Careful, TRAV:"SEC Considers Controversial Plan To Combat Microcap Stock Fraud
By JUDITH BURNS
Dow Jones Newswires
WASHINGTON -- The U.S. Securities and Exchange Commission will
consider four proposals when it meets Friday, including a controversial
plan to crack down on "microcap" stock fraud by imposing tougher rules
on broker-dealers who sell such stocks to the public.
In the microcap area, the SEC will revisit a proposal it floated last year to
combat fraud.
At issue is Rule 15c2-11, adopted in 1971 to curb trading in bogus
"penny" stocks. Such stocks, too small to trade on most stock exchanges,
usually are listed in the National Quotation Bureau's so-called pink sheets,
or the OTC Bulletin Board run by the National Association of Securities
Dealers.
Currently, a market maker can't begin quoting prices for an
over-the-counter stock before reviewing the company's financial
statements and having a reasonable basis to believe the information is
accurate. Once trading begins, however, other brokers may "piggyback"
onto trading without looking into the company's financial data.
"There will be fewer bogus microcap stock promotions" if the SEC
proposal is adopted, predicts Philip Feigin, executive director of the North
American Securities Administrators Association. NASAA, which
represents state securities regulators, favors the SEC's tougher approach.
But securities industry professionals expressed concerns about the plan.
"We're as concerned about microcap stock fraud as anyone," said George
Kramer, an associate general counsel with the Securities Industry
Association. But, he said the SEC's 1998 proposal would have an impact
on markets other than microcap stocks, where fraud isn't prevalent.
Last February, the SEC sought to toughen the rule by eliminating
piggybacking and requiring all brokers who make markets in OTC
securities -- not just the original market maker -- to review the information
first hand, revisit it at least once a year, and refrain from publishing quotes
for "questionable" stocks.
"You have to make the firms put their money where their mouth is," Mr.
Feigin said. "I think (this) will go a long way toward making firms
responsible for the stocks they're promoting."
The Securities Industry Association, Mr. Kramer said, "can live with the
notion that broker-dealer monitoring plays a role here," but fears the 1998
proposal is much too broadly written.
The Bond Market Association raised similar concerns, noting the changes
proposed in 1998 would affect debt markets and foreign equities as well
as microcap stocks. It joined others in urging the SEC to revise the plan by
defining "microcap" stocks, or excluding other markets from the tougher
broker-dealer rules.
"It remains to be seen if they're going to refine it to deal with those
concerns," said Mr. Feigin. Mr. Kramer thinks the SEC will make some
changes, but isn't sure if it will add a definition, or exclude certain markets
from changes it approves.
In a similar vein, the SEC will consider Rule 504, which allows small
companies to issue limited amounts of stock, up to $1 million, without
federal registration.
"There's a good side to 504" because it helps small companies tap capital
markets with relative ease, said Mr. Feigin. While that is a boon for
legitimate companies, it has led to fraudulent microcap offerings, thanks to
what he calls the "New York loophole."
That refers to the fact that all U.S. states, except New York, require state
registration for stock offerings below the $1 million threshold. When the
SEC loosened its small business rules in 1992, Mr. Feigin said it spurred
scam artists to use a New York base to sell microcap stock under Rule
504, with no federal or state oversight.
The SEC's plan is to "close that loophole" by amending Rule 504 to
require that small stock offerings be registered in at least one state.
"It will be a major blow against microcap fraud" if that change is adopted,
Mr. Feigin said." |
