STA Comments on Rule 204T

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14 August 2009

August 13, 2009

Ms. Elizabeth M. Murphy
Secretary
U.S. Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549
RE: Release No. 34-59748; File No. S7-08-09 and
Release No. 34-60388; File No. S7-30-08

Dear Ms. Murphy:

The Securities and Exchange Commission’s recent actions adopting Rule 204T on a permanent basis is a significant advance in the effort to control abusive short selling. Rule 204T is a measured and targeted regulation that places the regulatory burden primarily upon those market participants that engage in short selling. It is an effective regulation that has significantly reduced the number of issues on the threshold lists and reduced overall fails to deliver by over 50%. This rule works. The deliberative open process used to vet this rule is most effective for considering complex issues. The Security Traders Association congratulates the Commission on this exemplary rulemaking effort.

The Security Traders Association (STA) has been involved in the short sale discussions for decades. We have long viewed short sales as a valid investment alternative and we have held equally strong support for strict enforcement of locate and delivery rules that serve to eliminate illegal naked and abusive short selling. The STA has also long shared its concerns about abusive short selling. We continue to believe that short sale regulations should concentrate on the clearing and settlements processes.

We absolutely concur with Commissioner Paredes’ remarks at the Security Traders Association’s 13th Annual Washington Conference on May 6, 2009:

Much attention has focused on concerns with short selling, but it is equally important to emphasize the benefits of short selling. Short selling makes significant contributions to the effective operation of securities markets, benefiting all market participants and the economy overall. Short selling contributes to liquidity, capital formation, and more efficiently allocated risk. Short selling can buttress buying by allowing investors going long to hedge their positions; and short selling can encourage market participation by leading to improved price discovery. Short selling helps ensure that securities prices are not systematically biased higher than the fundamentals warrant, as could be the case if prices did not reflect the less optimistic views of short sellers. Price discovery matters because investors would be less willing to invest if the contrarian views of short sellers were not fully incorporated into securities prices. Furthermore, when price discovery is compromised, we run the risk that our securities markets allocate capital inefficiently.

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