Commentary

Jos Schmidt
Traders Magazine Online News

Reducing the Regulatory Burden on Public Companies, Yes Please But...

In this commentary, NEO's Jos Schmidt discusses regulatory requirements and needs in the Canadian equity markets.

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February 1, 1998

The SEC Approves Overhaul For the OTC Marketplace: NASD Joins Clean-Up With Tighter Listing Standard

By Michael L. O'Reilly

The Securities and Exchange Commission has proposed a regulatory initiative to curb small-cap fraud and increase the responsibilities of broker dealers quoting small, thinly-traded over-the-counter stocks.

In a similar push, the National Association of Securities Dealers will publish, at the end of this month, a list of companies no longer meeting new standards to list on Nasdaq.

At press time, the SEC declined to comment on the outcome of the agency's Feb. 10 meeting.

At issue was a proposed SEC requirement that all broker dealers research and make available information on companies they quote on the pink sheets and the OTC Bulletin Board. At the moment, only the broker dealer initially quoting the over-the-counter stock is required to review the issuer's financial data. Updates are not required.

The SEC initiative is part of a larger agency drive to cut down on stock fraud. The pink sheets and the OTC Bulletin Board are generally perceived by regulators to harbor some questionably-listed companies.

Indeed, the OTC Bulletin Board, although owned by the NASD, is not held to the regulatory agency's listing standards.

Still, the SEC rule change may encourage rather than discourage small-cap fraud, according to Cromwell Coulson, chairman of the National Quotation Bureau, owner and operator of the manually-traded pink sheets.

"This rule springs from good intentions, but it will have the wrong results," Coulson said. "The new rules may put the information obligation on the broker dealer, who is not controlling the source of information. That information is the responsibility of the listing company."

He added that if broker dealers back away from quoting small-cap stocks, the listings could move to a wholly unregulated marketplace, like the Internet. "That type of black-market trading could hurt investors terribly," Coulson warned.

Separately, the National Quotation Bureau last month announced it would automate the trading of their more than 2,700 listings, pending regulatory approval. Coulson said the new system would provide a real-time bulletin board of market-maker quotations and an electronic-negotiation and order-routing platform for subscribers. He hopes to have the pink sheets fully automated by year's end.

"We will be getting a lot more listings with these new Nasdaq requirements," Coulson said.

On Feb. 23, the NASD is expected to make public a list of companies that do not meet the new Nasdaq listing requirements, with a view of pushing these listings to the pink sheets or the OTC Bulletin Board.

Approved by the SEC last August, the changes include a requirement that all Nasdaq and Nasdaq SmallCap common and preferred stock have a minimum bid price of $1. If a Nasdaq stock dips below $1 for 30 days, the stock has 90 days to return to the $1 mark, where it must close above $1 for ten consecutive days. Failing that, the stock will be delisted. The NASD said this measure is a safeguard against market activity associated with low-priced securities namely stock fraud.

Most Nasdaq stocks will also be required to have two market makers, 400 round-lot shareholders, 750,000 shares in the public float, a market value of at least $5 million and $4 million in net tangible assets.

Additionally, the new rules state that each Nasdaq SmallCap listing must have 300 round-lot shareholders, 500,00 shares in the public float, a market value of at least $1 million and either $2 million in net tangible assets, a $35 million market capitalization or at least $500,000 in net annual income.

Coulson expects more than 2,000 Nasdaq issues to delist to the pink sheets or OTC Bulletin Board this year under the new requirements.