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Dan Leuthner Comment On Regulatory Notice 21-19

Dan Leuthner

Financial regulation primary purpose is to both create a fair marketplace and create a public perception of a fair marketplace. To do this, financial regulation should work to eliminate uncertainty in the exchange process and work to eliminate volatility not due the fundamentals of the company who stock is being traded. While there are valid reasons for companies and individuals to short stocks, it is becoming evident that some organizations, in particular hedge funds, have used their vast financial resources to weaponize the use of short selling to “take” value from hands of well meaning investors and companies, without underlying reason for such value to evaporate. When an investment company borrows large portion of a company’s free float and floods the market in a short period of time, they can create ‘momentum’ that causes other investors to panic sell assets further depressing the price. In a manner of speaking it is a “pump and dump scheme,” but in reverse. While I don’t have a good understanding of what regulations might help to prevent some of the more nefarious activity, starting by applying some of the existing regulation around pump and dump might be a good place to start. Transparency in positions reporting of short position should have clear concise requirements and should not allow for calculated or interpreted positions. The reporting requirement should be something along the lines of “we have sold X number of shares that we did not physically own at the time of sale(s).” This type of reporting should capture any shares that were Synthetically created via an option call / put strategy. There will likely need additional definition as to what constitutes a share that was ‘not owned’ at the time of sale. Including a threshold for institutional or individual investors to “priority” report actions might be another way to deter weaponized short selling, something like reporting of any short sales or sum of short sales that is greater than 0.5% of the a company’s free float in a 24 hour period. As a side benefit, better reporting will help early detection of overleveraged financial organizations. This should in turn help investors and regulators understand weakness in the marketplace and market players, which will help to lesson the impact of companies that fail due to poor risk taking. I wish you luck as you modify these regulations, and I leave you with one final thought. Your job is not to create a place where individuals can take wealth of others, it is to create a fair market place where one person can depend on a smooth transaction based fair rules that apply to all. This section is connected to the protection of both the confidence of investors and