Subject: 34-41110 Author: Tom Stewart-Gordon Date: 5/6/99 7:45 AM May 4, 1999 Jonathan G. Katz Secretary United States Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Release No. 34-41110 Dear Mr. Katz: It is clear that the Commission has brought to the problem of microcap its customary rigor and insight. But it seems to me that it might be more useful if the Commission had asked some general questions and not devoted so much time and effort in attempting to fix existing rules. A number of points have to be cleared up before one can support, or suggest alternatives to, the steps outlined in Commission Release 34-41110. The first is what is the nature of a market maker? The Commission, and everybody but the market makers themselves, believe market makers try to establish a security's value. That is clearly not the case since the market makers are fighting very hard to be kept in ignorance of factors generally thought to reflect that value. In point of fact, the market maker's job is to make money by creating velocity. The quote is merely the market maker's best guess of the prices which will attract enough transactions to make the exercise worthwhile. The Commission seems to have an inkling that this is the true state of affairs since it doesn't propose requiring the quoter to collect useful information. The Commission is content to make brokers use financials that are up to 18 months old. Market makers in foreign equities are allowed even greater latitude. Is that because things move so slowly outside the U.S. that 24 month-old foreign data is equivalent to 18 month-old domestic data? Will 24 month-old foreign data give the investor the same amount of information as 18 month-old domestic data? The intent of 34-41110 is to have broker-dealers "stop, look and listen" before they make a quote. However, making market is not as simple as crossing a railroad track. It is an ongoing activity. Trains that weren't there at the beginning can materialize at any point in the process. An issuer usually has a year to conclude a Reg A offer. The financial information required by the states (the Commission doesn't require audited finanicals) can be up to three months old before the offer is declared effective. At the conclusion of the offer, the financials are up to 15 months old. The Commission believes that is adequate and will allow an issuer who has "conducted a recent public offering ...effected pursuant to Regulation A," to use a copy of the prospectus or offering document. Nobody would buy General Motors based on information that old, how is the investor in small, volatile companies served if the only information available is more than a year old? Mr. Spencer and others have said that the Commission's proposals will drive market makers out of the business and that that will result in the loss of liquidity in the market. I am not sure that, if it occurred, would be a significant event. Given the true nature of making market, are market makers really necessary? The argument for market makers is they assure an orderly market. Leaving aside the question, how can there be a market, orderly or not, without timely information, let's examine the orderliness of the OTCBB and NQB markets. Various people at the NASD have assured me that a market maker on the OTCBB is under no obligation to be the buyer or seller of last resort. The Commission has had to deal with firms who failed to honor their quotes. Brokers assure us at every opportunity that stocks are sold not bought. How is this accomplished if the broker has no idea of the company he is touting? Most of the comments from issuers either fear that market makers will disappear or that the requirements will be a burden on the issuers. Taking the second first, surely, the ability to sell one's securities to the general public is a privilege with an attendant responsibility. If the company's management does not wish to discharge that responsibility, it certainly should not be permitted to enjoy the privilege. As to the extinction of market makers, is that a bad thing? People buy and sell everything over the Internet. Would a judged bulletin board be out of the question? Brokers would be necessary to handle the customer's accounts and make sure that he can cover any bid or offer he makes, but market making doesn't seem necessary. It is possible for issuers, if they choose, to post financials within days of closing the books. If they don't wish to, a notice to that effect should be prominently displayed on the section of the bulletin board dealing with bids and asks in that company's securities. The argument that requiring brokers to familiarize themselves with the companies whose stocks they are touting will somehow make the brokers liable is spurious. If the broker reviews a company and touts it knowing, on the basis of his review, that the company is in deep trouble, clearly, the broker and his firm ought to be struck off and made to pay hefty punitive damages. If the broker reviews the company and believes that it is a good company, why should he be any more liable for touting that stock than he would for touting any other stock that falls from favor? If the broker feels that he is unqualified to render an opinion, he has no business touting the stock. Brokers, including market makers, justify their existence on the grounds that they are performing a service and possess an expertise. The comments I have read would have us believe they possess no particular expertise and certainly do not wish to be forced to acquire any. Under those circumstances, they hardly seem necessary. The NASD pioneered computerized quote systems. It is a pity that they have not kept up. The information on the OTC Bulletin Board is hardly timely and not much use to anyone considering a purchase of a listed security. The National Quotation Bureau has yet to unveil its offering. Both should revamp their systems to accommodate direct client bids and asks and the posting of information from listed companies. That would free the NASD to police clients and listing companies and not its members, something no SRO really does well. Yours respectfully, Tom Stewart-Gordon Editor, SCOR Report Dallas TX tsg@scor-report.com (972) 620-2489