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January 1, 1998

NASD Plan Could Boot Some Companies Off Bulletin Board

By Staff Reports

Big changes are afoot with the National Association of Securities Dealers' OTC Bulletin Board, the electronic stock quotation service for the trading of shares in nearly 7,000 companies. Many of these are small-cap and thinly-traded issues.

The bulletin board is loosely regulated. About half of the listed companies file financial statements. There are no listing standards.

The bulletin board is controversial. In fact, regulators charge that investors have been duped out of billions of dollars in stock scams perpetrated on the bulletin board. Some people closely connected to bulletin-board trading, however, dispute this estimate, saying it is grossly inflated.

Investor Protection

The main changes announced by the NASD would enhance investor protection by significantly increasing the amount of timely and accurate information about the companies that are quoted on the bulletin board.

The changes are subject to approval by the Securities and Exchange Commission.

In a release, the NASD said brokers in the future would be required to take additional steps prior to recommending or conducting a transaction in an over-the-counter (OTC) security not traded on Nasdaq.

The NASD is seeking comment from investors, regulators and other groups on each of three proposals prior to their submission to the SEC. The first would allow only those companies that report their current financial information to the SEC, or banking and insurance regulators, to be quoted on the bulletin board. This proposal would provide a phase-in period for those securities already quoted on the bulletin board.

The second would require brokers, before they recommend a transaction in an OTC security, to review current financial statements on the company they are recommending.

Finally, prior to the initial purchase of an OTC security, the proposals would require that every investor receive a standard disclosure statement, prepared by the NASD, emphasizing the differences between OTC stocks and other market-listed securities.

Securities quoted on the bulletin board include national, regional and foreign equity issues, warrants, units and American Depositary Receipts not listed on any other U.S. national securities market or exchange. Beginning in April, foreign securities will have to be fully registered with the SEC to remain quoted on the bulletin board.

Under the proposals, the NASD said, all companies that do not report to the SEC, or bank and insurance regulators, would be eliminated from the bulletin board. The delisted companies would be eligible, however, for quotation on the pink sheets. A phase-in period would apply before this measure is implemented.

Further Changes

The NASD is considering further changes. These include a halt on trading in a bulletin board stock when a foreign regulator halts trading in the same stock in the primary market.

While there have been scams associated with the bulletin board as well as the pink sheets, the old-fashioned manual OTC trading service run by the National Quotation Bureau in New York, defenders of the non-Nasdaq side of the OTC market stress that a huge majority of trading is fair and legitimate.

The intense scrutiny of this OTC market by regulators in recent times is particularly troubling, the defenders stress. "They are painting the industry with one broad brush and that's unfair," one trader said.

"I've been in this business all my life," the trader added, "and I've always played by the rules. But reading newspaper reports, you would think I was engaged in the organized crime business."

Indeed, small-cap trading on the OTC market has been hurt by allegations that organized crime entered some of the business. Last year, Business Week ran a sensational cover story on how organized crime had supposedly infiltrated the small-cap market on Nasdaq stocks. Some traders think the piece went over-the-top, once again grossly inflating the truth.