Here is a pretty good read. Especially interesting is part about getting Pink Sheet quotes at the Pink Sheet Website (in bold).
Katie K.
June 28, 2000
Wild West Of Wall St.: More Regulation
Comes To OTCBB
By PHYLLIS PLITCH
NEW YORK -- The regulators are coming.
For years, the Over-The-Counter Bulletin Board has operated with lax
quoting requirements and scant public scrutiny, a combination that often
created the impression it was more a mecca for unscrupulous companies and
pump-and-dump schemes than a crucial entree for small companies to the
capital markets.
Now, armed with a smattering of new rules, the National Association of
Securities Dealers, which operates the quotation service, is looking to soften
the market's rogue image and wring some of the risk out of investing in
Bulletin Board securities.
Some of the more sweeping changes include Nasdaq's newly granted trading
halt authority and the NASD's ejection of thousands of companies for failure
to file up-to-date financial statements with the Securities and Exchange
Commission.
Even with these regulatory changes the OTCBB is no Nasdaq; to list there
companies must meet certain tests of financial stability based on market
capitalization, number of publicly traded shares, corporate governance
standards and other measures.
"The Bulletin Board is now a lot safer than it used to be, but it's still not of the
same quality as you would find listed on other major stock markets, like the
New York Stock Exchange, Nasdaq or the Amex," said James Angel, an
associate professor of finance at Georgetown University. "In other words, it's
still a buyer beware area."
Indeed, an "investor alert" recently appeared as a top news item on the
Bulletin Board's professional and user-friendly Web site found at
otcbb.com.
Sketching out the differences between OTCBB and Nasdaq, the alert noted
that the latter has "rigorous listing standards to ensure the high quality of its
issuers," while the only requirement for inclusion in the OTCBB, is that
companies "be current in required periodic filings with the SEC or other
appropriate federal regulatory authority."
Moreover, no contractual relationship exists between the NASD/OTCBB -
essentially a quotation medium - and issuers, and as such the NASD has no
regulatory authority over companies themselves.
Nonetheless, the reverberations are being felt, probably most dramatically as
regulators have made good on the eviction threat behind the new eligibility
rule. In the past, actively quoted companies for the most part needed only to
file certain financial documents with a single market maker, and with no
update requirement.
Those days are over. Plunging forward with a take-no-prisoners approach,
the NASD has slashed its way through the Bulletin Board, unceremoniously
knocking off any and all companies that fail to file current financial statements
that meet SEC standards of review.
The SEC also plans to scrutinize entities that attempt to sidestep the rules by
slipping into already reporting shell companies, vowing to closely review their
financial filings.
With the year-long phase-in period nearing its end, nearly 60% of the 5,004
companies that have come up for review through the end of May have been
kicked off. Most companies have landed on the Pink Sheets, a traditionally
less visible market that is undergoing its own evolution.
"We're looking at making the Bulletin Board specifically a market that's safer
for the investor," said Adena Friedman, a Nasdaq vice president and product
manager of the OTCBB.
Since the beginning of the year, the NASD has also moved forward with new
trading rules. In January, the organization approved a limit-order protection
pilot program on some stocks. If it's approved by the SEC, dealers who
execute trades for their own account at prices equal to or better than a
customer limit order, must execute the customer order within five minutes.
And last month, the SEC granted Nasdaq authority to halt trading in OTCBB
securities under limited circumstances, including when a company fails to
disclose dividends or other distributions on a timely basis as required by SEC
rules.
In pushing for the sweeping reform, the NASD was acting, in part, out of
concern that the public perceived the OTCBB as a highly regulated market,
and that companies lacking in credibility traded off the legitimacy and prestige
of the Nasdaq market, giving investors a false sense of security.
The latest efforts are also seen as supplying the Nasdaq with antibodies
against the negative associations with the OTCBB.
For a time, Nasdaq was trying to draw a big line between itself and the
Bulletin Board, said John Coffee, a professor at Columbia Law School. "I
think now they recognize they can't really distance themselves and they have
to clean it up or it will tarnish their image," he said.
At the same time, the regulatory arm of the NASD, which has jurisdiction
over the hundreds of broker-dealers who trade over-the-counter stocks, says
it remains vigilant in keeping an eye out for fraud and manipulation in the
reconstituted venue. If a problem is spotted that appears to be the handiwork
of a company or someone not under its direct supervision, the enforcers refer
the matter to the SEC.
"Even though non-reporting companies are stripped away, we're still talking
about thinly-traded companies with little industry analysis," said Stephen
Luparello, executive vice president of market regulation at NASD Regulation.
"There's a lot of activity and a lot of people in it - you have to be careful."
While many people embrace the increased regulatory efforts, there have been
rumblings that regulators should be mindful not to choke off the capital raising
abilities of small companies - even those with not-so-hot business plans.
"This is a classic balancing situation," said Brandon Becker, former director of
market regulation at the SEC, now a partner at Wilmer, Cutler & Pickering.
"We don't use federal regulations to decide who has a good idea or a bad
idea. In an effort to prevent fraudsters, you have to be careful you don't
impede the ability of legitimate entrepreneurs to raise money, even if the ideas
ultimately prove unsuccessful."
Questions have also been raised by small business advocates and market
makers about whether pushing the companies to the Pink Sheets is truly
advantageous to investors. As one brokerage insider put it: "the cockroaches
are still in the cabinet."
But the way some people see it, the Pink Sheets are a more appropriate
home for non-reporting companies anyway, because of a "buyer beware"
image that exceeds even that of the Bulletin Board.
One person who subscribes to that theory is Cromwell Coulson, the current
owner of Pink Sheets LLC. Coulson, who took over the company three years
ago, compares the Pink Sheets to an eBay auction, where there's no outside
authority vouching for the quality of the product.
"Should there not be a place where a chipped vase or an unsigned painting can sell?" Coulson asks. The concern may ultimately be moot, he added, as the distinction between the two markets becomes fuzzier amid Pink Sheets' plans to widen dissemination of market data, starting with free 15-minute delayed quotes on his Web site this month. (http://www.pinksheets.com)
Regulators acknowledge that the eligibility rule won't lead to a completely
risk-free microcap environment. But it should motivate companies to provide
more information, because of the value associated with a more liquid segment
of the market, said Stephen Cutler, deputy director of enforcement at the
SEC. And if it doesn't succeed in all cases, no harm done.
"Obviously there are going to be companies that don't meet that standard, or
can't," he said. "That doesn't mean at the end of the day investors are worse
off. They weren't receiving information about those companies in the first
place."
-By Phyllis Plitch; Dow Jones Newswires; 201-938-2357
-phyllis.plitch@dowjones.com
(Michael Rapoport contributed to this story.) |
