FOUNDED 1960

BROKERS & DEALERS IN SECURITIES

UNDERWRITERS

NEWPORT OFFICE TOWER

525 WASHINGTON BLVD.**P.O. BOX 260

JERSEY CITY, NJ 07303-0260

wwwmhmeyerson.com

April 7, 1999

Jonathan G. Katz

Secretary

U.S. Securities and Exchange Commission

450 Fifth Street, N.W.

Mail Stop 6-9

Washington, DC 20549

1. S7-5-99 – Letter of Comment

Dear Mr. Katz:

We are writing to express our strong opposition to the amendments to Rule 15c2-11 under the Securities Exchange Act of 1934, which were reproposed by the Commission in Release No. 34-41110.

M.H. Meyerson & Co., Inc. is a 39-year-old securities firm, which conducts its business in seven divisions: wholesale trading, investment banking, retail services, institutional sales, syndicate, fixed income and correspondent service. Our largest division is wholesale market making. This division engages in principal transactions that are predominantly dealer-to-dealer transactions for our proprietary trading accounts. During 1998, we ranked 24^th in market making volume in OTC securities, as reported by "Autex."

As market makers, we have a substantial stake in the success of the Commission’s program for curbing fraud and manipulation in the microcap securities markets. Market makers traditionally maintain the liquidity of the market in stocks by placing their own capital at risk. As a result, we may suffer the largest losses when a microcap stock is fraudulently touted or manipulated due to our having been left with an inventory of worthless securities.

We do not, however, view the proposed amendments to Rule 15c2-11 as an effective or workable means of curbing microcap fraud and manipulation. As is further discussed herein, the proposed amendments fundamentally change the responsibilities of OTC market makers relative to Nasdaq market makers and stock exchange specialists. Currently, like their counterparts, OTC market makers use their capital to maintain liquidity and price transparency in the stocks for which they make a market. The proposed amendments would turn OTC market makers into regulatory analysts required to continually reevaluate the "accuracy" and "reliability" of the available information concerning an OTC issuer and subject to unlimited litigation exposure if the issuer’s insiders were perpetrating a fraud –- notwithstanding the market makers’ lack of involvement. The review and "red flag" analysis that is required for both reporting and non-reporting issuers clearly will threaten the economic viability of numerous OTC market making firms and will result in down-sizing and lay-offs for this segment of the industry.

The proposed amendments severely prejudice OTC Bulletin Board stocks relative to Nasdaq and exchange listed stocks notwithstanding that the OTC Bulletin Board stocks are subject to the same SEC reporting requirements. The prejudice is even more severe in the case of OTC Pink Sheet stocks, which will be subject to the same SEC reporting requirements by mid-year 2000. In effect, the proposed amendments presume that the OTC companies, the majority of which are legitimate ventures that simply fail to satisfy the recently-enhanced Nasdaq listing standards, somehow warrant a rigorous, ongoing "red flag" analysis as a prerequisite for having an active trading market in their shares. In fact, the proposed amendments make it impossible for OTC companies to have an active trading market. Market makers, faced with unlimited litigation exposure and uneconomical resource demands, will severely curtail their market making activities with respect to such companies. Because the litigation exposure and resource demands are even higher in the case of non-reporting issuers, the proposed amendments are the death knell for the OTC Pink Sheet market. If they are adopted, Pink Sheet companies will have been eliminated long before the mid-year 2000 deadline for their conversion to reporting companies.

Based upon our long-standing experience as OTC market makers, we believe that the proposed amendments do not enhance investor protections. They not only are unlikely to reduce fraud but are actually detrimental to existing shareholders of OTC issuers and the OTC market. The efficacy of the proposed amendments as an antifraud measure is severely compromised by the fact that their target –- the OTC market making firms – have not been shown to be active perpetrators of, or even participants in, microcap fraud. Yet, notwithstanding the lack of regulatory justification, the proposed amendments place substantial new burdens upon virtually all OTC market makers. The inevitable result will be a dramatic reduction in the number of reputable firms that are willing to publish quotations for microcap stocks and a dramatic reduction in the liquidity and price transparency of those stocks – a very unfortunate consequence for existing shareholders of microcap companies and a situation that actually facilitates fraud and manipulation.

In fact, the proposed amendments would substantially reduce opportunities for individual investors who want to invest in microcap companies notwithstanding the risks. In this sense, the proposed amendments are truly out of step with the realities of the current marketplace in which microcap companies – the majority of them legitimate ventures – are the focus of unprecedented levels of trading activity due to their heightened exposure in Internet investor websites and chat rooms and the ability of individual investors to trade cheaply via online brokerage services.

For all of the reasons set forth herein, we strongly urge the Commission not to adopt the proposed amendments. We believe the adverse impact of these amendments upon the OTC Bulletin Board and Pink Sheet markets will be immediate, dramatic and irreversible and would harm rather than help public investors.

The proposed amendments would expand the scope of Rule 15c2-11 in at least four significant respects:

Each of the above expansions of Rule 15c2-11 would impose substantial burdens upon OTC market makers who publish priced quotations in microcap stocks. A broader universe of such market makers, many of which have no relationship to the microcap issuers, would be required to gather voluminous issuer information and to perform an extensive "red flag" analysis on an ongoing basis. One year’s worth of filings for a single OTC reporting company would consist of hundreds of pages. The typical market making firm that publishes price quotations for 50-100 such companies would be deluged with hundreds of thousands of pages of filing material – all of which would have to be carefully reviewed and analyzed. Market making professionals, who typically have no legal or accounting background, lack the necessary expertise to conduct such ongoing issuer investigations and it is not cost-effective for such firms to hire outside professionals to conduct them.

The information-gathering requirements and "red flag" analysis that is required for non-reporting issuers is so extensive that most if not all firms will discontinue making a market in such issuers’ shares rather than assume the risks of attempted compliance. The proposed amendments thus threaten to shut-down the market for non-reporting issuers’ stock at the very same time that the NASD is providing non-reporting Bulletin Board issuers with a "grace period" for attaining reporting status under NASD Rules 6539 and 6540.

Another inhibiting aspect of the proposed amendments lies in their requirement that market makers disseminate issuer information that is not available via EDGAR or similar electronic repositories directly to other broker dealers and prospective customers. In disseminating such information, market makers would be implicitly representing that they have a "reasonable basis" for believing the information to be accurate and from reliable sources. Plaintiff investors would no doubt attempt to use this new Rule 15c2-11 requirement to impose liability upon market makers for their alleged negligence in verifying the accuracy and reliability of the issuer information that they disseminate. As the potential "deep pockets" in any situation involving microcap fraud or manipulation, OTC market makers could be regularly named as defendants in shareholder class action litigation against the issuers. This increased litigation exposure that the proposed amendments would create for OTC market makers would contrast sharply with the very limited exposure of their Nasdaq market maker and stock exchange specialist counterparts.

There is no regulatory justification for creating a new, heightened trading market standard for full SEC-reporting OTC Bulletin Board issuers and their market makers in comparison with Nasdaq and exchange listed issuers and their market makers. Given the inevitable dire consequences, it is fundamentally unfair to subject legitimate, financially sound companies and their market makers to such an onerous proposed standard merely because there has been fraud and manipulation in connection with a minority of the issuers in their trading market. Moreover, it is highly prejudicial to penalize the majority of OTC Bulletin Board companies for the sins of a few, while not penalizing Nasdaq or exchange listed companies for the fraud and manipulation that occurs in their trading markets.

This is the third time in a decade that the Commission is proposing to substantially expand Rule 15c2-11, yet the Proposing Release still fails to articulate any reasons for believing that expanded Rule 15c2-11 requirements will reduce microcap fraud. In fact, as the Proposing Release notes, microcap fraud and manipulation are effectuated primarily through the touting of a microcap stocks by the issuers and promoters. Market makers are mere bystanders and often victims of most "pump and dump" schemes.

There already exist powerful incentives for reputable market makers to avoid facilitating a microcap fraud or manipulation. It is economic suicide for a market maker to carry an inventory of stocks with manipulated prices which could become worthless at a moment’s notice. Moreover, as the Proposing Release notes, market makers who knowingly facilitate a microcap fraud or manipulation currently face regulatory and civil liability under the antifraud provisions of the securities laws.

Further, the overall risks of investing in microcap stocks currently are the subject of extensive disclosure under the Commission’s Penny Stock rules. Clearly, those rules embody the principle of caveat emptor under which, once they are fully apprised of the generally high risk of penny stocks, investors nonetheless may choose to assume that risk and invest.

Ironically, the proposed amendments would virtually close down legitimate market making activity in those situations in which the liquidity and price transparency that it produces is most urgently needed, such as where issuers are delinquent in their periodic filings, are in bankruptcy or are non-reporting. In such situations, the market makers’ willingness to publish priced quotations in the subject security and assume the accompanying economic risk, notwithstanding the incomplete information that is available concerning the issuers, often provides the only source of objective "information" that is available to the investors who want to purchase or sell those stocks notwithstanding the risk.

The elimination of legitimate market making activity in such situations will not eliminate the opportunities for fraud or manipulation for two reasons. First, by the time that the issuer becomes delinquent, insolvent or non-reporting, the fraud and manipulation often has already occurred and the issuer-affiliated broker-dealers have already dumped their shares on the market. The publishing of priced quotations by legitimate market makers at this point provides a desirable opportunity for defrauded investors who are looking to liquidate their shares. Second, even if a fraud or manipulation is ongoing, the elimination of the legitimate market makers will not halt the scheme, rather it will put the market for the issuer’s stock entirely within the control of co-conspirators in the scheme and by widening the spread in the issuer’s securities, significantly increase their illicit gains.

The crucial role of market makers, particularly during ongoing bankruptcy proceedings should not be foreclosed. There is a very active market in the stock of companies that are in bankruptcy proceedings. Many such companies have emerged from bankruptcy proceedings in strong financial condition. Hundreds of thousands of dollars are spent on research relating to such companies, the vast majority of which are traded on the OTC Bulletin Board. The fact that an issuer is in bankruptcy is prominently reflected as part of their Bulletin Board or Pink Sheet share symbol. For the Commission to close down the market in such companies’ shares entirely disregards the demonstrated willingness of investors to assume the well-known risk of investing in such companies.

There is little doubt that the increased burdens and expanded potential liability resulting from the proposed amendments will dramatically decrease the depth and liquidity of the OTC markets and in the process, totally devalue the equity holdings of the existing investors in that market. The Commission’s Proposing Release notes that market maker compliance with the new requirements – solely with respect to the 40% of the OTC market comprised of non-reporting issuers – will cost more than $ 5.7 million for all firms combined. As the Proposing Release concedes, the costs of compliance with the expanded Rule 15c2-11 requirements will cause some firms to reduce the number of OTC stocks in which they make a market and some will cease OTC market-making activity altogether. From a market structure standpoint, the proposed amendments threaten to undo what the Commission and the NASD have spent the past several years trying to do, i.e., increase price competition and narrow market-making spreads.

Indeed, the proposed amendments appear to entirely disregard the realities of the current market for microcap stocks, the autonomous participation of individual investors in that market and the underlying principle of caveat emptor. In the past few years, microcap stocks have experienced an unprecedented level of trading activity, largely as a result of two Internet-driven phenomena: (a) the broad public exposure for microcap companies facilitated by Internet newsletters, chat rooms and investor forums; and (b) the ability to purchase such stocks at dramatically reduced commission rates via online brokerage services. At the same time, the focus of regulatory initiatives, such as the Manning Rules and the Order Display Rules, has been at facilitating a customer order-driven market in which individual investors can obtain the same quality of execution as institutional investors. The proposed amendments would reverse these recent developments by foreclosing rather than enhancing the opportunities for individual investors to participate in the microcap securities market on a cost-effective basis

Any rule proposal having such an undesirable collateral effect should be supported by strong evidence that it will materially increase investor protection. No such evidence exists with respect to the proposed amendments to Rule 15c2-11. There is scant evidence of major market makers participating in microcap fraud or manipulation. Indeed as is discussed above., there are powerful incentives against such misconduct by market makers. Unless and until there exists evidence that an expansion of Rule 15c2-11 is necessary to curb harmful practices on the part of OTC market makers that raise investor protection concerns, Rule 15c2-11 should not be expanded.

Because there has been relatively little publicity concerning the proposed amendments, we did not become aware of them until March 31, when we received a trade association letter that mentioned them for the first time. This provided us with insufficient opportunity to provide the extensive commentary and background data that is called for by such a ground-breaking regulatory initiative. We believe that a significant number of other OTC market makers and issuers either have been unaware of the reproposal of these amendments or have become aware of it on the same late date that we were first informed.

Accordingly, we request that the comment period be extended by at least another 45 days to facilitate comment by a broader segment of the OTC issuer and market maker community on the proposed amendments, particularly in view of their far-reaching and irreversible impact upon the OTC Bulletin Board and Pink Sheet markets.

Thank you for the opportunity to make our views known to the Commission.

Respectfully submitted,

Martin H. Meyerson, Chairman