From: Tom Stewart-Gordon [mailto:tsg@scor-report.com] Sent: Sunday, July 07, 2002 6:28 PM To: Rule-comments@sec.gov Subject: S7-24-2 July 5, 2002 Mr. Jonathan G. Katz Secretary, Securities and Exchange Commission 450 Fifth St., NW Washington, DC 20549-0609 Reference: File No. S7-24-02 Dear Secretary Katz: One aspect of the accounting mess that hasn’t been addressed is its chilling effect on small business capital formation. If investors can’t trust brands they grew up with, like Sunbeam and RiteAid, there is very little chance that they are going to put money into young companies. Also among the missing is any allowance for small companies. Since they won’t be reporting companies unless they are audited by a PAB member, it strikes me that this proposal is likely to make it prohibitively expensive for companies to do SB-2 filings, or meet the reporting requirements for listing. If that is an unintended consequence, perhaps it can be addressed. If the Commission has made a conscious decision to try to cut back on SB-2 filings and small company listings, this is an inappropriate way to accomplish that. Let us, for the sake of argument, assume that the Commission seriously believes its stated purpose; that it can regulate investor confidence into existence. What is there in Release 33-8109 that will accomplish that? Is there accountability? No. There is only another buffer between the Commission and the people it is supposed to police. The PAB is some sort of what the British call a quango (quasi-nongovernmental organization), a non-governmental organization with powers usually reserved to governmental entities. Quangos produce two things: a great deal of debate as to whether they have the power to do what they are doing, and a great deal of effort in trying to get those powers away from them when they go too far. While the release goes to great lengths to say that PABs will not be self-regulating organizations, at the end of the day, that is exactly what they are. SRO have never worked, and can never work, for the simple reason that as soon as there is an organization, there is a need to act for the good of that organization, and that invariably means sweeping as much as possible under the carpet. Are there potential punishments so draconian that no one would consider transgressing? No. The punishments are largely those already available, only under different names. PABs really have only one weapon, and it is a weapon which it is not the PAB’s interest to discharge. PABs are to be funded by contributions of their members and adjunct members. Their only weapon is to expel transgressors. If it does that, it has also reduced its budget, which, theoretically, reduces its effectiveness, or puts an added burden on the remaining members and adjunct members. As we have seen with Andersen, fines have a way of becoming a cost of doing business, a cost the clients will gladly bear. Is there any effort at all to explain how crooked behavior got to epidemic proportions? No. The subject is not treated at all, for very good reason. The current problems can be laid well and truly to the door of Congress, which funds the Commission. For that reason the Commission can’t do anything. It is held in thrall by an abnormally venal Congress and administration. Anything with teeth in it, will result in reduced funding. We know that because that was threatened when Chairman Levitt tried to separate the accountants from their consulting business. To counter the last wholesale mistrust of our capital markets, Congress passed a number of laws and created the Securities and Exchange Commission almost 70 years ago. Why have those laws and the Commission failed? It doesn’t take a great brain to realize that so many people opted to pull so many tricks because they thought they had bought protection. The congressmen they were paying had delivered time and time again. There was no reason to suppose that anything could upset the hand-washing bowl. They had delivered on tort reform, options, and consulting. Even in the midst of a firestorm, Sen. Sarbanes (D. Md.) and Rep Oxley (R. Ohio) tried to deliver for their benefactors by suggesting that state securities regulators be pre-empted from investigating Wall Street firms. The courts also helped by making it next to impossible for small investors to find out if they had grounds for a suit. As the release pointed out: “In Ross v. Bolton, the court noted the danger in ‘making NASD files fair game for any of the thousands of private securities fraud litigants across the country who wish to shortcut their own discovery’.” Surely, the existence of thousands of litigants indicates a problem that ought to be addressed. The Commission’s proposal will do little, if any, good, and will hurt small business. It should be completely overhauled. Perhaps the Commission should stop complaining that it doesn’t have the resources to do what it is being paid to do and just do it without relying on intermediaries. Sincerely, Tom Stewart-Gordon Editor, SCOR Report Dallas TX