fwiw, commentary from elsewhere on the net.
To remember is that the FTD data only covers CNS fails. ex-clearing fails are not included nor does the SEC keep track of those. Fails with repurchase agreements are also not reported.
These fails are in addition to the reported short interest - which are also not fully reported.
Here's the low down on REG SHO:
REG SHO does not explicitly permit FTDs. Matter of fact the SEC has no formal rule permitting this. However, the Securities Acts expressly prohibits the sale of unregistered securities, which is what FTDs are. FTDs are derivative securities that are issued and traded but not registered. Thus, without being registered they are prohibited. Just like call and put options are derivative securities, etc..as defined by the Securities Acts.
So what is the SEC doing wrong?
1. Abandoning Statutory Obligations
The SEC is deciding not to enforce portions of the securities acts that prohibit the sale of unregistered securities (section 5 of the Securities Act of 1933) and to abandon its statutory obligations instead. This, despite the fact that these acts obligate the SEC to enforce these provisions and to regulate the securities markets.
The Supreme court had this to say in 2007 about this type of non-enforcement and abandonment:
Plaintiffs say:.."...its refusal to regulate such emissions, at a minimum, âcon-tributesâ to Massachusettsâ injuries."
Opinion of The Supreme Court agreed...." As to EPAâs statutory authority, the petition observed that the agency itself had already confirmed that it had the power to regulate...."
"On September 8, 2003, EPA entered an order denying the rule making petition. 68 Fed. Reg. 52922. The agency gave two reasons for its decision: (1) that contrary to the opinions of its former general counsels, the Clean Air Act does not authorize EPA to issue mandatory regulations..."
"..It has refused to do so, offering instead a laundry list of reasons not to regulate......Nor can EPA avoid its statutory obligation....concluding that it would therefore be better not to regulate at this time."
Basically, since the SEC is charged by the 1934 Securities Exchange Act to regulate the markets and enforce the provisions of the Securities Acts, it can not simply decide not to enforce these prohibitions on the sale of unregistered securities, which are explicit in the Securities Acts. At least not without a formal rule from the SEC permitting it. But there is no such formal rule.
2.
The APA requires the SEC to follow the rule making process for all rules it promulgates. However, in permitting the sale of unregistered securities and FTDs by not enforcing the Securities Acts, it has avoided the APA requirements and is implementing a rule without any formality required by the APA (Administrative Procedure Act) http://en.wikipedia.org/wiki/Administrative_Procedure_Act.
At a minimum, the SEC needs to formalize a rule permitting FTDs. However, the SEC knows this would be just about impossible. The only beneficiaries would be Wall Street firms and such a proposed rule would be struck on petition. So it's better to let everything fly under the radar.
However, the FPA had to deal with a similar problem and they forced the SEC to formalize the "Broker-Dealer" rule. When the SEC formalized the rule, the formal rule was struck by the courts on petition.
To remember is that the FTD data only covers CNS fails. ex-clearing fails are not included nor does the SEC keep track of those. Fails with repurchase agreements are also not reported.
These fails are in addition to the reported short interest - which are also not fully reported.
Here's the low down on REG SHO:
REG SHO does not explicitly permit FTDs. Matter of fact the SEC has no formal rule permitting this. However, the Securities Acts expressly prohibits the sale of unregistered securities, which is what FTDs are. FTDs are derivative securities that are issued and traded but not registered. Thus, without being registered they are prohibited. Just like call and put options are derivative securities, etc..as defined by the Securities Acts.
So what is the SEC doing wrong?
1. Abandoning Statutory Obligations
The SEC is deciding not to enforce portions of the securities acts that prohibit the sale of unregistered securities (section 5 of the Securities Act of 1933) and to abandon its statutory obligations instead. This, despite the fact that these acts obligate the SEC to enforce these provisions and to regulate the securities markets.
The Supreme court had this to say in 2007 about this type of non-enforcement and abandonment:
Plaintiffs say:.."...its refusal to regulate such emissions, at a minimum, âcon-tributesâ to Massachusettsâ injuries."
Opinion of The Supreme Court agreed...." As to EPAâs statutory authority, the petition observed that the agency itself had already confirmed that it had the power to regulate...."
"On September 8, 2003, EPA entered an order denying the rule making petition. 68 Fed. Reg. 52922. The agency gave two reasons for its decision: (1) that contrary to the opinions of its former general counsels, the Clean Air Act does not authorize EPA to issue mandatory regulations..."
"..It has refused to do so, offering instead a laundry list of reasons not to regulate......Nor can EPA avoid its statutory obligation....concluding that it would therefore be better not to regulate at this time."
Basically, since the SEC is charged by the 1934 Securities Exchange Act to regulate the markets and enforce the provisions of the Securities Acts, it can not simply decide not to enforce these prohibitions on the sale of unregistered securities, which are explicit in the Securities Acts. At least not without a formal rule from the SEC permitting it. But there is no such formal rule.
2.
The APA requires the SEC to follow the rule making process for all rules it promulgates. However, in permitting the sale of unregistered securities and FTDs by not enforcing the Securities Acts, it has avoided the APA requirements and is implementing a rule without any formality required by the APA (Administrative Procedure Act) http://en.wikipedia.org/wiki/Administrative_Procedure_Act.
At a minimum, the SEC needs to formalize a rule permitting FTDs. However, the SEC knows this would be just about impossible. The only beneficiaries would be Wall Street firms and such a proposed rule would be struck on petition. So it's better to let everything fly under the radar.
However, the FPA had to deal with a similar problem and they forced the SEC to formalize the "Broker-Dealer" rule. When the SEC formalized the rule, the formal rule was struck by the courts on petition.
