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DTCC Statement On Alleged Short Selling And Issuers Withdrawal From DTC

New York, January 23, 2003 - In recent months, a number of small OTCBB companies have announced plans to withdraw from The Depository Trust Company (DTC), a subsidiary of The Depository Trust & Clearing Corporation (DTCC), and move to physical certificate ownership only of their shares, ostensibly to reduce the alleged short selling or "naked short selling"¹ in their shares.

Why the statements by issuers on this subject are lacking in merit

• The rules governing short selling are the same in a physical environment as they are in a book-entry environment. Moving to physical securities does not inhibit short selling in any way. The rules governing short selling are the same, and are made and enforced by the SEC and major markets. Those are Rule 3370 for NASD members and Rule 440B for New York Stock Exchange members.

• DTC rules do not allow its participants to be short in deliveries to other participant firms. While a brokerage firm can lend shares to an investor, the brokerage firm cannot be short in delivering shares to another brokerage firm through DTC. If necessary, a firm can and must borrow shares from one or more brokerage firms that currently have enough shares in inventory to lend. Brokers who fail to deliver shares owed at DTC are subject to penalties.

DTCC's Position
We have discussed this matter with the SEC staff and have advised them that DTC will be providing the following guidance to issuers requesting withdrawal of their securities from DTC:

For shares to be withdrawn from DTC, DTC's procedures require that DTC's participants, for whose benefit DTC holds the shares and provides services, submit the withdrawal request. If the shareholders of any company wish to have their shares withdrawn from DTC and hold them in certificated form, they should submit that request to their broker and when that request is forwarded to DTC, it will be handled in the ordinary course of business in accordance with DTC's procedures. DTC does not have any procedures for acting upon withdrawal requests by issuers. In addition, the Uniform Commercial Code (UCC) obligates issuers and their transfer agents to follow the re-registration instructions of DTC as the registered holder and provides that it is the shareholder that has the right to determine how his or her shares should be registered, not the issuer.

¹ The issue being contended by these issuers and transfer agents and DTC/NSCC is the degree of short selling, or "naked short selling" occurring in these thinly capitalized stocks. The definition of "selling short", generally speaking, is: "the sale of a security or commodity future contract not owned by the seller; a technique used (1) to take advantage of an anticipated decline in the price or (2) to protect a profit in a long position.

"An investor borrows stock certificates for delivery at the time of short sale. If the seller can buy that stock later at a lower price, a profit results; if the price rises, however, a loss results."

Loans of shares can be made by a broker from his own inventory, from the margin account of another customer, or shares borrowed from another broker.  These shares are used to make settlement with the buying broker within three days of the short sale transaction, and the proceeds are used to secure the loan. SEC regulations prohibit short sales in penny stocks (usually defined as shares trading for under $1), and short sales must be made at the same price or on an increasing price for the shares. "Naked short selling" is allegedly when securities are sold short but neither borrowed nor never delivered.