Could it be that the SEC is finally getting around to moving before the small investor is hustled?
Market Place: SEC Says Brokerages Should Know Financial Status of Companies
By FLOYD NORRIS
If a brokerage house is posting prices at which it will buy or sell a stock, should it know something about the company's financial condition?
The Securities and Exchange Commission proposed Tuesday that brokerage firms should have such information, and should be barred from quoting prices if they do not.
The proposal was part of a series of SEC actions it said were needed to combat "micro-cap fraud," or frauds in the stocks of very small companies.
Currently, virtually any stock can be traded on the over-the counter bulletin board, operated by the National Association of Securities Dealers, or the "pink sheets," published by the National Quotation Bureau. The rule now in effect says that for a stock to begin trading, one market maker must certify it has access to current financial information. After that, any market maker can "piggyback" and trade in the stock without having any information on it.
The proposed rule would require every market maker to have financial information, and to review and update it at least once a year. Richard Lindsey, the SEC's director of market regulation, said that qualifying information could be financial statements certified by an auditor, even if they did not conform to generally accepted accounting principles.
"Basically, we are proposing they do due diligence," Lindsey said. "You should understand if this is a real company or a sham. It is a little like saying, 'If I am selling meat, is it real fresh meat, or is it green and slimy and smells bad?' If it's green and slimy, you probably shouldn't be selling it."
That opinion is not shared by everyone. Cromwell Coulson, the chairman of the National Quotation Bureau, said he also wanted to root out fraud, but he said he worried that such a rule might cause legitimate market makers not to trade in certain stocks, leaving the business to others. "The dishonest shops have never been unwilling to break any rules," he said.
Coulson said it might be better to issue a rule that would make it harder for unsophisticated investors to buy stocks sold on the pink sheets.
In micro-cap frauds, it is necessary to have a market where the stock trades -- hence the rule aimed at market makers -- and it is necessary to have a way to distribute stock, at low prices, to people perpetrating the fraud. The SEC announced two actions aimed at curbing the supply of stock.
The first is adoption of a rule, modified and weakened from the proposed form a year ago, aimed at ending abuses in the issuance of stock overseas.
Under an exemption known as Regulation S, a company that sells securities overseas need not register the securities with the SEC, so long as the buyers agree not to sell them into the American market for at least 40 days. In some frauds, shares were sold "overseas" to people who sold them back into this country.
The new rule lengthens that time period to one year for equity securities, and the sale of such securities will be reported in quarterly financial statements filed with the SEC. In the past, such sales often went unreported. But the SEC shied away from its proposals last year, which would have applied the rule to foreign as well as American companies and would have required a two-year holding period.
The other proposal made by the SEC Tuesday dealt with issuing stock to consultants of a company. Currently, using a form called S-8, companies can easily register stock used in employee benefit plans. The commission said it did not want to make it any harder for most companies, but wanted to stop what it viewed as the abusive use of that form to issue stock to "consultants" whose job is to push up the price of the stock.
The new rule, if adopted, would require disclosure of shares issued to consultants, and the nature of the duties they performed to get them, and would bar using the form for shares issued to consultants whose job was to promote the company's securities.
Wednesday, February 11, 1998
Copyright 1998 The New York Times
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