SEC Unconvinced on Small-Stocks Review

The Securities and Exchange Commission is likely to drop a disputed proposal aimed at curbing stock manipulation by requiring brokerages to vouch for the financial health of small companies, two SEC commissioners said Monday.

“We cannot allow the existence of fraud to serve as a justification for measures that might effectively preclude many deserving smaller companies from accessing capital markets,” Commissioner Norman Johnson told an SEC small-business conference.

The proposal, issued for public comment in February, would require broker-dealers to review information about small, thinly traded stocks--known as micro-cap stocks--before publishing a quote. Dealers would have to review this data for accuracy and reliability, and look for signs of fraud. They also would have to update that data annually and make it available to the public.

“Dealers would drop a number of stocks rather than review them, which would affect the price transparency and liquidity of the markets,” said Cromwell Coulson, chairman of the National Quotation Bureau, which owns the Pink Sheets stock-listing service, where the tiniest stocks trade.

Johnson and Commissioner Laura Unger said they expect the SEC staff to recommend in the next few months that the proposal be withdrawn. They said they oppose the plan, and expect other commissioners to also vote to withdraw it.

The plan is “one of the only rule proposals I’ve seen where the burdens clearly outweigh the benefits,” Unger said.