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SEC, NASD At Odds Over Status of Proposal

Mark Faulk - Aug 5, 2004

In March of 2004, the NASD filed a proposed rule change with the SEC that would replace existing rules (Rule 3210 and Rule 11830) with a new rule "requiring that clearing firms make delivery, or take affirmative steps to make delivery, within 10 business days after settlement date for all short sell transactions" http://www.nasdr.com/pdf-text/rf04_44.pdf .

The proposal has languished there for the past five months while the SEC passed its own version of a "reform package", Regulation SHO (which had been in the works since 1999, and was finally released for public comment in October of 2003), then promptly gutted it just before passing it last month, citing, as the SEC's Annette Nazareth so eloquently put it, "overwhelming comments from the industry." www.faulkingtruth.com/Articles/Investing101/1006.html

Instead of the sweeping reforms that investors had hoped for, Regulation SHO is a watered-down version that does absolutely nothing to curtail the rampant fraud that has plagued the stock market for decades. The SEC, which promises in it's mission statement "to protect investors and maintain the integrity of the securities market", instead caved in to pressure from the industry: the brokers, the clearing houses, and the market makers, all who have pocketed massive profits from the lack of oversight on short selling at the expense of the same investors that the SEC is pledged to protect.

Protect investors?... Maintain the integrity of the securities market? … Regulation SHO does nothing to accomplish either.

To investors who have been victimized by fraudulent short selling for years, the NASD rules awaiting approval from the SEC seemed in many ways to be their "last hope". It actually promised to adopt the "zero tolerance" approach that NASD Executive Vice President Barry Goldsmith vowed to take against stock market fraud when he spoke at a congressional hearing in September of 2000. Unlike the SEC's Regulation, the NASD guidelines were clear and addressed the very issues that have plagued the market for years.

NASD is "Reconsidering" its Rule …

Indeed, it looked as if there was still hope for investors - until three days ago the SEC cast a cloud of doubt over the fate of the NASD proposal when in response to a question from Dave Patch at www.investigatethesec.com regarding the status of the NASD rule application, the SEC’s Peter Chepucavage said: “It is my understanding that the NASD is reconsidering its rule and you need to speak to them."

It was a stunning statement, especially since the NASD website still has the rule listed on its site as "awaiting SEC approval". Patch also told me "my contacts at the NASD were amazed that I would receive something like this since it is not public information".

As seems always the case when trying to get a straight answer out of either the SEC or NASD, things get a bit murky.

This exchange of emails speaks for itself, I'll try to separate the wheat from the chaff as we go along:

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Monday, August 02, 2004 10:30 AM
To: Peter Chepucavage, SEC
From: Mark Faulk, The Faulking Truth
Subject: NASD short selling rules

Peter,
I am currently working on an article concerning the proposed NASD short selling rules. I just received a copy of an email from you stating that the "NASD is reconsidering" the rule package. Can you confirm this for me? I have a call in to the NASD as well, but I would like to have confirmation from you that this is indeed your email. Also, has the request that the NASD filed for review with the SEC on March 9 been officially withdrawn? If not, why do you state that it is being "reconsidered", and do you have any idea why? This issue is very important, and judging from our increased readership (over 65,000 direct hits a month, and hundreds of thousands more through reprints and distribution by financialwire.net and other news services), I am not alone in that opinion.

Mark Faulk

His reply was short and to the point:

Monday, August 02, 2004 11:14 AM
To: Mark Faulk, The Faulking Truth
From: Peter Chepucavage, SEC

I must defer to the NASD.

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Monday, August 02, 2004 12:34 PM
To: Peter Chepucavage, SEC
From: Mark Faulk, The Faulking Truth

Peter,
I just spoke with Maurine Hawkins at the NASD, and she told me that the official status is that they are waiting on approval from the SEC. I'm writing this article, so I need your take on this. Why did you make your earlier statement, and what information was that based on?

Thank you, Mark Faulk

Again, Peter is a man of few words (although by the time this was over, he probably wished he was a man of no words):

Monday, August 02, 2004 12:52 PM
To: Mark Faulk, The Faulking Truth
From: Peter Chepucavage, SEC

That is incorrect and you should tell her to call me.


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Monday, August 02, 2004 2:29 PM
To: Peter Chepucavage, SEC
From: Mark Faulk, The Faulking Truth

Peter,
Thanks, I just spoke with her again, and she got off the phone for a minute, and then came back and told me that she had the same information that I did, which is that it is "officially pending approval from the SEC". She then said she would look into it further and call me back. I relayed your email message to me, so she might be calling you shortly. I am writing this tonight, but I'd like to find out what the real story is before I do. Otherwise, I have to go with the information I have in hand. Here is her phone number in case you want to call her and get your stories straight:

Maurine Hawkins
Office Of General Counsel,NASD
[phone]

Thanks again,
Mark Faulk

Then, a different approach … instead of answering me directly, Peter sent me a copy of an email he received from Terri Reicher at the NASD. Apparently, they followed my advice and "got their stories straight", even though the question they answered wasn't the question I had been asking:

Tuesday, August 03, 2004 1:35 PM
To: Mark Faulk, The Faulking Truth
From: Peter Chepucavage, SEC

As for the short sale rule filing, you asked whether NASD had withdrawn the rule filing from the SEC, I told you that we had not. Your most recent voicemail indicates that the SEC now confirms what I told you. If NASD withdraws or amends the rule filing, that action will be publicly available.

Terri L. Reicher
Associate General Counsel
Office of General Counsel
NASD
1735 K Street, N.W.
Washington, DC 20006

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So apparently, the SEC now agreed with the NASD that the rule filing had not been "officially" withdrawn, which we all knew from the very beginning, and wasn't even the question I had asked, which was:

Is the NASD "reconsidering its rule", if so, why, and if not, why did Peter Chepucavage say that they were?

Finally, I received a phone call from Nancy Condon at the NASD, who apparently inherited the task from Maurine Hawkins. According to Condon, "Rule 3370 is not withdrawn, but in light of the passage of the SEC's Regulation SHO, we are going to have to reconsider it. There is some duplication between SHO and the NASD proposal". Interesting point, but once again, it only raises more questions: If the NASD was worried about duplicating the regulations contained in SHO, why did they file the application at all, instead of waiting for the SHO regulations to go into effect? SHO was officially opened for public comment in October of 2003, a full five months before the NASD filed its rule package. When asked that question, Condon said, "I'm not going to comment on that. SHO has been passed, and we're taking a look at the NASD rule".

So is it currently being reconsidered or isn't it? Condon claims that no official action has been taken, and in response to Peter Chepucavage's statement that it was currently being "reconsidered", and that the NASD's statement that they are "waiting on approval from the SEC" is "incorrect", Condon said simply, "I have no idea where the guy at the SEC got his information".

But, we're not quite done yet. Just to change things up a bit, I called Peter Chepucavage's direct line, but sadly, he wasn't available to take my questions. However, I did leave him a message relaying what the NASD had told me. He never returned my call, but, low and behold, I came home to find one last email from Mr. Chepucavage:

Tuesday, August 03, 2004 2:30 PM
To: Mark Faulk, The Faulking Truth
From: Peter Chepucavage, SEC

Mark, the filing is not waiting sec action. The NASD has told us they are taking additional action before we put it out for comment.


He Said, She Said

Okay, let's summarize:

He said: The NASD is reconsidering its rule.

Then …

He said: Talk to the NASD.

She said: The NASD is waiting on approval from the SEC.

He said: She's wrong, have her call me.

She said: Officially, the NASD hasn't withdrawn the rule filing .. (Duh!)

Then …

She said: I have no idea where the guy at the SEC got his information.

And finally,

He said: The filing is not waiting SEC action. The NASD has told us they are taking additional action before we put it out for comment.

The Investor's Advocate ..

According to Dave Patch, "The Securities Act of 1934 (Section 17A) specifically addresses the needs for prompt and accurate settlement of all trades. The SEC and NASD have both admitted that trade settlements are not taking place, or being enforced, and those failures are resulting in abuse and manipulation in our marketplace. The SEC went so far as to say that 4% of all publicly traded companies have some level of abuse on their stock (600+ companies). Where is the Zero Tolerance?"

So, where does that leave investors? Once again, this issue, and "efforts" by the SEC and the NASD to deal with it, has raised more questions than it has answered. Is the NASD rule package awaiting approval, as the NASD contends, or has it been "unofficially" put on hold, as the SEC claims?

Will NASD in the end cave in to the same industry pressure that the SEC succumbed to when it gutted Regulation SHO, or .. Will it stick to its guns and do the right thing for the American investor?

And why has the SEC dragged its feet for years on this issue, and even hindered efforts by NASD to stop the corruption that has cost investors literally hundreds of millions of dollars?

In the end, these are the questions that every investor, in fact every American, needs to ask, and that the SEC (and the NASD) needs to answer. Only then can they ever hope to live up to the SEC's self-proclaimed title: "The Investor's Advocate". And that is the Faulking Truth.

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Take a look at the NASD Rule filing:
http://www.nasdr.com/pdf-text/rf04_44.pdf

Questions or comments for the SEC or NASD? Here's who to contact:

Peter Chepucavage, Attorney Fellow, Division of Market Regulations, SEC
phone: [phone] email: [e-mail]

Nancy Condon, Public Relations, NASD
phone: [phone]

Terri Reicher, Associate General Counsel, NASD
phone: [phone]

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And here's some fun reading from the SEC website (in case you've forgotten what they are supposed to be doing):
The Investor's Advocate: How the SEC Protects Investors and Maintains Market Integrity
http://www.sec.gov/about/whatwedo.shtml

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He Said, She Said: SEC, NASD At Odds Over Status of Proposal (Mark Faulk, Aug 5, 2004)

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