COMMENTS ON THE APPLICATION OF RULE 2711 - RESEARCH ANALYSTS AND RESEARCH REPORTS - JANUARY 2, 2003

Dennis R. Roth
Vice President/Research
Chesapeake Securities Research Corporation (CSRC)
819 Ritchie Highway, Suite 2001,
Severna Park, MC 21146

Overview

Chesapeake Securities is a very small boutique brokerage firm that has been operating for approximately 19 years. I have worked for Chesapeake for the last four years but also worked for this firm in the early 90s. Although I am Series 7 and Series 24 (broker and principal) licensed, I began writing research reports in the early 90s, while working for Chesapeake Securities at that time and have been heading up its Research Department for the last several years. Although I only actively cover a very limited number of companies (three at present and up to 5-6 companies at any one time), most of my time is spent doing research and writing reports.

With the passing of Tom Taylor (one of the founders of Chesapeake Securities) in January of 2001 (Tom was a CFA), I became the sole analyst for our firm, which had at that time approximately ten brokers. Chesapeake Securities, from time-to-time, would do investment banking for companies that it recommended. The level of investment banking that Chesapeake Securities engaged in was minimal, raising less than $1 million per year and working for probably no more than one or two clients.

In July of 2001, Chesapeake Securities established an investment banking relationship with a NASDAQ BB company called PowerCold Corporation "PWCL." Although the President of Chesapeake Securities executed the agreement between our two companies, Chesapeake's commitment to PWCL to raise up to $5 million on a best-efforts basis over the following 12-months, was based totally on my assessment of the PowerCold's prospects. Since I began writing a research report on PowerCold while familiarizing myself with their business (heating, ventilation and air conditions-HVAC) and refrigeration, I became the only person in Chesapeake qualified to speak with PowerCold personnel as the field of refrigerants, compressors and condensers is somewhat technical and not a "quick study." Chesapeake Securities published a short two-page overview of the Company that appeared in the November/December 2001 issue of Wall Street Research Magazine distributed to fund managers and buy-side analysts.

In June of 2002, Chesapeake Securities published a 32-page Strong Buy Recommendation on PowerCold Corporation that took more than 2,000 hours to research and write. Between late July '01 and late March '02, Chesapeake raised approximately $3.4 million in private placement funds. Virtually all the private placement funds came from my clients.

Although I am an analyst, neither Chesapeake Securities nor any other firm has ever paid me for my research. As a broker, I normally acquire large positions for my clients in companies that I cover as an analyst. My reports have always been reviewed and approved by the compliance officer in the Company's for whom I have worked. Most of my equity commission business is done with institutional clients. One of the other two other companies that I follow, IGEN International ("IGEN" NASDAQ NM) I published my first report in September 2000 (the stock was at $16 and it is closed today at $42.50). The other company that I follow, Possis Medical ("POSS" NASDAQ NM) I've been covering since March of '99 when I published a 34-page buy recommendation on the Company at $12 (it closed today at $17.90).

Consequently, at Chesapeake Securities during the last 1.5 years, I have been both analyst and investment banker. However, unlike other analysts who are salaried as "analysts" I live or die on my stocks' performances because I earn my living from either stock trades or private placement commission business done with my clients.

Rule 2711 Could Have A Very Negative Impact On Micro Cap Companies' Ability To Raise Capital

With a need to raise only a maximum of up to $5 million in a give year, PowerCold Corporation's capital needs were way under the radar screens of even the regional Wall Street firms. And, I would suggest that this would be true of the capital needs of many of the Bulletin Board companies. Further smaller companies like to try to raise funds incrementally as it is their intention to "make progress" with the funds raised which should then theoretically enable them to raise additional funds at higher prices resulting in less dilution. Consequently, a Bulletin Board company may initially only want to take in $1 million.

Therefore, we believe that the micro cap market into which most Bulletin Board stocks fit is not well served by the restrictions you propose by Rule 2711. The few small brokerage houses that are equipped to handle micro cap investment banking requirement (the NASD only received ten comments from their July '02 Notice to Members 02-44) do not have nor can they afford the large in-house staffs that Wall Street's wire houses employ. Raising small amounts of private placement capital does not require sophisticated investment banking. Yet, even Chesapeake Securities' minimal investment banking capabilities have been of significant value to PowerCold Corporation. Chesapeake has raised the capital PowerCold needed to develop and market a patented much more energy-efficient way to heat, ventilate, air condition and do refrigeration projects for small commercial and industrial businesses that could save these companies up to 30-40% of the power they are now using.

Admittedly, PowerCold Corporation and Bulletin Board companies like it are a HIGH-RISK investments and Chesapeake has always categorized these types of investments as high risk, not suitable for all investors. However, I do not cover 10-20 stocks as do most Wall Street analysts and I believe that the amount of time I spend on my fewer companies enables me to know the company's products and its management better than most Wall Street analysts know the companies that they follow.

Perhaps you should consider establishing an exempt category for either very small investment banking projects, i.e. for companies requiring less than $5 million per year or for very small but specialized brokerage houses that are equipped to do small investment banking projects limiting these firm to only two projects per year that would generate less than $1 million in investment banking commission business.