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From: National Quotation Bureau, LLC
Time: 9:12:17 AM
The National Quotation Bureau literally has a franchise when it comes to Bulletin Board Securities. There is not much question that the proposed SEC changes in rule 15c2-11 will have a tremendous impact on that franchise should they pass as presently written.
In this instance, the National Quotation Bureau is getting one more bite at the apple. Robert A. Spira Chapman Spira and Carson LLC
Rule 15c2-11 Note: SEC Extends 15c2-11 Comment Period Until May 8, 1999 The SEC is re-proposing amendments to Rule 15c2-11. "As well intentioned as the re-proposal to Rule 15c2-11 is, it is self-evident that given the magnitude of concerns that have been registered, implementation with any ongoing review or oversight responsibilities and liabilities for Market Makers will have the counterproductive consequence of undermining, rather than improving the marketplace for OTC securities."
If Rule 15c2-11 is approved: OTC Market Makers will face intolerable liabilities and chose to avoid them by ceasing to publish quotes on the OTC Bulletin Board (and Pink Sheets). OTC Markets will lose price transparency, competition and liquidity while opportunities for fraud and manipulation will increase. OTC Securities spreads will widen and liquidity will disappear. OTC Issuers will suffer from lower stock prices and lose access to capital. Leaving, OTC Investors with no liquidity, higher transaction costs, poor executions and no market for legitimate investments. The NQB is deeply concerned that the Commission's proposals to amend Rule 15c2-11 will have terrible unintended consequences for the secondary market of small issuers. The amendments have been widely opposed by issuers, investors and the press since they were initially proposed in 1989 and re-proposed in 1998. We believe that the underlying logic of the proposal is deeply flawed. Our practical, market experience suggests that the amendments will actually facilitate fraud and manipulation. At the same time the Rule will impose terrible costs and consequences on the secondary market for legitimate issuers. Rather than reiterate our views on why the amendments will fail to stop fraud and manipulation, read the commentary by Gary Weiss in Business Week.
The NQB is concerned about the thousands of legitimate issuers, who comprise the majority of the Pink Sheet and OTC Bulletin Board marketplace. The companies quoted in the Pink Sheets and the OTCBB consist of small companies, new companies, closely held companies and economically distressed companies. These issues are unable to list in any other marketplace. As with any poor neighborhood or inner city ghetto, enforcement and the press only see the criminals in the neighborhood, not the honest companies with employees and shareholders. The Commission has made great studies in improving liquidity and competition in the highest market tiers. It is time it applies a more sophisticated approach to the Pink Sheets and OTCBB markets.
The NQB is concerned that the marketplaces for legitimate, small issuers are being made scapegoats of the Microcap Fraud initiative. NQB believes that the amendments will irreparably harm liquidity, widen spreads and decrease price transparency for the legitimate issuers in this marketplace. This result is contrary to the very principals of the Commission.
Why is 15c2-11 flawed? Market Makers are concerned of the potential liability from an oversight role. Rule 15c2-11 uses the Trojan horse that investors in Pink Sheets and OTCBB issues suffer from a lack of available information and that increased information will decrease opportunities for fraud and manipulation. We agree. What NQB disagrees with is the review and oversight responsibilities that the Rule requires of Market Makers. Market Makers are supposed to look for "red flags" that signal potential or actual fraud and/or manipulation. Market Makers cannot rely on the fact that the information is audited and/or filed with the SEC. NASD Notice to Members 92-50 states "simply because the statements have been audited, a broker/dealer cannot avoid its responsibility to review the financial statements in order to have a reasonable basis to believe that the information is accurate."
The SEC does not review all information that is filed on EDGAR. The SEC states on their web site "By law, the reports that companies file with the SEC must be truthful and complete, presenting the facts investors find important in making decisions to buy, hold, or sell a security. But the SEC cannot guarantee the accuracy of the reports companies file. Some dishonest companies break the law and file false reports."1 NQB does not think that the SEC should hold Market Makers to a higher review standard than they hold themselves to.
What are the red flags or material inconsistencies that a Market Maker should look out for? NTM 92-50 states "Examples of potential material deficiencies are material inconsistencies in the information or between the information and other information in the broker/dealer's possession, a qualified auditor's report, a recently acquired asset that materially enhances the financial condition of the issuer, or a material asset listed on the balance sheet that is unrelated to the issuer's business." Legitimate Market Makers are scared of Rule 15c2-11 because they know that many legitimate issues with no fraud or manipulation have possible red flags and many frauds and manipulations exhibit no red flags.s
Under the proposed Rule, a market maker that uncovers indications of fraud or manipulation is supposed to cease quoting the subject security. NQB has the following problems with that outcome: Most Market Makers have no relationship with issuers and thus can't control or oversee the financial reporting of third parties. Information is almost never so concrete and unequivocal as to make such decisive action appropriate. The differences between market exuberance or future potential and fraud or manipulation are rarely perfectly apparent until after the fact. If it were, short sellers would have much better returns. Even where it is, withdrawal results in the opposite of informing the market. The market maker's prices disappear, not drop. Its short selling stops or never starts. Regardless, the rule abiding market maker is not in a position to stop the misconduct of others, at least not by withdrawing. The rule-breaking conduct continues, and perhaps increases as "good" firms leave the market. The ability of rogue firms to dominate and control a security is actually enhanced by the Rule. There is no regulatory response to stop the party committing the fraud or manipulation. NQB believes that market makers should be free to reflect whatever information they have in their prices. That is how the Efficient Market functions. They should continue to make as informed markets as possible, not become bystanders watching others being "ripped off." by rogue firms, insiders, etc.
The NQB's grave concerns have been reinforced by a study we undertook of Market Maker reactions to the Re-proposal's review and oversight liabilities. NQB identified the responses of those Market Makers that have filed Form 15c2-11's on and/or quoted securities that were later suspended by the SEC. Those Market Makers did not seem troubled by Rule and the majority stated that they would continue to file Form 15c2-11's and submit priced quotes. However, the most disturbing result was from Market Makers not involved with the suspended securities. Those Market Makers, which range from large firms, wholesale Market Makers, highly regarded regional firms and specialist boutiques that trade bank stocks or distressed securities, indicated that they would stop submitting priced quotations and possibly exit the market sector completely. The consequence will be that the reputable Market Makers will cease quoting prices or exit the Pink Sheet and OTCBB market and the legitimate securities will suffer a loss of price transparency and liquidity.
The Commission has tried very hard to create opportunities for small business capital formation in the primary issuance. Many of those (such as Rule 504 of Regulation D and Regulation S), while well intended, have created many of the problems that the recent microcap initiative are designed to address. NQB would hope that attention could be paid to improving the markets, rather than shutting them down because of the very few whom abuse the system.
Investors, Issuers and Broker/dealers should all comment on the foolishness of the proposed Rule 15c2-11. The interests of thousands of small businesses hang in the balance. Comments are due April 7, 1999
Comments should be sent to: email@example.com or three copies by Mail to Jonathon G. Katz, Secretary, Securities Exchange Commission, Mail Stop 6-9, 450 Fifth Street N.W., Washington, DC 20549.
Copies of your Comments should be sent to the SEC Commissioners:
SEC Chairman Arthur Levitt SEC Commissioners Isaac C. Hunt, Jr. Norman Johnson Paul R. Carey Laura Simone Unger
Your Congressman and Senator To find your representative: http://congress.org/search.html
Your State Securities Regulator To find you State Securities Regulator: http://www.nasaa.org/regulator/
Copyright © 1999 National Quotation Bureau, LLC