PACE INVESTOR RIGHTS PROJECT
Pace University School of Law
March 11, 2004
Secretary, Securities and Exchange Commission
Re: Proposed Amendments to the Penny Stock Rules
To Whom It May Concern:
The Pace Investor Rights Project ("PIRP") at Pace University School of Law welcomes the opportunity to comment on the Securities and Exchange Commission's ("Commission") proposed amendments to the Penny Stock Rules. PIRP's mission is to advocate on behalf of investor justice, particularly with respect to the rights of small investors.
The Commission states that "these proposed amendments are intended to ensure that investors continue to receive the protections of the penny stock rules, regardless of changing technology or market structures." We generally support the approval of these amendments because they should enhance investor protection while recognizing the growing importance and pervasiveness of the internet in the investment process. We are concerned that fraudulent sales practices will still occur, inflicting financial injury on investors and undermining confidence in the securities markets. For example, a broker may intentionally fail to send required disclosure documents, improperly mark a transaction as unsolicited, or inappropriately treat a transaction as exempt. We urge the Commission to pursue an aggressive enforcement policy against penny stock fraud and abuses.
We applaud the Commission's effort to provide an additional level of protection to penny stock investors by amending Rule 3a51-1 to add minimum quantitative standards for exclusion from the definition of a penny stock. We agree that the proposed balance sheet or income statement criteria specified in 3a51-1(a) should help distinguish excluded securities from those securities appropriately falling within the penny stock rules. We further agree that initial listing and continued listing standards will enhance investor protection. Nevertheless, these enhanced protections may not flow to first time penny stock investors participating in solicited transactions. Abuses in solicited penny stock transactions may have little to do with the underlying status of a stock. However, improved protections might flow to general investors who make unsolicited transactions and rely to some degree on whether a security is properly classified as a penny stock or not.
We have no objections in regard to 3a51-1(e) and (f).
Rules 15g-2 and 15g-9
We generally support the proposed amendments to Rules 15g-2 and 15g-9 that would permit certain communications between broker or dealer and customer to occur electronically. Under current Penny Stock Rules a broker or dealer is required (1) to deliver certain documentation to customers in hard copy form, and (2) to obtain manually signed and dated acknowledgments of such documentation:
However, we believe the proposed minimum two business day waiting period specified in 15g-2(b), 15g-9(a)(2)(ii)(B), and 15g-9(b)(4)(ii) is inadequate. The penny stock disclosure document and suitability statement are the two most important vehicles for informing and educating the first-time penny stock investor. Accordingly, we favor an initial cooling-off period that provides sufficient time for the customer to reflect fully upon the proposed transaction, read the documentation, and seek additional information without sales pressure. We do appreciate the convenience of the internet, but believe that investor education and protection take precedence over convenience.
We suggest a minimum five business day waiting period. Our suggestion considers the Federal Trade Commission's three business day cooling-off period for sales made at home1 and average first class mail delivery times.2 We note that the former allows a customer to cancel an order until midnight of the third business day following a transaction. The latter reflects our preference for hard copy delivery of the initial documents. We believe that hard copy delivery will be more effective for initial educational and cooling-off purposes. In particular, we believe it is very important for customers to review the broker's suitability determination. In general, we do not support email-only delivery and acknowledgment approaches or web-based methods requiring only a single click or response.
We recognize that a customer can become exempt from the transaction agreement requirement within a very short period of time: three transactions. In order to enhance investor protection, we suggest that the requirement stay in effect for a minimum time period, perhaps two months, unless two conditions are met: (1) three qualifying transactions have taken place, and (2) the customer opts out of the requirement by electing, in writing, to no longer receive and sign a transaction agreement prior to a solicited penny stock transaction.3
We applaud the Commission's proposed effort to simplify and streamline the penny stock disclosure document. We generally approve of the revised content and, in particular, we are pleased with the inclusion of toll-free numbers for regulatory agencies. Nevertheless, because the disciplinary history of a broker or a firm can provide valuable information to a new customer, we further recommend that a broker's disciplinary history be provided as part of the initial disclosures. A customer's timely access to this valuable information should not depend on the customer's ability to successfully navigate an unfamiliar website or to ask the right questions of a regulator.
In addition, we recognize that a customer who elects to read the revised disclosure information might then find it difficult to follow up on the Commission's recommendation to "learn about the market in which the penny stock trades to determine how much demand there is for this stock and how difficult it will be to sell[ and to be] especially careful if [the] broker is offering to sell [the customer] newly issued penny stock that has no established trading market." Therefore, we recommend that the transaction agreement also include (1) an up-to-date list of market makers for the solicited stock, and (2) a recent market share volume report indicating whether the soliciting broker is among the most active market makers in the solicited stock. Presentation of this information could be modeled after the comparable reports available on the Trading Activity Reports page at the OTC Bulletin Board website.4 Again, the burden of obtaining this valuable information should not be on the customer.
Finally, given the importance of the disclosure document, we do not recommend dissemination via a hyperlink unless such a link is part of a comprehensive multi-step online delivery and acknowledgment procedure.5 As noted earlier, we would prefer that any documents be sent directly to the customer. Similarly, we would recommend that brokers send customers a hard copy of the expanded information available on the Commission's website unless a customer explicitly requests otherwise.
Thank you for your consideration of these comments. Please do not hesitate to contact us if we can provide additional information.
/s/ Barbara Black
/s/ Jill I. Gross
/s/ Bob Kim