Risk

Changes To The Uniform Commercial Code (State Laws)

Step 1 -

Return Investor Money When trades fail to settle as contracted

Under the existing § 8-501 of the UCC, securities accounts must have financial assets credited to them as agreed. This means,

“securities entitlements” credited to accounts after settlement date, must be identical to the contracted security – they are not

valid as an IOU marker to eventually settle when settlement fails.

§ 8-501

should be amended to add that when securities fail to be credited as agreed, all purchase monies are to be immediately

credited back to the account.

In addition

, the UCC

could

be amended to

1. Explicitly prohibit financial intermediaries from crediting securities that they do not have or hold on behalf of customer

accounts, after the contracted settlement date

as "securities entitlements"

2. Prohibit financial intermediaries from crediting more securities than they have or hold on behalf of customer accounts, after

the contracted settlement date

"securities entitlements"

3. Prohibit financial intermediaries from crediting the contracted securities to customer accounts if settlement fails as contracted.

4. Mandate that if there is a change of beneficial owners, that those customer accounts that are no longer the beneficial owners

have the securities debited from their accounts.

Step 2 - "Securities Entitlements

And Stopping The Misrepresentation of Securities

The

states have cooperated with other jurisdictions to ensure a smooth system of securities transfers. For that the states

amended the UCC to allow intermediaries to credit the contracted securities to accounts before they were obtained by the

intermediary. However, this is only for the period before the settlement date, not after the settlement date.

The

UCC should be amended to clarify that "securities entitlements" are not valid after

the

settlement date of the

contracted

security. That means that after settlement date, the real security must be obtained, maintained and credited to

investor

accounts

and not mere

invalid

"securities entitlements".

When settlement fails, the contracted for security must be debited back out again

from the account as there is no real security.

The states should

clarif

y the UCC so that it is unmistakable that

securities

entitlements

can

only be used for what they

were

intended

for

- to credit securities to accounts only during the settlement cycle

and before

the

settlement date

in order to make

the

transfer of securities seamless and smooth.

However, u

sing "securities

entitlements" after the settlement cycle

to hide settlement

failure

and

hide the borrowing of securities from investors,

is pure

market

manipulation

and

the

mere a

earance

of trades

To be abundantly clear, t

prohibition on using "securities entitlements"

after the settlement date should

extend to securities

borrowing. When these

are borrowed or hypothecated

from investor accounts,

they

should

be debited from accounts.

Furthermore, The UCC

should

be amended

to require that

account holders

are

notified separately whenever their securities are

borrowed.

Step

Implement New

Self Enforcing Mechanism

e UCC

can effectively be amended to ensure nobody unjustly profits from failed

settlement

and

the

misrepresentation of

securities

through self enforcement mechanisms

. The UCC should be amended to require all financial intermediaries immediately return investor purchase funds when the

transfer of securities fail to settle as contracted.

Basically they should be prohibited from holding investor money past settlement,

if the contracted securities do not settle.

. Mandatory financial penalties should be built into the UCC to ensure it is not economical to violate the UCC. Perhaps a

penalty of 10% of the unreturned money is to be compounded daily, paid to the investor who is not receiving his money back.

. Specifically allow civil suits for recovery of purchase money when intermediaries

not return their money

in violation of the

amended

UCC, so that investors

can safeguard their own money.

4. Mandate that state licenses be revoked for repeat offenders, including entire firms.

Further State Laws

All states should have

a provision on their books like the one in California, that is taken almost verbatim from the text of federal

securities laws. This ensures that civil action can be taken in state courts by investors or by state regulators based on state laws:

Cal Corp Code § 25400 (2008):

Creating false or misleading statements or appearance of active trading to induce purchase or sale or to manipulate price

It is unlawful for any person, directly or indirectly, in this state:

(a) For the purpose of creating a false or misleading appearance of active trading in any security or a false or misleading

appearance with respect to the market for any security, (1) to effect any transaction in a security which involves no change in

the beneficial ownership thereof, or (2) to enter an order or orders for the purchase of any security with the knowledge that an

order or orders of substantially the same size, at substantially the same time and at substantially the same price, for the sale of

any such security, has been or will be entered by or for the same or different parties, or (3) to enter an order or orders for the

sale of any security with the knowledge that an order or orders of substantially the same size, at substantially the same time and

at substantially the same price, for the purchase of any such security, has been or will be entered by or for the same or different

parties.

(b) To effect, alone or with one or more other persons, a series of transactions in any security creating actual or apparent

active trading in such security or raising or depressing the price of such security, for the purpose of inducing the purchase or

sale of such security by others.

Using State Authority

The steps outlined below can best be achieved by amending the Uniform Commercial Code of any
one large state to incorporate the needed characteristics. If more than one state amends its UCC,
that would be even better. The securities industry can be counted on to try and claim federal
pre-emption to any change in any state UCC that they don't like. However, the states have exclusive
jurisdiction in matters of the securities industry that the UCC covers and in fact, the modern
securities industry is forced to rely on the states' UCCs because the federal securities acts have
left important areas regarding securities for the states to regulate - and this has been
accomplished by all 50 states adopting a version of the UCC.

These changes can also be achieved on the federal level, and in some cases, like the Glass-Steagall
Act or the Uptick rule, it is best handled there. But even on these issues, individual states could
enact similar laws and adopt amendments to their UCC to achieve similar results.

There are several ways to skin the cat.