May 11, 1999

Mr. Jonathan G. Katz

Secretary

Securities and Exchange Commission

450 Fifth Street, NW, Mail Stop 6-9

Washington, DC 20549

Re: File S7-5-99

Dear Mr. Katz:

We welcome this opportunity to comment on the amendments to Rule 15c2-11 (the "Rule"), under the Securities Exchange Act of 1934 ("Exchange Act"), proposed by the Securities and Exchange Commission ("SEC" or the "Commission"). We are members of the OTC Bulletin Board Advisory Group (the "Advisory Group"), a subcommittee of the Quality of Markets Committee, a Committee of the Nasdaq Board, that advises the National Association of Securities Dealers, Inc. ("NASD" or the "Association") and its subsidiaries on matters pertaining to its OTC Bulletin Board Service (the "OTCBB Service"). Collectively, the undersigned dealers traded approximately 45% of the share volume in the OTCBB Service and the Pink Sheets last month. As firms that commit substantial capital to the market for micro-cap issuers, we have a critical interest in the efficiency, integrity and reputation of this market and believe that the Commission will find our comments useful in its efforts to fight fraud and manipulation.

Comment Letter from NASD Regulation Inc.

Notwithstanding the unanimous views of the Advisory Committee, NASD Regulation, Inc. ("NASDR") sent the Commission a letter dated April 1, 1999, commenting favorably on the proposed Rule amendments. Please be assured that the NASDR letter does not represent the views of the Advisory Group. The Advisory Group voted unanimously to oppose the proposed Rule amendments, believing them to be detrimental to the public interest, the operation of the marketplace, and the capital formation process for small businesses. Moreover, it was the view of the Advisory Group that the Rule amendments would cause a reduction in transparency, thus playing directly into the hands of manipulators by substantially reducing the amount of information available for regulatory surveillance purposes.

The Piggyback Provision

Experience has shown that the piggyback provision is the singular most important provision of the Rule, without which manipulation surely would increase as disreputable broker-dealers gain virtual monopolies over a covered security's order flow. Piggybacking – i.e., the ability to begin making markets in a security that is already the subject of regular and frequent quotations – assures ease of entry for other market makers interested in committing liquidity to a security. Increasing the number of market makers in a security increases competition and promotes the efficiency and integrity of the pricing mechanism, bringing countervailing pressures to bear on any manipulative efforts that may exist.

For these reasons, piggybacking becomes more important when there are fewer market makers for a security. We therefore find it troubling that the NASDR letter would support elimination of the piggyback exemption only where there exist more than 10 broker-dealers publishing quotations for a covered security. Indeed, NASDR's formulation is based on the very premise that market manipulation is less likely where there are more broker-dealers publishing quotations for a covered security. That basic time-tested principle argues for eliminating barriers to entry and increasing the number of market makers in a security. In any event, we note that the NASDR formulation would virtually eliminate piggybacking because few if any broker-dealers will be able to piggyback if 10 other broker-dealers must first obtain and review the information required by the Rule.

Scope of the Rule

With respect to limiting the scope of the Rule, the approach suggested by the Commission and NASDR (excluding non-equity securities and those equity securities of issuers below certain size or trading volume thresholds) would guarantee that the Rule remain virtually unchanged. Consistent with the original intent of the Rule when it was first adopted, we believe that the rule should only apply to shell companies, and only if those shells are non-reporting companies for which no current financial information is available.

The Commission adopted the Rule in 1971 to make certain that no dealer quoted a security for which certain information about the issuer was not readily available in the market place to investors and other broker-dealers. The biggest area of concern was the quoting of non-public shells that were being spun off to the public. Over the years, the Commission has amended the Rule to include all types of issuers, large and small, foreign and domestic, even though volumes of information from these additional issuers was readily available to the investing public. With the emergence of the Internet and the SEC's EDGAR database, the investing public now has at its fingertips information on all domestic reporting companies. Through the Internet and the SEC's own web site, investors readily can ascertain whether foreign issuers have furnished information to the Commission under Rule 12g3-2(b). These technological innovations have rendered obsolete the requirement that each market maker in a security copy and store issuer information in its files. Consequently, the Rule imposes an unnecessary burden on the marketplace. The Commission's desire to have broker-dealers review issuer information for red flags is an attempt to transfer its own regulatory responsibility to market makers who are ill equipped to perform listing-type reviews for non-Nasdaq OTC issuers and have no regulatory authority to demand information of issuers.

Priced Quotations

Imposing a review requirement on market makers who publish priced quotations would significantly degrade market quality by discouraging the use of priced quotations. It is well established that transparency of prices facilitates price discovery and increases competition and market efficiency. Limiting the use of priced quotations will force market makers to obtain prices over the telephone and handle more orders manually, thereby increasing the difficulty of obtaining best execution for customer orders.

In essence, we believe that the review requirements under the Rule cause broker-dealers publishing priced quotations to perform the equivalent of a listing review on the non-Nasdaq OTC issuers whose securities they quote. The OTCBB Service and the Pink Sheets are dealer driven quotation media that impose no listing standards on the issuers that trade there. We believe the Commission and the NASD have always been uncomfortable about this lack of listing reviews in this segment of the securities markets, and thus, through these Rule amendments, these regulatory bodies would conscript broker-dealers who conduct business there to perform the desired review.

The only other explanation for the Rule is that these regulatory bodies believe that by requiring a market maker to review an issuers' information, including current balance sheets and income statements, the market maker will somehow price its quotations differently than if it had not otherwise performed this review. This explanation defies logic and basic economic principles given that dealers by definition base their quotations on the perceived forces of supply and demand in the marketplace. Ultimately, it is the investing and trading public that drives pricing through its order flow.

Request for Information

As amended, the Rule would require broker-dealers to provide issuer information to current and prospective customers, information repositories, and other broker-dealers. We are opposed to requiring market makers to furnish issuer information upon request to the various categories of market participants specified by the Commission on the grounds that such a requirement would be overly burdensome and unnecessary. Although we now receive very few requests for the issuer information we are currently required to maintain under the Rule, informational requests surely will rise if the Rule is amended and the piggyback provision is eliminated. We also note that supplying information residing with the Commission or other federal or state regulatory agencies should not be required because of its ready availability through other sources. In any event, the Commission should make clear that the simple act of honoring informational requests under this Rule should in no way indicate or imply that the broker-dealer providing the information recommends a transaction in the subject securities or is otherwise liable for the information.

Record Retention

As noted above, we oppose any attempt to require broker-dealers to keep in their records reams of information already publicly available from the SEC through its EDGAR database. In fact, with respect to OTC BB issuers, the SEC's EDGAR database already functions as a central repository for issuer disclosure information. With respect to issuer information that is not readily available, we would support any effort by the Commission to make issuer information more accessible to the public, such as through the establishment of a central repository. Indeed, such an effort seems consistent with the Commission's role as a federal agency.

Scope of the Review

We fundamentally disagree with the premise relied on by the SEC and NASDR that market makers are the appropriate gatekeeper for identifying problematic issuers and assuring the accuracy and reliability of issuer information. We believe that broker-dealers are ill equipped to perform such a review function, especially regarding foreign issuers. As originally adopted, the Rule required the initial market maker quoting a security simply to review an issuer's information for completeness. Such a standard implicitly recognized that broker-dealers generally are not in a position to reconcile red flags as they share no special relationship with an issuer who must cooperate to provide corrective information. Under the current formulation , however, if broker-dealers found themselves in such a position, in all likelihood, they would have material inside information that would preclude them from trading the issuers' stock until such information was fully and fairly disseminated. As such, broker-dealers may find themselves needing to issue press releases before they could commence trading.

In today's marketplace stocks are subject to many sudden and violent price movements. Any continuing obligation to review issuer information would force market makers to cease making a market until a red flag is reconciled. While the market makers are researching the underlying cause of the price movement and not executing orders, what are the market makers' obligations to their customers under "Best Execution" principles? What liabilities do market makers incur if they decline to execute customer orders in the face of red flags but trading continues by other market makers, and when those red flags are cured, the subject securities are then trading at a price favorable to the customers had their orders been filled promptly? Market makers will be put in a conundrum where best execution obligations become obfuscated further in the presence of red flags for non-Nasdaq OTC issuers. Moreover, when broker-dealers leave the marketplace to investigate red flags, volatility and spreads will increase for the subject securities, both to the public's detriment.

If the Rule amendments are adopted, we believe that market makers will face an avalanche of lawsuits from disappointed public investors. Any investor who loses money on a stock trading in the OTCBB Service or in the Pink Sheets potentially will allege that market makers should have been aware of red flags and should have ceased executing the investors' orders. Red flag lawsuits will be so debilitating and draining of financial and human resources that market makers will be forced to discontinue or severely limit their market making activity in this venue.

The Advisory Group's Approach

We believe that the preferred approach is to encourage greater transparency in terms of collection and dissemination of price and trade data at a time when issuer information is not readily available. Under the Commission's approach, lack of current issuer information would result in removal of the security from the OTCBB Service. Such removal would deprive investors and regulators of price discovery information and the associated audit trail when most needed. Investors have a right to expect a continuous market in the securities. To trade in an illiquid market with no transparency would provide an opportunity for manipulation and boiler-shop operations to flourish. Congress recognized this in 1990 when it enacted the Securities Enforcement Remedies and Penny Stock Reform Act, which added Section 17B to the Exchange Act to provide greater transparency in the marketplace for penny stocks.

In Section 17B of the Exchange Act, Congress found that the marketplace for penny stocks suffers from a lack of reliable and accurate quotation information available to investors and regulators. It also found that it is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to significantly improve the information available to brokers, dealers, investors, and regulators with respect to quotations for and transactions in penny stocks. Lastly, Congress found that a fully implemented automated quotation system for penny stocks would meet the information needs of investors and market participants, would add visibility and would supply regulatory and surveillance data to that market.

We believe that the Commission's proposed Rule amendments run counter to these Congressional goals. We also presume that if Congress found it appropriate to increase transparency for penny stocks, increased transparency in the market for the securities of micro-cap issuers must similarly be an important endeavor for that market as well. From the findings in Section 17B came the mandate that the Commission facilitate the wide-spread dissemination of reliable and accurate last sale and quotation information with a view toward establishing one or more automated quotation systems that will collect and disseminate information. From this mandate came the OTCBB Service.

In March 1999, 398 dealers used the OTCBB Service to quote 6,630 different domestic and foreign securities. This is up 3.72% from the 6,392 different securities quoted in March of 1998, which is quite significant considering over 130 foreign securities were removed from the OTCBB Service after that month. Even more remarkable is that total share volume increased 82.43% from March 1998 (2.84 billion) to March 1999 (5.18 billion). We believe that the OTCBB Service is one of the NASD's more noteworthy successes over the last 10 years.

Chairman Levitt has recognized the importance of transparency as a tide that lifts all boats. In his efforts to improve transparency in the corporate debt market, he has noted that "investors have a right to know the prices at which bonds are being bought and sold. Transparency will help investors make better decisions, and it will increase confidence in the fairness of the markets. Simply put, it's in everybody's interest." The Chairman recently echoed these thoughts when commending the Municipal Securities Rulemaking Board for working to improve transparency in the municipal market. Would not the same hold true for investors in micro-cap companies? We do not understand how the Chairman can call for more transparency in the corporate debt market and municipal market while his staff concurrently works to reduce transparency in the micro-cap stock market.

We believe that the Commission should propose Rule amendments making it easier for market makers to quote micro-cap stocks on the OTCBB Service.. Increasing competition by encouraging additional market makers, as well as maintaining transparency of quote and trade data will help to provide a more liquid market. The increased investor confidence that arises from more visible and liquid markets helps the capital formation process, making the cost of capital, particularly the financing of small businesses, less expensive. "We know from our own past experience and from the current situation in Asia and Russia that there is a direct relationship between information and investor confidence: Increase one and you increase the other; decrease one and you decrease the other. The Commission's efforts to reduce the cost of raising capital for small business would be aided significantly if it would help the secondary market for those securities to flourish.

Other measures the Commission could promote include: (i) having the NASD act as the informational repository because its regulatory subsidiary already receives Form 211 submissions for all securities trading on the OTCBB Service; (ii) expanding the NASD's power to halt trading when manipulative acts and practices are occurring in the market for non-Nasdaq OTC securities; (iii) increasing the SEC's surveillance through targeting broker-dealers that recommend non-Nasdaq OTC securities; and (iv) prohibiting affiliates from selling restricted securities under Rule 144 when public companies are not current in their Forms 10-K and 10-Q.

In closing, we would like to see the Commission reach out to the industry in a concept release and through meetings with various industry committees as part of an on-going dialogue on what can and should be done to prevent fraud and manipulation in non-Nasdaq OTC securities. We would make ourselves available to the Commission and its staff to discuss the steps needed to accomplish such a goal. Undoubtedly it is a difficult undertaking, but it is a goal as important to the industry as to the Commission.

We the undersigned stand ready to assist the Commission in its efforts to curb fraud and manipulation in the market for non-Nasdaq OTC securities. Please feel free to give any one of us a call.

cc: Hon. Arthur Levitt, Chairman

     Hon. Norman Johnson, Commissioner

     Hon. Isaac C. Hunt, Jr. Commissioner

     Hon. Laura Simone Unger

     Hon. Paul R. Carey, Commissioner

     Annette Nazareth, Director, Division of Market Regulation

     Robert L.D. Colby, Deputy Director, Division of Market Regulation

     Larry Bergmann, Senior Associate Director, Division of Market Regulation

     James Brigagliano, Assistant Director, Division of Market Regulation

     Florence E. Harmon, Special Counsel, Division of Market Regulation