You linked to ‘Key Points’ which is commentary. Actually it is CYA propaganda and a continuation of the process of obscuring the real story. The person that wrote this distraction has a problem with understanding what ‘naked shorting’ is. It is not the selling of shares without first locating such as Market Makers do. It is the conscious act of selling shares which are known to not exist or are highly likely to be nonexistant. This amounts to counterfeit shares in electronic form.
But I suppose you are one of those that believe anything if it is on a website. I suppose then you would have believed Bear Stearns CEO a few months back when he said the Company’s financial state was strong or even more recently the statements by Lehman executives that there were no liquidity problems in the firm.
Yes indeed, when a person with a suit and a title make a statement, it must be true, right? Especially if they work for the government, right? Have you ever heard of the Ibank-SEC revolving door?
Now here’s how to find the real story. You must look at the regulation, not the yes-person comments. And you must research the history of the regulation and the foundational discussions leading to the regulation. Then you must read the comments from those calling for regulation in response to the REGSHO regulation that was implemented.
REGSHO was not greeted with a sigh of relief but rather disbelief. Those that knew naked shorting was rampant (and still is) also knew that REGSHO was an attempt to deflect real responsibility. You will see that in the comments to the REGSHO draft.
Read the REGSHO regulation.
http://sec.gov/rules/final/34-50103.htm#P69_11847
Do a search on ‘naked shorting’ WITHIN THE REGULATION ITSELF. You will find one solitary reference that indicates it is undefined. If the phrase is undefined in securities laws, then it cannot be used by regulators for enforcement. Enforcement can only occur with respect to statutes and case law. But your attention should be immediately drawn to the question of why ‘naked shorting’ was not defined in the regulation. The regulation’s reference to its undefined status is a red flag in itself.
Commentary and propaganda do not have to abide in a legal framework as does a federal regulation. The lawyers that write and review regulations are not allowed to leave terms undefined in enforceable parts of regulations. Each term or phrase that is material to the regulation must be defined clearly.
In the context of selling short without a locate, the regulation spells out clearly the exceptions to the locate requirement. The regulation further describes that any short sale without a locate must be done with the understanding that the shares exist.
So there you have it. If there is an understanding that the shares exist, and a market maker needs to sell without first locating the shares, then they may do so under strict guidelines of ‘bonafide market making’ and they have a tight window to deliver. This is not the same as ‘naked shorting’.
Your commentator SEC hack got it wrong and that was typical for the year when he wrote the ‘Key Points’. There were many SEC hacks on the defensive and coming up with all manner of twists to meanings and actions for the purpose of defending the SEC’s lack of enforcement and oversight of naked shorting.
Naked shorting is a known entity, hence this latest SEC announcement. Trying to be technically correct is impossible in this situation, not to mention downright nerdy.