U.S. regulator pushes reforms for microcap market-making brokers; Regulator Urges Tougher Rules for Microcap Market

http://www.reuters.com/article/2015/03/04/sec-microcap-brokers-idUSL1N0W616J20150304

http://ww2.cfo.com/capital-markets/2015/03/regulator-urges-tougher-rules-microcap-market/

U.S. regulator pushes reforms for microcap market-making brokers

Wed, Mar 4 2015

By Sarah N. Lynch

WASHINGTON, March 4 (Reuters) – A top U.S. regulator is calling for new rules for brokers who make markets in over-the-counter microcap stocks, saying the current regulations are lax and may lead to poor-quality pricing.Luis Aguilar, a Democratic member of the Securities and Exchange Commission, urged consideration of the reforms during a meeting on Wednesday of a regulatory advisory panel convened to help the SEC craft rules to help small businesses thrive.

“Investors need to have confidence that the quotes for these securities are fair and accurate,” Aguilar said in prepared remarks for the SEC advisory committee meeting.

“Without this confidence, a fair and liquid secondary market for these securities will not exist.”

Aguilar’s remarks refer to a rule known as “15c2-11” which brokers use to list quotes and make markets in microcap stocks traded off-exchange.

The rule requires brokers to review the accuracy and adequacy of a small company’s financial statements before they can publish an initial quote for unlisted stocks.

The problem, Aguilar said, stems from an exemption baked into the rule which allows other broker dealers to “piggyback” on previously published quotes, even if those quotes are stale.

The piggybacking brokers also are not required to undertake the same rigorous review of a company’s financials before publishing stock quotes.

In addition, brokers who initially publish the first quote for a microcap company also are not obligated to go back later and confirm that the information they first relied on is still valid, he said.

“This is hardly an effective way to create a fair and efficient market and it’s a poor way to instill trust in this market,” Aguilar said.

The SEC has renewed its focus on microcap markets over the past few years, with a particular eye toward cracking down on fraud.

SEC Chair Mary Jo White launched a microcap fraud task force a few years ago that has been fighting both the perpetrators of pump-and-dump schemes, as well as “gatekeepers” who may help enable them, such as lawyers, auditors and transfer agents.

However, little has been done in the way of reforming the rule book when it comes to microcap markets.

Aguilar said the SEC in the late 1990s had considered changes to the rules to help reduce the risk of fraud, but they were never completed. (Reporting by Sarah N. Lynch; Editing by Paul Simao)

Regulator Urges Tougher Rules for Microcap Market

Matthew Heller

5 March 2015

CFO.com

“Without [investor] confidence, a fair and liquid secondary market for these securities will not exist,” says an SEC commissioner.

A member of the U.S. Securities and Exchange Commission has made a plea for tougher regulation of the over-the-counter microcap market, saying current rules aren’t sufficient to ensure investors are properly informed.

The SEC has a task force that investigates fraud surrounding the thinly traded securities of small companies, including pump-and-dump schemes. Commissioner Luis Aguilar’s remarks at a meeting on Wednesday of a regulatory advisory panel suggest the agency is gearing up to change the microcap rule book.

“Investors need to have confidence that the quotes for these securities are fair and accurate,” Aguilar said, according to a Reuters report. “Without this confidence, a fair and liquid secondary market for these securities will not exist.”

Under a rule known as “15c2-11,” brokers are required to review the accuracy and adequacy of a small company’s financial statements before they can publish an initial quote for unlisted stocks. Aguilar expressed concern about an exemption that allows other broker dealers to “piggyback” on previously published quotes, even if those quotes are stale.

The piggybacking brokers also are not required to undertake the same rigorous review of a company’s financials before publishing stock quotes. And, Aguilar noted, brokers who initially publish the first quote for a microcap company are not obligated to go back later and confirm that the information they first relied on is still valid, he said.

“This is hardly an effective way to create a fair and efficient market and it’s a poor way to instill trust in this market,” he said.

In their crackdown on microcap fraud, regulators have also been focusing on transfer agents, the back-office businesses hired by companies to keep track of shareholder records and changes in ownership.

“To date, the industry has been lightly regulated, despite its critical role in keeping track of stocks as they change hands, and the issuance of shares,” Reutersreported.

In December, Aguilar said the investing public “needs capable, honest, and reliable transfer agents to help the capital markets function properly and effectively” and “It is past time that the Commission … modernizes the rules regulating transfer agents.”

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