Rule Comments: S7-5-99

May 26, 1999

Mr. Johanthan G. Katz, Secretary

U.S. Securities and Exchange Commission

450 5th Street, NW

Washington, D.C.

Re: File Number S7-5-99

Dear Mr. Katz,

On February 25, 1999, the Commission issued Release No. 34-41110

requesting public comment on whether Rule 15c2-11 needed to be amended

and strengthened to deter fraud in the micro cap securities markets.

While I am in complete agreement with the Commission's belief that

affirmative regulatory action should be taken in order to deter micro

cap fraud, I am equally convinced that the proposed changes to Rule

15c2-11 will fail to accomplish their stated goal while causing serious

unnecessary disruption in the OTC markets. In particular, I believe that

the proposed changes will:

I. force fundamental changes in the day-to-day operation of the OTC

markets;

II. impose unacceptable new legal burdens and litigation risks on

market makers;

III. have devastating impact on the capital formation efforts of small

businesses;

IV. have an insignificant impact on the incidence of micro cap fraud;

V. provide no significant incremental benefit to micro cap investors;

and

VI. constitute a fundamental departure from the legislative policies

underlying the Securities Act

and the Exchange Act.

The practical problems with the proposed amendments to Rule 15c2-11

arise from an amazing "disconnect" between the Rules and the market they

are intended to regulate. In today's OTC market, the vast majority of

"market makers" simply perform a wholesaling function. They provide

liquidity to the market by purchasing shares at $5 in the hope they will

be able to sell the same shares for $5.25 later that day. In most cases,

the market makers have no established relationship with the companies

whose securities they quote and their sole function is to buy, hold and

sell as market conditions dictate. As a practical matter, one can have

perfect information at the market maker level and it will not make a bit

of difference until a mechanism is developed to convey that information

to the street.

It is a fact of life that the securities of small companies are

"sold," not "bought." Unless some human being, usually a street broker,

is willing to (a) contact prospective investors for the purpose of

selling a particular security, (b) explain why the security is a

potentially good investment, (c) ask the prospective investor to write a

check, and (d) follow up on the agreed transaction, there will be no

transaction. Therefore, the fundamental problem of micro cap fraud

arises when a street broker gives incomplete, inaccurate or misleading

information to an investor who has no independent ability to verify that

information. And there is nothing in the proposed changes to Rule

15c2-11 that will improve this situation.

Just as it is difficult to make locks and alarm systems that will

stop a determined thief, it is difficult to craft securities laws and

regulations that will stop a determined con man. The fact of the matter

is that if someone is intent on perpetrating an investment fraud, he

will do so regardless of the legal framework. Since the fundamental

premise of the securities laws is that full and fair disclosure of all

material facts is the best protection against fraud, I believe that the

only reasonable course of action is to adopt reasonable disclosure

standards for publicly traded micro cap securities and create a

mechanism for distributing that information to the persons who need it:

the street brokers who are selling a security and the investors who are

purchasing the security.

Small does not necessarily equal badsespecially in the case of new

industries and emerging technologies. And the purpose of the securities

law is not to protect all investors from all risk. Rather, the principal

goal is to provide sufficient information to permit a reasonable man to

make an informed determination of whether the level of risk in a

particular enterprise is acceptable to him.

The recent changes to Rule 504 require State level registration and

delivery of a written disclosure document prior to sale if the issuer

intends to issue freely transferable securities. But at this point the

system breaks down entirely and there is no mechanism for providing

ongoing information to the market. As absurd as it may seem, the limited

information required by Rule 15c2-11 is generally not available to an

interested investor. The street broker selling a security rarely has a

complete package of information available for distribution to investors

and I have personally asked the NASD for copies of 15c2-11 filings only

to be told that the information in their files was confidential. So I

ask, what is an investor to do?

If the Commission really wants to clamp down on fraud in the OTC

micro cap securities market, I believe the following specific steps must

be taken:

I. Every issuer that intends to maintain a secondary trading market

for its securities should

be required to:

1. establish a Web site on the internet that includes a

disclosure document meeting

the requirements of Form U-7 or Schedule A;

2. post quarterly and annual updates to its Web site within a

reasonable period after

the end of each reporting period so that the available

information will continue to

satisfy the requirements of Form U-7 or Regulation A;

3. include a URL reference to its Web site in all public

relations communications and

press releases; and

4. make printed copies of its Web site material available upon

request by any current

or prospective investor.

II. Every brokerage firm that operates as a market maker for

securities of a non reporting issuer

should be obligated to verify the availability of such

information on a regular basis, but not

less often than quarterly:

III. Every registered representative that proposes to effect a sale of

the securities of a

non reporting issuer should be required to:

1. review the issuer's Web site before soliciting any transaction

in the Issuer's securities;

2. disclose the URL of the issuer's Web site (and/or the address

of the issuer's investor

relations officer) to his client before accepting an order

for securities:

These three simple requirements have the regulatory advantage of

establishing "bright line" performance standards for each level of

market participant without imposing an unreasonable burden at any

particular level. They will also make it relatively simple to identify

fraudulent conduct, determine who is responsible for the fraudulent

conduct and take appropriate remedial action against the guilty party.

Finally, they will make real information available to the class of

persons who needs it most: micro cap investors.

I am a firm believer in the propositions that (1) a reasonable man

given access to current and accurate information will usually make a

well informed decision and (2) wide-spread fraud can only exist in the

absence of current and accurate information. If the SEC truly wants to

reduce fraud in the micro cap markets, useable information effectively

communicated to the investor level is the only answer.

Sincerely

John L. Petersen

Attorney at Law

Houston, Texas

Barbereche Switzerland

--------------65F7FF94C11BA02FD2BA85A7

Content-Type: text/html; charset=iso-8859-1

Content-Transfer-Encoding: 8bit

<!doctype html public "-//w3c//dtd html 4.0 transitional//en">

<html>

Mr. Johanthan G. Katz, Secretary

U.S. Securities and Exchange Commission

450 5th Street, NW

Washington, D.C.

Re: File Number S7-5-99

Dear Mr. Katz,

On February 25, 1999, the Commission issued Release

No. 34-41110 requesting public comment on whether Rule 15c2-11 needed to

be amended and strengthened to deter fraud in the micro cap securities

markets. While I am in complete agreement with the Commission's belief

that affirmative regulatory action should be taken in order to deter micro

cap fraud, I am equally convinced that the proposed changes to Rule 15c2-11

will fail to accomplish their stated goal while causing serious unnecessary

disruption in the OTC markets. In particular, I believe that the proposed

changes will:

I.    force fundamental changes in the day-to-day operation

of the OTC markets;

II.   impose unacceptable new legal burdens and litigation

risks on market makers;

III. have devastating impact on the capital formation efforts of small

businesses;

IV. have an insignificant impact on the incidence of micro cap fraud;

V.  provide no significant incremental benefit to micro cap investors;

and

VI. constitute a fundamental departure from the legislative policies

underlying the Securities Act

and the Exchange Act.

The practical problems with the proposed amendments

to Rule 15c2-11 arise from an amazing "disconnect" between the Rules and

the market they are intended to regulate. In today's OTC market, the vast

majority of "market makers" simply perform a wholesaling function. They

provide liquidity to the market by purchasing shares at $5 in the hope

they will be able to sell the same shares for $5.25 later that day. In

most cases, the market makers have no established relationship with the

companies whose securities they quote and their sole function is to buy,

hold and sell as market conditions dictate. As a practical matter, one

can have perfect information at the market maker level and it will not

make a bit of difference until a mechanism is developed to convey that

information to the street.

It is a fact of life that the securities of small

companies are "sold," not "bought." Unless some human being, usually a

street broker, is willing to (a) contact prospective investors for the

purpose of selling a particular security, (b) explain why the security

is a potentially good investment, (c) ask the prospective investor to write

a check, and (d) follow up on the agreed transaction, there will be no

transaction. Therefore, the fundamental problem of micro cap fraud arises

when a street broker gives incomplete, inaccurate or misleading information

to an investor who has no independent ability to verify that information.

And there is nothing in the proposed changes to Rule 15c2-11 that will

improve this situation.

Just as it is difficult to make locks and alarm systems

that will stop a determined thief, it is difficult to craft securities

laws and regulations that will stop a determined con man. The fact of the

matter is that if someone is intent on perpetrating an investment fraud,

he will do so regardless of the legal framework. Since the fundamental

premise of the securities laws is that full and fair disclosure of all

material facts is the best protection against fraud, I believe that the

only reasonable course of action is to adopt reasonable disclosure standards

for publicly traded micro cap securities and create a mechanism for distributing

that information to the persons who need it: the street brokers who are

selling a security and the investors who are purchasing the security.

Small does not necessarily equal bad_especially in

the case of new industries and emerging technologies. And the purpose of

the securities law is not to protect all investors from all risk. Rather,

the principal goal is to provide sufficient information to permit a reasonable

man to make an informed determination of whether the level of risk in a

particular enterprise is acceptable to him.

The recent changes to Rule 504 require State level

registration and delivery of a written disclosure document prior to sale

if the issuer intends to issue freely transferable securities. But at this

point the system breaks down entirely and there is no mechanism for providing

ongoing information to the market. As absurd as it may seem, the limited

information required by Rule 15c2-11 is generally not available to an interested

investor. The street broker selling a security rarely has a complete package

of information available for distribution to investors and I have personally

asked the NASD for copies of 15c2-11 filings only to be told that the information

in their files was confidential.  So I ask, what is an investor to

do?

If the Commission really wants to clamp down on fraud

in the OTC micro cap securities market, I believe the following specific

steps must be taken:

I.   Every issuer that intends to maintain a secondary trading

market for its securities should

be required to:

1.    establish a Web site on the

internet that includes a disclosure document meeting

the requirements

of Form U-7 or Schedule A;

2.    post quarterly and annual updates

to its Web site within a reasonable period after

the end

of each reporting period so that the available information will continue

satisfy

the requirements of Form U-7 or Regulation A;

3.    include a URL reference to its

Web site in all public relations communications and

press

releases; and

4.    make printed copies of its Web

site material available upon request by any current

or prospective investor.

II.    Every brokerage firm that operates as a market

maker for securities of a non reporting issuer

should be obligated to verify

the availability of such information on a regular basis, but not

less often than quarterly:

III.   Every registered representative that proposes to effect

a sale of the securities of a

non reporting issuer

should be required to:

1.    review the issuer's Web site

before soliciting any transaction in the Issuer's securities;

2.    disclose the URL of the issuer's

Web site (and/or the address of the issuer's investor

relations officer) to his client before accepting an order for securities:

These three simple requirements have the regulatory

advantage of establishing "bright line" performance standards for each

level of market participant without imposing an unreasonable burden at

any particular level. They will also make it relatively simple to identify

fraudulent conduct, determine who is responsible for the fraudulent conduct

and take appropriate remedial action against the guilty party. Finally,

they will make real information available to the class of persons who needs

it most: micro cap investors.

I am a firm believer in the propositions that

(1) a reasonable man given access to current and accurate information will

usually make a well informed decision and (2) wide-spread fraud can only

exist in the absence of current and accurate information. If the SEC truly