SPEAKING OF WHICH ... CRUNCH TIME!
IRI Chair Brad Smith heads up emergency effort, industry joins!
Your comments deadline: June 30 to rule-comments@sec.gov
moneysearch.com
nqb.com
sec.gov
sec.gov
Due to requests by IRI Chair Brad Smith and other industry leaders, the SEC
has announced it will extend the comment period (see links above) on the
matters discussed below.
On February 19, 1999, the SEC reproposed amendments to Rule 15c2-11 under
the Securities Exchange Act of 1934 (Exchange Act). Rule 15c2-11 governs
the publication of quotations by broker-dealers for over-the-counter (OTC)
securities. The Rule applies to OTC securities quoted on the OTC Bulletin
Board, the Pink Sheets, and other quotation mediums.
Last year, the Commission proposed amendments to Rule 15c2-11 under the
Exchange Act to require all market makers initiating quotations for OTC
securities in a quotation medium to review information about the issuer,
and to review updated information annually if they are publishing priced
quotations.
The Commission has reproposed amendments that are substantially similar to
the earlier proposal, but they will apply to a smaller group of securities
-- those that are more prone to fraud and manipulation. This narrowed
scope responds to commenters' concerns about the initial proposal and
should reduce compliance costs. According to a survey of OTCBB market
makers and practitioners in the capital markets arena, IRI's Chair, Brad
Smith, found the following concerns:
1. A majority of respondents indicated that the Reproposal of 15c2-11 if
enacted is likely to create a long-term effect of driving well-capitalized
market makers away from the smallest issuers that trade on the OTCBB and
that overtime -- investor liquidity will be degraded in the small-issuer
capital market segment. These predictions were made in the context of
observing that well-capitalized market makers are likely to reduce the
total number of OTCBB companies in which they make a market because the
Reproposal requires them to assume underwriting liabilities that are
problematic.
2. Moreover respondents indicated their strong belief that thinly
capitalized market makers will spring up solely for the purpose of
promoting a few micro cap issues and then they will disappear when the
promotional opportunity evaporates or they begin meeting regulatory
resistance. Respondents predicted that this outcome will further diminish
investor liquidity in the small-issuer capital market segment and that it
will increase the number of regulatory problems.
3. One respondent observed that the Reproposal of Amendments to Rule
15c2-11 does not provide the two fundamental tools that regulators need to
fight micro cap fraud. First, it does not enable wide spread access to
information that is being put into the market place about a company. And,
second it makes no provision for regulators to trace the flow of money by
requiring disclosure of who is signing the checks or who is receiving money
generated by a micro cap company's operations and its secondary market
activities.
4. Several respondents indicated that they believe regulators must focus on
developing the Reproposal of Amendments to Rule 15c2-11 so it requires
immediate filing of information in a central repository that is available
to all investors. A few respondents observed that immediate filing of
transparent information will make it possible for professional "Shorters"
to help regulators confront irrational run-ups in micro cap stock prices.
Generally respondents indicated that enabling the "Shorting" market
function can help regulators mitigate micro cap fraud and a few respondents
had nothing nice to say about "The Shorters".
5. Several respondents observed that the bulk of micro cap fraud occurs as
development-stage companies attempt to raise capital and that the
Reproposal of Amendments to Rule 15c2-11 does nothing to create a better
entry level small-issuer securities offering program or system.
6. A few respondents believe that under the Reproposal of Amendments to
Rule 15c2-11 market makers that quote a covered security will be legally
responsible for the accuracy of the company's financial information and
unable to rely on audited financial statements or SEC filings. They
believe that this could cause market makers to face unlimited liability and
leave themselves open to lawsuits from plaintiff's attorneys and
disgruntled investors. These respondents believe the requirement places an
unfair burden on OTCBB market makers and that if enacted it is likely to
drive well-capitalized firms away from small issuers.
7. Respondents observed that the Reproposal provides no mechanism for
market makers to receive regulatory verification that they have completely
and adequately addressed the "Red Flag" issues that appear to be the
Reproposalís policy focus.
8. Some respondents believe that assumptions articulated in the Reproposal
of Amendments to Rule 15c2-11 are at variance with The Small Business
Regulatory Enforcement Fairness Act that was enacted into law March 29,
1996. They observed that the Reproposal does not:
* Consider the impact of its policies and rules on small business
issuersí
ability to raise capital or on their investor's ability to fully
participate in a transparent secondary market;
* Create provisions to provide plain English instructions for small
issuers and their practitioners to present the required information to
market makers;
* Reflect adequate study to ascertain if this rule will increase or
decrease the total amount of capital available to create secondary market
liquidity for small business investors;
* Address concerns that an estimated 3,000 small businesses with
approximately 12,000 employees and professionals plus an estimated 20,000
to 40,000 small business investors are likely to experience financial harm
because the market value of these companies will decrease when the
Reproposalís policies force them off the OTCBB; and,
* Respondents who voiced these concerns believe that the total
impact of
the Reproposal of Amendments to Rule 15c2-11 on small business has not been
thoroughly rendered through the Small Business Regulatory Enforcement
Fairness Actís process.
9. Respondents generally complained that the short time period for comments
about the Reproposal of Amendments to Rule 15c2-11 was not adequate for all
parties to fully study its impact. Capital market practitioners want to
extend the time for comments about the Reproposal so they can conduct the
studies necessary to present informed, constructive recommendations to
improve Rule 15c2-11 when it is implemented.
"The SECís first proposal to amend 15c2-11 met widespread opposition, notes
Smith. "This Reproposal favors large issuers while imposing more
compliance obligations on small issuer market makers and capital market
practitioners. Complying with these obligations will ultimately increase
small issuer costs. This is being done under an assumption that these
rules will mitigate micro cap fraud.
"The Reproposal does accomplish educating investors because it is not
creating a function that provides investors easy, immediate and transparent
access to the additional information that market makers will be required to
compile, says Smith.
"While I believe that many elements of the Reproposal will improve the
OTCBB secondary market it does not create a better situation for investors
by providing them immediate access to company information and it is likely
to reduce the amount of capital that market makers commit to creating
secondary market liquidity for small business investors.
"Without a central repository function to make the accumulated information
readily available to investors the Reproposal of Amendments to Rule 15c2-11
will generate reams of content that only a few insiders see. Unfortunately
providing that information will create cost and legal barriers that prevent
legitimate small issuers from being served by well-capitalized market
makers," he states.
"As a class small issuers can benefit the most by accessing the
capabilities and wisdom of well established capital market practitioners.
Effective policy should attempt to enhance this possibility rather than
diminish it.
"It is my conclusion that implementing the Reproposal of Amendments to Rule
15c2-11 should be delayed for a reasonable period of time so that a wider
array of the affected parties can study its potential impact and intended
objectives, the Chairman suggests. "This will enable refining, adding or
deleting critical elements to better achieve the Reproposalís policy
objectives and effective implementation and improve its application for
small business issuers and their investors."
Smith says that individual investors and public company investors need to
write comment letters by the truckload -- as they did last year when IR/j
and IR/x first highlighted this issue -- to ask them to "slow this wrecking
ball" before it's too late.
Think about it ...
GB
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