This week, We The Investors filed a petition for rulemaking with the SEC to Redline Reg SHO. Regulation SHO (which governs short-selling) is 20 years old, yet it’s still riddled with loopholes and has proven unenforceable. Professor John Welborn from Dartmouth recently released an important new paper, “Reg SHO At Twenty” documenting the history of Reg SHO and quantifying the current problems with failures to deliver (FTDs) and stocks that remain on the threshold list. This paper provides the justification for updating Reg SHO and makes three simple, concrete recommendations that the SEC can adopt. 

We The Investors has taken those recommendations and filed a petition asking for three amendments to Reg SHO:

1. Rule 203: Require all short sales, without exception, to be backed by a confirmed borrow of securities prior to execution.

2. Rule 204: Impose escalating monetary fees or fines for FTDs, applicable to all market participants, with proceeds supporting enforcement.

3. Rule 204: Eliminate all market maker exceptions to locate and close-out requirements, ensuring uniform settlement timelines.

These are simple changes that would impose a universal pre-borrow requirement (anyone selling short would have to borrow shares to do so - not just locate them), would eliminate any exceptions to locate and close-out requirements, and would impose escalating fines for any FTDs. These are clear, simple rules that are easily enforced, as compared to our current system of short selling regulation that was designed by Bernie Madoff.

We are kicking off a new effort to push change in DC, with SEC and Congressional meetings, and this petition and comment letter campaign. If you think our settlement system needs to be fixed, these changes are the way to bring it about. If you support this, we would love to have you file a comment letter. You can learn all about filing a comment letter and how to do it on the WTI website. We have put together a sample comment letter (please do not request edit privileges - just save a copy to your Google Drive if you want to make changes), or you can write your own - individual comment letters are more effective than form letters, but don’t let that stop you from doing either or both. Every little action makes a big difference.

You can send in your comment letter to rule-comments@sec.gov with the subject line “Comment Letter for File Number 4-848 Petition for Rulemaking to amend Reg SHO to require pre-borrows for all short sales, impose fees for Fails To Deliver and eliminate market maker exceptions.”

Feel free to ask me any questions on this, I’ll do my best to answer and speak to what we’re doing and why. Thank you for your support!