IRI Chair Brad Smith heads up emergency effort, industry joins!
Your comments deadline: June 30 to rule-comments@sec.gov
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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 over time -- 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 Reproposal's 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 issuers' 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 Reproposal's 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 Act's 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 SEC's 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 Reproposal's 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." |
