Stoecklein Law Group, a Professional Corporation
March 15, 2004
Mr. Jonathan G. Katz
RE: FILE NO. S7-02-04
Dear Mr. Katz:
We are responding to your request for comments on the Commission's proposal pertaining to the "Amendments to the Penny Stock Rules."
In general, we do not disagree with the proposed amendments, only the basis upon which the amendments are being made. You have indicated that during the decade since you adopted the penny stock rules, several developments have enhanced transparency with regard to trading in low-priced securities. As examples, securities trading on the OTC Bulletin Board are now subject to last sale transaction reporting within 90 seconds after execution. In addition, you indicated that quotation on the OTC Bulletin Board is now limited to the securities of companies that report their current financial information to the SEC and are current in those reports.
You have indicated that "despite these moves toward increased transparency in the markets where penny stocks are quoted and traded, a persistent pattern of abuse continues to exist with regard to the trading of these low-price, thinly traded securities." Although we certainly would not deny that there is a concerted effort by some to defraud investors, we have difficulty assessing a pattern of abuse against penny stocks any more than the pattern of abuses noted on the NYSE, AMEX, or Nasdaq markets. To the contrary, we believe that the reporting element added to the OTC Bulleting Board went a long way in mitigating the abuses in OTC:BB traded stocks.
We believe that your focus on Penny Stocks is like chasing the mice for a pittance of cheese while the dogs are on the table devouring the meal.
That being said, we have the following comments on the proposed amendments:
Proposed Amendments to Rules 15g-2 and 15g-9
As currently required, Rule 15g-2(a) makes it unlawful for a broker-dealer to effect a transaction in a penny stock with or for the account of a customer unless the broker-dealer distributes to the customer, prior to effecting a transaction in a penny stock, a document, as set forth in Schedule 15G, and receives a signed and dated acknowledgement of receipt of that document from the customer in tangible form.
Although we have no knowledge on the statistics, the fact that there are a disproportionate number of abuses in penny stocks when there is a disproportionate number of quantitative abuses in the excluded stocks, should not be the basis for discriminating against the penny stocks. On the other hand, we believe that the proposed amendment makes logical sense considering the narrow circumstances under which they are applicable. Primarily, the provisions of Rule 15g-9 do not apply if the customer is an "established customer" of the broker-dealer; that is, if the customer has had an account with the broker-dealer in which the customer (1) has effected a securities transaction or deposited funds more than one year previously, or (2) has already made three purchases involving different penny stocks on different days. In simplified context, Rule 15g-2 only applies to broker-dealers making markets in the penny stocks they are recommending to non-accredited investors when the customer enters into his/her first penny stock transactions.
We are of the opinion that the modifications in facilitating electronic filing, maintenance of and access to registration information over the Internet, in concert with a "cooling off" period, properly harmonizes the Congressional mandate of the Electronic Signatures in Global and National Commerce Act with Exchange Act Rules 15g-2 and 15g-9. In light of the electronic age in which we collectively transact business, a proposed cooling off period would be a significantly more appropriate means of regulation than withholding access to modern electronic means of communication. However, we believe that the waiting period as proposed should be two (2) days versus two (2) business days as proposed, in that the time period over a weekend or holiday period serves the same rationale for a cooling off period. Additionally, we believe that the cooling off period should commence upon receipt of the document back from the customer, as there are verifiable electronic means of determining the exact time of receipt.
We believe that the Commission should be prescriptive and specify in detail how the proposed disclosure document should appear electronically, as opposed to allowing the satisfaction of the requirements by "presenting the information in any manner reasonably calculated to draw attention to it." This would provide consistency in the disclosure documentation and avoid misunderstanding or further clarification in the future.Proposed Elimination of the Exclusion for Nasdaq Securities
We agree with the elimination of paragraph (f) of Rule 3a51-1, as a result of the Commission's order in 2001 which explicitly recognized SmallCap Market securities as reported securities within the meaning of paragraph (a) of Rule 3a51-1 and thus excluded from the definition of penny.
Commission Cost Analysis
As we understand your proposals and the cost analysis, we believe that the costs associated with the proposed amendments would be minimal. In addition, the electronic transmission and storage of the information would minimize the burden further. We are assuming that the maintenance of these documents could, and most likely would occur, electronically.
In conclusion, we concur with the staff's opinion that the proposed amendments are consistent with the public interest and would promote efficiency, competition and capital formation by providing greater protections for investors, thus increasing investor confidence and involvement in the securities of small businesses.
We do believe that any burden on capital formation as a result of the proposed amendments will pale in comparison to the burden placed on capital formation as the result of the implementation of Section 404, assessment of internal control over financial reporting, as mandated by Sarbanes-Oxley.
/S/Donald J. Stoecklein
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