Oct. 02, 2019
The Securities and Exchange Commission (the “SEC” or the “Commission”) is proposing amendments to 17 CFR 240.15c2-11. I am please to the following comments on the proposed rule and concept release, Release No. 34-87115 (the “Release”). Stripped of platitudes, the Release’s central argument is this: 1. We (i.e., the SEC staffers who drafted the Release) assume that the typical Board of Directors of the typical “catch-all” entity desires a robust public market for its entity’s stock. 2. The SEC will therefore change the rules – in particular, the “piggyback exception” - which apply to broker-dealers so as to severely restrict or eliminate the ability of broker-dealers to display bid or ask quotations for “catch-all” entities unless those entities make their current financial information publicly available. 3. The typical Board of Directors of the typical “catch-all” entity will respond to this change in rules by making the entity’s current financial information available to the public, and therefore to broker-dealers. 4. Broker-dealers will be readily able to show bid and asked quotations, and generally to make a market, in the typical catch-all entity’s stock. 5. The market in the typical “catch-all” entity’s stock will flourish, with the existence of current publicly available financial information concerning the entity, multiple market-makers in the entity’s stock, and fairness and transparency for all potential market participants in the entity’s stock. The steps in this chain of reasoning are taut, flawless, and absolutely compelling to any logician. Its concluding outcome is therefore seemingly inevitable. But what if the very foundation of this chain, its initial assumption that the typical Board of Directors of the typical “catch-all” entity desires a robust public market for its entity’s stock, is absolutely wrong? What if the typical Board of Directors of the typical “catch-all” entity is either indifferent to the existence of a robust public market in the entity’s stock or is hostile to the existence of such a market? If the latter is the correct starting assumption, then we can easily see the logical chain of events which would follow from the Commission’s adoption of the proposed rule. The typical Board of Directors of a typical “catch-all” entity will not make the entity’s current financial information available, and may even take steps to restrict the flow of such information to potential participants in the market, e.g., broker-dealers, current minority shareholders, and potential investors. No potential market-maker will be permitted to make a market in the entity’s stock, so there will be little or no public trading in it. Existing minority shareholders will struggle to obtain current financial information, and will have “nowhere to go” to sell stock except perhaps to the entity itself or to its controlling shareholder. In short, the consequence of the proposed rule, if adopted, will be the very opposite of the ambitions and expectations of the rule’s authors. Well, which is it? Does the typical Board of Directors of the typical “catch-all” entity want a robust public market in the entity’s stock, or is the typical such Board indifferent or hostile to such a market? I venture to express an opinion. I am a private investor, with no affiliation with any broker-dealer, and no “insider” relationship with any publicly traded entity, “catch-all” or otherwise. I have 50 years of experience in buying, owning, and selling securities for my own account, including almost 40 years of experience with “catch-all” entities. I hesitate to provide an exact count, but I daresay that over that span of time I have had the opportunity to observe – and in dozens of cases have interacted closely with the Boards of Directors of – many hundreds of “catch all” entities. My unvarnished and unhesitating opinion is that the Boards of Directors of most such entities are either indifferent to the public market in their respective entity’s stock or are hostile to such a market. If my opinion is correct, then by the chain of reasoning above, adoption of the proposed rule will be disastrous for the public market those entities’ securities. In fact, if adopted, the proposed rule will create an additional incentive for many Boards of Directors to take steps which will cause their entities to “go dark” and become “catch-all” entities. Adoption of the proposed rule would therefore destroy rather than invigorate public markets in the stock of many, many companies, including both current “catch-all” entities and ones whose creation is motivated by the change. What should the Commission do? First, the Commission should do no harm. It should NOT adopt the proposed rule. Second, the Commission should re-focus enforcement efforts on “the bad guys”, including the “pump and dumpers”, the unethical stock promoters, insiders who trade on inside information, controlling shareholders who disregard their fiduciary obligations to minority shareholders, and the professional cadre of attorneys, accountants, and so-called “valuation experts” who facilitate illegal or abusive behavior. (I do not exclude all broker-dealers from this “Hall of Shame”, but the typical market maker in the typical “catch-all” issuer’s stock is not among its members. In any event, adoption of the proposed rule would end up punishing shareholders, not broker-dealers.) Third, the Commission should expand rather than restrict the ability of broker-dealers to make markets in “catch-all” securities. If some open competition is a good thing for transparency and free markets, would not more of it be better? Fourth, the Commission should encourage state laws which require the availability of current financial statements to shareholders. My knowledge is far from encyclopedic, but I believe that North Carolina has an excellent statute which may serve as a model. (Delaware may think it does, but the experience of minority shareholders who have had to incur expense and “pull teeth” in order to extract basic financial information from Delaware companies in which they own shares says otherwise.) Finally, the Commission should facilitate the ability of beneficial shareholders to become registered shareholders, with a corresponding increase in shareholder awareness, the ability to participate in corporate democracy, corporate disclosure, and free and vigorous financial markets. In the Internet Age, should it not be possible to become a registered shareholder in every domestic corporation without needing in many instances to pay a “toll” of $500 to the official “gatekeeper” DTC? And why do we need market makers, anyway? Shouldn’t it be possible to post bids and asks, and to clear agreed-upon transactions, almost as easily as one can buy something on Amazon or eBay? I appreciate your consideration of these comments. Sincerely, Daniel Raider San Mateo, California