- The Washington Times - Wednesday, March 20, 2002

If anything can be said to have come out of the tragic events of September 11, it forced the Securities and Exchange Commission and Nasdaq bureaucracies to review their regulations to see how they could minimize the terrorists' disruptions of the markets, especially in New York.

Acting first through emergency decrees and a temporary rule on Sept. 26, 2001, Nasdaq followed by issuing an order easing the $1 minimum stock price requirement until Dec. 31, 2003, for the SmallCap Market.

Historically, the SEC has considered itself a fraud policeman, especially regulating trading in what it calls "penny stocks," the reason for the $1 minimum rule. SEC defines penny stock as a security selling for less than $5 per share that is not listed or authorized for quotation on a Nasdaq or higher stock exchange. Why $5 is a "penny" stock no one knows. If exchanges were not exempted, this would be an enormous group subject to the significantly more stringent filing and disclosure requirements. Indeed, one-third of listed firms often trade at $5 or less. As it is, 600 of the 4,300 companies listed on Nasdaq are often below the $1 minimum price required to remain listed. While the SEC focuses upon penny fraud, most of the large losses in recent years have come from huge firms, such as Barings IMG and Prudential Securities.

A majority of the American work force is employed by small businesses of fewer than 500 employees, and these have provided all of the net new jobs in recent years. Those that raise public funds generally called "small cap" or small public companies face an amazingly bureaucratic puzzle they must master to survive, most of whose procedures go back to the founding of federal regulation in 1933. The SEC regulates, but so do all 50 states as do the private exchanges. The system is so opaque that the SEC itself recommends that no firm proceed without legal representation to avoid possible penalties.

In one action last year, where the SEC itself admitted the "scope of the abuse is small," 2,982 firms, almost half of those registered, were delisted from the Over The Counter market and forced into the more volatile and inefficient "pink sheet" market. After the OTC process was completed on June 28, 2000, the small cap market fell to what was then its lowest level and has not recovered since.

While protection against fraud is essential, most securities regulation is simply paperwork. The requirement that stock prices not fall below $1 per share is a good example. Once it falls below $1, it can be delisted. This forces management to take drastic steps to move the price up, which actually fosters fraud and unethical practices as the owner grasps at any alternative available to do so.

The fact that a revolving group of hundreds of firms listed by Nasdaq frequently sell for less than $1 and that this may include a half-dozen or more on its composite list, demonstrates this is not a minor matter. In one recent month, 40 companies were delisted, with one-third forced to merge on unfavorable terms.

What did Nasdaq do after September 11? It extended the grace period for a firm to lift its price above the $1 minimum from 90 to 180 days. The Nasdaq action was welcome for small cap companies and undoubtedly will allow some enough time to recover. But the action was needlessly timid. With the especially large number of firms in danger of being delisted as a result of the economic recession, much more was required. In fact, the supposedly more restrictive New York Stock Exchange already allows a 180 day recovery period. The SEC and Nasdaq should eliminate the $1 minimum requirement altogether.

Why are a million shares at 99 cents any different than a 100,000 at $9.90, except that the SEC says so? Anyone who thinks the former is tainted other than by arbitrary bureaucratic reasoning and wants to trade 1 million collectible baseball cards worth 0.99 each for any discount relative to 100,000 worth $9.90, please call immediately.

Perhaps a few months experience with the longer recovery period could inspire bolder action to topple the minimum entirely.

Not only would Nasdaq keep listing fees, but investors could salvage something even when stocks plunge. Companies on the brink could spend their time making their businesses more profitable rather than meeting economically meaningless government requirements and there would be less panicked fraud for the SEC to police. Instead of counting pennies, the SEC could free the owners to create billions.

Donald Devine, former director of the U.S. Office of Personnel Management, is a columnist and a Washington-based policy consultant.

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