitable to economic conditions as determined
for listed stocks should be put in place.
3) NASD rule 3370 (b)(2)(B) must be modified to prohibit NASD member
market making firms from naked short selling OTCBB issues.
4) A Limit Order Display and Limit Order Protection rules must be
implemented for OTCBB issues.
5) NASD rule 3350, "The Short Rule" must be modified to extend short
sales protections to OTCBB issues by prohibiting short sales on a down
tick and the practices of "Bear Raiding" and "Piling On".
6) Market making firms must not be allowed to arbitrarily set prices.
Instead supply and demand must be allowed to work in a free and fair
market. When majority buying or majority selling from the investing or
trading public occurs, the issues price trend should reflect that
condition. Creation of a suitable trading algorithm could be
accomplished. The engineering expertise is readily available.
If you need clarification of my questions or need further information,
please do not hesitate to email or call me.
Best Regard for Continued Success |
