Subject: File No. S7-3-98 Robotti & Company, Incorporated 52 Vanderbilt Avenue New York, New York 10017 212-986-4800 April 27, 1998 Mr. Jonathan G. Katz Securities and Exchange Commission Mail Stop 6-9 450 Fifth Street, N.W. Washington, D.C. 20549 Dear Mr. Katz: This letter is in response to proposed amendments to Rule 15c2-11. Robotti & Company, Incorporated is an NASD member firm formed in 1983. We are currently market makers in 20 Pink Sheet issues and 70 OTC Bulletin Board issues. Of these 70 OTC Bulletin Board issues, 38 issues are non-reporting companies. A base premise of this proposed rule change needs to be addressed: "The Commission recognizes, however, that not all securities traded in this market sector are tainted by fraud." The accurate statement is "the overwhelmingly vast majority of these issues are not tainted by fraud". This of course is our base consideration - these rule changes will effect every issue in this universe, although the instances of fraud are statistically very, very small. A supporting statement in this proposal asserts "Investors fall prey to persons who make false representations and unrealistic predictions about these securities". These devices to defraud (false representations and unrealistic predictions) are unaffected by the availability (or lack thereof) of financial statements. A corollary argument would suggest actually that financial statements, like quotations should be eliminated as the existence of accurate and audited financial statements can be construed to give credence to "false representations and unrealistic predictions". On net, the elimination of "firm quotations" cannot possibly be construed as beneficial to fostering a competitive market place and a better informed market place. This idea to "eliminate quotes" also seems to run directly in contraction to the changes recently mandated in the NASDAQ market in response to the SEC's Section 21(a) report- all customer orders and firm proprietary interests must be displayed! As a firm which regularly competes in this market place I can state with conviction that the lack of electronically displayed, firm quotes already works to the disadvantage of the seller in this market. In several pink sheet issues we quote trades regularly occur at prices significantly below our firm bids. The NASD rule that the seller quote at least three markets is either violated (difficult for examiners to discover after the fact) or ineffective (four or more market makers). The existence of firm quotations on a real time quotation medium eliminated this fraud and provides regulators with the ability to identify and enforces best execution. Conversely, the elimination of quotes facilitates this fraud. In addition, it could not possibly be contemplated that trade report rules instituted for OTC Bulletin Board and Pink Sheet would be eliminated. This would definitely be a step back into a "Dark Ages". Therefore the trade reporting will give the same "appearance" of "creditability" that might otherwise be limited by the quotation restrictions proposed. Our interest in non-reporting companies is almost always as a buyer (very rarely a seller). That buy interest is for long term sophisticated investors who are willing to accept the risks of limited availability of information. These rule changes threaten the ability of these investors to provide some market for the shareholdings of the vast majority of issues in this market place. The rule filing specifically states "responsible broker-dealers would be deterred from publishing quotations if they were aware of basic information about the issuer that suggested a possible fraud". I believe our firm to be a completely responsible broker-dealer. As such I am concerned adoption of this standard exposes us unduly to significant regulatory issues and to potential investor litigation. It is my professional opinion ( as a financial analyst of repute in this area) that none of the issues we quote are frauds. I back this up with our own capital by buying these issues for the long term in our investment account and in various accounts in which I have a beneficial ownership interest. (This is supported by the fact that in vast majority of these issues our market is a firm bid only, no offers). All that said, the potential exposure will cause us as "responsible broker-dealers" and prudent businessmen to reevaluate our potentially innocent exposure versus the estimated benefits. I do believe withdrawing from these market would be a disservice to these issues but well be the prudent course of action for us. The affirmative statement that the dealer "have a reasonable basis for believing the issuer information is accurate and that it was obtained from a reliable source" seems too vague. This is also true of the exposure implicit in the statement that we are aware of basic information about the issuer that suggested a possible fraud (our italics added). We believe a very significant shortcoming of the proposed rule change is the presumption that a market maker has the ability to detect fraud by reviewing financial statements. I am a CPA and have practiced as a financial analyst for over 15 years. I would guess that if I reviewed extensively the financial statements of one hundred firms were fraud existed I would be able to detect that fraud in very few cases. And the statement that one might detect " a possible fraud" would mean that many legitimate issues would lose market liquidity. For example, inventories can increase over time for a multitude of reasons, changes in raw material purchasing procedures, changing product mixes, new product introductions and line extensions or it might be due to fraud. This can be said of almost every company experiencing deterioration in fundamentals. Although almost always due to business conditions whether industry or company specific, fraud might also be the cause. Would not this new rule expose every broker/dealer trading issues with deteriorating fundamental to a fraud claim under this premise? Would not ten innocent men be found guilty without even assurance that the guilty be stopped? To reiterate, I disagree with the premise that review of complete GAAP compliant financials can possibly enable even the most skilled analyst to detect fraud with any degree of success. Financial data to be reviewed: Even though most companies prepare financial information in accordance with GAAP, we believe there a problems with requiring these statements be reviewed: Companies are not explicated required by state law to provide this information even to its current shareholders. Changes have occurred in GAAP for many of the base statements that state laws have not stayed up to date with. The majority of states only require companies provide shareholders with a balance sheet and an income statement. All other GAAP statements are not explicitly required to be provided by a company. We are also shareholders in companies that refuse to provide the full audited reported with footnotes. At the same time we cannot force this information be provided under existing state laws. At the same time we are willing to buy such shares for our own account (including our investment account) as we take such information and lack therefore as part of the whole and reach a conclusion that at the price we are bidding, we are willing to take on that investment risk. We believe we provide potential sellers a very viable option and provide liquidity to the market place. Often statements are not in compliance with GAAP in only some limited way. GAAP is a very comprehensive body of data and statements that are substantively in compliance may not be fully compliant. Such statements often provide us with enough information to accept the risks of buying such shares when taken as part of a whole at the price offered. As for significant events, again there is no state law requirement to provide this information or that specifies when this information must be disclosed to shareholders. Here a problem would arise for all market makers in all non-reporting issues that they would be held responsible for events that occur but for which they have no legal right of entitlement to? I believe that most mangements and boards will refuse to provide much of the expanded information. This information is considered by them to proprietary and confidential. This refusal to provide this information should not be construed to imply guilt. Clearly one such reason may company's become reporting companies is to safe the cost of compliance with SEC rules. Another is to limit disclosure to competitors of information about the company as well as information about the shareholders and shareholdings. A short coming of the proposed ruling is that there is no regulatory require for these companies to provide the information requested. As non-reporting companies, the obligations of these companies to disclose data is limited the laws of their individual states on incorporation. All shareholders in a company can force compliance only to the extent of the law. Therefore advent of these rules can facilitate these companies elimination of a market As for the annual review process I suggest that it be longer than four months after the year end. Some of these companies are buyer of their own shares and this system could facilitate their being able to eliminate the market's competition and give the company a potential monopoly on buying in their own shares to the detriment of their non management shareholders. This activity could well increase with the advent of these rules. There should also be a relaxed reentry period if annual compliance can not be accomplished within the four month period. Instead of completing a new Rule 211 filing, within one year quotes can be reactivated by the current rules, not the new contemplated extended rules. Therefore shareholder will have the ability to force compliance with the distribution of an annual report. Again I believe that application of these rules to bankrupt companies is misguided. First it is important to realize that the vast majority of public issues that file for bankruptcy are not worthless. Therefore to prevent trading in these issues for periods of time while in bankruptcy means that in the vast majority of these situations many, many more issue with value will be unavailable for trading. As a safeguard to potential investors, we suggest that disclosure on the confirm similar to that indicating an issuer is a market maker. This disclosure should highlight this fact to purchasers. The proposal to eliminate the need to provide the NASD copies of publicly filed and available data in rule 211 filings is to be applauded. This makes all the sense in the world and is realization of a change brought to the market place with the advent of new technology. We believe that the Rule has clear anticompetitive effects beyond some potential and possible for the public interest. The vast, overwhelming majority of issues effected are not the subject of fraud. In those vast majority of issues there will undoubtedly be fewer market makers. So for those vast majority of "fraud free" companies (by the SEC's own estimates total over 4,000 issues) there will be significant disadvantages. We thank you for the opportunity to comment and we are available if you should have any questions of us. Sincerely, Robert E. Robotti Robert E. Robotti