Subject: File No. S7-3-98 Date: 4/27/98 8:32 AM John D. Browning 220 Circle Drive Plandome Manor, NY 11030 516-365-1903 April 27,1998 Mr. Jonathan G. Katz Secretary Securities and Exchange Commission Re: File No. S7-3-98 I read with some despair the proposed changes to Rule 15c2-11. I thought this type of regulation was discarded in 1991. Who has taken the stake out of the monsters heart? The reasons that these changes were a poor idea in the early 1990s still hold today. The enactment of these proposed rule changes would cause a diminishing of transparency of the market, impair liquidity for the trading of these securities and hurt capital formation for a great number of legitimate companies. If anything the present reincarnation of 15c2-11 changes are worse than those earlier proposed. The burdens and potential liabilities imposed on the market makers are more onerous this time around. The microcap¶ marketplace is not perfectthere are stocks that are being manipulatedbut the vast majority of issues are the stocks legitimate companies. There are fallen angels¶ whose value has dropped for whatever reason, small aspiring companies whose access to capital is dependent on these markets and companies not large enough to qualify for other markets. Some may be fraudsbut to single out this area is unfair and unjustified. Fraud is not restricted to only one area of investing. The focus exclusively on microcaps¶ is misplacedfraud can take place in any arena. NASDAQ and listed issues have no immunity from manipulation and vastly inflated prospects. Names like Bre-Ex and Cendant readily come to mind. In fact, it seems that recent frauds have taken place more in NASDAQ issues than OTC ones probably because thats where the money is¶. The public has lost more money by investing in the Stratton Oakmont and A.R. Baron securities than in Bulletin Board and Pink Sheet frauds. Why should the specialist making a market in Cendant be held to a less strict standard, when his failure to see the red flag¶ cost investors over $10 billion. The stated purpose of these rule changes is to protect the investing public from fraud in the microcap¶ market placea laudable goal. They seek to protect the unsophisticated buyer from the wiles of an unscrupulous broker who is offering a return incommensurate with the true prospects of the company whose security is being offered. These proposals thus seek to protect a narrow segment of the investing publicthose who are susceptible to promises made by fraudulent brokers. By doing so, it places burdens upon the rest of the investing community. Those who own microcap¶ securities, indeed those, who own all securities, will be harmed. In focusing their concern only on the potential buyers of these securities, the regulations will interfere with those who wish to sell their stocks or bonds but find a greatly reduced market. Those who fall prey to the types of fraud covered by this rule change would be better served by a program of education and a more rigorous enforcement of the rules already in place. If the phone rings during dinner and the voice on the other end promises an investment opportunity which will quadruple in a matter of weeks, but must purchased immediately because this golden opportunity¶ is available now or never, the diner must know enough to hang up and go back to his meal. Potential buyers of securities offered by boiler room salesmen using scripts that pander to their greed should learn to ignore these empty promises. Also an Internet tout, whatever its source, must also be treated with great skepticism. The NASD and the SEC should expand their educational programs to aim them at the potential buyers of fraudulent stocks whether they are microcaps, NASDAQ or listed securities. The buyer of a fraudulent security is harmed at the point of sale. There are a number of safeguards in place to protect the buyer. The know your customer¶ rule precludes recommending an inappropriate investmenta fraud can never pass muster. Checking out the broker and his employer is a better way to avoid being cheated than studying the financial statements of the suggested investment. Rarely will a reputable broker suggest fraudan application of the know your broker rule¶. The penny stock¶ and designated security¶ rules put forth requirements for dealing with customers in OTC stocks. New regulations are not needed the enforcement of existing ones is. If the rules concerning publishing quotations that require a market maker to have a reasonable basis for believing that the information is accurate and current in all material respects and is obtained from reliable sources¶ are implemented, it is not difficult to imagine a marketplace abandoned by legitimate market makers because of their fear of litigation should one of the securities in which they make a market turns out to be fraudulent. By establishing this standard for OTC market makers, the SEC would be painting a litigation bulls eye on their backs. If this reasonable test¶ is itself reasonable, then not only the OTC market makers should be held to it, but all NASDAQ market makers and, indeed, exchange specialists should be as well. The perpetrators of the fraud would be sued, as would the innocent market maker. This threat of litigation will have a chilling effect on the dealer community and discourage legitimate firms from making markets. The manipulating and crooked firms will have the field to themselvesthey have no intention in following the rules anyway. A recent Business Week article pointed out that Mafia-dominated broker dealers used thugs to threaten legitimate market makers who dared enter their manipulated fiefdoms. Instead of restricting market makers by eliminating piggybacking¶, regulations should encourage multiple market makersthe fairest, most open markets will provide the investing public with the opportunity for best execution of their orders. By limiting market makers to only those who have the requisite information, these rules create an unfair advantage for the haves¶a company could favor one market maker over others or parcel out financials to friendly¶ dealers. In conclusion, I urge that the proposed changes to Rule 15c2-11 be turned down again. I think educating the investor and applying existing rules can reduce the instance of all fraudnot just that in the microcap¶ area. Sincerely yours, John D. Browning