October 9, 2019
Dear SEC,
I am writing you in regards to the Proposed Rule for Publication or Submission of Quotations Without Specified Information (File Number S7-14-19).
While I understand that the intention of the rule is to protect the investing public and reduce the burden on broker-dealers, which I commend, I URGE the Commission NOT to enact the rule as it stands due to the foreseeable unintended consequences that will occur. In economics, there is a term called the Cobra Effect. The cobra effect occurs when an attempted solution to a problem makes the problem worse, as a type of unintended consequence. The term is used to illustrate the causes of incorrect stimulation in the economy. This term describes precisely what will happen if the Proposed Rule is implemented without change and input from the investing public and professional community. I am grateful for the opportunity to provide some of that feedback so that the rule is not enacted shortsightedly without full understanding of the secondary and tertiary consequences. This way, a comprehensive, informed, and effective solution can be designed that both protests the public from frauds but also protects existing investors from SUBSTANTIAL and IRREVERSIBLE financial damage.
What the Commission proposes is that Broker-Dealers stop quoting OTC securities if their information is “non-current” and “publicly available.” Having “current” financial information is defined by OTCMarkets as “90 days after fiscal year end for Annual Reports; 45 days after each fiscal quarter end for Quarterly Reports.” The Commission may think that this will incentivize the legitimate companies that do not currently meet this criterion to comply. However, the reality is that it will incentivize the opposite. Here is why.
If Broker-Dealers are no longer allowed to quote these securities then investors holding the securities will be left with one of two options:
1. Forced sale- if Broker-Dealers no longer quote a security, then they will stop transacting in those securities. If an investor knows on date MM/YY, their broker-dealer will no longer allow transactions in specified securities, they will be forced to sell. These securities are already generally illiquid, and the rule will cause a considerable imbalance in buyers and sellers, thus causing the prices of said securities to plummet and investors to sustain SUBSTANTIAL and IRREVERSIBLE financial loss to their retirements and savings. This is NOT protecting the investing public. On the contrary, it will cause direct harm to thousands of investors.
2. Hold the securities without the ability to transact them in the public, thus turning the investments into privately owned shares- if Broker-Dealers do not require a forced sale of the securities in an investors account, then the investor is left with option to hold those securities while the quoted price plummets and is ultimately left with privately held shares (since they can no longer be publicly quoted). Please note that this would directly contradict the SEC’s position on Rule 506 Regulation D, which only allows private security purchases for Accredited Investors.
When either #1 or #2 occur, this would allow the “non-current” companies to take their companies private at depressed prices. Many of the CEOs already view their companies as private and would love this opportunity. It would be a wealth transfer from the investing public to the CEOs of said companies. Furthermore, these companies have a financial incentive to remain “non-current” since complying would increase their auditing and administrative financial burden, which is something the companies have no interest in doing. Many of these companies are very small in size and an increase in expenses can have a major impact on profits. One example is Evercel Inc. (OTC Pink No Information: EVRC). Evercel has a profit of about $6 million USD. They are a holding company with manufacturing subsidiaries around the world. They provide a Shareholder Letter and Annual Report on their website once a year in the fall. For Evercel to comply with being “current,” just from an auditing perspective, it would increase their auditing costs approximately 600% and reduce profit by 8%. These are conservative estimates. For both of these reasons, companies will be incentivized to remain “non-current” and current shareholders will suffer real harm.
It is clear that the Commission has not considered the effects that the Rule will have on current shareholders. What do you anticipate will happen when Broker-Dealers announce that on MM/YY date, they will no longer quote or transact stocks that are currently in an investors portfolio?
A better solution would be the following:
Include “beneficial shareholders” in the definition of “shareholders of record.” This is an antiquated definition from when securities were not held by Broker-Dealers in street name. This would make the criteria for de-registering much more difficult. It would also force companies to re-register with the SEC or take the companies private without subjecting current shareholders into a forced sale. This second point is key. This change would resolve the problem without harming shareholders. It would also give companies an option to 1) increase their compliance burden or 2) officially take the companies private.
For the good of the investing public, I urge you to please consider.