Before we head off to D.C. and join the #OccupySEC2023 initiative, we wanted to make sure we addressed this community and articulated in more detail what we perceive the event is all about and what CEOBLOC aims to achieve with its participation and support of the cause.
Put simply, we want immediate action. Congressional action. The issue of malicious naked short selling has gone beyond the scope of the SEC mandate and we need Congress to expand the SEC’s reach. The regulators must realize that technology progressed faster than rules and laws could be formed, and as a result businesses and retail investors have watched their capital get crippled by prime brokers, hedge funds and market makers who wittingly or unwittingly drive stock prices down.
When we talk about the specifics of Congressional action, we can distill it down into three key focus areas.
The first step is a Congressional Committee and an investigation into all the mechanics of short selling in our markets and how quickly short selling can turn into naked shorting. The investigation must track shorting from the first share location to the final close out of the open trade. It is in the interest of the short players to never close out a trade. Too many loopholes have formed in the rules Congress passed regarding FTDs and RegSHO. While we are paying close attention to the rules the SEC is seeking to place on Payment for Order Flow and Best Execution, the implementation of these rules are months or years away, and have fallen 10 years behind in regards to the underlying issues they were meant to resolve. We would like to see an investigation into the points of failure for the rules that already exist. For example, the rules regarding margin calls seem to have a clear mathematical basis, however, we learned through the Congressional investigation into the Gamestop saga that margin calls can be waived by a person for any reason at any time. One of the worst points of failure is the Bernie Madoff exemption called “securities sold, not yet purchased”. With the technology we have today, this rule is one of the most outdated. We need action now, we need true price discovery, and transparency. This is something only Congress can do.
A Congressional investigation should cover the limited fees and fines that the SEC is allowed to impose on companies who break the existing rules. At this time, the fines are little more than a “crime tax” ; they are pennies on the dollar of overall profits that clearly doesn’t deter rule-breaking. These are just line items to the perpetrators. The SEC needs a wider margin to be able to impose fines that actually impact the profits made by breaking rules. More importantly, there should be a limit to the amount of times a company can break the rules. Just as a person can only have a limited number of traffic violations without facing escalating consequences, we need limits to the number of violations a company can have before being suspended from trading in the markets, facing criminal charges and jail time.
In 2008, U.S. regulators temporarily banned short selling of stocks, believing that the practice was self fulfilling and would have lasting effects if it did not enforce restrictions. Today, the market is faced with a similar predicament as it was in 2008. There is a need to recalibrate and assess market making as a business. To do so without banning short selling, is to simply prolong the problem and further damage the foundation of the capital markets. We are asking the SEC and Congress to ban short selling immediately to allow our economy to stabilize without added pressure from malicious hedge funds who care nothing for damage they do to the American people. Congress must act now to save companies from predatory shorts.
A Final Note
So why are we here, #OccupySEC2023 and not #OccupyCongress? The most immediate action that can be taken is by the SEC; they set the precedent in 2008, to temporarily ban short selling. We are here, on their doorstep, asking them to do that now. We are fighting for the companies we’ve built and for the money invested in them. There can be no accurate price discovery in the current market environment. The big picture solution will require Congressional actions and so, we are asking the SEC to join us in asking Congress to investigate and to expand the SEC’s mandate and create legitimate deterrents as opposed to decades of inaction and small, punitive victories.