March 30, 1998
Comments RE: Rule 15c2-11 Proposals
Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
Mail Stop 6-9
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Mr. Katz:
Please treat the comments on page 6 of the January-February issue of The Corporate Counsel as my comments on the Rule 15c2-11 proposals.
|Jesse M. Brill |
The Rule 15c2-11 proposals (see Release No. 34-39670, February 17, 1998) are a direct result of the Commission's growing concern over "microcap fraud"-fraudulent trading in thinly traded OTC securities with minimal assets.
The Current 15c2-11 Approach
Rule 15c2-11 is a threshold requirement for a broker-dealer seeking to make a market in OTC securities that are not traded on Nasdaq, i.e., OTC Bulletin Board and Pink Sheets traded securities. Prior to publishing quotations for an issuer's securities, the market maker is required to review basic issuer information set forth in 15c2-11 and have a reasonable basis for believing that the information is accurate, current and from reliable sources. Once one market maker has published quotations in the security for 30 days, other market makers can commence making a market without obtaining any 15c2-11 information. Moreover, there is no ongoing requirement to review any issuer information.
The Proposed Amendments
The proposals expand the information requirement for issuers that are not 1934 Act reporting companies, and would require all market makers to (i) review issuer information before making a market in non-Nasdaq securities, (ii) obtain and review updated issuer information annually, and (iii) retain documentation of the market maker's compliance with Rule 15c2-11. (In footnote 11 of the 15c2-11 Release, the Commission notes that the NASD has recently proposed related rules which, among other things, would limit OTC Bulletin Board trading to 1934 Act reporting companies, and would impose additional issuer and broker disclosure obligations for non-Nasdaq OTC companies.)
Our Initial Reaction
We think this is a good, but modest, first step. Unfortunately, the last time the SEC proposed amendments to Rule 15c2-11, in 1991, it received many negative comments about how such proposals would chill capital raising and liquidity. We don't buy those arguments. What these minimal requirements would, hopefully, help achieve is some greater integrity in the small cap marketplace-which in turn would benefit all legitimate small companies.
Hopefully, the new requirements will also chill the efforts of less principled broker-dealers. But, unless some real teeth are added to these proposals (e.g., preventing making markets unless all the required information is obtained, and expressly providing consequences for broker-dealers who do not comply), we suspect that this will simply be a cosmetic exercise.
Moreover, to close the loop on insiders' using Rule 144 to unload shares of microcap securities on the unsuspecting public, we would urge the Commission to strengthen the Rule 144(c)(2) alternative public information requirement for non-reporting companies (by more clearly defining the term "publicly available," which the Staff has interpreted to be wider dissemination than simply providing the 15c2-11 information to market makers-see our May-June 1990 issue at pg 6).
We would urge the Commission to adopt the 15c2-11 proposals quickly. It does little good to implement fixes in hindsight after the damage has been done. Also, we would suggest that the Commission institute a simple filing requirement (e.g., name of market maker, name of issuer, boxes to check showing the information obtained, and a signed representation by all the principals of the broker-dealer (not just a scapegoat) that the information is complete and accurate) which would (a) provide the Commission with invaluable information and (b) have a salutary prophylactic effect on those who otherwise might simply hide their sins in a file (again to be discovered when it's too late).