Posted in r/Superstonk by u/WhatCanIMakeToday • 1,458 points and 60 comments
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The original was posted on /r/gmecanada by /u/Odinthedoge on 2025-08-05 20:09:43+00:00.

ICYMI: There’s a gaping loophole in RegSHO for long sales where brokers and dealers are explicitly allowed to fail to deliver if a seller lies. Below is a petition template (⤵️) to close the gaping loophole. Reddit posts for context:

Reddit formatting sucks so I recommend copying/pasting the petition from one of the following with the text below for your review:

Sending The Petition

To petition simply send the SEC an email (anonymously is fine) with the PDF or as follows:

TO: [[email protected]](mailto:[email protected])

SUBJECT: Petition for Rulemaking: Closing Loopholes Abused for Naked Shorting (CLANS)

Dear Ms. Countryman,

As a retail investor, I respectfully submit this petition for rulemaking pursuant to Rule 192 of the Securities and Exchange Commission’s (“SEC”) — Rules of Practice, to request that the SEC amend Rule 203(a) of Regulation SHO and Rule 15c3-3 to protect investors from fraud and deceit by addressing settlement and clearing failures, market risks arising from (potentially abusive, naked, and/or fraudulent) short selling, and (potentially extreme) market imbalances to support the stability of our financial system by eliminating loopholes and exemptions to ensure that long sellers have possession of and deliver securities sold.

I respectfully submit this petition consistent with information on the SEC’s website for Petitions for Rulemaking Submitted to the SEC4 which states “[a]ny person may request that the Commission issue, amend or repeal a rule of general application” where “[p]etitions must be filed with the Secretary of the Commission” and “[p]etitions may be submitted via electronic mail to [[email protected]](mailto:[email protected]) (preferred method)”.  This petition also satisfies requirements that “[p]etitions must contain the text or substance of any proposed rule or amendment or specify the rule or portion of a rule requested to be repealed” and “petitions must also include a statement of their interest and/or reasons for requesting Commission action.” [Id.]

Failures To Deliver On Long Sales

Retail investors are now aware that the regulatory framework for our securities markets includes exceptions (aka “loopholes” colloquially) which may be abused to short sell securities and/or allow sellers to fail to deliver on securities sold.  Failure to require sellers to deliver securities sold is obviously a problem as there is no other market in the world where it is OK for a seller to fail to deliver on items sold.  Can you imagine if Amazon or eBay sold products to customers and then failed to deliver them?  Of course not!  So why should we tolerate settlement failures in our securities market?

The SEC even provides data regarding failures to deliver (“FTD”) on their website5 as far back as 2004 which demonstrates how failures to deliver in our securities market is an ongoing phenomenon with a lengthy history. Market participants are even known to strategically fail to deliver securities simply because borrowing costs are high6. As shown by the table below, the impact of FTDs have been increasing with the quantity and/or notional value of FTDs increasing over time.  The quantity of FTDs grew from 7.3 billion FTDs in the 3 months of 2004Q1 (i.e., approximately 2.4 billion FTDs per month) to 3.8 billion FTDs in the first half of July 2009 (i.e., approximately 7.6 billion FTDs per month).  Comparing July 2009 to January 2025, the total notional value of the FTDs (computed as quantity of fails x price where available in the SEC’s data) increased 30x from $1.2B in the first half of July 2009 to nearly $36.7B in the first half of January 20257; outpacing inflation or GDP growth, and delegitimizing the public market system itself.

|| || |Filename (Date)|Date|Total Quantity  (Fails to Deliver)|Total Notional  (Fails x Price)| |cnsp_sec_fails_200403  (2004 First Quarter)|2004 Q1|7,343,986,170|N/A| |cnsfails200907a  (2009 July, first half)|2009-07 1st Half|3,881,580,156|$1,205,872,733| |cnsfails202506b  (2025 January, first half)|2025-01 1st Half|2,032,216,720|$36,655,085,066|

Fails to deliver are an understandably growing problem as the SEC has acknowledged failures to deliver are explicitly allowed within the regulatory framework of our securities market8.  For example, when RegSHO was adopted [Release 34-50103 (July 2004)], the SEC acknowledged two commenters at the time who suggested that the proposed Rule did not adequately address long sale delivery fails [Release 34-50103 fn 109] and disagreed with the commenters stating “[w]e believe that the provisions of Rule 203(a) are appropriate to guard against fails to deliver on long sales, in that a broker may fail to deliver borrowed shares on long sale fails only in the limited circumstances set forth in the rule” (emphasis added).

The limited circumstances set forth in Rule 203(a) were outlined by the SEC when RegSHO was adopted, and as shown by the SEC’s FTD data, these exceptions render Regulation SHO woefully inadequate for addressing long sale delivery fails:

This delivery obligation does not apply in three circumstances:

(1) the loan of a security through the medium of a loan to another broker or dealer;

(2) where the broker or dealer knows or has been reasonably informed by the seller that the seller owns the security and will deliver it to the broker or dealer prior to the scheduled settlement of the transaction and the seller fails to make such delivery; or

(3) where an exchange or securities association finds, prior to the loan or arrangement to loan any security for delivery, or failure to deliver, that the sale resulted from a good-faith mistake, the broker-dealer exercised due diligence, and either that requiring a buy-in would result in undue hardship or that the sale had been effected at a permissible price.

[Release 34-50103 VI. Rule 203(a) — Long Sales (reformatted with emphasis added)]

The first exception to the delivery obligation, Rule 203(a)(2)(i), is for securities loaned to another broker or dealer.  This exception creates issues with settlement, clearing, and artificially inflates the supply of securities in circulation as a broker can lend a security to another broker without obligation to deliver which results in both brokers having possession of the same security!  If Hertz loans me a vehicle, Hertz has to deliver the vehicle to me.  Why is there an exception to the delivery obligation when a broker or dealer loans a security to another broker or dealer?  This petition proposes to eliminate this “loan without delivery” exemption.

The second exception, Rule 203(a)(2)(ii), allows a broker or dealer to fail to deliver when they have been “reasonably informed by the seller that the seller owns the security and will deliver it to the broker or dealer prior to the scheduled settlement of the transaction and the seller fails to make such delivery”. As the seller fails to make such delivery after reasonably informing the broker or dealer that the seller owns the security and will deliver it to the broker or dealer prior to the scheduled settlement, this exemption is akin to “the check is in the mail” [Wiktionary] where the seller lied about delivering. Why should a broker or dealer be allowed to fail to deliver if a seller (their customer) lied to them?9 Are brokers and dealers not gatekeepers10 for our securities markets who, therefore, should require and enforce (with a buy-in where necessary) delivery of the securities sold by their …

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